Business Segments, Concentration of Business, and Credit Risk and Significant Customers

6 Months Ended

Jun. 30, 2011

Business Segments, Concentration of Business, and Credit Risk and Significant Customers

Business Segments, Concentration of Business, and Credit Risk and Significant Customers

(8) Business Segments, Concentration of Business, and Credit Risk and Significant Customers

The Company’s accounting policies of the segments below are the same as those described in the summary of significant accounting policies in the Company’s Annual Report, except that the Company does not allocate corporate overhead costs or non-operating income and expenses to segments. The Company evaluates segment performance primarily based on net sales and income or loss from operations. The Company’s reportable segments include the strategic business units for the worldwide wholesale operations of the UGG brand, Teva brand, and its other brands, its eCommerce business and its retail store business. The wholesale operations of each brand are managed separately because each requires different marketing, research and development, design, sourcing and sales strategies. The eCommerce and retail store segments are managed separately because they are direct to consumer sales, while the brand segments are wholesale sales. The income or loss from operations for each of the segments includes only those costs which are specifically related to each segment, which consist primarily of cost of sales, costs for research and development, design, selling and marketing, depreciation, amortization and the costs of employees and their respective expenses that are directly related to each business segment. The unallocated corporate overhead costs are the shared costs of the organization and include the following: costs of the distribution centers, certain executive and stock compensation, accounting and finance, legal, information technology, human resources and facilities costs, among others. The gross profit derived from the sales to third parties of the eCommerce and retail stores segments is separated into two components: (i) the wholesale profit is included in the related operating income or loss of each wholesale segment, and (ii) the retail profit is included in the operating income of the eCommerce and retail stores segments.  In prior periods, the gross profit of the international portion of the eCommerce and retail stores segments included both the wholesale and retail profit.  This change in segment reporting only changed the presentation within the below table and did not impact the Company’s condensed consolidated financial statements for any periods.  The segment information for the three and six months ended June 30, 2010 has been adjusted retrospectively to conform to the current period presentation.

The Company’s other brands include Simple®, TSUBO®, Ahnu®, and MOZO®.  The wholesale operations of the Company’s other brands are included as one reportable segment, other wholesale, presented in the figures below.  Business segment information is summarized as follows:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010
Net sales to external customers:
UGG wholesale	$	85,347		$	88,100		$	176,431		$	152,600
Teva wholesale	38,080			29,086			87,566			71,323
Other wholesale	4,963			4,744			10,415			12,368
eCommerce	5,709			5,177			29,169			23,599
Retail stores	20,123			9,952			55,492			33,096
	$	154,222		$	137,059		$	359,073		$	292,986
(Loss) income from operations:
UGG wholesale	$	23,432		$	33,776		$	62,095		$	66,811
Teva wholesale	7,678			7,556			21,963			18,741
Other wholesale	(2,682		)	(1,496		)	(4,608		)	(2,311		)
eCommerce	(390		)	(69		)	5,284			4,633
Retail stores	(3,005		)	(1,549		)	2,570			2,359
Unallocated overhead costs	(35,831		)	(25,002		)	(69,907		)	(48,196		)
	$	(10,798	)	$	13,216		$	17,397		$	42,037

Business segment asset information is summarized as follows:

	June 30,		December 31,
	2011		2010
Total assets for reportable segments:
UGG wholesale	$	249,752	$	194,028
Teva wholesale	66,155		49,849
Other wholesale	14,282		12,031
eCommerce	2,776		4,053
Retail stores	46,195		39,377
	$379,160		$	299,338

The assets allocable to each segment generally include accounts receivable, inventory, fixed assets, intangible assets and certain other assets that are specifically identifiable with one of the Company’s segments.  Unallocated assets are the assets not specifically related to the segments and generally include cash and cash equivalents, deferred tax assets, and various other assets shared by the Company’s segments. Reconciliations of total assets from reportable segments to the condensed consolidated balance sheets are as follows:

	June 30,		December 31,
	2011		2010
Total assets for reportable segments	$	379,160	$	299,338
Unallocated cash and cash equivalents	325,170		445,226
Unallocated deferred tax assets	28,697		27,123
Other unallocated corporate assets	62,100		37,307
Consolidated total assets	$	795,127	$	808,994

A portion of the Company’s cash and cash equivalents are held as cash in operating accounts that are with third party financial institutions.  These balances, at times, exceed the Federal Deposit Insurance Corporation (FDIC) insurance limits. While the Company regularly monitors the cash balances in its operating accounts and adjusts the balances as appropriate, these cash balances could be impacted if the underlying financial institutions fail or are subject to other adverse conditions in the financial markets. As of June 30, 2011, the Company had experienced no loss or lack of access to cash in its operating accounts.

The remainder of the Company’s cash equivalents is invested in interest bearing funds managed by third party investment management institutions. These investments can include US treasuries and government agencies, money market funds, and municipal bonds, among other investments. Certain of these investments are subject to general credit, liquidity, market, and interest rate risks.  Investment risk has been and may further be exacerbated by US mortgage defaults and credit and liquidity issues, which have affected various sectors of the financial markets. As of June 30, 2011, the Company had experienced no loss or lack of access to its cash and cash equivalents.

The Company sells its products to customers throughout the US and to foreign customers located in Europe, Canada, Australia, Asia, and Latin America, among other regions.  International sales were 46.3% and 52.4% of the Company’s total net sales for the three months ended June 30, 2011 and 2010, respectively.  International sales were 35.7% and 37.8% of the Company’s total net sales for the six months ended June 30, 2011 and 2010, respectively.  As of June 30, 2011, no single foreign country comprised more than 10% of total sales.  The Company does not consider international operations a separate segment, as management reviews such operations in the aggregate with the aforementioned segments.

Long-lived assets, which consist of property and equipment, by major country were as follows:

	June 30,		December 31,
	2011		2010
US	$	39,990	$	36,591
UK	6,169		6,753
All other countries*	8,382		4,393
Total	$	54,541	$	47,737

* No other country’s long-lived assets comprised more than 10% of total long-lived assets as of June 30, 2011 or December 31, 2010.

Management performs regular evaluations concerning the ability of its customers to satisfy their obligations and records a provision for doubtful accounts based upon these evaluations.  No single customer accounted for more than 10.0% of the Company’s net sales for the six months ended June 30, 2011 and 2010.  As of June 30, 2011, the Company had one customer representing 11.5% of net trade accounts receivable.  As of December 31, 2010, the Company had one customer representing 33.2% and another customer representing 10.1% of net trade accounts receivable.

The Company’s production is concentrated at a limited number of independent contractor factories in China. The Company’s sourcing is concentrated in Australia and China and include a limited number of key sources for the principal raw material for certain UGG products, sheepskin.  The Company’s operations are subject to the customary risks of doing business abroad, including, but not limited to, currency fluctuations, customs duties and related fees, various import controls and other nontariff barriers, restrictions on the transfer of funds, labor unrest and strikes and, in certain parts of the world, political instability.  The supply of sheepskin can be adversely impacted by weather conditions, disease, and harvesting decisions that are completely outside the Company’s control.  Further, the price of sheepskin is impacted by demand, industry, and competitors.