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

9 Months Ended

Sep. 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 nine months ended September30, 2011 has been adjusted retrospectively to conform to the current period presentation.

In 2012, the Company's other brands include TSUBO®, Ahnu®, and MOZO®. On September27, 2012, the Company acquired the remaining ownership interest in Hoka, which was previously a privately held footwear company in which the Company already had a noncontrolling ownership interest. The results of operations for Hoka are included in the other brands segments beginning from the acquisition date. In 2011, the Company's other brands also included Simple®, a brand for which the Company ceased distribution effective December31, 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 July1, 2011. Business segment information is summarized as follows:

	ThreeMonthsEnded						NineMonthsEnded
	September30,						September30,
	2012			2011			2012			2011
Net sales to external customers:
UGG wholesale	$	284,075		$	334,308		$	454,652		$	510,739
Teva wholesale	15,922			12,879			96,087			100,445
Sanuk wholesale	17,008			15,350			76,003			15,350
Other wholesale	6,991			6,866			16,933			17,281
eCommerce	13,263			10,254			42,968			39,423
Retail stores	39,133			34,701			110,491			90,193
	$	376,392		$	414,358		$	797,134		$	773,431
Income (loss) from operations:
UGG wholesale	$	98,548		$	143,999		$	137,649		$	206,208
Teva wholesale	(1,090		)	(1,389		)	12,717			20,576
Sanuk wholesale	3,217			1,459			16,895			1,459
Other wholesale	58			(2,969		)	(1,876		)	(7,577		)
eCommerce	769			483			5,021			5,767
Retail stores	(6,264		)	(545		)	(10,698		)	1,631
Unallocated overhead costs	(35,629		)	(50,377		)	(116,874		)	(120,006		)
	$	59,609		$	90,661		$	42,834		$	108,058

Business segment asset information is summarized as follows:

	September30,		December31,
	2012		2011
Total assets for reportable segments:
UGG wholesale	$	624,329	$	347,213
Teva wholesale	60,462		61,893
Sanuk wholesale	207,527		217,936
Other wholesale	24,975		10,690
eCommerce	3,170		5,964
Retail stores	112,925		80,514
	$	1,033,388	$	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:

	September30,		December31,
	2012		2011
Total assets for reportable segments	$	1,033,388	$	724,210
Unallocated cash and cash equivalents	61,636		263,606
Unallocated deferred tax assets	28,398		27,637
Other unallocated corporate assets	132,921		130,743
Consolidated total assets	$	1,256,343	$	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 September30, 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 September30, 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 35.6% and 37.8% of the Company's total net sales for the three months ended September30, 2012 and 2011, respectively. International sales were 34.0% and 36.8% of the Company's total net sales for the nine months ended September30, 2012 and 2011, respectively. For the nine months ended September30, 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:

	September30,		December31,
	2012		2011
US	$	79,887	$	65,034
All other countries*	35,427		25,223
Total	$	115,314	$	90,257

* No foreign country's long-lived assets comprised more than 10% of total long-lived assets as of September30, 2012 and December31, 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 nine months ended September30, 2012 or 2011. As of September30, 2012, no single customer accounted for more than 10% of net trade accounts receivable. As of December31, 2011, one customer accounted for 17.1% of net trade accounts receivable.

The Company's production is concentrated at a limited number of independent contractor factories. 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.