Business Combination

12 Months Ended

Dec. 31, 2011

Business Combination

Business Combination

(9) Business Combination

        On May 19, 2011, the Company entered into an asset purchase agreement whereby it agreed to acquire substantially all of the assets and assume the related liabilities of Sanuk, an action sport footwear brand rooted in the surf community, known for its original sandals and shoes. On July 1, 2011, the Company completed the acquisition of the purchased assets and the assumption of the assumed liabilities. The total purchase price for the assets related to the Sanuk brand was $123,544 plus contingent consideration. The contingent consideration included 2011 EBITDA of the Sanuk brand multiplied by ten, less the closing payment, up to maximum of $30,000, expected to be paid in March 2012; and additional contingent consideration payments as follows:

• •

  51.8% of the gross profit of the Sanuk brand in 2012, defined as total sales less the cost of sales for the business of the sellers;

  •

  36.0% of gross profit of the Sanuk brand in 2013;

• •

  8.0% of the product of gross profit of the Sanuk brand in 2015 multiplied by five.

        There is no maximum to the contingent consideration payments for 2012, 2013, and 2015.

        The Company acquired the Sanuk brand based upon the belief that Sanuk is a profitable, well-run business with a similar corporate culture, and provides substantial growth opportunities, particularly within the action sports market where it has a large and loyal consumer base of active outdoor enthusiasts. The Sanuk brand complements the Company's existing brand portfolio with its unique market position through the combination of original and innovative product designs, as well as authentic and irreverent marketing campaigns. The brand assists in balancing the Company's existing seasonality, with its largest revenues being generated in the first half of the year. The Sanuk brand also brings additional distribution channels to the Company, as it sells to hundreds of independent specialty surf and skate shops throughout the US that were not significantly in the Company's existing customer portfolio. The acquisition was accounted for as a business combination, and the Sanuk brand is reported as a new reportable segment.

        The Company has included the operating results of the Sanuk brand in its consolidated financial statements since the date of acquisition, including worldwide revenue of $26,578 and operating loss of $3,004 for all distribution channels. This operating loss includes overhead costs that are excluded from worldwide wholesale segment operating income of $797 (see note 10). The operating loss also included $5,066 of amortization expense on the acquired Sanuk intangibles and $3,500 of expense related to the change in fair value of the Sanuk contingent consideration due to accretion and updated forecasts of the gross profit of the Sanuk brand through 2015. For the year ended December 31, 2011, the Company incurred approximately $4,000 of transaction costs for the Sanuk acquisition which was included in SG&A.

        The fair value of the contingent consideration is based on Level 3 inputs, and further changes in the fair value of the contingent consideration will be recorded through operating income (see note 1). The Company allocated the excess of the purchase price over the identifiable intangible and net tangible assets to goodwill. The goodwill arising from the acquisition of the Sanuk brand relates to the projected earnings power in the future, which includes the items discussed above. The goodwill is included in the Sanuk wholesale reportable segment and all of it is expected to be deductible for tax purposes.

        The Company used the income approach to value the contingent consideration and identifiable intangible assets. The contingent consideration used a discounted cash flow method with a discount rate of 5.0% in 2011 and 7.0% thereafter. The following table summarizes the methods used under the income approach for the identifiable intangible assets and their corresponding discount rates and royalty rates, where applicable:

Identifiable intangible asset	Method	Discount Rate			Royalty Rate
US trademarks	Relief from royalty		15.0	%		5.0	%
International trademarks	Relief from royalty		17.0	%		5.0	%
Customer relationships	Excess earnings		15.5	%
International distributor relationships	Lost profits		17.5	%
US non-compete agreements	Lost profits		15.5	%
International non-compete agreements	Lost profits		17.5	%
Patents	Relief from royalty		16.5	%		3.0	%
US backlog	Excess earnings		14.0	%
International backlog	Excess earnings		16.0	%

        The amortizable intangible assets are being amortized straight-line over their estimated useful lives, with the exception of the customer relationships, which are being amortized on an accelerated basis based on their aggregate projected after tax undiscounted cash flows. The following table summarizes the final purchase price allocation:

	Estimated Fair Value			Estimated Useful Life (Years)
Consideration
Cash paid	$	125,203
Receivable from sellers		(1,659	)
Contingent consideration arrangement		88,100
Total consideration transferred	$	211,644
Recognized amounts of identifiable assets acquired and liabilities assumed:
Trade accounts receivable, net of allowances of $1,130	$	12,809
Inventories		7,545
Other assets		367
Trade accounts payable		(5,544	)
Other liabilities		(507	)
Net tangible assets acquired		14,670
Identifiable intangible assets:
Trademarks		47,200		20
Customer relationships		21,300		8
International distributor relationships		800		2
Non-compete agreements		5,300		5
Patents		6,600		14
Backlog		1,830		1
Goodwill		113,944		Non-amortizable
Total purchase price	$	211,644

        The table below reconciles the preliminary purchase price allocation to the final purchase price allocation. The adjustments to cash paid and receivable from sellers are the final working capital adjustment.

	As of Acquisition			Adjustments			As of December 31, 2011
Consideration
Cash paid	$	122,524		$	2,679		$	125,203
Receivable from sellers		—			(1,659	)		(1,659	)
Contingent consideration arrangement		84,300			3,800			88,100
				$	4,820
Trade accounts payable	$	(5,590	)	$	46		$	(5,544	)
Goodwill		109,170			4,774			113,944
				$	4,820

        The following table presents the unaudited pro forma results of the Company for the year ended December 31, 2011 and 2010 as if the acquisition of the Sanuk brand had occurred on January 1, 2010. These results are not intended to reflect the actual operations of the Company had the acquisition occurred on January 1, 2010. Acquisition transaction costs have been excluded from the pro forma operating income.

	December 31,
	2011		2010
Net sales	$	1,419,557	$	1,049,389
Income from operations	$	297,835	$	246,130

        The Company entered into a deferred purchase factoring agreement with CIT Commercial Services (CIT) whereby CIT collects the Sanuk accounts receivable at the gross amount of such receivables, less any discounts and allowances. CIT is responsible for the servicing and administration of accounts receivables collected on behalf of the Company and, to the extent that an eligible account is in default, CIT is required to purchase the account from the Company. CIT collects amounts due and remits collected funds, less factoring and various administrative fees. Open receivables collected by CIT totaled approximately $4,700 at December 31, 2011 and are included in accounts receivable in the consolidated balance sheets. Collection fees for the year ended December 31, 2011 were $111.