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

6 Months Ended

Jun. 30, 2012

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

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

(9)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, Sanuk 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 segment.  The unallocated corporate overhead costs include: 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, certain operating expenses were classified as segment expenses and are now classified as unallocated expenses.  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 period.  The segment information for the three and six months ended June 30, 2011 has been adjusted retrospectively to conform to the current period presentation.

In 2012, the Company’s other brands include TSUBO®, Ahnu®, and MOZO®. In 2011, the Company’s other brands also included Simple®, a brand for which the Company ceased distribution effective December 31, 2011.  The wholesale operations of the Company’s other brands are included as one reportable segment, other wholesale, presented in the figures below.  The Sanuk brand operations are included in the Company’s segment reporting effective upon the acquisition date of July 1, 2011.  Business segment information is summarized as follows:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011
Net sales to external customers:
UGG wholesale	$	78,643		$	85,347		$	170,577		$	176,431
Teva wholesale	31,757			38,080			80,165			87,566
Sanuk wholesale	26,723			—			58,995			—
Other wholesale	4,155			4,963			9,942			10,415
eCommerce	7,999			5,709			29,705			29,169
Retail stores	25,159			20,123			71,358			55,492
	$	174,436		$	154,222		$	420,742		$	359,073
Income (loss) from operations:
UGG wholesale	$	10,747		$	23,430		$	39,101		$	62,210
Teva wholesale	5,727			7,679			13,807			21,965
Sanuk wholesale	3,030			—			13,678			—
Other wholesale	(564		)	(2,682		)	(1,934		)	(4,608		)
eCommerce	(108		)	(389		)	4,252			5,284
Retail stores	(7,693		)	(3,006		)	(4,434		)	2,176
Unallocated overhead costs	(39,847		)	(35,830		)	(81,245		)	(69,630		)
	$	(28,708	)	$	(10,798	)	$	(16,775	)	$	17,397

Business segment asset information is summarized as follows:

	June 30,		December 31,
	2012		2011
Total assets for reportable segments:
UGG wholesale	$	366,920	$	347,213
Teva wholesale	63,984		61,893
Sanuk wholesale	220,636		217,936
Other wholesale	10,435		10,690
eCommerce	3,610		5,964
Retail stores	88,858		80,514
	$	754,443	$	724,210

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

	June 30,		December 31,
	2012		2011
Total assets for reportable segments	$	754,443	$	724,210
Unallocated cash and cash equivalents	114,401		263,606
Unallocated deferred tax assets	27,769		27,637
Other unallocated corporate assets	128,390		130,743
Consolidated total assets	$	1,025,003	$	1,146,196

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, 2012, 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, credit and liquidity issues, and the European debt crisis, which have affected various sectors of the financial markets.  As of June 30, 2012, the Company had experienced no loss or lack of access to its invested 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 34.9% and 46.3% of the Company’s total net sales for the three months ended June 30, 2012 and 2011, respectively.  International sales were 32.5% and 35.7% of the Company’s total net sales for the six months ended June 30, 2012 and 2011, respectively.  For the six months ended June 30, 2012, no single foreign country comprised more than 10% of total net 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,
	2012		2011
US	$	74,473	$	65,034
All other countries*	28,807		25,223
Total	$	103,280	$	90,257

*  No foreign country’s long-lived assets comprised more than 10% of total long-lived assets as of June 30, 2012 and December 31, 2011.

Management performs regular evaluations concerning the ability of its customers to satisfy their obligations and records a provision for doubtful accounts based upon these evaluations.  No single customer accounted for more than 10% of net sales for either the six months ended June 30, 2012 or 2011.  As of June 30, 2012 and December 31, 2011, one customer accounted for 12.7% and 17.1% of net trade accounts receivable, respectively.

The Company’s production is concentrated at a limited number of independent contractor factories in China.  The Company’s materials sourcing is concentrated in Australia and China and includes 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.