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 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 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 that 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.

Beginning January 1, 2013, all gross profit derived from the sales to third parties of the eCommerce and retail stores segments is reported in income from operations of the eCommerce and retail stores segments, respectively. In prior periods, the gross profit derived from the sales to third parties of the eCommerce and retail stores segments was separated into two components: (i) the wholesale profit was included in the related operating income or loss of each wholesale segment, and represented the difference between the Company’s cost and the Company’s wholesale selling price, and (ii) the retail profit was included in the operating income of the eCommerce and retail stores segments, and represented the difference between the Company’s wholesale selling price and the Company’s retail selling price. Each of the wholesale segments charged the eCommerce and retail segments the same price that they charged third party retail customers, with the resulting profit from inter-segment sales included in income (loss) from operations of each respective wholesale segment. Inter-segment sales and cost of sales are eliminated upon consolidation. These changes in segment reporting only changed the presentation within the table below and did not impact the Company’s condensed consolidated financial statements for any periods. The Company believes that these changes better align with how management views the business, which is that sales of the eCommerce and retail stores segments each generate a cash flow of their own and the wholesale segments are not active in generating those cash flows. The segment information for the three and nine months ended September 30, 2012 has been adjusted retrospectively to conform to the current period presentation.

In 2013, the Company’s other brands include TSUBO®, Ahnu®, MOZO®, and Hoka. On September 27, 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. 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 September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Net sales to external customers:
UGG wholesale	$	273,677		$	284,075		$	418,749		$	454,652
Teva wholesale	15,893			15,922			95,145			96,087
Sanuk wholesale	16,649			17,008			74,446			76,003
Other wholesale	12,993			6,991			31,340			16,933
eCommerce	14,884			13,263			52,234			42,968
Retail stores	52,629			39,133			148,656			110,491
	$	386,725		$	376,392		$	820,570		$	797,134
Income (loss) from operations:
UGG wholesale	$	82,256		$	90,177		$	95,827		$	111,273
Teva wholesale	(1,366		)	(1,377		)	10,423			11,947
Sanuk wholesale	3,657			2,856			19,506			16,158
Other wholesale	(189		)	(21		)	(5,258		)	(2,032		)
eCommerce	2,678			3,281			13,283			13,855
Retail stores	(2,260		)	321			(1,612		)	8,507
Unallocated overhead costs	(38,279		)	(35,628		)	(125,771		)	(116,874		)
	$	46,497		$	59,609		$	6,398		$	42,834

Inter-segment sales from the Company’s wholesale segments to the Company’s eCommerce and retail stores segments are at the Company’s cost, and there is no inter-segment profit on these inter-segment sales. Income (loss) from operations of the wholesale segments does not include any inter-segment gross profit from sales to the eCommerce and retail stores segments.

Business segment asset information is summarized as follows:



	September 30, 2013		December 31, 2012
Total assets for reportable segments:
UGG wholesale	$	538,934	$	377,997
Teva wholesale	48,074		59,641
Sanuk wholesale	204,617		209,861
Other wholesale	34,699		29,446
eCommerce	3,711		5,058
Retail stores	159,453		134,804
	$	989,488	$	816,807

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:



	September 30, 2013		December 31, 2012
Total assets for reportable segments	$	989,488	$	816,807
Unallocated cash and cash equivalents	84,107		110,247
Unallocated deferred tax assets	31,279		30,662
Other unallocated corporate assets	171,064		110,348
Consolidated total assets	$	1,275,938	$	1,068,064

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 September 30, 2013, 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 treasury bonds and securities, 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 sovereign debt concerns in Europe, which have affected various sectors of the financial markets. As of September 30, 2013, the Company had experienced no loss or lack of access to its invested cash and cash equivalents. The Company’s cash and cash equivalents are as follows:



	September 30, 2013		December 31, 2012
Money market fund accounts	$	35,167	$	52,650
Cash	48,940		57,597
Total Cash and Cash Equivalents	$	84,107	$	110,247

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 38.3% and 35.6% of the Company’s total net sales for the three months ended September 30, 2013 and 2012, respectively. International sales were 35.2% and 34.0% of the Company’s total net sales for the nine months ended September 30, 2013 and 2012, respectively. For the nine months ended September 30, 2013 and 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, in the US and all other countries combined were as follows:



	September 30, 2013		December 31, 2012
US	$	126,866	$	89,423
All other countries*	37,546		35,947
Total	$	164,412	$	125,370

* No foreign country’s long-lived assets comprised more than 10% of total long-lived assets as of September 30, 2013 and December 31, 2012.

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 September 30, 2013 or 2012. As of September 30, 2013, no single customer accounted for more than 10% of net trade accounts receivable. As of December 31, 2012, one customer accounted for 18.8% 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 sheepskin, the principal raw material for certain UGG products. 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.