10-Q 1 croxq2-20180630x10q.htm 10-Q
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________________________
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
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. 000-51754
_____________________________________________________________
CROCS, INC.
(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization) |  | 20-2164234 (I.R.S. Employer Identification No.)

7477 East Dry Creek Parkway, Niwot, Colorado 80503
(Address, including zip code, of registrant’s principal executive offices)
(303) 848-7000
(Registrant’s telephone number, including area code)
_____________________________________________________________
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 x 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 x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o | Accelerated filer ý | Non-accelerated filer o (do not check if a smaller reporting company) | Smaller reporting company o | Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of July 31, 2018, Crocs, Inc. had 68,094,302 shares of its $0.001 par value common stock outstanding.

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Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). From time to time, we may also provide oral or written forward-looking statements in other materials we release to the public. Such forward-looking statements are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995.
Statements that refer to industry trends, projections of our future financial performance, anticipated trends in our business and other characterizations of future events or circumstances are forward-looking statements. These statements, which express management’s current views concerning future events or results, use words like “anticipate,” “assume,” “believe,” “continue,” “estimate,” “expect,” “future,” “intend,” “plan,” “project,” “strive,” and future or conditional tense verbs like “could,” “may,” “might,” “should,” “will,” “would,” and similar expressions or variations. Examples of forward-looking statements include, but are not limited to, statements we make regarding:

• | our expectations regarding future trends, selling, general and administrative cost savings, expectations, and performance of our business;

• | our belief that we have sufficient liquidity to fund our business operations during the next twelve months; and

• | our expectations about the impact of our strategic plans

Forward-looking statements are subject to risks, uncertainties and other factors, which may cause actual results to differ materially from future results expressed or implied by such forward-looking statements. Important factors that could cause actual results to differ materially from the forward-looking statements include, without limitation, those described in the section entitled “Risk Factors” under Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2017, and our subsequent filings with the Securities and Exchange Commission. Caution should be taken not to place undue reliance on any such forward-looking statements. Moreover, such forward-looking statements speak only as of the date of this report. We undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.
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Crocs, Inc.
Table of Contents to the Quarterly Report on Form 10-Q
For the Quarterly Period Ended June 30, 2018

PART I — Financial Information |
Item 1. | Financial Statements (Unaudited) |
| Condensed Consolidated Statements of Operations | 1
| Condensed Consolidated Statements of Comprehensive Income (Loss) | 2
| Condensed Consolidated Balance Sheets | 3
| Condensed Consolidated Statements of Cash Flows | 4
| Notes to Condensed Consolidated Financial Statements | 5
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 20
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 34
Item 4. | Controls and Procedures | 35
PART II — Other Information | 36
Item 1. | Legal Proceedings | 36
Item 1A. | Risk Factors | 36
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 36
Item 6. | Exhibits | 37
Signatures |  | 38

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PART I — Financial Information
ITEM 1. Financial Statements
CROCS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share data)

| Three Months Ended June 30, |  | Six Months Ended June 30,
| 2018 |  | 2017 |  | 2018 |  | 2017
Revenues | $ | 328,004 |  |  | $ | 313,221 |  |  | $ | 611,152 |  |  | $ | 581,128 |
Cost of sales | 146,604 |  |  | 143,414 |  |  | 289,879 |  |  | 277,737 |
Gross profit | 181,400 |  |  | 169,807 |  |  | 321,273 |  |  | 303,391 |
Selling, general and administrative expenses | 144,336 |  |  | 140,361 |  |  | 258,287 |  |  | 258,363 |
Income from operations | 37,064 |  |  | 29,446 |  |  | 62,986 |  |  | 45,028 |
Foreign currency gains, net | 283 |  |  | 162 |  |  | 1,354 |  |  | 438 |
Interest income | 146 |  |  | 157 |  |  | 425 |  |  | 307 |
Interest expense | (132 | ) |  | (188 | ) |  | (245 | ) |  | (372 | )
Other income, net | 16 |  |  | 9 |  |  | 69 |  |  | 133 |
Income before income taxes | 37,377 |  |  | 29,586 |  |  | 64,589 |  |  | 45,534 |
Income tax expense | 3,000 |  |  | 7,627 |  |  | 13,758 |  |  | 12,564 |
Net income | 34,377 |  |  | 21,959 |  |  | 50,831 |  |  | 32,970 |
Dividends on Series A convertible preferred stock | (3,000 | ) |  | (3,000 | ) |  | (6,000 | ) |  | (6,000 | )
Dividend equivalents on Series A convertible preferred shares related to redemption value accretion and beneficial conversion feature | (951 | ) |  | (873 | ) |  | (1,882 | ) |  | (1,729 | )
Net income attributable to common stockholders | $ | 30,426 |  |  | $ | 18,086 |  |  | $ | 42,949 |  |  | $ | 25,241 |
Net income per common share: |  |  |  |  |  |  |
Basic | $ | 0.37 |  |  | $ | 0.21 |  |  | $ | 0.52 |  |  | $ | 0.29 |
Diluted | $ | 0.35 |  |  | $ | 0.20 |  |  | $ | 0.51 |  |  | $ | 0.29 |
Weighted average common shares outstanding: |  |  |  |  |  |  |
Basic | 68,153 |  |  | 73,953 |  |  | 68,427 |  |  | 73,882 |
Diluted | 71,467 |  |  | 74,572 |  |  | 70,462 |  |  | 74,625 |

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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CROCS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(in thousands)

| Three Months Ended June 30, |  | Six Months Ended June 30,
| 2018 |  | 2017 |  | 2018 |  | 2017
Net income | $ | 34,377 |  |  | $ | 21,959 |  |  | $ | 50,831 |  |  | $ | 32,970 |
Other comprehensive income: |  |  |  |  |  |  |  |  |
Foreign currency translation gain (loss), net | (12,784 | ) |  | 2,951 |  |  | (10,555 | ) |  | 7,465 |
Reclassification of foreign currency translation loss to income (1) | (840 | ) |  | — |  |  | (840 | ) |  | — |
Total comprehensive income | $ | 20,753 |  |  | $ | 24,910 |  |  | $ | 39,436 |  |  | $ | 40,435 |

(1) Reclassification of cumulative foreign currency translation adjustment of manufacturing subsidiaries.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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CROCS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share and par value amounts)

| June 30, 2018 |  | December 31, 2017
ASSETS |  |  |  |  |
Current assets: |  |  |  |  |
Cash and cash equivalents | $ | 171,514 |  |  | $ | 172,128 |
Accounts receivable, net of allowances of $25,956 and $31,389, respectively | 149,496 |  |  | 83,518 |
Inventories | 129,903 |  |  | 130,347 |
Income taxes receivable | 9,946 |  |  | 3,652 |
Other receivables | 13,076 |  |  | 10,664 |
Restricted cash - current | 2,041 |  |  | 2,144 |
Prepaid expenses and other assets | 25,865 |  |  | 22,596 |
Total current assets | 501,841 |  |  | 425,049 |
Property and equipment, net of accumulated depreciation and amortization of $90,520 and $91,806, respectively | 27,038 |  |  | 35,032 |
Intangible assets, net | 49,146 |  |  | 56,427 |
Goodwill | 1,644 |  |  | 1,688 |
Deferred tax assets, net | 12,202 |  |  | 10,174 |
Restricted cash | 2,143 |  |  | 2,783 |
Other assets | 10,360 |  |  | 12,542 |
Total assets | $ | 604,374 |  |  | $ | 543,695 |
LIABILITIES AND STOCKHOLDERS’ EQUITY |  |  |  |  |
Current liabilities: |  |  |  |  |
Accounts payable | $ | 79,101 |  |  | $ | 66,381 |
Accrued expenses and other liabilities | 105,788 |  |  | 84,446 |
Income taxes payable | 21,666 |  |  | 5,515 |
Current portion of borrowings and capital lease obligations | 15 |  |  | 676 |
Total current liabilities | 206,570 |  |  | 157,018 |
Long-term income taxes payable | 4,315 |  |  | 6,081 |
Other liabilities | 10,947 |  |  | 12,298 |
Total liabilities | 221,832 |  |  | 175,397 |
Commitments and contingencies: |  |  |  |  |
Series A convertible preferred stock, 1.0 million shares authorized, 0.2 million outstanding, liquidation preference $203 million | 184,316 |  |  | 182,433 |
Stockholders’ equity: |  |  |  |  |
Preferred stock, par value $0.001 per share, 4.0 million shares authorized, none outstanding | — |  |  | — |
Common stock, par value $0.001 per share, 250 million shares authorized, 95.9 million and 94.8 million issued, 68.1 million and 68.8 million outstanding, respectively | 96 |  |  | 95 |
Treasury stock, at cost, 27.8 million and 26.0 million shares, respectively | (360,032 | ) |  | (334,312 | )
Additional paid-in capital | 379,571 |  |  | 373,045 |
Retained earnings | 233,380 |  |  | 190,431 |
Accumulated other comprehensive loss | (54,789 | ) |  | (43,394 | )
Total stockholders’ equity | 198,226 |  |  | 185,865 |
Total liabilities and stockholders’ equity | $ | 604,374 |  |  | $ | 543,695 |

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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CROCS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)

| Six Months Ended June 30,
| 2018 |  | 2017
Cash flows from operating activities: |  |  |  |  |
Net income | $ | 50,831 |  |  | $ | 32,970 |
Adjustments to reconcile net income to net cash provided by operating activities: |  |  |  |  |
Depreciation and amortization | 14,874 |  |  | 16,815 |
Unrealized foreign currency gain, net | (1,057 | ) |  | (1,744 | )
Share-based compensation | 6,015 |  |  | 3,945 |
Other non-cash items | 3,229 |  |  | (2,872 | )
Changes in operating assets and liabilities: |  |  |  |
Accounts receivable, net of allowances | (73,845 | ) |  | (53,086 | )
Inventories | (6,506 | ) |  | (4,743 | )
Prepaid expenses and other assets | (1,089 | ) |  | 12,567 |
Accounts payable, accrued expenses and other liabilities | 48,409 |  |  | 35,528 |
Cash provided by operating activities | 40,861 |  |  | 39,380 |
Cash flows from investing activities: |  |  |  |  |
Purchases of property, equipment, and software | (3,246 | ) |  | (12,231 | )
Proceeds from disposal of property and equipment | 34 |  |  | 1,506 |
Cash used in investing activities | (3,212 | ) |  | (10,725 | )
Cash flows from financing activities: |  |  |  |  |
Proceeds from bank borrowings | — |  |  | 5,500 |
Repayments of bank borrowings and capital lease obligations | (669 | ) |  | (7,565 | )
Dividends—Series A preferred stock | (6,000 | ) |  | (6,000 | )
Repurchases of common stock | (25,946 | ) |  | (10,000 | )
Other | (208 | ) |  | (240 | )
Cash used in financing activities | (32,823 | ) |  | (18,305 | )
Effect of exchange rate changes on cash, cash equivalents, and restricted cash | (6,183 | ) |  | (717 | )
Net change in cash, cash equivalents, and restricted cash | (1,357 | ) |  | 9,633 |
Cash, cash equivalents, and restricted cash—beginning of period | 177,055 |  |  | 152,646 |
Cash, cash equivalents, and restricted cash—end of period | $ | 175,698 |  |  | $ | 162,279 |

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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CROCS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unless otherwise noted in this report, any description of the “Company,” “Crocs,” “we,” “us,” or “our” includes Crocs, Inc. and its consolidated subsidiaries within our reportable operating segments and corporate operations. The Company is engaged in the design, development, worldwide marketing, distribution, and sale of casual lifestyle footwear and accessories for men, women, and children. We strive to be the global leader in the sale of molded footwear characterized by functionality, comfort, color, and lightweight design. Our reportable operating segments include: the Americas, operating in North and South America; Asia Pacific, operating throughout Asia, Australia, New Zealand, Africa, and the Middle East; and Europe, operating throughout Western Europe, Eastern Europe, and Russia.
The accompanying unaudited condensed consolidated interim financial statements include the Company’s accounts and those of its wholly-owned subsidiaries, and reflect all adjustments which are necessary for a fair statement of the financial position, results of operations, and cash flows for the periods presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Such unaudited condensed consolidated interim financial statements have been prepared in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the U.S. Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. The year-end condensed balance sheet data was derived from audited financial statements but does not include all disclosures required by U.S. GAAP.
These unaudited condensed consolidated interim financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2017 (“Annual Report”), and have been prepared on a consistent basis with the accounting policies described in Note 1 of the Notes to the Audited Consolidated Financial Statements included in our Annual Report. Our accounting policies did not change during the six months ended June 30, 2018, other than for the change in accounting principle described in “Inventories” below and the new accounting pronouncements adopted as described in Note 2 — Recent Accounting Pronouncements.
Seasonality of Business
Due to the seasonal nature of our footwear, which is more heavily focused on styles suitable for warm weather, revenues generated during our fourth quarter are typically less than revenues generated during our first three quarters, when the northern hemisphere is experiencing warmer weather. Our quarterly results of operations may also fluctuate significantly as a result of a variety of other factors, including the timing of new model introductions, general economic conditions, and consumer confidence. Accordingly, results of operations and cash flows for any one quarter are not necessarily indicative of expected results for any other quarter or for any other year.
Transactions with Affiliates
The Company receives services from three subsidiaries of Blackstone Capital Partners VI L.P. (“Blackstone”). Blackstone and certain of its permitted transferees currently beneficially own all the outstanding shares of the Company’s Series A Convertible Preferred Stock, which is convertible into approximately 13.8 million shares, or 16.8%, of the Company’s common stock as of June 30, 2018. Blackstone also has the right to nominate two representatives to serve on the Company’s Board of Directors.
Certain Blackstone subsidiaries provide various services to the Company, including inventory count, cybersecurity and consulting, and workforce management services. The Company paid $0.3 million and $0.4 million for the three months ended June 30, 2018 and 2017, respectively, and $0.4 million and $0.5 million for the six months ended June 30, 2018 and 2017, respectively, for these services. Expenses related to these services are reported in ‘Selling, general and administrative expenses’ in the condensed consolidated statements of operations.
Restricted Cash
Restricted cash primarily consists of funds to secure certain retail store leases, certain customs requirements, and other contractual arrangements.
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Inventories
Inventories are stated at the lower of cost or net realizable value. Effective January 1, 2018, the Company completed implementation of a new inventory costing system for approximately 95% of its inventories. In connection with the implementation, the Company changed its method of inventory costing from a moving average cost method to a first-in-first-out method. The Company believes this change in accounting principle is preferable because it results in more precision and consistency in global and regional inventory costs, more efficient analysis and better matching of inventory costs with revenues, better matches the physical flow of inventories, and improves comparability with industry peers. The change from the Company’s former inventory cost method did not have a material effect on inventory or cost of sales, and, as a result, prior comparative financial statements have not been restated.
As of June 30, 2018 and December 31, 2017, our finished goods inventories accounted for 98.1% and 97.5%, respectively, of our consolidated inventories, and the remaining balance consists of raw materials and work-in-process.
Marketing Expenses
Total marketing expenses inclusive of advertising, production, promotion, and agency expenses were $25.4 million and $27.7 million for the three months ended June 30, 2018 and 2017, respectively, and $40.9 million and $39.7 million for the six months ended June 30, 2018 and 2017, respectively. Marketing expenses are reported in ‘Selling, general and administrative expenses’ in the condensed consolidated statements of operations.
Prepaid advertising and promotional endorsement costs of $9.0 million and $7.0 million are included in ‘Prepaid expenses and other assets’ in the condensed consolidated balance sheets at June 30, 2018 and December 31, 2017, respectively.
2. RECENT ACCOUNTING PRONOUNCEMENTS
New Accounting Pronouncement Adopted
Income Tax Accounting Implications of the Tax Cuts and Jobs Act
In March 2018, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance on the income tax accounting implications of the U.S. Tax Cuts and Job Act (“Tax Act”), addressing the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. The guidance provides a measurement period for companies to evaluate the impacts of the Tax Act on their financial statements. This measurement period begins in the reporting period that includes the enactment date and ends when an entity has obtained, prepared, and analyzed the information that was needed in order to complete the accounting requirements, and cannot exceed one year.
Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Act, we made reasonable estimates of the effects and recorded provisional amounts in our financial statements for the three and six months ended June 30, 2018 and the year ended December 31, 2017, including provisional estimates for the Base Erosion and Anti-abuse Tax (“BEAT”), Global Intangible Low-Taxed Income (“GILTI”), and transition tax. The U.S. Treasury Department, the Internal Revenue Service (“IRS”), and other standard-setting bodies may issue guidance on how the provisions of the Tax Act will be applied or otherwise administered that is different from our interpretation. As we collect and prepare necessary data, and interpret the Tax Act and any additional guidance issued by the IRS or other standard-setting bodies, we may make adjustments to the provisional amounts that could materially affect our financial position and results of operations as well as our effective tax rate in the period in which the adjustments are made. See Note 10 — Income Taxes for more information.
Stock Compensation Scope of Modification Accounting
In May 2017, the FASB issued authoritative guidance intended to clarify those changes to terms and conditions of stock-based compensation awards that are required to be accounted for as modifications of existing stock-based awards. The Company adopted this guidance as of January 1, 2018. The adoption did not have an impact on our consolidated financial position or results of operations.
Clarifying the Definition of a Business
In January 2017, the FASB issued authoritative guidance intended to clarify the definition of a business, for purposes of determining whether a business has been acquired or sold, and consequently whether transactions should be accounted for as acquisitions or
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disposals of a business or as acquisitions or disposals of assets. The Company adopted this guidance as of January 1, 2018. The adoption did not have an impact on our consolidated financial position or results of operations.
Statements of Cash Flows - Classification and Change in Restricted Cash
In August 2016, the FASB issued authoritative guidance intended to clarify how entities should classify certain cash receipts and cash payments in the statements of cash flows. In November 2016, the FASB issued additional guidance requiring that restricted cash be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period amounts reported in the statements of cash flows. The guidance is applied retrospectively to all periods presented and is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those annual periods. The Company adopted this guidance as of January 1, 2018. As a result of the adoption, the Company changed the presentation in its statements of cash flows for all periods presented.
Prepaid Stored-Value Products
In March 2016, the FASB issued guidance related to the recognition of breakage for certain prepaid stored-value products. The standard is effective for annual periods (including interim periods) beginning after December 15, 2017. The Company adopted this guidance as of January 1, 2018. The adoption did not have a significant impact on our consolidated financial position or results of operations.
Revenue Recognition
In May 2014, the FASB issued authoritative guidance related to revenue recognition from contracts with customers. On January 1, 2018, the Company adopted the guidance using the modified retrospective method. The comparative information presented in the condensed consolidated financial statements was not restated and is reported under the accounting standards in effect for the periods presented. The adoption of this guidance did not have, and is not expected to have, a significant impact on our reported revenues, gross margins or income from operations.
Substantially all of the Company’s revenues are recognized when control of product passes to customers when the products are shipped or delivered. Effective January 1, 2018, the Company changed its balance sheet presentation for expected product returns by reporting a product return asset for the right to receive returned products and a returns liability for amounts expected to be refunded to customers as a result of product returns. The product return asset is reported within ‘Prepaid expenses and other assets’ in the condensed consolidated balance sheet. The returns liability and payments received from customers for future delivery of products are reported within ‘Accrued liabilities and other expenses’ in the condensed consolidated balance sheet.
The Company elected to account for shipping and handling costs associated with outbound freight after control of product passes to customers as fulfillment costs, which are expensed as incurred and included in ‘Cost of sales’ in our condensed consolidated statements of operations. There is no change to the Company’s comparative reporting of shipping and handling costs as a result of adoption.
The Company elected to expense incremental costs to obtain customer contracts, consisting primarily of commission incentives, when incurred and reports these costs within ‘Selling, general and administrative expenses’ in its condensed consolidated statements of operations. There is no change to the Company’s comparative reporting of incremental costs to obtain customer contracts as a result of adoption.
The impact of adoption on the January 1, 2018 condensed consolidated balance sheet was:

|  | December 31, 2017 |  | Impact of Adoption (1) |  | January 1, 2018
|  | (in thousands)
Assets: |  |  |  |  |  |
Accounts receivable, net |  | $ | 83,518 |  |  | $ | 1,801 |  |  | $ | 85,319 |
Prepaid expenses and other assets |  | 22,596 |  |  | 1,555 |  |  | 24,151 |
Liabilities: |  |  |  |  |  |
Accrued expenses and other liabilities |  | 84,446 |  |  | 3,356 |  |  | 87,802 |

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(1) Prior to adoption, product return assets and return liabilities were reported within ‘Accounts receivable, net’, within the allowance for doubtful accounts. As of the adoption date, the product return assets were reclassified and reported as a component of ‘Prepaid expenses and other assets’, and return liabilities were reclassified to ‘Accrued expenses and other liabilities’ in the Company’s condensed consolidated balance sheet.
The impact of the new revenue recognition guidance on our condensed consolidated balance sheet as of June 30, 2018 was:

|  | June 30, 2018
|  | Balances Without Adoption |  | Effects of New Guidance (1) |  | As Reported
|  | (in thousands)
Assets: |  |  |  |  |  |
Accounts receivable, net |  | $ | 144,095 |  |  | $ | 5,401 |  |  | $ | 149,496 |
Prepaid expenses and other assets |  | 22,570 |  |  | 3,295 |  |  | 25,865 |
Liabilities: |  |  |  |  |  |
Accrued expenses and other liabilities |  | 97,092 |  |  | 8,696 |  |  | 105,788 |

(1) The new revenue recognition guidance requires comparative disclosures of the effects of the new guidance on the Company’s condensed consolidated financial statements for all interim periods during the year of adoption. The new guidance did not have a significant effect on the Company’s condensed consolidated statements of operations for the three and six months ended June 30, 2018.
See Note 8 — Revenues for additional disclosures.
New Accounting Pronouncements Not Yet Adopted
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
In February 2018, the FASB issued authoritative guidance that permits reclassification of the income tax effects of the Tax Act on accumulated other comprehensive income (“AOCI”) to retained earnings. This guidance may be adopted retrospectively to each period (or periods) in which the income tax effects of the Tax Act related to items remaining in AOCI are recognized, or at the beginning of the period of adoption. The guidance becomes effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods, with early adoption permitted. The Company does not expect adoption of this standard will have a significant impact on the Company’s consolidated financial statements.
Leases
In February 2016, the FASB issued authoritative guidance intended to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing key information about leasing arrangements. Under the new guidance, lessees will be required to recognize a right-of-use asset and a lease liability, measured on a discounted basis, at the commencement date for all leases with terms greater than twelve months. Additionally, this guidance will require disclosures to help investors and other financial statement users to better understand the amount, timing, and uncertainty of cash flows arising from leases, including qualitative and quantitative requirements. The guidance will be applied under a modified retrospective transition approach. The guidance and related amendments are effective for annual reporting periods beginning after December 15, 2018, including interim periods within those annual periods, with early adoption permitted.
The Company will adopt this guidance effective January 1, 2019. In July 2017, the Company established an implementation team and engaged external advisers and solution providers to develop a multi-phase plan to assess the Company’s leasing arrangements, as well as any changes to accounting policies, processes, or necessary systems. The Company has entered into agreements to procure software and services to facilitate adoption of the guidance. The Company is performing a detailed review of its leases and other contractual arrangements, system implementation requirements, and practical expedient alternatives available. The adoption of this guidance will result in significant increases in reported lease-related assets and liabilities in the consolidated balance sheet.
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Other Pronouncements
Other new pronouncements issued but not effective until after June 30, 2018 are not expected to have a material impact on the Company’s condensed consolidated financial statements.
3. ACCRUED EXPENSES AND OTHER LIABILITIES
Amounts reported in ‘Accrued expenses and other liabilities’ in the condensed consolidated balance sheets were:

| June 30, 2018 |  | December 31, 2017
| (in thousands)
Accrued compensation and benefits | $ | 32,494 |  |  | $ | 34,955 |
Professional services | 15,031 |  |  | 10,835 |
Accrued rent and occupancy | 9,309 |  |  | 8,535 |
Fulfillment, freight, and duties | 12,499 |  |  | 6,921 |
Royalties payable and deferred revenue | 4,420 |  |  | 6,193 |
Sales/use and value added taxes payable | 11,733 |  |  | 3,509 |
Return liabilities (1) | 8,696 |  |  | — |
Other (2) | 11,606 |  |  | 13,498 |
Total accrued expenses and other liabilities | $ | 105,788 |  |  | $ | 84,446 |

(1) Return liabilities are presented within ‘Accrued expenses and other liabilities’ upon adoption of new authoritative guidance on revenue recognition effective January 1, 2018, as described in Note 2 — Recent Accounting Pronouncements.
(2) Includes current liabilities of $3.0 million related to Series A preferred stock dividends at both June 30, 2018 and December 31, 2017.
4. FAIR VALUE MEASUREMENTS
Recurring Fair Value Measurements
All of the Company’s derivative instruments are classified as Level 2 and are reported in the condensed consolidated balance sheets within ‘Accrued expenses and other liabilities’ at June 30, 2018 and December 31, 2017. The fair values of the Company’s derivative instruments were liabilities of $0.1 million and $0.4 million at June 30, 2018 and December 31, 2017, respectively. See Note 5 — Derivative Financial Instruments for more information.
The carrying amounts of the Company’s cash, cash equivalents and restricted cash, accounts receivable, accounts payable, and current accrued expenses and other liabilities approximate their fair value as recorded due to the short-term maturity of these instruments.
The Company’s borrowing instruments are recorded at their carrying values in the condensed consolidated balance sheets, which may differ from their respective fair values. The fair values of the Company’s outstanding notes payable approximate their carrying values at June 30, 2018 and December 31, 2017, based on interest rates currently available to the Company for similar borrowings.

| June 30, 2018 |  | December 31, 2017
| Carrying Value |  | Fair Value |  | Carrying Value |  | Fair Value
| (in thousands)
Borrowings and capital lease obligations | $ | 38 |  |  | $ | 38 |  |  | $ | 706 |  |  | $ | 706 |

Non-Financial Assets and Liabilities
The Company’s non-financial assets, which primarily consist of property and equipment, goodwill, and other intangible assets, are not required to be carried at fair value on a recurring basis and are reported at carrying value. The fair values of these assets are determined based on Level 3 measurements, including estimates of the amount and timing of future cash flows based upon historical experience, expected market conditions, and management’s plans. Impairment expense is reported in ‘Selling, general and administrative expenses’ in the Company’s condensed consolidated statements of operations. During the three and six months ended June 30, 2018, the Company recorded non-cash impairment expenses of $0.1 million and $0.7 million, respectively, to reduce the carrying values of certain retail store assets. During the three and six months ended June 30, 2018, the Company
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recorded non-cash impairment expenses of $0.3 million and $1.2 million, respectively, to reduce the carrying values of certain supply chain assets related to the closure of our Mexico and Italy manufacturing and distribution facilities, included in ‘Other businesses,’ to their estimated fair values. The Company did not record impairment expense in the three and six months ended June 30, 2017.
5. DERIVATIVE FINANCIAL INSTRUMENTS
The Company transacts business in various foreign countries and is therefore exposed to foreign currency exchange rate risk that impacts the reported U.S. Dollar amounts of revenues, costs, and certain foreign currency monetary assets and liabilities. In order to manage exposure to fluctuations in foreign currency and to reduce the volatility in earnings caused by fluctuations in foreign exchange rates, the Company enters into forward contracts to buy and sell foreign currency. By policy, the Company does not enter into these contracts for trading purposes or speculation.
Counterparty default risk is considered low because the forward contracts that the Company enters into are over-the-counter instruments transacted with highly-rated financial institutions. The Company was not required to and did not post collateral as of June 30, 2018 or December 31, 2017.
The Company’s derivative instruments are recorded at fair value as a derivative asset or liability in the condensed consolidated balance sheets. The Company reports derivative instruments with the same counterparty on a net basis when a master netting arrangement is in place. Changes in fair value are recognized within ‘Foreign currency gains, net’ in the condensed consolidated statements of operations. For the condensed consolidated statements of cash flows, the Company classifies cash flows from derivative instruments at settlement in the same category as the cash flows from the related hedged items within ‘Cash provided by (used in) operating activities.’
Results of Derivative Activities
The fair values of derivative assets and liabilities, net, all of which are classified as Level 2 and are reported within either ‘Prepaid expenses and other assets’ or ‘Accrued expenses and other liabilities’ in the condensed consolidated balance sheets, were:

| June 30, 2018 |  | December 31, 2017
| Derivative Assets |  | Derivative Liabilities |  | Derivative Assets |  | Derivative Liabilities
| (in thousands)
Forward foreign currency exchange contracts | $ | 2,439 |  |  | $ | (2,561 | ) |  | $ | 1,241 |  |  | $ | (1,647 | )
Netting of counterparty contracts | (2,439 | ) |  | 2,439 |  |  | (1,241 | ) |  | 1,241 |
Foreign currency forward contract derivatives | $ | — |  |  | $ | (122 | ) |  | $ | — |  |  | $ | (406 | )

The notional amounts of outstanding foreign currency forward exchange contracts presented below report the total U.S. Dollar equivalent position and the net contract fair values for each foreign currency position.

| June 30, 2018 |  | December 31, 2017
| Notional |  | Fair Value |  | Notional |  | Fair Value
| (in thousands)
Singapore Dollar | $ | 44,299 |  |  | $ | (1,036 | ) |  | $ | 73,455 |  |  | $ | 364 |
Euro | 26,207 |  |  | 342 |  |  | 37,718 |  |  | (122 | )
Japanese Yen | 39,860 |  |  | 578 |  |  | 30,688 |  |  | (89 | )
South Korean Won | 22,964 |  |  | 471 |  |  | 15,888 |  |  | (134 | )
British Pound Sterling | 48,318 |  |  | (114 | ) |  | 13,233 |  |  | 80 |
Other currencies | 65,351 |  |  | (363 | ) |  | 53,698 |  |  | (505 | )
Total | $ | 246,999 |  |  | $ | (122 | ) |  | $ | 224,680 |  |  | $ | (406 | )
Latest maturity date | July 2018 |  | January 2018

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Amounts reported in ‘Foreign currency gains, net’ in the condensed consolidated statements of operations include both realized and unrealized gains (losses) from foreign currency transactions and derivative contracts, and were:

| Three Months Ended June 30, |  | Six Months Ended June 30,
| 2018 |  | 2017 |  | 2018 |  | 2017
| (in thousands)
Foreign currency transaction gains (losses) | $ | (563 | ) |  | $ | (1,417 | ) |  | $ | 488 |  |  | $ | 1,794 |
Foreign currency forward exchange contracts gains (losses) | 846 |  |  | 1,579 |  |  | 866 |  |  | (1,356 | )
Foreign currency gains, net | $ | 283 |  |  | $ | 162 |  |  | $ | 1,354 |  |  | $ | 438 |

6. REVOLVING CREDIT FACILITIES AND BANK BORROWINGS
The Company’s borrowings consisted of:

| June 30, 2018 |  | December 31, 2017
| (in thousands)
Notes payable | $ | — |  |  | $ | 662 |
Capital lease obligations | 38 |  |  | 44 |
Total borrowings and capital lease obligations | 38 |  |  | 706 |
Less: Current portion of borrowings and capital lease obligations | 15 |  |  | 676 |
Total long-term capital lease obligations | $ | 23 |  |  | $ | 30 |

Senior Revolving Credit Facility
In December 2011, the Company entered into a revolving credit facility (the “Facility”), pursuant to an Amended and Restated Credit Agreement (as amended, the “Credit Agreement”), with the lenders named therein and PNC Bank, National Association (“PNC”), as a lender and administrative agent for the lenders. The Credit Agreement, as amended, contains certain covenants that restrict certain actions by the Company, including limitations on: (i) stock repurchases to $100.0 million per year, subject to certain restrictions; and (ii) capital expenditures and commitments to $50.0 million per year. The Credit Agreement also permits intercompany loans of up to $375.0 million and requires the Company to meet certain financial covenant ratios that become effective when average outstanding borrowings under the Credit Agreement, including letters of credit, exceed the lesser of $40.0 million or 40% of the total commitments during certain periods or if the outstanding borrowings exceed the borrowing base. If the financial covenant ratios are in effect, the Company must maintain a minimum fixed charge coverage ratio of 1.10 to 1.00, and a maximum leverage ratio of 2.00 to 1.00. As of June 30, 2018, the Company was in compliance with all financial covenants.
As of June 30, 2018, the total commitments available from the lenders under the Facility were $100.0 million. At June 30, 2018, the Company had no outstanding borrowings and $0.6 million in outstanding letters of credit under the Facility, which reduces amounts available for borrowing under the Facility. As of June 30, 2018 and December 31, 2017, the Company had $99.4 million of available borrowing capacity under the Facility.
Asia Revolving Credit Facilities
The Company’s revolving credit facility agreement with HSBC Bank (China) Company Limited, Shanghai Branch (“HSBC”), or the “HSBC Facility,” provides the Company uncommitted dual currency revolving loan facilities of up to 40.0 million Chinese Renminbi (“RMB”), or $6.0 million, with a combined facility limit of RMB 60.0 million, or $9.1 million. As of June 30, 2018 and December 31, 2017, there were no borrowings outstanding and borrowings under the HSBC Facility remained suspended at the discretion of HSBC.
The Company’s one year revolving credit facility agreement with China Merchants Bank Company Limited, Shanghai Branch (the “CMBC Facility”), provides the Company a revolving loan facility of up to 30.0 million RMB, or $4.5 million, subject to consent by the lender. The CMBC Facility will mature in January 2019. The CMBC Facility may be canceled or suspended at any time by either party. As of June 30, 2018, there were no borrowings outstanding on this credit facility.
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Maturities
The maturities of the Company’s debt and capital lease obligations were:

| As of June 30, 2018
| (in thousands)
2018 (remainder of year) | $ | 7 |
2019 | 13 |
2020 | 12 |
2021 | 6 |
Total principal debt maturities and capital lease obligations | 38 |
Less: current portion | 15 |
Non-current portion | $ | 23 |

7. COMMON STOCK REPURCHASE PROGRAM
For the three and six months ended June 30, 2018, the Company repurchased 0.4 million and 1.8 million shares of its common stock, respectively, at a cost of $5.9 million and $25.9 million, including commissions, respectively. During the three and six months ended June 30, 2017, the Company repurchased 1.4 million shares of its common stock, for $10.0 million, including commissions. As of June 30, 2018, the Company had remaining authorization to repurchase approximately $192.9 million of its common stock, subject to restrictions under its Credit Agreement.
8. REVENUES
The Company adopted authoritative guidance related to the recognition of revenue from contracts with customers effective January 1, 2018 using the modified retrospective method. The comparative information presented in the condensed consolidated financial statements was not restated and is reported under the accounting standards in effect for the periods presented. See ‘Revenue Recognition’ in Note 2 — Recent Accounting Pronouncements for a discussion of the significant changes resulting from adoption of the guidance. The adoption of the guidance did not have a significant impact on revenues.
Revenues by reportable operating segment and by channel were:

|  | Three Months Ended June 30, 2018
|  | Americas |  | Asia Pacific |  | Europe |  | Other Businesses |  | Total
|  | (in thousands)
Wholesale |  | $ | 53,920 |  |  | $ | 71,561 |  |  | $ | 38,820 |  |  | $ | 295 |  |  | $ | 164,596 |
Retail |  | 56,594 |  |  | 30,803 |  |  | 12,080 |  |  | — |  |  | 99,477 |
E-commerce |  | 27,248 |  |  | 26,036 |  |  | 10,647 |  |  | — |  |  | 63,931 |
Total revenues |  | $ | 137,762 |  |  | $ | 128,400 |  |  | $ | 61,547 |  |  | $ | 295 |  |  | $ | 328,004 |

|  | Six Months Ended June 30, 2018
|  | Americas |  | Asia Pacific |  | Europe |  | Other Businesses |  | Total
|  | (in thousands)
Wholesale |  | $ | 126,594 |  |  | $ | 143,294 |  |  | $ | 88,697 |  |  | $ | 608 |  |  | $ | 359,193 |
Retail |  | 91,310 |  |  | 48,417 |  |  | 19,256 |  |  | — |  |  | 158,983 |
E-commerce |  | 43,688 |  |  | 33,851 |  |  | 15,437 |  |  | — |  |  | 92,976 |
Total revenues |  | $ | 261,592 |  |  | $ | 225,562 |  |  | $ | 123,390 |  |  | $ | 608 |  |  | $ | 611,152 |

Revenues are recognized in the amount expected to be received in exchange for goods when control of the products transfers to customers, and excludes various forms of promotions, which range from contractually-fixed percentage price reductions to sales returns, discounts, rebates, and other incentives that may vary in amount and must be estimated. Variable amounts are estimated based on an analysis of historical experience and adjusted as better estimates become available. During the three and six months ended June 30, 2018, the Company recognized increases of $0.2 million and $1.0 million, respectively, to wholesale revenues due
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to changes in estimates related to products transferred to customers in prior periods. There were no changes to estimates in retail and e-commerce channels during the three and six months ended June 30, 2018.
The Company elected to exclude from revenues taxes assessed by governmental authorities, including value-added and other sales-related taxes, that are imposed on and concurrent with revenue-producing activities, and as a result there is no change in presentation from prior comparative periods.
The following is a description of our principal revenue-generating activities by distribution channel. The Company has three reportable operating segments and sells its products using three primary distribution channels. For more detailed information about reportable operating segments, see ‘Note 13 — Operating Segments and Geographic Information’.
Wholesale Channel
For the majority of wholesale customers, control transfers and revenues are recognized when the product is shipped or delivered from a manufacturing facility or distribution center to the wholesale customer. In certain cases, control of the product transfers and revenues are recognized when the customer receives the product at the designated delivery point. For certain customers, primarily in the Asia Pacific region, cash payment from customers is required in advance of delivery and revenues are recognized upon the later of cash receipt or delivery of the product. For a small number of customers in the Asia Pacific region, products are sold on consignment and revenues are recognized on a sell-through basis. Wholesale customers are invoiced when products are shipped or delivered.
The Company has arrangements that grant certain wholesale customers exclusive licenses, concurrent with the terms of the related distribution agreements, to use the Company’s intellectual property in exchange for a sales-based royalty. Sales-based royalty revenues are recognized over the terms of the related license agreements as sales are made by the wholesalers.
Retail Channel
The Company transfers control of products and recognizes revenues at retail stores at the point of sale, in exchange for cash or other payment, primarily debit or credit card. A portion of the transaction price charged to our customers is variable, primarily due to promotional discounts or allowances, and terms that permit retail customers to exchange or return products for a full refund within a limited period of time. When recognizing revenues, the amount of revenues associated with expected sales returns is estimated based on historical experience, and adjustments to our estimates are made when the most likely amount of consideration we expect to receive changes.
E-commerce Channel
In the e-commerce channel, the Company transfers control and recognizes revenues when the product is shipped from the distribution centers. Payment from customers is primarily through debit and credit card and is made at the time the customer order is shipped.
Similar to the retail channel, a portion of the amount of revenue is variable, primarily due to sales returns, discounts, and other promotional allowances offered to our customers. When recognizing revenues, the amount of revenues associated with expected sales returns is estimated based on historical experience, and adjustments are made when the most likely amount of consideration changes. Historically, the amount of revenues associated with product returns in the e-commerce channel has been higher than the retail channel.
Contract Liabilities
Contract liabilities consist of advance cash deposits received from wholesale customers to secure product orders in connection with seasonal selling seasons, and payments received in advance of delivery. As products are shipped and control transfers, the Company recognizes the deferred revenue in ‘Revenues’ in the condensed consolidated statements of operations. At January 1 and June 30, 2018, $1.3 million and $1.2 million, respectively, of deferred revenues associated with advance customer deposits were reported in ‘Accrued expenses and other liabilities’ in the condensed consolidated balance sheets. Deferred revenues of $1.4 million and $2.2 million, respectively, were recognized in revenues during the three and six months ended June 30, 2018. The remainder of deferred revenues at June 30, 2018 are expected to be recognized in revenues during the third quarter of 2018 as products are shipped or delivered.
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Refund Liabilities
Refund liabilities, primarily associated with product sales returns, retrospective volume rebates, and early payment discounts are estimated based on an analysis of historical experience, and adjustments to revenues made when the most likely amount of consideration expected changes. At January 1 and June 30, 2018, $3.4 million and $8.7 million, respectively, of refund liabilities, primarily associated with product returns, were reported in ‘Accrued expenses and other liabilities’ in the condensed consolidated balance sheets.
9. SHARE-BASED COMPENSATION
The Company’s share-based compensation awards are issued under the 2015 Equity Incentive Plan (“2015 Plan”) and two predecessor plans, the 2005 Equity Incentive Plan, and the 2007 Equity Incentive Plan (the “2007 Plan”). Any awards that expire or are forfeited under the 2007 Plan become available for issuance under the 2015 Plan. As of June 30, 2018, 2.2 million shares of common stock remained available for future issuance under all plans, subject to adjustment for future stock splits, stock dividends, and similar changes in capitalization.
Refer to Notes 1 and 10 of the Company’s Annual Report on Form 10-K for a detailed description of the Company’s share-based compensation awards, including information related to grant date fair value, vesting terms, performance, and other conditions.
Share-Based Compensation Expense
Pre-tax share-based compensation expense reported in the Company’s condensed consolidated statements of operations was:

| Three Months Ended June 30, |  | Six Months Ended June 30,
| 2018 |  | 2017 |  | 2018 |  | 2017
| (in thousands)
Cost of sales | $ | 98 |  |  | $ | 111 |  |  | $ | 177 |  |  | $ | 200 |
Selling, general and administrative expenses | 3,243 |  |  | 1,225 |  |  | 5,838 |  |  | 3,745 |
Total share-based compensation expense | $ | 3,341 |  |  | $ | 1,336 |  |  | $ | 6,015 |  |  | $ | 3,945 |

Stock Option Activity
Stock option activity during the six months ended June 30, 2018 was:

| Number of Options
| (in thousands) |
Outstanding December 31, 2017 | 541 |
Granted | — |
Exercised | (80 | )
Forfeited or expired | (27 | )
Outstanding June 30, 2018 | 434 |

As of June 30, 2018, the Company had $0.3 million of total unrecognized share-based compensation expense related to unvested options, which is expected to be amortized over the remaining weighted average period of 1.89 years.
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Restricted Stock Awards and Restricted Stock Units Activity
The Company grants time-based restricted stock awards (“RSAs”) as well as time-based and performance-based restricted stock units (“RSUs”). RSA and RSU activity during the six months ended June 30, 2018 was:

| Restricted Stock Awards |  | Restricted Stock Units
| Shares |  | Weighted Average Grant Date Fair Value |  | Shares |  | Weighted Average Grant Date Fair Value
| (in thousands, except fair value data)
Unvested at December 31, 2017 | 17 |  |  | $ | 6.84 |  |  | 3,791 |  |  | $ | 7.99 |
Granted | 35 |  |  | 18.61 |  |  | 1,369 |  |  | 14.18 |
Vested | (39 | ) |  | 13.32 |  |  | (1,041 | ) |  | 8.42 |
Forfeited | — |  |  | — |  |  | (1,180 | ) |  | 7.39 |
Unvested at June 30, 2018 | 13 |  |  | $ | 18.61 |  |  | 2,939 |  |  | $ | 11.09 |

As of June 30, 2018, unrecognized share-based compensation expense for RSAs was $0.2 million, which is expected to amortize over a remaining weighted average period of 0.93 years.
RSUs vested during the six months ended June 30, 2018 consisted of 0.8 million time-based awards and 0.2 million performance-based awards. As of June 30, 2018, unrecognized share-based compensation expenses for time-based and performance-based awards were $10.7 million and $9.2 million, respectively, and are expected to amortize over remaining weighted average period of 1.74 years and 2.68 years, respectively.
10. INCOME TAXES
U.S. Federal Income Tax Reform
The Tax Act resulted in a number of significant changes to U.S. federal income tax law for U.S. corporations. Most notably, the statutory U.S. federal corporate income tax rate was changed from 35% to 21% for corporations. In addition to the change in the corporate income tax rate, the Tax Act further introduced a number of other changes including a one-time transition tax via a mandatory deemed repatriation of post-1986 undistributed foreign earnings and profits; the introduction of GILTI for tax years beginning after December 31, 2017; the limitation of deductible net interest to 30% of adjustable taxable income; the further limitation of the deductibility of share-based compensation of certain highly-compensated employees; the ability to elect to accelerate bonus depreciation on certain qualified assets; and BEAT.
Income tax expense and effective tax rates were:

| Three Months Ended June 30, |  | Six Months Ended June 30,
| 2018 |  | 2017 |  | 2018 |  | 2017
| (in thousands, except effective tax rate)
Income before income taxes | $ | 37,377 |  |  | $ | 29,586 |  |  | $ | 64,589 |  |  | $ | 45,534 |
Income tax expense | 3,000 |  |  | 7,627 |  |  | 13,758 |  |  | 12,564 |
Effective tax rate | 8.0 | % |  | 25.8 | % |  | 21.3 | % |  | 27.6 | %

During the three and six months ended June 30, 2018, the decrease in effective tax rates, compared to the same periods in 2017, is due to the release of valuation allowances in certain jurisdictions, partially offset by operating losses in certain jurisdictions where the Company has determined that it is not more likely than not to realize the associated tax benefits, tax expense recorded in profitable jurisdictions, and the impact of the GILTI provisions included in the Tax Act. The Company has elected to account for GILTI as a period cost, and therefore has included GILTI expense in the effective tax rate calculation. The Company’s effective income tax rate, for each period presented, also differs from the federal U.S. statutory rate due to the release of valuation allowances in certain jurisdictions and differences in income tax rates between U.S. and foreign jurisdictions. The Company had unrecognized tax benefits of $4.6 million and $6.2 million at June 30, 2018 and December 31, 2017, respectively, and the Company does not expect any significant changes in tax benefits in the next twelve months.
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Our tax rate is volatile and may increase or decrease with changes in, among other things, the amount of income or loss by jurisdiction, our ability to utilize net operating losses and foreign tax credits, changes in tax laws, and the movement of liabilities established pursuant to accounting guidance for uncertain tax positions as statutes of limitations expire, positions are effectively settled, or when additional information becomes available. There are proposed or pending tax law changes in various jurisdictions and other changes to regulatory environments in countries in which we do business that, if enacted, may have an impact on our effective tax rate.
11. EARNINGS PER SHARE
Basic and diluted earnings per common share (“EPS”) for the three and six months ended June 30, 2018 and 2017 were:

| Three Months Ended June 30, |  | Six Months Ended June 30,
| 2018 |  | 2017 |  | 2018 |  | 2017
| (in thousands, except per share data)
Numerator: |  |  |  |  |  |  |  |  |
Net income attributable to common stockholders | $ | 30,426 |  |  | $ | 18,086 |  |  | $ | 42,949 |  |  | $ | 25,241 |
Less: Net income allocable to Series A convertible preferred stockholders (1) | (5,121 | ) |  | (2,843 | ) |  | (7,205 | ) |  | (3,971 | )
Adjusted net income available to common stockholders - basic and diluted | $ | 25,305 |  |  | $ | 15,243 |  |  | $ | 35,744 |  |  | $ | 21,270 |
Denominator: |  |  |  |  |  |  |  |  |
Weighted average common shares outstanding - basic | 68,153 |  |  | 73,953 |  |  | 68,427 |  |  | 73,882 |
Plus: dilutive effect of stock options and unvested restricted stock units | 3,314 |  |  | 619 |  |  | 2,035 |  |  | 743 |
Weighted average common shares outstanding - diluted | 71,467 |  |  | 74,572 |  |  | 70,462 |  |  | 74,625 |
Net income per common share: |  |  |  |  |  |  |  |  |
Basic | $ | 0.37 |  |  | $ | 0.21 |  |  | $ | 0.52 |  |  | $ | 0.29 |
Diluted | $ | 0.35 |  |  | $ | 0.20 |  |  | $ | 0.51 |  |  | $ | 0.29 |

(1) Represents the amount which would have been paid to preferred stockholders in the event the Company had declared a dividend on its common stock.
For the three months ended June 30, 2018 and 2017, 0.1 million and 2.2 million options and restricted stock units, respectively, were excluded from the calculation of diluted EPS under the two-class method because the effect was anti-dilutive. For the six months ended June 30, 2018 and 2017, 0.2 million and 0.8 million options and restricted stock units, respectively, were excluded from the calculation of diluted EPS under the two-class method because the effect was anti-dilutive. If converted, Series A Preferred Stock would represent approximately 16.8% of the Company’s common stock outstanding, or 13.8 million additional common shares, as of June 30, 2018.
12. COMMITMENTS AND CONTINGENCIES
Rental Commitments and Contingencies
The Company rents retail store, office and warehouse space, vehicles, and equipment under operating leases expiring at various dates through 2033. Rent expense for leases with escalations or rent holidays is recognized on a straight-line basis over the lease term beginning on the lease inception date. Certain leases also provide for contingent rents, which are generally determined as a percent of sales in excess of specified levels. A contingent rent liability is recognized together with the corresponding rent expense when specified levels have been achieved or when the Company determines that achieving the specified levels during the period is probable.
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Future minimum lease payments under operating leases were:

| As of June 30, 2018
| (in thousands)
2018 (remainder of year) | $ | 24,955 |
2019 | 36,870 |
2020 | 29,706 |
2021 | 24,013 |
2022 | 17,404 |
Thereafter | 39,581 |
Total minimum lease payments | $ | 172,529 |

Minimum sublease rental income of $0.2 million under non-cancelable subleases, and contingent rentals are excluded from the commitment schedule.
Rent expense under operating leases was:

| Three Months Ended June 30, |  | Six Months Ended June 30,
| 2018 |  | 2017 |  | 2018 |  | 2017
| (in thousands)
Minimum rentals (1) | $ | 17,565 |  |  | $ | 20,403 |  |  | $ | 35,844 |  |  | $ | 41,188 |
Contingent rentals | 5,535 |  |  | 5,562 |  |  | 7,695 |  |  | 7,822 |
Less: Sublease rentals | (33 | ) |  | (52 | ) |  | (73 | ) |  | (89 | )
Total rent expense | $ | 23,067 |  |  | $ | 25,913 |  |  | $ | 43,466 |  |  | $ | 48,921 |

(1) Minimum rentals include all lease payments as well as fixed and variable common area maintenance, parking, and storage fees, which were approximately $2.4 million and $2.8 million for the three months ended June 30, 2018 and 2017, respectively, and $4.8 million and $5.7 million for the six months ended June 30, 2018 and 2017, respectively.
Purchase Commitments
As of June 30, 2018, the Company had purchase commitments to third-party manufacturers, primarily for materials and supplies used in the manufacture of the Company’s products, for an aggregate of $80.3 million.
Other
The Company is regularly subject to, and is currently undergoing, audits by various tax authorities in the United States and several foreign jurisdictions, including customs duties, import, and other taxes for prior tax years.
During its normal course of business, the Company may make certain indemnities, commitments, and guarantees under which it may be required to make payments. The Company cannot determine a range of estimated future payments and has not recorded any liability for indemnities, commitments, and guarantees in the accompanying condensed consolidated balance sheets.
See Note 14 — Legal Proceedings for further details regarding potential loss contingencies related to government tax audits and other current legal proceedings.
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13. OPERATING SEGMENTS AND GEOGRAPHIC INFORMATION
The Company has three reportable operating segments based on the geographic nature of its operations: Americas, Asia Pacific, and Europe. In addition, the ‘Other businesses’ category aggregates insignificant operating segments that do not meet the reportable segment threshold, including manufacturing operations located in Mexico and Italy, and corporate operations.
Each of the reportable operating segments derives its revenues from the sale of footwear and accessories to external customers. Revenues for ‘Other businesses’ include non-footwear product sales to external customers that are excluded from the measurement of segment operating revenues and income.
Segment performance is evaluated based on segment results without allocating corporate expenses, or indirect general, administrative, and other expenses. Segment profits or losses include adjustments to eliminate inter-segment sales. Reconciling items between segment income from operations and income from operations consist of other businesses and unallocated corporate and other expenses, as well as inter-segment eliminations. The following tables set forth information related to reportable operating segments:

| Three Months Ended June 30, |  | Six Months Ended June 30,
| 2018 |  | 2017 |  | 2018 |  | 2017
| (in thousands)
Revenues: |  |  |  |  |  |  |
Americas | $ | 137,762 |  |  | $ | 136,154 |  |  | $ | 261,592 |  |  | $ | 253,877 |
Asia Pacific | 128,400 |  |  | 124,644 |  |  | 225,562 |  |  | 222,989 |
Europe | 61,547 |  |  | 52,320 |  |  | 123,390 |  |  | 103,971 |
Total segment revenues | 327,709 |  |  | 313,118 |  |  | 610,544 |  |  | 580,837 |
Other businesses | 295 |  |  | 103 |  |  | 608 |  |  | 291 |
Total consolidated revenues | $ | 328,004 |  |  | $ | 313,221 |  |  | $ | 611,152 |  |  | $ | 581,128 |
Income from operations: (1) |  |  |  |  |  |  |
Americas | $ | 39,689 |  |  | $ | 34,426 |  |  | $ | 68,228 |  |  | $ | 56,733 |
Asia Pacific | 36,387 |  |  | 36,743 |  |  | 62,971 |  |  | 63,496 |
Europe | 18,701 |  |  | 11,296 |  |  | 36,564 |  |  | 23,582 |
Total segment income from operations | 94,777 |  |  | 82,465 |  |  | 167,763 |  |  | 143,811 |
Reconciliation of total segment income from operations to income before income taxes: |  |  |  |  |  |  |  |  |
Other businesses (2) | (16,531 | ) |  | (5,035 | ) |  | (27,465 | ) |  | (10,650 | )
Unallocated corporate and other (1) | (41,182 | ) |  | (47,984 | ) |  | (77,312 | ) |  | (88,133 | )
Income from operations | 37,064 |  |  | 29,446 |  |  | 62,986 |  |  | 45,028 |
Foreign currency gains, net | 283 |  |  | 162 |  |  | 1,354 |  |  | 438 |
Interest income | 146 |  |  | 157 |  |  | 425 |  |  | 307 |
Interest expense | (132 | ) |  | (188 | ) |  | (245 | ) |  | (372 | )
Other income | 16 |  |  | 9 |  |  | 69 |  |  | 133 |
Income before income taxes | $ | 37,377 |  |  | $ | 29,586 |  |  | $ | 64,589 |  |  | $ | 45,534 |
Depreciation and amortization: |  |  |  |  |  |  |
Americas | $ | 1,211 |  |  | $ | 1,347 |  |  | $ | 2,515 |  |  | $ | 2,692 |
Asia Pacific | 537 |  |  | 920 |  |  | 1,233 |  |  | 1,847 |
Europe | 327 |  |  | 379 |  |  | 679 |  |  | 764 |
Total segment depreciation and amortization | 2,075 |  |  | 2,646 |  |  | 4,427 |  |  | 5,303 |
Other businesses | 1,431 |  |  | 1,741 |  |  | 2,955 |  |  | 3,488 |
Unallocated corporate and other | 3,725 |  |  | 3,982 |  |  | 7,492 |  |  | 8,024 |
Total consolidated depreciation and amortization | $ | 7,231 |  |  | $ | 8,369 |  |  | $ | 14,874 |  |  | $ | 16,815 |

(1) In 2018, certain global marketing expenses previously reported within the operating segments are managed and reported within ‘Unallocated corporate and other’. The previously reported amounts for income from operations for the second quarter and first six months ended June 30, 2017 have been revised to conform to the current year presentation. For the second quarter of 2017, adjustments for this revision had the following impacts (in thousands): income from operations for the ‘Americas’ segment increased by $9,221; income from operations for the ‘Asia Pacific’ segment increased by $3,438; income from operations for the ‘Europe’ segment increased by $1,265; costs within
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‘Unallocated corporate and other’ increased by $13,924. For the first six months of 2017, adjustments for this revision had the following impacts (in thousands): income from operations for the ‘Americas’ segment increased by $9,526; income from operations for the ‘Asia Pacific’ segment increased by $3,466; income from operations for the ‘Europe’ segment increased by $1,277; costs within ‘Unallocated corporate and other’ increased by $14,269.
(2) ‘Other businesses’ expense increases are due primarily to supply chain reorganization activities in conjunction with the closure of Mexico and Italy manufacturing and distribution facilities.
14. LEGAL PROCEEDINGS
The Company was subjected to an audit by the Brazilian Federal Tax Authorities related to imports of footwear from China between 2010 and 2014. On January 13, 2015, the Company was notified about the issuance of assessments totaling 14.4 million Brazilian Real (“BRL”), or approximately $3.7 million, plus interest and penalties, for the period January 2010 through May 2011. The Company has disputed these assessments and asserted defenses to the claims. On February 25, 2015, the Company received additional assessments totaling 33.3 million BRL, or approximately $8.6 million, plus interest and penalties, related to the remainder of the audit period. The Company has also disputed these assessments and asserted defenses to these claims in administrative appeals. On August 29, 2017, the Company received a favorable ruling on its appeal of the first assessment, which dismissed all fines, penalties, and interest. The tax authorities have requested a special appeal to that decision. If the appeal is accepted, Crocs will have the opportunity to both defend the appeal as well as challenge it procedurally. Should the Brazilian Tax Authority prevail in this final administrative appeal, Crocs may still challenge the assessments through the court system, which would likely require the posting of a bond. Additionally, the second appeal for the remaining assessments was heard on March 22, 2018. That decision was partially favorable and resulted in an approximately 38% reduction in principal, penalties, and interest, leaving approximately $5.3 million, plus interest and penalties, at risk for those assessments. The tax authorities have appealed that decision. Crocs intends to file a response to the tax authorities’ appeal as well as a separate appeal against the unfavorable portion of the ruling. We have not recorded these items within the condensed consolidated financial statements as it is not possible at this time to predict the timing or outcome of this matter or to estimate a potential amount of loss, if any.
For all other claims and other disputes, the Company has accrued estimated losses of $0.2 million within ‘Accrued expenses and other liabilities’ in its condensed consolidated balance sheet as of June 30, 2018. Where the Company is able to estimate possible losses or a range of possible losses, the Company estimates that as of June 30, 2018, losses associated with these claims and other disputes are immaterial.
Although the Company is subject to other litigation from time to time in the ordinary course of business, including employment, intellectual property and product liability claims, the Company is not party to any other pending legal proceedings that it believes would reasonably have a material adverse impact on its business and financial results.
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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Business Overview
Crocs, Inc. and its consolidated subsidiaries (collectively the “Company,” “Crocs,” “we,” “our,” or “us”) are engaged in the design, development, worldwide marketing, distribution, and sale of casual lifestyle footwear and accessories for men, women, and children. We strive to be the global leader in the sale of molded footwear characterized by functionality, comfort, color, and lightweight design. All of our products utilize our proprietary closed-cell resin, called Croslite TM, along with a range of other materials, enabling us to produce innovative, lightweight footwear.
Known or Anticipated Trends
Based on our recent operating results and current perspectives on our operating environment, we anticipate certain trends will impact our operating results:

• | Consumer spending preferences continue to shift toward e-commerce and away from brick and mortar stores. This has resulted in continued sales growth in our e-commerce channel, as well as on various e-tail sites operated by wholesalers, and contributed to declining foot traffic in our retail locations.

• | As we close less productive stores as leases expire and transfer select company-operated stores to distributors, we anticipate a reduction in retail revenues and a benefit to selling, general and administrative expenses (“SG&A”). Distributor revenues are reported within our wholesale channel.

• | Foreign exchange rate volatility impacts our reported U.S. Dollar results from our foreign operations.

• | In 2017 we identified annual reductions in SG&A in the amount of $75 to $85 million which, once implemented, are projected to generate an annual $30 to $35 million improvement in earnings before interest and taxes by 2019, compared to 2016. We achieved approximately $23 million of these SG&A reductions in 2017 while incurring approximately $10 million of costs related to variable compensation. We remain on track to achieve the targeted SG&A reductions by 2019. We incurred $11 million in non-recurring charges to achieve these SG&A reductions in 2017 and expect to incur approximately $5 million in additional non-recurring charges related to SG&A reductions in 2018. We reduced our company-operated retail stores by 111 in 2017 and anticipate an additional reduction in 2018, reducing our total store count to under 400 from 558 over a two year period. The majority of company-operated store closures are occurring as store leases expire. We completed 50 store closures in the first six months of 2018.

• | We are prioritizing growth in our lower-priced, higher-margin molded styles, primarily in clog and sandal silhouettes, as we drive global alignment of our product portfolio and focus on sustainable, profitable revenue growth.

• | In connection with ongoing efforts to simplify the business and improve profitability, the Company made the decision to fully outsource our production to third party manufacturers and to close its manufacturing facilities in Mexico and Italy. The manufacturing facilities in Mexico and Italy and the distribution facility in Mexico will be closed by the end of 2018. The Company has incurred total charges of $8.0 million before taxes in the first six months of 2018 related to the closures. The Company expects to incur approximately $6 million of additional costs related to the Mexico and Italy closures through the remainder of 2018.

Use of Non-GAAP Financial Measures
In addition to financial measures presented on the basis of accounting principles generally accepted in the United States of America (“U.S. GAAP”), we present certain information related to our current period results of operations through “constant currency,” which is a non-GAAP financial measure and should be viewed as a supplement to our results of operations and presentation of reportable operating segments under U.S. GAAP. Constant currency represents current period results that have been retranslated using prior year average foreign exchange rates for the comparative period to enhance the visibility of the underlying business trends excluding the impact of foreign currency exchange rate fluctuations.
Management uses constant currency to assist in comparing business trends from period to period on a consistent basis in communications with the Board of Directors (the “Board”), stockholders, analysts, and investors concerning our financial performance. We believe constant currency is useful to investors and other users of our condensed consolidated financial statements as an additional tool to evaluate operating performance. We believe it also provides a useful baseline for analyzing trends in our operations. Investors should not consider constant currency in isolation from, or as a substitute for, financial information prepared in accordance with U.S. GAAP.
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Second Quarter 2018 Financial Highlights
The following were significant developments in our businesses during the three months ended June 30, 2018:

• | Revenues were $328.0 million, growing 4.7% over the second quarter of 2017, or 2.3% on a constant currency basis.

• | We sold 17.8 million pairs of shoes worldwide, an increase of 2.4% from 17.4 million pairs in the three months ended June 30, 2017.

• | Gross margin was 55.3%, an increase of 110 basis points from last year’s second quarter.

• | SG&A was $144.3 million compared to $140.4 million in the second quarter of 2017. As a percent of revenues, SG&A improved 80 basis points and represented 44.0% of revenues. Second quarter 2018 results included $1.3 million of non-recurring charges associated with our SG&A reduction plan compared to $1.8 million in last year’s second quarter and $7.1 million of non-recurring charges associated with the closure of company-operated manufacturing and distribution facilities.

• | Income from operations of $37.1 million increased 25.9% compared to $29.4 million in last year’s second quarter. Net income attributable to common stockholders was $30.4 million, or $0.35 per diluted share, compared to $18.1 million, or $0.20 per diluted share, in last year’s second quarter. We had 71.5 million and 74.6 million weighted average diluted common shares outstanding on June 30, 2018 and 2017, respectively.

• | We continued to focus on improving the efficiency and effectiveness of our operations, including carefully managing and reducing our retail fleet, especially full-priced retail stores. During the three months ended June 30, 2018, we opened one store and closed 28 company-operated retail stores.

• | We repurchased 0.4 million shares of common stock at an aggregate cost of $5.9 million.

Future Outlook
We intend to continue advancing our strategic objectives, focusing on three key initiatives to:
(1) drive sustainable, profitable revenue growth;
(2) improve the quality of revenues to enhance gross margins, and;
(3) simplify our business to reduce costs.
We are focusing on our core molded footwear heritage by narrowing our product line to emphasize higher-margin units, as well as developing innovative new casual lifestyle footwear platforms. By streamlining our product portfolio to focus on the most successful designs, driving global alignment of our product offerings, and investing in marketing, we believe we will create a more powerful consumer connection to the brand.
We are refining our business model around the world, prioritizing direct investment in larger-scale geographies to focus our resources on the demographics with the largest growth prospects, and transferring significant commercial responsibilities to distributors. Further, we are expanding our engagement with leading wholesale accounts in select markets to drive sales growth, optimize product placement, and enhance brand reputation.
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Results of Operations

| Three Months Ended June 30, |  | Six Months Ended June 30, |  | % Change
| 2018 |  | 2017 |  | 2018 |  | 2017 |  | Q2 2018-2017 |  | YTD 2018-2017
| (in thousands, except per share, margin, and average selling price data)
Revenues | $ | 328,004 |  |  | $ | 313,221 |  |  | $ | 611,152 |  |  | $ | 581,128 |  |  | 4.7 | % |  | 5.2 | %
Cost of sales | 146,604 |  |  | 143,414 |  |  | 289,879 |  |  | 277,737 |  |  | (2.2 | )% |  | (4.4 | )%
Gross profit | 181,400 |  |  | 169,807 |  |  | 321,273 |  |  | 303,391 |  |  | 6.8 | % |  | 5.9 | %
Selling, general and administrative expenses | 144,336 |  |  | 140,361 |  |  | 258,287 |  |  | 258,363 |  |  | (2.8 | )% |  | — | %
Income from operations | 37,064 |  |  | 29,446 |  |  | 62,986 |  |  | 45,028 |  |  | 25.9 | % |  | 39.9 | %
Foreign currency gains, net | 283 |  |  | 162 |  |  | 1,354 |  |  | 438 |  |  | 74.7 | % |  | 209.1 | %
Interest income | 146 |  |  | 157 |  |  | 425 |  |  | 307 |  |  | (7.0 | )% |  | 38.4 | %
Interest expense | (132 | ) |  | (188 | ) |  | (245 | ) |  | (372 | ) |  | 29.8 | % |  | 34.1 | %
Other income | 16 |  |  | 9 |  |  | 69 |  |  | 133 |  |  | 77.8 | % |  | (48.1 | )%
Income before income taxes | 37,377 |  |  | 29,586 |  |  | 64,589 |  |  | 45,534 |  |  | 26.3 | % |  | 41.8 | %
Income tax expense | 3,000 |  |  | 7,627 |  |  | 13,758 |  |  | 12,564 |  |  | 60.7 | % |  | (9.5 | )%
Net income | 34,377 |  |  | 21,959 |  |  | 50,831 |  |  | 32,970 |  |  | 56.6 | % |  | 54.2 | %
Dividends on Series A convertible preferred stock | (3,000 | ) |  | (3,000 | ) |  | (6,000 | ) |  | (6,000 | ) |  | — | % |  | — | %
Dividend equivalents on Series A convertible preferred shares related to redemption value accretion and beneficial conversion feature | (951 | ) |  | (873 | ) |  | (1,882 | ) |  | (1,729 | ) |  | (8.9 | )% |  | (8.8 | )%
Net income attributable to common stockholders | $ | 30,426 |  |  | $ | 18,086 |  |  | $ | 42,949 |  |  | $ | 25,241 |  |  | 68.2 | % |  | 70.2 | %
Net income per common share: |  |  |  |  |  |  |  |  |  |  |  |
Basic | $ | 0.37 |  |  | $ | 0.21 |  |  | $ | 0.52 |  |  | $ | 0.29 |  |  | 76.2 | % |  | 79.3 | %
Diluted | $ | 0.35 |  |  | $ | 0.20 |  |  | $ | 0.51 |  |  | $ | 0.29 |  |  | 75.0 | % |  | 75.9 | %
Gross margin (1) | 55.3 | % |  | 54.2 | % |  | 52.6 | % |  | 52.2 | % |  | 110 | bp |  | 40 | bp
Operating margin (1) | 11.3 | % |  | 9.4 | % |  | 10.3 | % |  | 7.7 | % |  | 190 | bp |  | 260 | bp
Footwear unit sales | 17,846 |  |  | 17,422 |  |  | 34,879 |  |  | 33,817 |  |  | 2.4 | % |  | 3.1 | %
Average footwear selling price - nominal basis | $ | 18.05 |  |  | $ | 17.66 |  |  | $ | 17.18 |  |  | $ | 16.91 |  |  | 2.2 | % |  | 1.6 | %
Average footwear selling price - constant currency basis (2) | $ | 17.62 |  |  | $ | 17.66 |  |  | $ | 16.90 |  |  | $ | 16.91 |  |  | (0.2 | )% |  | (0.1 | )%

(1) Changes for gross margin and operating margin are shown in basis points (“bp”).
(2) Reflects year over year change as if the current period results were in constant currency, which is a non-GAAP financial measure. Constant currency represents current period results that have been retranslated using exchange rates in effect in the prior comparative period.
Revenues. Revenues increased $14.8 million, or 4.7%, during the three months ended June 30, 2018 compared to the same period in 2017 as we experienced growth in our e-commerce and wholesale channels that more than offset a decline in retail sales. Our wholesale channel grew by 7.2%, with especially strong performance in Europe and Asia Pacific during the second quarter. Our e-commerce channel grew by 23.8% due to increased traffic and improved conversion rates as consumers continued to migrate to online shopping channels, and the Company continued to invest in digital marketing. Our retail sales decreased by 8.0% in the second quarter of 2018 compared to the same period of 2017, as we operated 105 fewer retail stores compared to June 30, 2017. Total revenues increased by $7.6 million, or 2.4%, due to higher sales volumes, in part due to continued growth in both our clog and sandal silhouettes primarily in our e-commerce and wholesale channels. Lower average selling prices (“ASP”) decreased revenues by approximately $0.5 million, or 0.2%. An increase of $7.7 million, or 2.5%, resulted from foreign currency translation.
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Revenues increased $30.0 million, or 5.2%, in the six months ended June 30, 2018, compared to the same period in 2017. The increase in revenues was led by 23.9% growth in our e-commerce channel and 6.8% growth in our wholesale channel. These increases more than offset a reduction in retail revenues of 6.4%, the result of our targeted reductions in the number of company-operated retail stores. Higher sales volumes of approximately $18.2 million, or 3.1%, were offset by a decrease of $9.3 million, or 1.6%, attributable to a lower ASP as our product, store, and channel mix continued to change due to store closures and business model changes as we implement our strategic plan. An increase of $21.1 million, or 3.7%, resulted from foreign currency translation.
Future changes in ASP will be impacted by: (i) the mix of products sold, (ii) the sales channel under which sales are made (as we generally realize higher sales prices from our retail and e-commerce channels compared to our wholesale channel), and (iii) the level of sales discounts and incentives we offer our customers.
Cost of sales. Cost of sales increased $3.2 million, or 2.2%, during the three months ended June 30, 2018 compared to the same period in 2017. Higher sales volume resulted in an increase in cost of sales of $3.5 million, or 2.4%, and foreign currency translation resulted in an increase of $3.6 million, or 2.5%. Changes in product mix and supply chain cost reductions contributed to lower average costs per unit, accounting for a $3.9 million, or 2.7%, decline in cost of sales.
During the six months ended June 30, 2018, cost of sales increased $12.1 million, or 4.4%, compared to the same period in 2017. Higher sales volumes resulted in an increase of $8.7 million, or 3.1%, in cost of sales, partially offset by a decrease of $5.7 million, or 2.1%, due to a lower average cost per unit. Lower average costs per unit were primarily the result of product mix, reflecting our ongoing focus on core molded products, continued supply chain cost reductions, and a reallocation of third-party manufacturing production within the Asia Pacific region to lower-cost suppliers. The effect of foreign currency translation was an increase of $9.1 million, or 3.4%, to cost of sales.
Gross Profit. Gross profit increased $11.6 million, or 6.8%, during the three months ended June 30, 2018 compared to the same period in 2017. Gross margin improved 110 basis points to 55.3% compared to the same period in 2017, driven by favorable product mix and foreign currency impacts. An increase of approximately $4.1 million, or 2.4%, resulted from higher sales volumes and an increase of $4.1 million, or 2.4%, resulted from foreign currency translation. An increase of $3.4 million, or 2.0%, resulted from decreases in average costs per unit which exceeded the decrease in ASP.
During the six months ended June 30, 2018, gross profit increased $17.9 million, or 5.9%, and gross margin increased 40 basis points to 52.6% compared to the same period in 2017. The increase in gross profit was primarily due to our continued focus on sales of higher margin products. Higher unit sales volumes of approximately $9.5 million, or 3.1%, were partially offset by a decrease of $3.6 million, or 1.2%, which resulted from a decline in our ASP that exceeded the decrease in our average cost per unit, and by an increase of $12.0 million, or 4.0%, from foreign currency translation.
Selling, general and administrative expenses. SG&A increased $4.0 million, or 2.8%, during the three months ended June 30, 2018 compared to the same period in 2017. The increase was primarily due to expenses of $7.1 million related to the closure of our Mexico and Italy facilities and higher variable compensation of $2.0 million, partially offset by lower professional service fees of $3.4 million and lower other net expenses of $1.7 million. As a percent of sales, SG&A improved by 80 basis points to 44.0%, a reflection of our SG&A reduction efforts.
SG&A was flat for the six months ended June 30, 2018, compared to the same period in 2017. As a percent of sales, SG&A improved by 220 basis points to 42.3%. A decrease of $4.9 million in professional services fees and a decrease of $4.4 million in facilities expenses as a result of fewer company-owned retail stores were partially offset by $8.0 million in expenses related to the closure of our Mexico and Italy facilities, and higher marketing and other expenses of $1.3 million.
Foreign currency gains, net. Foreign currency gains, net, consists of unrealized and realized foreign currency gains and losses from the remeasurement and settlement of monetary assets and liabilities denominated in non-functional currencies as well as realized and unrealized gains and losses on foreign currency derivative instruments. During the three months ended June 30, 2018, we recognized realized and unrealized net foreign currency gains of $0.3 million compared to $0.2 million during the three months ended June 30, 2017. During the six months ended June 30, 2018, we recognized realized and unrealized foreign currency net gains of $1.4 million, compared to $0.4 million during the six months ended June 30, 2017.
Income tax expense. During the three months ended June 30, 2018, income tax expense decreased $4.6 million compared to the same period in 2017. The effective tax rate for the three months ended June 30, 2018 was 8.0% compared to an effective tax rate of 25.8% for the same period in 2017, a 17.8% decrease. The decrease in the effective rate was due to the release of valuation allowances in certain jurisdictions, partially offset by operating losses in certain jurisdictions where the Company has determined that it is not more likely than not to realize the associated tax benefits, tax expense recorded in profitable jurisdictions, and the impact of the GILTI provisions included in the Tax Act. The Company has elected to account for GILTI as a period cost, and
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therefore has included GILTI expense in the effective tax rate calculation. Our effective tax rate of 8.0% for the three months ended June 30, 2018 differs from the federal U.S. statutory rate due to the release of valuation allowances in certain jurisdictions and differences in income tax rates between U.S. and foreign jurisdictions.
During the six months ended June 30, 2018, income tax expense increased $1.2 million compared to the same period in 2017. The effective tax rate for the six months ended June 30, 2018 was 21.3% compared to an effective tax rate of 27.6% for the same period in 2017, resulting in an effective tax rate decrease of 6.3%. This decrease in the effective rate was due to the release of valuation allowances in certain jurisdictions, partially offset by operating losses in certain jurisdictions where the Company has determined that it is not more likely than not to realize the associated tax benefits, tax expense recorded in profitable jurisdictions, and the impact of the GILTI provisions included in the Tax Act. The Company has elected to account for GILTI as a period cost, and therefore has included GILTI expense in the effective tax rate calculation. Our effective tax rate of 21.3% for the six months ended June 30, 2018 differs from the federal U.S. statutory rate differs from the federal U.S. statutory rate due to differences in income tax rates between U.S. and foreign jurisdictions as well as book losses in certain jurisdictions for which tax benefits cannot be recognized.
Our tax rate is volatile and may increase or decrease with changes in, among other things, the amount of income or loss by jurisdiction, our ability to utilize net operating losses and foreign tax credits, changes in tax laws, and the movement of liabilities established pursuant to accounting guidance for uncertain tax positions as statutes of limitations expire, positions are effectively settled, or when additional information becomes available. There are proposed or pending tax law changes in various jurisdictions and other changes to regulatory environments in countries in which we do business that, if enacted, may have an impact on our effective tax rate.
Revenues By Channel

|  | Three Months Ended June 30, |  | Six Months Ended June 30, |  | % Change |  | Constant Currency % Change (1)
|  | 2018 |  | 2017 |  | 2018 |  | 2017 |  | Q2 2018-2017 |  | YTD 2018-2017 |  | Q2 2018-2017 |  | YTD 2018-2017
|  | (in thousands)
Wholesale: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Americas |  | $ | 53,920 |  |  | $ | 57,307 |  |  | $ | 126,594 |  |  | $ | 128,333 |  |  | (5.9 | )% |  | (1.4 | )% |  | (5.4 | )% |  | (1.0 | )%
Asia Pacific |  | 71,561 |  |  | 65,146 |  |  | 143,294 |  |  | 136,081 |  |  | 9.8 | % |  | 5.3 | % |  | 6.6 | % |  | 0.5 | %
Europe |  | 38,820 |  |  | 30,947 |  |  | 88,697 |  |  | 71,530 |  |  | 25.4 | % |  | 24.0 | % |  | 18.3 | % |  | 12.3 | %
Other businesses |  | 295 |  |  | 103 |  |  | 608 |  |  | 291 |  |  | 186.4 | % |  | 108.9 | % |  | 173.8 | % |  | 91.1 | %
Total wholesale |  | 164,596 |  |  | 153,503 |  |  | 359,193 |  |  | 336,235 |  |  | 7.2 | % |  | 6.8 | % |  | 4.6 | % |  | 2.5 | %
Retail: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Americas |  | 56,594 |  |  | 55,576 |  |  | 91,310 |  |  | 88,405 |  |  | 1.8 | % |  | 3.3 | % |  | 1.7 | % |  | 3.1 | %
Asia Pacific |  | 30,803 |  |  | 39,429 |  |  | 48,417 |  |  | 60,961 |  |  | (21.9 | )% |  | (20.6 | )% |  | (25.0 | )% |  | (24.1 | )%
Europe |  | 12,080 |  |  | 13,071 |  |  | 19,256 |  |  | 20,490 |  |  | (7.6 | )% |  | (6.0 | )% |  | (9.1 | )% |  | (10.4 | )%
Total retail |  | 99,477 |  |  | 108,076 |  |  | 158,983 |  |  | 169,856 |  |  | (8.0 | )% |  | (6.4 | )% |  | (9.4 | )% |  | (8.3 | )%
E-commerce: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Americas |  | 27,248 |  |  | 23,271 |  |  | 43,688 |  |  | 37,139 |  |  | 17.1 | % |  | 17.6 | % |  | 16.7 | % |  | 17.2 | %
Asia Pacific |  | 26,036 |  |  | 20,069 |  |  | 33,851 |  |  | 25,946 |  |  | 29.7 | % |  | 30.5 | % |  | 22.9 | % |  | 23.2 | %
Europe |  | 10,647 |  |  | 8,302 |  |  | 15,437 |  |  | 11,952 |  |  | 28.2 | % |  | 29.2 | % |  | 19.9 | % |  | 18.4 | %
Total e-commerce |  | 63,931 |  |  | 51,642 |  |  | 92,976 |  |  | 75,037 |  |  | 23.8 | % |  | 23.9 | % |  | 19.6 | % |  | 19.5 | %
Total revenues |  | $ | 328,004 |  |  | $ | 313,221 |  |  | $ | 611,152 |  |  | $ | 581,128 |  |  | 4.7 | % |  | 5.2 | % |  | 2.3 | % |  | 1.5 | %

(1) Reflects year over year change as if the current period results were in constant currency, which is a non-GAAP financial measure. Constant currency represents current period results that have been retranslated using exchange rates in effect in the prior comparative period.
Wholesale channel revenues. Revenues from our wholesale channel increased $11.1 million, or 7.2%, during the three months ended June 30, 2018 compared to the same period in 2017. An increase of approximately $7.2 million, or 4.7%, from higher sales volumes due to increased customer demand, especially with e-tail customers as consumers shift towards online purchasing. Strength in volume was partially offset by a decrease of $0.1 million, or less than 0.1%, attributable to a lower ASP, reflective of our focus on lower-priced, higher-margin molded footwear. Foreign currency translation drove an increase of $4.0 million, or 2.6%.
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During the six months ended June 30, 2018, revenues from our wholesale channel increased $23.0 million, or 6.8%, compared to the same period in 2017. Higher sales volumes of approximately $14.8 million, or 4.4%, were partially offset by a lower ASP of $6.3 million, or 1.9%, while the effect of foreign currency translation was an increase $14.5 million, or 4.3%.
Retail channel revenues. Revenues from our retail channel decreased $8.6 million, or 8.0%, during the three months ended June 30, 2018 compared to the same period in 2017. The decrease in retail channel revenues was due to targeted reductions in our company-operated retail store count, consistent with our store rationalization plan. As of June 30, 2018, we operated 105 fewer stores compared to the end of last year’s second quarter. Our comparable retail store sales grew 7.1% on a global basis, indicative of increased traffic in our remaining company-operated stores. A decrease of $13.5 million, or 12.5%, was due to lower sales volumes related to store count reduction, partially offset by a favorable impact of $3.3 million, or 3.1%, to ASP related to product mix and improved quality of revenues, and an increase of $1.6 million, or 1.4%, from foreign currency translation.
During the six months ended June 30, 2018, revenues from our retail channel decreased $10.9 million, or 6.4%, compared to the same period in 2017. The decrease in retail channel revenues was due primarily to net reduction of 105 company-operated retail store locations as we worked to optimize our store fleet, partially offset by ASP gains and favorable foreign currency impacts. Sales volumes decreased by approximately $17.4 million, or 10.3%. Favorable product mix and improved quality of revenues, the results of less promotional discounting and improved inventory composition, resulted in a higher ASP impact of $3.3 million, or 2.0%. An increase of $3.2 million, or 1.9%, resulted from foreign currency translation.
E-commerce channel revenues. Revenues from our e-commerce channel, which includes our own e-commerce sites as well as sales through third-party marketplaces, increased $12.3 million, or 23.8%, during the three months ended June 30, 2018 compared to the same period in 2017, as this channel continued to grow in each region. Improved in-stock levels and investment in digital marketing resulted in increased e-commerce traffic and improved conversion rates. Revenues increased by $9.4 million, or 18.3%, from higher sales volumes as a result of increased consumer demand and a continuing shift toward online purchasing. Changes in product mix resulted in an increase of $0.7 million, or 1.3%, from higher ASP. Foreign currency translation resulted in an increase of $2.2 million, or 4.2%.
During the six months ended June 30, 2018, revenues from our e-commerce channel increased $17.9 million, or 23.9%, compared to the same period in 2017. Revenues increased by $14.2 million, or 18.9%, from higher sales volumes, and higher ASP related to mix contributed an additional $0.4 million, or 0.5%. Favorable foreign currency translation resulted in an increase of $3.3 million, or 4.5%.
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Reportable Operating Segments
The following table sets forth information related to our reportable operating segments, including a comparison of revenues and operating income by segment:

| Three Months Ended June 30, |  | Six Months Ended June 30, |  | % Change |  | Constant Currency % Change (1)
| 2018 |  | 2017 |  | 2018 |  | 2017 |  | Q2 2018-2017 |  | YTD 2018-2017 |  | Q2 2018-2017 |  | YTD 2018-2017
| (in thousands) |  |
Revenues: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Americas | $ | 137,762 |  |  | $ | 136,154 |  |  | $ | 261,592 |  |  | $ | 253,877 |  |  | 1.2 | % |  | 3.0 | % |  | 1.3 | % |  | 3.1 | %
Asia Pacific | 128,400 |  |  | 124,644 |  |  | 225,562 |  |  | 222,989 |  |  | 3.0 | % |  | 1.2 | % |  | (0.8 | )% |  | (3.6 | )%
Europe | 61,547 |  |  | 52,320 |  |  | 123,390 |  |  | 103,971 |  |  | 17.6 | % |  | 18.7 | % |  | 11.7 | % |  | 8.5 | %
Total segment revenues | 327,709 |  |  | 313,118 |  |  | 610,544 |  |  | 580,837 |  |  | 4.7 | % |  | 5.1 | % |  | 2.2 | % |  | 1.5 | %
Other businesses | 295 |  |  | 103 |  |  | 608 |  |  | 291 |  |  | 186.4 | % |  | 108.9 | % |  | 173.8 | % |  | 91.1 | %
Total consolidated revenues | $ | 328,004 |  |  | $ | 313,221 |  |  | $ | 611,152 |  |  | $ | 581,128 |  |  | 4.7 | % |  | 5.2 | % |  | 2.3 | % |  | 1.5 | %
Income from operations: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Americas | $ | 39,689 |  |  | $ | 25,205 |  |  | $ | 68,228 |  |  | $ | 47,207 |  |  | 57.5 | % |  | 44.5 | % |  | 57.2 | % |  | 44.5 | %
Asia Pacific | 36,387 |  |  | 33,305 |  |  | 62,971 |  |  | 60,030 |  |  | 9.3 | % |  | 4.9 | % |  | 6.4 | % |  | 0.2 | %
Europe | 18,701 |  |  | 10,031 |  |  | 36,564 |  |  | 22,305 |  |  | 86.4 | % |  | 63.9 | % |  | 80.6 | % |  | 51.1 | %
Total segment income from operations | 94,777 |  |  | 68,541 |  |  | 167,763 |  |  | 129,542 |  |  | 38.3 | % |  | 29.5 | % |  | 35.9 | % |  | 125.1 | %
Other businesses(2) | (16,531 | ) |  | (5,035 | ) |  | (27,465 | ) |  | (10,650 | ) |  | (228.3 | )% |  | (157.9 | )% |  | 110.5 | % |  | 154.4 | %
Unallocated corporate and other (3) | (41,182 | ) |  | (34,060 | ) |  | (77,312 | ) |  | (73,864 | ) |  | (20.9 | )% |  | (4.7 | )% |  | 5.4 | % |  | (51.4 | )%
Total consolidated income from operations | $ | 37,064 |  |  | $ | 29,446 |  |  | $ | 62,986 |  |  | $ | 45,028 |  |  | 25.9 | % |  | 39.9 | % |  | 58.5 | % |  | 220.0 | %

(1) Reflects year over year change as if the current period results were in constant currency, which is a non-GAAP financial measure. Constant currency represents current period results that have been retranslated using exchange rates in effect in the prior comparative period.
(2) ‘Other businesses’ consists primarily of our owned and leased manufacturing facilities, which manufacture products for sale by our operating segments.
(3) Unallocated corporate and other includes corporate support and administrative functions, costs associated with share-based compensation, research and development, brand marketing, legal, and depreciation and amortization of corporate and other assets not allocated to operating segments.
Americas Operating Segment
Revenues. Revenues for our Americas segment increased $1.6 million, or 1.2%, during the three months ended June 30, 2018 compared to the same period in 2017. The increase in revenues was led by a 17.1%, increase in e-commerce revenues due to increased traffic as this channel continues to grow. Retail revenues increased by 1.8%, despite operating 15 fewer retail stores compared to the same period last year, as our comparable sales showed growth of 7.5%. These increases were offset in part by a decrease in wholesale channel revenues of 5.9%, due to the combination of a late start to Spring, timing of shipments, and currency instability in our South American markets. For all channels combined, lower sales volumes resulted in a decrease of approximately $5.4 million, or 4.0%, which was offset by an increase in ASP of $7.1 million, or 5.2%. The effect of foreign currency translation was a decrease of $0.1 million, or less than 0.1%.
During the six months ended June 30, 2018, revenues for our Americas segment increased by $7.7 million, or 3.0%, compared to the same period in 2017. The increase in revenues resulted primarily from 17.6% higher e-commerce revenues as well as a 3.3% increase in retail revenues, which more than offset a slight decline in wholesale revenues. For all channels combined, higher sales
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volumes resulted in an increase of $5.4 million, or 2.1%, along with an increase from higher ASPs of $2.5 million, or 1.0%, while the effect of foreign currency translation was a decrease of $0.2 million, or 0.1%.
Income from Operations. Income from operations for the Americas segment was $39.7 million for the three months ended June 30, 2018, an increase of $14.5 million, or 57.5%, compared to the same period in 2017. Gross profit increased $6.4 million, or 8.8%, and gross margin increased 400 basis points to 57.2%, compared to the same period in 2017. The increase in our Americas segment gross profit is due to the net impact of a decrease of $4.2 million, or 5.8%, due to lower sales volumes and a increase of $10.6 million, or 14.6%, due to an increase in ASP. The impact of foreign currency translation on gross margin was insignificant.
SG&A for our Americas segment decreased $8.1 million, or 17.2%, during the three months ended June 30, 2018 compared to the same period in 2017. The decrease in SG&A was primarily due to lower marketing expenses of $8.4 million, driven by a reduction in regionally controlled marketing and an increase in global brand marketing, which is managed within ‘Other Businesses and Unallocated Corporate’ that impacted segment results by $9.2 million, partially offset by a net increase of $0.3 million in other expenses, none of which were individually significant.
Income from operations for the Americas segment was $68.2 million for the six months ended June 30, 2018, an increase of $21.0 million, or 44.5%, compared to the same period in 2017. Gross profit increased $8.7 million, or 6.6%, and gross margin increased 180 basis points to 54.0%, compared to the same period in 2017. The increase in the Americas segment gross profit is due to an increase of $2.8 million, or 2.1%, from higher sales volumes, an increase of $5.9 million, or 4.5% in our ASP. The impact of foreign currency translation on gross margin was insignificant.
During the six months ended June 30, 2018, SG&A for our Americas segment decreased $12.3 million, or 14.4%, compared to the same period in 2017. The decrease in SG&A was due to reductions of $9.6 million in marketing expenses, driven by a reduction in regionally controlled marketing and an increase in global brand marketing, which is managed within ‘Other Businesses and Unallocated Corporate’ that impacted segment results by $9.5 million, $1.7 million in compensation expenses, and $0.9 million in facilities costs related to store closures, and a net decrease of $0.1 million in other expenses, none of which were individually significant.
Asia Pacific Operating Segment
Revenues. Revenues for our Asia Pacific segment increased $3.8 million, or 3.0%, during the three months ended June 30, 2018 compared to the same period in 2017. E-commerce revenues increased by 29.7%, and wholesale revenues increased by 9.8%, which were partially offset by a decrease in retail channel revenues. Retail revenues decreased by 21.9% as we operated 67 fewer stores in the region compared to the same period last year. Retail comparable sales of 2.9% reflected higher conversion rates in company-operated stores. For all channels combined, higher sales volumes drove an increase of $1.1 million, or 0.9%, and a lower ASP resulted in a decrease of $2.0 million, or 1.6%. The effect of foreign currency translation was an increase of $4.7 million, or 3.7%.
During the six months ended June 30, 2018, revenues for our Asia Pacific segment increased $2.6 million, or 1.2%, compared to the same period in 2017. E-commerce revenues increased by 30.5%, with growth in every country we operate in and strong results in key markets in the region, and wholesale revenues increased by 5.3%. Retail revenues decreased by 20.6% as a result of a lower number of company-operated retail stores. For all channels combined, an increase in sales volumes of approximately $0.9 million, or 0.4%, was offset by a decrease in ASP of of $8.9 million, or 4.0%. The effect of foreign currency translation was an increase of $10.6 million, or 4.8%.
Income from Operations. Income from operations for the Asia Pacific segment was $36.4 million for the three months ended June 30, 2018, an increase of $3.1 million, or 9.3%, compared to the three months ended June 30, 2017. Gross profit increased $0.8 million, or 1.1%, and gross margin increased 110 basis points to 58.8% compared to the same period in 2017. The increase in gross profit is due to an increase of $3.3 million, or 4.4%, due to higher sales volumes and a $2.7 million, or 3.6%, increase from favorable foreign currency translation, partially offset by a decrease of $5.2 million, or 6.9%, due to a lower ASP, reflecting our focus on lower-priced molded footwear.
SG&A for our Asia Pacific segment decreased $2.3 million or 5.5%, during the three months ended June 30, 2018 compared to the same period in 2017. The decrease in SG&A was primarily due to decreases of $2.1 million in marketing expenses, driven by a reduction in regionally controlled marketing and an increase in global brand marketing, which is managed within ‘Other Businesses and Unallocated Corporate’, that impacted segment results by $3.4 million, $1.8 million in compensation expenses, and $0.6 million in facilities expense as a result of the reduction in the number of company-operated retail stores, partially offset by lower recoveries of previously written off accounts receivable of $0.9 million and a net increase in other expenses of $1.3 million, none of which were individually significant.
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Income from operations for the Asia Pacific segment was $63.0 million for the six months ended June 30, 2018, an increase of $2.9 million, or 4.9%, compared to the same period in 2017. Gross profit decreased $1.3 million, or 1.0%, and gross margin decreased 120 basis points to 56.4% compared to the same period in 2017. The decrease in the Asia Pacific segment gross profit was due to a decrease in our ASP that exceeded the decline in our average costs per unit of $8.0 million, or 6.2%, partially offset by an increase of $6.2 million, or 4.8%, from favorable foreign currency translation and an increase in unit sales volumes of $0.5 million, or 0.4%.
During the six months ended June 30, 2018, SG&A for our Asia Pacific segment decreased $4.2 million, or 6.2%, compared to the same period in 2017. The decrease in SG&A was primarily due to decreases of $2.8 million in compensation and $2.4 million in facilities expenses as a result of the reduction in the number of company-operated retail stores and our SG&A reduction efforts and a decrease of $2.0 million in marketing expenses, driven by a reduction in regionally controlled marketing and an increase in global brand marketing, which is managed within ‘Other Businesses and Unallocated Corporate’ that impacted segment results by $3.5 million, partially offset by lower recoveries of previously written off accounts receivable of $1.9 million, and a net increase of $1.1 million in sales expenses and other costs, none of which were individually significant.
Europe Operating Segment
Revenues. Revenues for our Europe segment increased $9.2 million, or 17.6%, during the three months ended June 30, 2018 compared to the same period in 2017. E-commerce revenue grew 28.2%, reflecting higher online traffic and reduced promotional activity, and wholesale revenue grew 25.4%, more than offsetting a decline of 7.6% in retail results as we operated 23 fewer stores in the region compared to last year. Our retail comparable sales of 16.4% for the quarter benefited from increased demand and improved inventory positioning. Revenues increased $7.3 million, or 13.9%, due to higher sales volumes, partly offset by a decrease of $1.2 million, or 2.2%, due to a lower ASP in the region. Foreign currency translation drove an increase of $3.1 million, or 5.9%.
During the six months ended June 30, 2018, revenues for our Europe segment increased $19.4 million, or 18.7%, compared to the same period in 2017. E-commerce revenue grew 29.2% and wholesale revenue grew 24.0%, more than offsetting a 6.0% decline in retail revenues as we reduced the number of company-operated retail stores in the region. Approximately $10.7 million, or 10.3%, of the increase was due to higher unit sales volumes, partially offset by a decrease of $1.8 million, or 1.8%, from a lower ASP. Favorable foreign currency translation resulted in an increase of $10.5 million, or 10.2%.
Income from Operations. Income from operations for the Europe segment was $18.7 million for the three months ended June 30, 2018, an increase of $8.7 million, or 86.4%, compared to the three months ended June 30, 2017. Gross profit for the Europe segment increased $6.7 million, or 23.9%, and gross margin increased 280 basis points to 56.2% compared to the same period in 2017. The increase in the Europe segment gross profit was due to the net impact of an increase of $4.8 million, or 17.0%, from higher unit sales volumes, an increase of $0.5 million, or 1.8%, from a higher ASP, and a $1.4 million, or 5.1%, increase from foreign currency translation.
SG&A for our Europe segment decreased $2.0 million, or 11.4%, during the three months ended June 30, 2018 compared to the same period in 2017. The decrease in SG&A was primarily due to decreases in marketing expenses of $1.2 million, driven by a reduction in regionally controlled marketing and an increase in global brand marketing, which is managed within ‘Other Businesses and Unallocated Corporate’ that impacted segment results by $1.3 million, and facilities expense of $0.8 million, resulting from reductions in the number of company-operated retail stores.
Income from operations for the Europe segment was $36.6 million for the six months ended June 30, 2018, an increase of $14.3 million, or 63.9%, compared to the same period in 2017. During the six months ended June 30, 2018, gross profit for the Europe segment increased $13.1 million, or 24.4%, and gross margin increased by 250 basis points to 54.0% compared to the same period in 2017. The increase in the Europe segment gross profit is due to the net impact of a increase of $5.5 million, or 10.3%, due to higher unit sales volumes, an increase of $1.9 million, or 3.4%, due to a higher ASP, and an increase of $5.7 million, or 10.7%, from foreign currency translation.
During the six months ended June 30, 2018, SG&A for our Europe segment decreased $1.2 million, or 3.7%, compared to the same period in 2017.The decrease in SG&A was primarily due to a decrease of $1.2 million in facilities expenses as a result of the reduction in company-operated retail stores, a decrease of $1.0 million in marketing expenses, driven by a reduction in regionally controlled marketing and an increase in global brand marketing, which is managed within ‘Other Businesses and Unallocated Corporate’ that impacted segment results by $1.3 million, an increase of $1.1 million in salaries and wages, and a decrease in other costs of $0.1 million, none of which were individually significant.
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Other Businesses and Unallocated Corporate
During the three months ended June 30, 2018, total net costs within ‘Other Businesses and Unallocated Corporate’ increased by $18.6 million compared to the same period in 2017. The increase was primarily due to higher marketing expenses of $9.4 million, driven by a reduction in regionally controlled marketing and an increase in global brand marketing, which is managed within ‘Other Businesses and Unallocated Corporate’, that impacted segment results by $13.9 million, and expenses related to our Mexico and Italy facility closures totaling $6.4 million, increased variable compensation expense of $2.0 million, and other net expenses of $0.8 million.
During the six months ended June 30, 2018, total net costs within ‘Other Businesses and Unallocated Corporate’ increased by $20.3 million compared to the same period in 2017. The increase was primarily due to an increase of $13.8 million in marketing expenses, driven by a reduction in regionally controlled marketing and an increase in global brand marketing, which is managed within ‘Other Businesses and Unallocated Corporate’ that impacted segment results by $14.3 million, $7.1 million in expenses related to our Mexico and Italy facility closures, higher compensation expenses of $2.9 million, partially offset by a net decrease in professional services and other expenses of $3.5 million.
Store Locations and Comparable Store Sales
The tables below illustrate the overall change in the number of our company-operated retail locations by type of store and reportable operating segment for the three and six months ended June 30, 2018:

| March 31, 2018 |  | Opened |  | Closed/Transferred |  | June 30, 2018
Company-operated retail locations: |  |  |  |  |  |  |
Type: |  |  |  |  |  |  |
Kiosk/store in store | 71 |  |  | — |  |  | 2 |  |  | 69 |
Retail stores | 145 |  |  | — |  |  | 19 |  |  | 126 |
Outlet stores | 209 |  |  | 1 |  |  | 7 |  |  | 203 |
Total | 425 |  |  | 1 |  |  | 28 |  |  | 398 |
Operating segment: |  |  |  |  |  |  |
Americas | 174 |  |  | — |  |  | 5 |  |  | 169 |
Asia Pacific | 177 |  |  | 1 |  |  | 17 |  |  | 161 |
Europe | 74 |  |  | — |  |  | 6 |  |  | 68 |
Total | 425 |  |  | 1 |  |  | 28 |  |  | 398 |

| December 31, 2017 |  | Opened |  | Closed/Transferred |  | June 30, 2018
Company-operated retail locations: |  |  |  |  |  |  |
Type: |  |  |  |  |  |  |
Kiosk/store-in-store | 71 |  |  | — |  |  | 2 |  |  | 69 |
Retail stores | 161 |  |  | — |  |  | 35 |  |  | 126 |
Outlet stores | 215 |  |  | 1 |  |  | 13 |  |  | 203 |
Total | 447 |  |  | 1 |  |  | 50 |  |  | 398 |
Operating segment: |  |  |  |  |  |  |
Americas | 175 |  |  | — |  |  | 6 |  |  | 169 |
Asia Pacific | 186 |  |  | 1 |  |  | 26 |  |  | 161 |
Europe | 86 |  |  | — |  |  | 18 |  |  | 68 |
Total | 447 |  |  | 1 |  |  | 50 |  |  | 398 |

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Comparable retail store sales and direct to consumer store sales by operating segment were:

| Constant Currency (1)
| Three Months Ended June 30, |  | Six Months Ended June 30,
| 2018 |  | 2017 |  | 2018 |  | 2017
Comparable retail store sales: (2) |  |  |  |  |  |  |
Americas | 7.5 | % |  | 0.4 | % |  | 8.8 | % |  | (2.1 | )%
Asia Pacific | 2.9 | % |  | (0.9 | )% |  | 3.6 | % |  | (1.1 | )%
Europe | 16.4 | % |  | 0.7 | % |  | 9.2 | % |  | (2.5 | )%
Global | 7.1 | % |  | — | % |  | 7.3 | % |  | (1.8 | )%

| Constant Currency (1)
| Three Months Ended June 30, |  | Six Months Ended June 30,
| 2018 |  | 2017 |  | 2018 |  | 2017
Direct to consumer comparable store sales (includes retail and e-commerce): (2) |  |  |  |  |  |  |
Americas | 10.4 | % |  | 1.1 | % |  | 11.4 | % |  | 1.2 | %
Asia Pacific | 11.6 | % |  | 13.3 | % |  | 11.2 | % |  | 10.9 | %
Europe | 18.0 | % |  | 5.1 | % |  | 13.2 | % |  | 1.4 | %
Global | 11.8 | % |  | 5.7 | % |  | 11.6 | % |  | 2.9 | %

(1) Reflects period over period change on a constant currency basis, which is a non-GAAP financial measure. Constant currency represents current period results that have been retranslated using exchange rates used in the prior comparative period.
(2) Comparable store status is determined on a monthly basis. Comparable store sales includes the revenues of stores that have been in operation for more than twelve months. Stores in which selling square footage has changed more than 15% as a result of a remodel, expansion, or reduction are excluded until the thirteenth month in which they have comparable prior year sales. Temporarily closed stores are excluded from the comparable store sales calculation during the month of closure. Location closures in excess of three months are excluded until the thirteenth month post re-opening. E-commerce revenues are based on same site sales period over period.
Financial Condition, Capital Resources, and Liquidity
Liquidity
Our liquidity position as of June 30, 2018 was:

|  | June 30, 2018
|  | (in thousands)
Cash, cash equivalents, and restricted cash |  | $ | 175,698 |
Available borrowings |  | 99,400 |

As of June 30, 2018, we had $175.7 million in cash, cash equivalents, and restricted cash and up to $99.4 million of remaining availability under our revolving credit facilities. We believe that cash flows from operations, our cash and cash equivalents on hand, and available borrowings under our revolving credit facilities and other financing instruments will be sufficient to meet our liquidity needs and capital expenditure requirements for at least the next twelve months. Additional future financing may be necessary to fund our operations and there can be no assurance that, if needed, we will be able to secure additional debt or equity financing on terms acceptable to us or at all. Although we believe we have adequate sources of liquidity over the long term, the success of our operations, the global economic outlook, and the pace of sustainable growth in our markets, among other factors, could impact our business and liquidity.
Due to the seasonal nature of our footwear, which is more heavily focused on styles suitable for warm weather, cash flows from operating activities during our first quarter are typically lower as customer receivables and inventories rise in preparation for the Spring/Summer season. Cash flows from operating generated during our second and third quarters are generally higher, when the
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northern hemisphere is experiencing warmer weather. Accordingly, results of operations and cash flows for any one quarter are not necessarily indicative of expected results for any other quarter or for any other year.
Repatriation of Cash
As a global business, we have cash balances in various countries and amounts are denominated in various currencies. Fluctuations in foreign currency exchange rates impact our results of operations and cash positions. Future fluctuations in foreign currencies may have a material impact on our cash flows and capital resources. Cash balances held in foreign countries may have additional restrictions and covenants associated with them which could adversely impact our liquidity and our ability to timely access and transfer cash balances between entities.
As a result of the Tax Act, most of the cash held outside of the U.S. could be repatriated to the U.S. without incurring additional U.S. federal income taxes. In some countries, repatriation of certain foreign balances is restricted by local laws and could have adverse tax consequences if we were to move the cash to another country. As of June 30, 2018, we held $129.8 million of our total $171.5 million in cash in international locations. This cash is primarily used for the ongoing operations of the business in the locations in which the cash is held. Of the $129.8 million, $1.1 million could potentially be limited by local regulations. If the remaining $128.7 million were to be immediately repatriated to the U.S., no additional U.S. federal income tax expense would be incurred.
Senior Revolving Credit Facility
In order to provide additional liquidity in the future and to help support our strategic goals, our senior revolving credit facility (the “Facility”), pursuant to an Amended and Restated Credit agreement (the “Credit Agreement”), provides for borrowings of up to $100.0 million through February 2021. The Facility contains financial covenants that restrict certain actions by us, including limitations on: (i) stock repurchases to $100.0 million per year, subject to certain restrictions; and (ii) capital expenditures and commitments to $50.0 million per year. The Credit Agreement also permits intercompany loans of up to $375.0 million and requires the Company to meet certain financial covenant ratios that become effective when average outstanding borrowings under the Credit Agreement, including letters of credit, exceed the lesser of $40.0 million or 40% of the total commitments during certain periods or if the outstanding borrowings exceed the borrowing base. If the financial covenant ratios are in effect, the Company must maintain a minimum fixed charge coverage ratio of 1.10 to 1.00, and a maximum leverage ratio of 2.00 to 1.00. As of June 30, 2018, the Company was in compliance with all financial covenants.
As of June 30, 2018, the total commitments available from the lenders under the Facility were $100.0 million. At June 30, 2018, the Company had no outstanding borrowings and $0.6 million in outstanding letters of credit under the Facility, which reduces amounts available for borrowing under the Facility. As of June 30, 2018, the Company had $99.4 million of available borrowing capacity under the Facility.
Asia Revolving Credit Facilities
The Company’s revolving credit facility agreement with HSBC Bank (China) Company Limited, Shanghai Branch (“HSBC”), or the “HSBC Facility,” provides the Company uncommitted dual currency revolving loan facilities of up to 40.0 million Chinese Renminbi (“RMB”), or $6.0 million, with a combined facility limit of RMB 60.0 million, or $9.1 million. As of June 30, 2018, there were no borrowings outstanding and borrowings under the HSBC Facility remained suspended at the discretion of HSBC.
In January 2018, the Company entered into a revolving credit facility with China Merchants Bank Company Limited, Shanghai Branch, or the “CMBC Facility,” which provides the Company a revolving loan facility of up to 30.0 million RMB, or $4.5 million, subject to consent by the lender. The CMBC Facility will mature in January 2019. For RMB loans under the CMBC Facility, interest is based on a benchmark interest rate plus a certain number of basis points upon agreement by the lender and the Company at the time of borrowing. The CMBC Facility may be canceled or suspended at any time by either party. As of June 30, 2018, there were no borrowings outstanding on this credit facility.
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Cash Flows

| Six Months Ended June 30, |  |
| 2018 |  | 2017 |  | $ Change |  | % Change
| (in thousands) |  |
Cash provided by operating activities | $ | 40,861 |  |  | $ | 39,380 |  |  | $ | 1,481 |  |  | 3.8 | %
Cash used in investing activities | (3,212 | ) |  | (10,725 | ) |  | 7,513 |  |  | 70.1 | %
Cash used in financing activities | (32,823 | ) |  | (18,305 | ) |  | (14,518 | ) |  | (79.3 | )%
Effect of exchange rate changes on cash, cash equivalents, and restricted cash | (6,183 | ) |  | (717 | ) |  | (5,466 | ) |  | (762.3 | )%
Net change in cash, cash equivalents, and restricted cash | $ | (1,357 | ) |  | $ | 9,633 |  |  | $ | (10,990 | ) |  | (114.1 | )%

Operating Activities. Our primary source of liquidity is cash provided by operating activities, consisting of net income adjusted for noncash items and changes in working capital. Cash provided by operating activities increased $1.5 million for the six months ended June 30, 2018 compared to the six months ended June 30, 2017. The increase in cash provided by operating activities resulted from the combined impacts of an increase in net income as adjusted for non-cash items, which resulted in a favorable change of $24.8 million, and an unfavorable change in our operating assets and liabilities of $23.3 million. The favorable change in net income adjusted for non-cash items was driven primarily by higher net income of $17.9 million, as well as higher non-cash stock-based compensation and impairment expenses, offset in part by lower depreciation and amortization expenses. Higher accounts receivable, reflective of higher revenues, drove a use of cash $20.8 million higher compared to 2017. Changes in prepaid expenses and other assets contributed an additional use of cash of $13.7 million compared to 2017. Increased accounts payable, accrued expenses, and other liabilities at June 30, 2018 compared to June 30, 2017, were a source of $12.9 million in cash as we improved our cash management. Changes in inventories were a $1.8 million use of cash compared to the same period in 2017.
Investing Activities. The $7.5 million decrease in cash used in investing activities for the six months ended June 30, 2018 compared to the six months ended June 30, 2017 is due to lower net capital asset expenditures. Capital spend during the six months ended June 30, 2018 related primarily to information technology investment and distribution center and retail store improvements.
Financing Activities. The $14.5 million increase in cash used in financing activities for the six months ended June 30, 2018 compared to the six months ended June 30, 2017 resulted primarily from repurchase of 1.8 million shares of our common stock for approximately $25.9 million compared to 1.4 million shares for approximately $10.0 million in the first six months of 2017 and net repayments on borrowings of $0.7 million during the six months ended June 30, 2018 compared to $2.1 million for the same period in 2017. Our net borrowings decreased in the six months ended June 30, 2018 and 2017 as we financed more of our short-term cash requirements from internal cash generated from operations.
Contractual Obligations
There have been no significant changes to the contractual obligations reported in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017.
Off-Balance Sheet Arrangements
We had no material off-balance sheet arrangements as of June 30, 2018, other than certain operating lease and purchase commitments, which are described in Note 12 — Commitments and Contingencies.
Critical Accounting Policies and Estimates
The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, sales, and expenses, and related disclosure of contingent assets and liabilities. We evaluate our assumptions and estimates on an on-going basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
As of January 1, 2018, we adopted authoritative guidance related to revenue recognition from contracts with customers using the modified retrospective method. The comparative information presented in the condensed consolidated financial statements was not restated and is reported under the accounting standards in effect for the periods presented. The adoption of this guidance did not have, and is not expected to have, a significant impact on our reported revenues, gross margins or income from operations.We
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changed our balance sheet presentation for expected product returns by reporting a product return asset for the right to receive returned products and a returns liability for amounts expected to be refunded to customers as a result of product returns. The product return asset is reported within ‘Prepaid expenses and other assets’. The returns liability and payments received from customers for future delivery of products are reported within ‘Accrued liabilities and other expenses’ in the condensed consolidated balance sheets.
Effective January 1, 2018, the Company changed its inventory costing method for approximately 95% of its inventories from a lower of net realizable value or cost, using a moving average cost method, to lower of net realizable value or cost using a first-in-first-out method. The change from the Company’s former inventory cost method did not have a significant effect on inventory or cost of sales, and, as a result, prior comparative financial statements have not been restated.
For a complete discussion of our critical accounting policies, please refer to our Annual Report on Form 10-K for the year ended December 31, 2017, and Note 2 — Recent Accounting Pronouncements — Revenue Recognition contained in the condensed consolidated financial statements in this report. There have been no other significant changes in our critical accounting policies or their application since December 31, 2017.
Recent Accounting Pronouncements
See Note 2 — Recent Accounting Pronouncements in the accompanying notes to the condensed consolidated financial statements for a description of recently adopted accounting pronouncements, and issued accounting pronouncements that we believe may have an impact on our consolidated financial statements when adopted.
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ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
We centrally manage our debt and investment portfolios considering investment opportunities and risks, tax consequences and overall financing strategies. Our exposure to market risk includes interest rate fluctuations in connection with our revolving credit facility and certain financial instruments.
Borrowings under our Facility bear interest at a variable rate and are therefore subject to risk based upon prevailing market interest rates. Interest rates fluctuate as a result of many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors that are beyond our control. As of June 30, 2018 and December 31, 2017, there were no borrowings outstanding under our Facility.
Foreign Currency Exchange Risk
As a global company, we have significant revenues and costs denominated in currencies other than the U.S. Dollar. We are exposed to the risk of gains and losses resulting from changes in exchange rates on monetary assets and liabilities within our international subsidiaries that are denominated in currencies other than the subsidiary’s functional currency. Likewise, our U.S. companies are also exposed to the risk of gains and losses and the resulting changes in exchange rates on monetary assets and liabilities that are denominated in a currency other than the U.S. Dollar.
We have experienced and will continue to experience changes in international currency rates, impacting both results of operations and the value of assets and liabilities denominated in foreign currencies. We enter into forward foreign exchange contracts to buy or sell various foreign currencies to selectively protect against volatility in the value of non-functional currency denominated monetary assets and liabilities. Changes in the fair value of these forward contracts are recognized in earnings in the period that the changes occur. As of June 30, 2018, the U.S. Dollar notional value of our outstanding foreign currency forward exchange contracts was approximately $247.0 million. The net fair value of these contracts at June 30, 2018 was a liability of $0.1 million.
We perform a sensitivity analysis to determine the effects that market risk exposures may have on the fair values of our foreign currency forward exchange contracts. To perform the sensitivity analysis, we assess the risk of changes in fair values from the effect of hypothetical changes in foreign currency exchange rates. This analysis assumes a like movement by the foreign currencies in our hedge portfolio against the U.S. Dollar. As of June 30, 2018, a 10% appreciation in the value of the U.S. Dollar would result in a net increase in the fair value of our derivative portfolio of approximately $4.9 million.
Effects of Changes in Exchange Rates on Translated Results of International Subsidiaries
Changes in exchange rates have a direct effect on our reported U.S. Dollar consolidated financial statements because we translate the operating results and financial position of our international subsidiaries to U.S. Dollars using current period exchange rates. Specifically, we translate the statements of operations of our foreign subsidiaries into the U.S. Dollar reporting currency using exchange rates in effect during each reporting period. As a result, comparisons of reported results between reporting periods may be impacted significantly due to differences in the exchange rates used to translate the operating results of our international subsidiaries. For example, in our European operating segment, when the U.S. Dollar strengthens relative to the Euro, our reported U.S. Dollar results are lower than if there had been no change in the exchange rate, because more Euros are required to generate the same U.S. Dollar translated amount. Conversely, when the U.S. Dollar weakens relative to the Euro, the reported U.S. Dollar results of our Europe segment are higher compared to a period with a stronger U.S. Dollar relative to the Euro. Similarly, the reported U.S. Dollar results of our Asia Pacific operating segment, where the functional currencies are primarily the Japanese Yen, Chinese Yuan, Korean Won and the Singapore Dollar, are comparatively lower or higher when the U.S. Dollar strengthens or weakens, respectively, relative to these currencies.
An increase of 1% of the value of the U.S. Dollar relative to foreign currencies would have decreased our income before taxes during the three and six months ended June 30, 2018 by approximately $0.4 million and $1.0 million, respectively. The volatility of the exchange rates is dependent on many factors that cannot be forecasted with reliable accuracy. See Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part I of this Form 10-Q for a discussion of the impact of the change in foreign exchange rates on our U.S. Dollar condensed consolidated statements of operations for the six months ended June 30, 2018 and 2017.
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ITEM 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures as such item is defined under Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2018, to provide reasonable assurance that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management necessarily applies its judgment in assessing the costs and benefits of such controls and procedures that, by their nature, can only provide reasonable assurance regarding management’s control objectives.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the three months ended June 30, 2018, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II — Other Information
ITEM 1. Legal Proceedings
The Company was subjected to an audit by the Brazilian Federal Tax Authorities related to imports of footwear from China between 2010 and 2014. On January 13, 2015, the Company was notified about the issuance of assessments totaling 14.4 million Brazilian Real (“BRL”), or approximately $3.7 million, plus interest and penalties, for the period January 2010 through May 2011. The Company has disputed these assessments and asserted defenses to the claims. On February 25, 2015, the Company received additional assessments totaling 33.3 million BRL, or approximately $8.6 million, plus interest and penalties, related to the remainder of the audit period. The Company has also disputed these assessments and asserted defenses to these claims in administrative appeals. On August 29, 2017, the Company received a favorable ruling on its appeal of the first assessment, which dismissed all fines, penalties, and interest. The tax authorities have requested a special appeal to that decision. If the appeal is accepted, Crocs will have the opportunity to both defend the appeal as well as challenge it procedurally. Should the Brazilian Tax Authority prevail in this final administrative appeal, Crocs may still challenge the assessments through the court system, which would likely require the posting of a bond. Additionally, the second appeal for the remaining assessments was heard on March 22, 2018. That decision was partially favorable and resulted in approximately a 38% reduction in principal, penalties, and interest, leaving approximately leaving approximately $5.3 million, plus interest and penalties, at risk for those assessments. The tax authorities have appealed that decision. Crocs intends to file a response to the tax authorities’ appeal as well as a separate appeal against the unfavorable portion of the ruling.
Although we are subject to other litigation from time to time in the ordinary course of business, including employment, intellectual property and product liability claims, we are not party to any other pending legal proceedings that we believe would reasonably have a material adverse impact on our business and financial results.
ITEM 1A. Risk Factors
There have been no material changes to the risk factors contained in our Annual Report on Form 10-K for the year ended December 31, 2017.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities
Period |  | Total Number of Shares Purchased |  | Average Price Paid per Share |  | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) |  | Maximum Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs
April 1 - April 30, 2018 |  | 1,300 |  |  | $ | 15.50 |  |  | 1,300 |  |  | $ | 198,739,313 |
May 1 - May 31, 2018 |  | 376,630 |  |  | 15.55 |  |  | 376,630 |  |  | 192,880,928 |
June 1 - June 30, 2018 |  | — |  |  | — |  |  | — |  |  | 192,880,928 |
Total |  | 377,930 |  |  | $ | 15.55 |  |  | 377,930 |  |  | $ | 192,880,928 |

(1) On December 26, 2013, the Company’s Board of Directors approved and authorized a program to repurchase up to $350.0 million of our common stock. On February 20, 2018, the Board increased the repurchase authorization up to $500.0 million of our common stock. As of June 30, 2018, approximately $192.9 million remained available for repurchase under our share repurchase authorization. The number, price, structure and timing of the repurchases, if any, will be at our sole discretion and future repurchases will be evaluated by us depending on market conditions, liquidity needs, restrictions under our Credit Agreement, and other factors. Share repurchases may be made in the open market or in privately negotiated transactions. The repurchase authorization does not have an expiration date and does not oblige us to acquire any particular amount of our common stock. The Board may suspend, modify, or terminate the repurchase program at any time without prior notice.
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ITEM 6. Exhibits

Exhibit Number |  | Description
3.1 |  | Restated Certificate of Incorporation of Crocs, Inc. (incorporated herein by reference to Exhibit 4.1 to Crocs, Inc.’s Registration Statement on Form S-8, filed on March 9, 2006).
3.2 |  | Certificate of Amendment to Restated Certificate of Incorporation of Crocs, Inc. (incorporated herein by reference to Exhibit 3.1 to Crocs, Inc.’s Current Report on Form 8-K, filed on July 12, 2007).
3.3 |  | Amended and Restated Bylaws of Crocs, Inc. (incorporated herein by reference to Exhibit 4.2 to Crocs, Inc.’s Registration Statement on Form S-8, filed on March 9, 2006).
3.4 |  | Certificate of Designations of Series A Convertible Preferred Stock of Crocs, Inc. (incorporated herein by reference to Exhibit 3.1 to Crocs, Inc.’s Current Report on Form 8-K, filed on January 27, 2014).
4.1 |  | Specimen Common Stock Certificate (incorporated herein by reference to Exhibit 4.2 to Crocs, Inc.’s Registration Statement on Form S-1/A, filed on January 19, 2006).
10.1* |  | Restricted Stock Unit Agreement under the Company’s 2015 Equity Incentive Plan dated June 11, 2018 between Crocs, Inc. and Andrew Rees (incorporated by reference to Exhibit 10.1 to Crocs, Inc.’s Current Report on Form 8-K, filed on June 13, 2018).
31.1† |  | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act.
31.2† |  | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes- Oxley Act.
32† |  | Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act.
101.INS† |  | XBRL Instance Document.
101.SCH† |  | XBRL Taxonomy Extension Schema Document.
101.CAL† |  | XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF† |  | XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB† |  | XBRL Taxonomy Extension Label Linkbase Document.
101.PRE† |  | XBRL Taxonomy Extension Presentation Linkbase Document.

† Filed herewith.
* Denotes a compensatory plan or arrangement.
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SIGNATURES
Pursuant to the requirements 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.

|  | CROCS, INC.
Date: August 7, 2018 |  | By: | /s/ Carrie W. Teffner
|  |  | Name: | Carrie W. Teffner
|  |  | Title: | Executive Vice President and Chief Financial Officer

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