Commitments and Contingencies

9 Months Ended

Sep. 30, 2011

Commitments and Contingencies

Commitments and Contingencies

(9) Commitments and Contingencies

The Company is currently involved in various legal claims arising from the ordinary course of business.  Management does not believe that the disposition of these matters will have a material effect on the Company’s financial position or results of operations.  In addition, the Company has agreed to indemnify certain of its licensees, distributors and promotional partners in connection with claims related to the use of the Company’s intellectual property.  The terms of such agreements range up to five years initially and generally do not provide for a limitation on the maximum potential future payments.  Management believes the likelihood of any payments is remote and would be immaterial.  The Company determined the risk was low based on a prior history of insignificant claims.  The Company is not currently involved in any indemnification matters in regards to its intellectual property.

The Company’s federal income tax returns for the years ended December 31, 2006 through December 31, 2009 are under examination by the Internal Revenue Service (IRS).  In connection with the examination, the Company has received notices of proposed adjustments (NOPAs), which the Company agreed with and recorded in its financial statements.  In addition, in March 2011, the Company received a NOPA related to transfer pricing arrangements with the Company’s subsidiaries in which adjustments were asserted totaling approximately $55,000 of additional taxable income, representing additional federal taxes and penalties of approximately $27,000, excluding interest.  The Company responded to this NOPA indicating that it disagrees with the proposed adjustments and will appeal the NOPA if the Company is unable to reach a resolution at the exam level.  The Company does not know the timing of completion of the examination or if the examination will result in a material effect to the Company’s condensed consolidated financial statements.  It is reasonably possible that the Company’s unrecognized tax benefit could change; however, the Company believes its unrecognized tax benefits are adequate.

Although the Company believes its tax estimates are reasonable and prepares its tax filings in accordance with all applicable tax laws, the final determination with respect to any tax audits, and any related litigation, could be materially different from the Company’s estimates or from its historical income tax provisions and accruals.  The results of an audit or litigation could have a material effect on operating results or cash flows in the periods for which that determination is made.  In addition, future period earnings may be adversely impacted by litigation costs, settlements, penalties, or interest assessments.

The Company has on-going income tax examinations under various state tax jurisdictions.  It is the opinion of management that these audits and inquiries will not have a material impact on the Company’s condensed consolidated financial statements.

In September 2011, the Company entered into an agreement with Santa Barbara Realty Development, L.L.C. to purchase approximately fourteen acres of land for its new headquarters facility in Goleta, California.  As consideration for the land, the Company will pay an aggregate purchase price of $20,428.  The purchase price is subject to a $500 credit if the close of the escrow period occurs before December 31, 2011.

In March 2011, the Company entered into contracts requiring minimum purchase commitments of sheepskin that Deckers’ affiliates, manufacturers, factories and other agents (each or collectively, a “Buyer”) must make on or before July 31, 2011. As of September 30, 2011, the remaining commitment was approximately $6,000.  In the event that a Buyer does not purchase such minimum commitments on or before July 31, 2011, the Company was required to make a deposit for the remaining amounts.  Such deposit shall be refundable upon receipt of payment by Buyers for such amounts. The Company made a deposit for the remaining commitment, and as of September 30, 2011, the deposit balance was approximately $10,000.  In July 2011, the Company entered into a contract requiring minimum purchase commitments of sheepskin that a Buyer is targeted to make between July 1, 2011 and January 31, 2012.  As of September 30, 2011, the remaining commitment was approximately $30,000.  The Company made an advance deposit of $20,000 under this contract, all of which was remaining as of September 30, 2011.  Subsequent to September 30, 2011, the Company entered into another sheepskin agreement for a total minimum commitment of $158,000 that a Buyer is targeted to make between February 1, 2012 and July 31, 2012.  Under this contract, the Company will pay an advance deposit of $50,000 in two payments of $25,000, which the Company expects to pay in November and December 2011, respectively.  These advance deposits shall be repaid to the Company as Buyers purchase goods under the terms of these agreements.  All of these agreements may result in unconditional purchase obligations if a Buyer does not meet the minimum purchase requirements.  In the event that a Buyer does not purchase such minimum commitments, the Company shall be responsible for compliance with any and all minimum purchase commitments under these contracts.  The contracts do not permit net settlement.  The Company expects sheepskin purchases by third party factories will eventually exceed the contract levels.  Therefore, management believes the likelihood of any non-performance payments under these contractual arrangements is remote and would have an immaterial effect on the condensed consolidated statements of income.  The Company determined this based upon its projected sales and inventory purchases.