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Section 1: 10-Q (10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended December 31, 2019
OR
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File Number: 001-36436

DECKERS OUTDOOR CORPORATION

(Exact name of registrant as specified in its charter)

Delaware
95-3015862
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)

250 Coromar Drive, Goleta, California 93117
(Address of principal executive offices and zip code)
 
(805) 967-7611
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading
Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.01 per share
DECK
New York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Yes No
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
Accelerated filer
 
 
 
 
 
Non-accelerated filer
 
Smaller reporting company
 
 
 
 
 
 
 
 
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

As of the close of business on January 29, 2020, the number of outstanding shares of the registrant's common stock, par value $0.01 per share, was 27,987,587.

 





DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
For the Three and Nine Months Ended December 31, 2019
TABLE OF CONTENTS
 
 
Page
 
 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Defaults Upon Senior Securities
*
Item 4.
Mine Safety Disclosures
*
Item 5.
Other Information
*
Item 6.
 

*Not applicable.


1


CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS


This Quarterly Report on Form 10-Q for our third fiscal quarter ended December 31, 2019 (Quarterly Report), and the information and documents incorporated by reference into this Quarterly Report, contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act), which statements are subject to considerable risks and uncertainties. These forward-looking statements are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements other than statements of historical fact contained in, or incorporated by reference into, this Quarterly Report. We have attempted to identify forward-looking statements by using words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “should,” “will,” or “would,” and similar expressions or the negative of these expressions. Specifically, this Quarterly Report, and the information and documents incorporated by reference into this Quarterly Report, contain forward-looking statements relating to, among other things:

our business, operating, investing, capital allocation, marketing and financing strategies;
the impacts of our ongoing operational system upgrades;
the expansion of our brands and product offerings, and changes to the geographic and seasonal mix of our products;
changes to our product distribution strategies, including the implementation of our product allocation and segmentation strategies and our decision to exit the warehouse channel for the Sanuk brand;
changes in consumer tastes and preferences with respect to our brands and products, and the fashion industry in general;
trends impacting the purchasing behavior of wholesale customers and retail consumers, including those impacting retail and E-Commerce businesses;
the impact of seasonality and weather on consumer behavior and our results of operations;
the impact of our efforts to continue to advance sustainable and socially conscious business operations;
expectations relating to the expansion of Direct-to-Consumer (DTC) capabilities;
the ongoing impacts from the implementation of our restructuring and operating profit improvement plans;
our consolidation of certain distribution center operations;
availability of raw materials and manufacturing capacity, and reliability of overseas production and storage;
commitments and contingencies, including operating leases and purchase obligations for product and raw materials;
the impacts of new or proposed legislation, tariffs, regulatory enforcement actions or legal proceedings;
the value of goodwill and other intangible assets, and potential write-downs or impairment charges;
changes impacting our tax liability and effective tax rates;
repatriation of earnings of non-United States subsidiaries and any related tax impacts;
the impact from adoption of recent accounting pronouncements; and
overall global economic and political trends, including foreign currency exchange rate fluctuations, changes in interest rates and changes in fuel costs.

Forward-looking statements represent management’s current expectations and predictions about trends affecting our business and industry and are based on information available at the time such statements are made. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy or completeness. Forward-looking statements involve numerous known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance or achievements predicted, assumed or implied by the forward-looking statements. Some of the risks and uncertainties that may cause our actual results to materially differ from those expressed or implied by these forward-looking statements are described in Part II, Item 1A, "Risk Factors," and Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations," in this Quarterly Report, as well as in our other filings with the Securities and Exchange Commission (SEC). You should read this Quarterly Report, including the information and documents incorporated by reference herein, in its entirety and with the understanding that our actual future results may be materially different from the results expressed or implied by these forward-looking statements. Moreover, new risks and uncertainties emerge from time to time and it is not possible for management to predict all risks and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause our actual future results to be materially different from any results expressed or implied by any forward-looking statements. Except as required by applicable law or the listing rules of the New York Stock Exchange, we expressly disclaim any intent or obligation to update any forward-looking statements. We qualify all our forward-looking statements with these cautionary statements.

2


PART I. FINANCIAL INFORMATION

References in this Quarterly Report to "Deckers," "we," "our," "us," "management," or the "Company" refer to Deckers Outdoor Corporation, together with its consolidated subsidiaries. UGG® (UGG), HOKA ONE ONE® (HOKA), Teva® (Teva), Sanuk® (Sanuk), Koolaburra® by UGG (Koolaburra), and UGGpure® (UGGpure) are some of the Company's trademarks. Other trademarks or trade names appearing elsewhere in this Quarterly Report are the property of their respective owners. Solely for convenience, the above trademarks and trade names in this Quarterly Report are referred to without the ® and ™ symbols, but such references should not be construed as an indication that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto.

Unless otherwise indicated, all dollar amounts herein are expressed in thousands, except per share or share data.


3



ITEM 1. FINANCIAL STATEMENTS

DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(dollar and share data amounts in thousands, except par value)
 
December 31, 2019

March 31, 2019
ASSETS
 
 
(AUDITED)
Cash and cash equivalents
$
616,864

 
$
589,692

Trade accounts receivable, net of allowances ($26,438 and $18,824 as of December 31, 2019 and March 31, 2019, respectively)
286,891

 
178,602

Inventories, net of reserves ($13,152 and $9,723 as of December 31, 2019 and March 31, 2019, respectively)
365,946

 
278,842

Prepaid expenses
19,110

 
19,901

Other current assets
42,917

 
26,028

Income tax receivable
8,122

 
2,340

Total current assets
1,339,850

 
1,095,405

Property and equipment, net of accumulated depreciation ($241,461 and $235,939 as of December 31, 2019 and March 31, 2019, respectively)
209,690

 
213,796

Operating lease assets
216,420

 

Goodwill
13,990

 
13,990

Other intangible assets, net of accumulated amortization ($74,025 and $71,186 as of December 31, 2019 and March 31, 2019, respectively)
48,653

 
51,494

Deferred tax assets, net
32,172

 
30,870

Other assets
27,576

 
21,651

Total assets
$
1,888,351

 
$
1,427,206

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Short-term borrowings
$
6,645

 
$
603

Trade accounts payable
244,767

 
124,974

Accrued payroll
40,775

 
54,462

Operating lease liabilities
47,521

 

Other accrued expenses
69,626

 
47,963

Income taxes payable
41,073

 
19,283

Value added tax payable
12,751

 
3,239

Total current liabilities
463,158

 
250,524

Mortgage payable
30,430

 
30,901

Long-term operating lease liabilities
192,562

 

Income tax liability
62,680

 
60,616

Deferred rent obligations

 
21,107

Other long-term liabilities
15,774

 
18,928

Total long-term liabilities
301,446

 
131,552

Commitments and contingencies

 

Stockholders' equity
 
 
 
Common stock ($0.01 par value; 125,000 shares authorized; shares issued and outstanding of 27,982 and 29,141 as of December 31, 2019 and March 31, 2019, respectively)
280

 
291

Additional paid-in capital
188,713

 
178,227

Retained earnings
957,857

 
889,266

Accumulated other comprehensive loss
(23,103
)
 
(22,654
)
Total stockholders' equity
1,123,747

 
1,045,130

Total liabilities and stockholders' equity
$
1,888,351

 
$
1,427,206


See accompanying notes to the condensed consolidated financial statements.

4


DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(dollar and share data amounts in thousands, except per share data)
 
Three Months Ended December 31,
 
Nine Months Ended December 31,
 
2019
 
2018
 
2019
 
2018
Net sales
$
938,735

 
$
873,800

 
$
1,757,779

 
$
1,626,307

Cost of sales
431,103

 
403,707

 
847,104

 
789,362

Gross profit
507,632

 
470,093

 
910,675

 
836,945

Selling, general and administrative expenses
251,866

 
225,375

 
589,195

 
541,229

Income from operations
255,766

 
244,718

 
321,480

 
295,716

 
 
 
 
 
 
 
 
Interest income
(848
)
 
(906
)
 
(5,244
)
 
(3,306
)
Interest expense
128

 
970

 
2,798

 
3,844

Other income, net
(117
)
 
(13
)
 
(295
)
 
(213
)
Total other (income) expense, net
(837
)
 
51

 
(2,741
)
 
325

Income before income taxes
256,603

 
244,667

 
324,221

 
295,391

Income tax expense
55,010

 
48,293

 
64,169

 
55,052

Net income
201,593

 
196,374

 
260,052

 
240,339

 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
Unrealized (loss) gain on cash flow hedges
(973
)
 
(3,128
)
 
207

 
998

Foreign currency translation gain (loss)
2,667

 
781

 
(656
)
 
(10,543
)
Total other comprehensive income (loss)
1,694

 
(2,347
)
 
(449
)
 
(9,545
)
Comprehensive income
$
203,287

 
$
194,027

 
$
259,603

 
$
230,794

 
 
 
 
 
 
 
 
Net income per share
 
 
 
 
 
 
 
Basic
$
7.21

 
$
6.74

 
$
9.12

 
$
8.06

Diluted
$
7.14

 
$
6.68

 
$
9.02

 
$
7.99

Weighted-average common shares outstanding
 
 
 
 
 
 
 
Basic
27,978

 
29,157

 
28,515

 
29,807

Diluted
28,249

 
29,397

 
28,832

 
30,063


See accompanying notes to the condensed consolidated financial statements.

5


DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
(amounts in thousands)
 
Nine Months Ended December 31, 2019
 
 
 
Additional Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive (Loss) Income
 
Total Stockholders'
Equity
 
Common Stock
 
 
 
 
 
Shares
 
Amount
 
 
 
 
Balance, March 31, 2019
29,141

 
$
291

 
$
178,227

 
$
889,266

 
$
(22,654
)
 
$
1,045,130

Stock-based compensation
1

 

 
3,424

 

 

 
3,424

Shares issued upon vesting
4

 

 

 

 

 

Exercise of stock options
46

 
1

 
2,772

 

 

 
2,773

Cumulative adjustment from adoption of recent accounting pronouncements (refer to Note 1)

 

 

 
(1,069
)
 

 
(1,069
)
Shares withheld for taxes

 

 
(374
)
 

 

 
(374
)
Repurchases of common stock
(227
)
 
(2
)
 

 
(35,003
)
 

 
(35,005
)
Net loss

 

 

 
(19,351
)
 

 
(19,351
)
Total other comprehensive loss

 

 

 

 
(249
)
 
(249
)
Balance, June 30, 2019
28,965

 
290

 
184,049

 
833,843

 
(22,903
)
 
995,279

Stock-based compensation
3

 

 
5,075

 

 

 
5,075

Shares issued upon vesting
73

 
1

 
617

 

 

 
618

Exercise of stock options
3

 

 
186

 

 

 
186

Shares withheld for taxes

 

 
(5,370
)
 

 

 
(5,370
)
Repurchases of common stock
(1,069
)
 
(11
)
 

 
(155,389
)
 

 
(155,400
)
Net income

 

 

 
77,810

 

 
77,810

Total other comprehensive loss

 

 

 

 
(1,894
)
 
(1,894
)
Balance, September 30, 2019
27,975

 
280

 
184,557

 
756,264

 
(24,797
)
 
916,304

Stock-based compensation
1

 

 
4,221

 

 

 
4,221

Shares issued upon vesting
3

 

 

 

 

 

Exercise of stock options
3

 

 
186

 

 

 
186

Shares withheld for taxes

 

 
(251
)
 

 

 
(251
)
Net income

 

 

 
201,593

 

 
201,593

Total other comprehensive income

 

 

 

 
1,694

 
1,694

Balance, December 31, 2019
27,982

 
$
280

 
$
188,713

 
$
957,857

 
$
(23,103
)
 
$
1,123,747


6


DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
(amounts in thousands)
(continued)
 
Nine Months Ended December 31, 2018
 
 
 
Additional Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Loss
 
Total Stockholders'
Equity
 
Common Stock
 
 
 
 
 
Shares
 
Amount
 
 
 
 
Balance, March 31, 2018
30,447

 
$
304

 
$
167,587

 
$
785,871

 
$
(12,983
)
 
$
940,779

Stock-based compensation
2

 

 
3,526

 

 

 
3,526

Shares issued upon vesting
6

 

 

 

 

 

Cumulative adjustment from adoption of recent accounting pronouncements

 

 

 
720

 

 
720

Shares withheld for taxes

 

 
(328
)
 

 

 
(328
)
Repurchases of common stock
(86
)
 

 

 
(9,999
)
 

 
(9,999
)
Net loss

 

 

 
(30,407
)
 

 
(30,407
)
Total other comprehensive loss

 

 

 

 
(2,140
)
 
(2,140
)
Balance, June 30, 2018
30,369

 
304

 
170,785

 
746,185

 
(15,123
)
 
902,151

Stock-based compensation
2

 

 
3,926

 

 

 
3,926

Shares issued upon vesting
65

 
1

 
474

 

 

 
475

Cumulative adjustment from adoption of recent accounting pronouncements

 

 

 
(252
)
 

 
(252
)
Shares withheld for taxes

 

 
(4,091
)
 

 

 
(4,091
)
Repurchases of common stock
(1,065
)
 
(11
)
 

 
(124,725
)
 

 
(124,736
)
Net income

 

 

 
74,372

 

 
74,372

Total other comprehensive loss

 

 

 

 
(5,058
)
 
(5,058
)
Balance, September 30, 2018
29,371

 
294

 
171,094

 
695,580

 
(20,181
)
 
846,787

Stock-based compensation
2

 

 
4,037

 

 

 
4,037

Shares issued upon vesting
5

 

 

 

 

 

Shares withheld for taxes

 

 
(310
)
 

 

 
(310
)
Repurchases of common stock
(250
)
 
(3
)
 

 
(26,657
)
 

 
(26,660
)
Net income

 

 

 
196,374

 

 
196,374

Total other comprehensive loss

 

 

 

 
(2,347
)
 
(2,347
)
Balance, December 31, 2018
29,128

 
$
291

 
$
174,821

 
$
865,297

 
$
(22,528
)
 
$
1,017,881


See accompanying notes to the condensed consolidated financial statements.

7


DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(amounts in thousands)
 
Nine Months Ended December 31,
 
2019
 
2018
OPERATING ACTIVITIES
 
 
 
Net income
$
260,052

 
$
240,339

Reconciliation of net income to net cash provided by (used in) operating activities:
Depreciation, amortization and accretion
29,437

 
33,547

Loss on extinguishment of debt

 
447

Bad debt expense
693

 
1,971

Deferred tax (benefit) expense
(1,020
)
 
5,094

Stock-based compensation
12,766

 
11,540

Excess tax benefits from stock-based compensation
(1,755
)
 
(1,319
)
Loss on disposal of property and equipment
679

 
87

Impairment of operating lease assets and other long-lived assets
1,382

 
180

Restructuring charges

 
295

Changes in operating assets and liabilities:
 
 
 
Trade accounts receivable, net
(108,982
)
 
(115,638
)
Inventories, net
(87,104
)
 
(54,373
)
Prepaid expenses and other current assets
(19,970
)
 
(19,808
)
Income tax receivable
(5,781
)
 
(357
)
Net operating lease assets and liabilities
(1,692
)
 

Other assets
(5,924
)
 
3,714

Trade accounts payable
119,794

 
134,495

Other accrued expenses
21,504

 
15,455

Income taxes payable
23,545

 
25,373

Long-term liabilities
1,101

 
(1,302
)
Net cash provided by operating activities
238,725

 
279,740

INVESTING ACTIVITIES
 
 
 
Purchases of property and equipment
(23,664
)
 
(21,832
)
Proceeds from sales of property and equipment
266

 
68

Net cash used in investing activities
(23,398
)
 
(21,764
)
FINANCING ACTIVITIES
 
 
 
Proceeds from short-term borrowings
69,336

 
162,001

Repayments of short-term borrowings
(63,178
)
 
(161,621
)
Debt issuance costs on short-term borrowings

 
(1,292
)
Proceeds from issuance of stock
618

 
475

Proceeds from exercise of options
3,145

 

Repurchase of common stock
(190,405
)
 
(161,395
)
Cash paid for shares withheld for taxes
(5,995
)
 
(4,900
)
Repayments of mortgage principal
(448
)
 
(425
)
Net cash used in financing activities
(186,927
)
 
(167,157
)
Effect of foreign currency exchange rates on cash and cash equivalents
(1,228
)
 
(4,851
)
Net change in cash and cash equivalents
27,172

 
85,968

Cash and cash equivalents at beginning of period
589,692

 
429,970

Cash and cash equivalents at end of period
$
616,864

 
$
515,938




8


DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(amounts in thousands)
(continued)
 
Nine Months Ended December 31,
 
2019
 
2018
SUPPLEMENTAL CASH FLOW DISCLOSURE
 
 
 
Cash paid during the period
 
 
 
Income taxes, net of refunds of $5,302 and $3,674, as of December 31, 2019 and 2018, respectively
$
47,482

 
$
29,646

Interest
1,749

 
3,158

Operating leases
45,732

 

Non-cash investing activities
 
 
 
Accrued for purchases of property and equipment
1,444

 
798

Accrued for asset retirement obligations
38

 
4,710


See accompanying notes to the condensed consolidated financial statements.

9

Table of Contents
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Nine Months Ended December 31, 2019 and 2018
(dollar amounts in thousands, except per share or share data)


Note 1. General

The Company

Deckers Outdoor Corporation and its wholly-owned subsidiaries (collectively, the Company) is a global leader in designing, marketing, and distributing innovative footwear, apparel, and accessories developed for both everyday casual lifestyle use and high-performance activities. As part of its Omni-Channel platform, the Company's proprietary brands are aligned across its Fashion Lifestyle group, including the UGG and Koolaburra brands, and Performance Lifestyle group, including the HOKA, Teva, and Sanuk brands.

The Company sells its products through domestic and international retailers, international distributors, and directly to its global consumers through its DTC business, which is comprised of its retail stores and E‑Commerce websites. Independent third-party contractors manufacture all the Company's products. A significant part of the Company's business is seasonal, requiring it to build inventory levels during certain quarters in its fiscal year to support higher selling seasons, which contributes to the variation in its results from quarter to quarter.

Basis of Presentation

The unaudited condensed consolidated financial statements and accompanying notes thereto (referred to herein as condensed consolidated financial statements) as of December 31, 2019 and for the three and nine months ended December 31, 2019 and 2018 were prepared in accordance with accounting principles generally accepted in the United States (US GAAP) for interim financial information pursuant to Rule 10-01 of Regulation S-X issued by the SEC. Accordingly, they do not include all the information and disclosures required by US GAAP for annual financial statements and accompanying notes thereto. The condensed consolidated balance sheet as of March 31, 2019 was derived from the Company's audited consolidated financial statements. In the opinion of management, the condensed consolidated financial statements include all normal and recurring entries necessary to fairly present the results of the interim periods presented but are not necessarily indicative of results to be achieved for full fiscal years or other interim periods. The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2019, filed with the SEC on May 30, 2019 (2019 Annual Report).

Consolidation. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Reclassifications. Certain reclassifications were made for prior periods presented to conform to the current period
presentation.

Use of Estimates. The preparation of the Company's condensed consolidated financial statements in accordance with US GAAP requires management to make estimates and assumptions that affect the amounts reported. Management bases these estimates and assumptions upon historical experience, existing and known circumstances, authoritative accounting standard pronouncements, and other factors that management believes to be reasonable. These estimates are based on information available as of the date of the condensed consolidated financial statements and actual results could differ materially from the results assumed or implied based on these estimates.

Significant areas requiring the use of management estimates relate to inventory write-downs, trade accounts receivable allowances, including variable consideration for net sales provided to customers, contract assets and liabilities, stock-based compensation, impairment assessments, goodwill and other intangible assets, depreciation and amortization, income tax receivables and liabilities, uncertain tax positions, the fair value of financial instruments, the reasonably certain lease term, lease classification, and the Company's incremental borrowing rate (IBR) utilized to discount its unpaid lease payments to measure its operating lease assets and liabilities.


10

Table of Contents
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Nine Months Ended December 31, 2019 and 2018
(dollar amounts in thousands, except per share or share data)

Reportable Operating Segments

The Company's six reportable operating segments include the worldwide wholesale operations for each of the UGG brand, HOKA brand, Teva brand, Sanuk brand, and Other brands, as well as DTC. Refer to Note 12, “Reportable Operating Segments,” for further information on the Company's reportable operating segments.

Recent Accounting Pronouncements

Recently Adopted. The Financial Accounting Standards Board (FASB) has issued Accounting Standard Updates (ASUs) that have been adopted by the Company for its annual and interim reporting periods as stated below. The following is a summary of each standard and the impact on the Company:
Standard
 
Description
 
Impact on Adoption
ASU No. 2016-02, Leases (as amended by ASUs 2015-14, 2018-01, 2018-10, 2018-11, 2018-20, and 2019-01)
 
Requires a lessee to recognize a lease asset and lease liability in its condensed consolidated balance sheets. A lessee should recognize a right-of-use (ROU) asset representing its right to use the underlying asset for the estimated lease term, and a liability for related lease payments.
 
The Company adopted this ASU (the new lease standard) on a modified retrospective basis beginning April 1, 2019. On adoption, the Company recorded a $230,048 increase to total assets due to the recognition of ROU assets, net of prior legacy US GAAP lease-related balances for deferred rent obligations and tenant allowances of $27,895, as previously recorded in other accrued expenses, deferred rent obligations, and other long-term liabilities, in the condensed consolidated balance sheets. In addition, the Company recorded a corresponding $254,538 increase to total liabilities due to the recognition of lease liabilities, net of a prior legacy US GAAP lease-related balance for prepaid rent of $4,846, as previously recorded in prepaid expenses, in the condensed consolidated balance sheets. ROU assets and lease liabilities include lease obligations for operating leases for retail stores, showrooms, offices, and distribution facilities. ROU assets and related lease liabilities are presented as operating lease assets and operating lease liabilities in the condensed consolidated balance sheets.

In addition, the Company recorded a net cumulative effect after-tax decrease to opening retained earnings of $1,069 in the condensed consolidated balance sheets due to the impairment of select operating lease assets related to retail stores whose fixed assets had been previously impaired and for which the initial carrying value of the operating lease assets were determined to be above fair market value on adoption.

The adoption of the new lease standard did not materially affect the condensed consolidated statements of comprehensive income as the classification and recognition of lease cost did not materially change from legacy US GAAP. Similarly, it did not have a material impact on the Company's liquidity or on its debt covenant compliance under current agreements
 including its borrowing strategy subject to leverage ratios. However, it did result in additional disclosures and presentation changes to the condensed consolidated statement of cash flows in the current period, including supplemental cash flow disclosure, as well as expanded disclosures on existing and new lease commitments.

The Company elected the “package of practical expedients” permitted under the transition guidance of this ASU, which provides a number of transition options, including (1) exemption from reassessment of prior conclusions about lease identification, classification and initial direct costs; (2) the ability to elect a short-term lease recognition exemption; and (3) the option to not separate lease and non-lease components. In addition, the Company did not apply the optional hindsight election and maintained original lease terms as estimated at lease inception.

The comparative condensed consolidated financial statements have not been restated and continue to be reported under legacy US GAAP in effect for those prior reporting periods presented. Refer to Note 7, “Leases and Other Commitments,” for further information, including the Company's accounting policy and expanded disclosures required under the new lease standard.

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DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Nine Months Ended December 31, 2019 and 2018
(dollar amounts in thousands, except per share or share data)

Standard
 
Description
 
Impact on Adoption
ASU No. 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities (as amended by ASUs 2018-16 and 2019-04)
 
Seeks to improve the transparency and understandability of information conveyed to financial statement users about an entity's risk management activities and to reduce the complexity of and simplify the application of hedge accounting. This ASU eliminates the requirement to separately measure and report hedge ineffectiveness.
 
The Company adopted this ASU (the new hedging standard) beginning April 1, 2019 on a prospective basis, which did not have a material impact on the condensed consolidated financial statements.

However, the Company made a change in accounting policy with respect to ineffective hedges and elected not to exclude hedge components from the periodic assessment of hedge effectiveness. Under legacy US GAAP, these amounts were excluded from hedge effectiveness and therefore as a component of accumulated other comprehensive loss (AOCL), and immediately recognized in selling, general and administrative (SG&A) expenses in the condensed consolidated statements of comprehensive income. Under the new hedging standard, these gains or losses will now be recognized as a component of AOCL and will be reclassified to net sales in the condensed consolidated statements of comprehensive income in the same period or periods as the related net sales are recorded.

The comparative condensed consolidated financial statements have not been restated and continue to be reported under legacy US GAAP in effect for those prior reporting periods presented.

Refer to Note 9, “Derivative Instruments,” for further information on the Company's hedging instruments.

Not Yet Adopted. The FASB has issued the following ASUs that have not yet been adopted by the Company. The following is a summary of each standard, planned period of adoption, and the expected impact on the Company:
Standard
 
Description
 
Planned Period of Adoption
 
Expected Impact on Adoption
ASU No. 2017-04, Goodwill and Other: Simplifying the Test for Goodwill Impairment (as amended by ASU 2019-06)
 
Requires annual and interim goodwill impairment tests be performed by comparing the fair value of a reporting unit with its carrying amount, effectively eliminating step two of the goodwill impairment test under legacy US GAAP. The amount by which the carrying amount exceeds the reporting unit’s fair value will continue to be recognized as an impairment charge.
 
Q1 FY 2021
 
The adoption of this ASU is not expected to have a material impact on the Company's condensed consolidated financial statements.
ASU No. 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (as amended by ASUs 2018-19, 2019-04, 2019-05, and 2019-11)
 
Replaces the incurred loss impairment methodology in legacy US GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.

 
Q1 FY 2021
 
The Company is currently evaluating the impact on adoption of this ASU; however, the Company does not expect that the adoption will have a material impact on its condensed consolidated financial statements.
ASU No. 2019-12, Income Taxes - Simplifying the Accounting for Income Taxes
 
Removes certain exceptions for recognizing deferred taxes for investments, performing intra-period allocation and calculating income taxes in interim periods, as well as reduces complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group.
 
Q1 FY 2022
 
The Company is currently evaluating the impact on adoption of this ASU; however, the Company does not expect that the adoption will have a material impact on its condensed consolidated financial statements.



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DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Nine Months Ended December 31, 2019 and 2018
(dollar amounts in thousands, except per share or share data)


Note 2. Revenue Recognition

Revenue is recognized when a performance obligation is completed at a point in time and when the customer has obtained control. Control passes to the customer when the customer can direct the use of, and obtain substantially all the remaining benefits from, the goods transferred. The amount of revenue recognized is based on the transaction price, which represents the invoiced amount less known actual amounts or estimates of variable consideration. Components of variable consideration include estimated discounts, markdowns or chargebacks, and sales returns. Estimated variable consideration is included in the transaction price to the extent that it is probable that a significant reversal of the cumulative revenue recognized will not occur in a future period.

The Company's customer contracts do not have a significant financing component due to their short durations, which are typically effective for one year or less and have payment terms that are generally 30-60 days.

Contract Assets and Liabilities

Contract assets represent the Company’s right to consideration subject to conditions other than the passage of time, such as additional performance obligations to be satisfied. Contract liabilities are performance obligations that the Company expects to satisfy or relieve within the next 12 months, advance consideration obtained prior to satisfying a performance obligation, or unconditional obligations to provide goods or services under non-cancelable contracts before the transfer of goods or services to the customer has occurred. Contract assets and liabilities are recorded in other current assets and other accrued expenses, respectively, in the condensed consolidated balance sheets.
Sales Returns. The following table provides activity during the nine months ended December 31, 2019 related to estimated sales returns for the Company’s existing customer contracts for all channels:
 
Contract Asset
 
Contract Liability
Balance, March 31, 2019
$
10,441

 
$
(24,787
)
Net additions to sales return allowance*
28,186

 
(92,694
)
Actual returns
(25,415
)
 
78,437

Balance, December 31, 2019
$
13,212

 
$
(39,044
)


The following table provides activity during the nine months ended December 31, 2018 related to estimated sales returns for the Company’s existing customer contracts for all channels:
 
Contract Asset
 
Contract Liability
Balance, March 31, 2018
$
11,251

 
$
(23,156
)
Net additions to sales return allowance*
29,653

 
(104,009
)
Actual returns
(24,549
)
 
82,828

Balance, December 31, 2018
$
16,355

 
$
(44,337
)

*Net additions to sales return allowance include provision for anticipated sales returns which consists of both contractual return rights and discretionary authorized returns.

Loyalty Programs. The Company has a customer loyalty program for the UGG brand in its DTC channel which allows customers to earn rewards from qualifying purchases or activities. As of December 31, 2019 and March 31, 2019, the Company's contract liability for loyalty programs was $10,760 and $5,171, respectively.

Refer to Note 12, “Reportable Operating Segments,” for further information on the Company's disaggregation of revenue by reportable operating segment.


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DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Nine Months Ended December 31, 2019 and 2018
(dollar amounts in thousands, except per share or share data)

Note 3. Goodwill and Other Intangible Assets

Goodwill and Other Intangible Assets

The Company's goodwill and other intangible assets are recorded in the condensed consolidated balance sheets, as follows:
 
December 31, 2019
 
March 31, 2019
Goodwill
 
 
 
UGG brand
$
6,101

 
$
6,101

HOKA brand
7,889

 
7,889

Total goodwill
13,990

 
13,990

Other intangible assets
 
 
 
Indefinite-lived intangible assets
 
 
 
Trademarks
15,454

 
15,454

Definite-lived intangible assets
 
 
 
Trademarks
55,245

 
55,245

Other
51,979

 
51,981

Total gross carrying amount
107,224

 
107,226

Accumulated amortization
(74,025
)
 
(71,186
)
Net definite-lived intangible assets
33,199

 
36,040

Total other intangible assets, net
48,653

 
51,494

Total
$
62,643

 
$
65,484



Amortization Expense

Aggregate amortization expense for definite-lived intangible assets during the nine months ended December 31, 2019 and 2018 was $2,839 and $4,817, respectively. A reconciliation of the changes in total other intangible assets, net, recorded in the condensed consolidated balance sheets is as follows:
Balance, March 31, 2019
$
51,494

Amortization expense
(2,839
)
Foreign currency translation net loss
(2
)
Balance, December 31, 2019
$
48,653



Note 4. Fair Value Measurements
The accounting standard for fair value measurements provides a framework for measuring fair value, which is defined as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. The fair value hierarchy under this accounting standard requires an entity to maximize the use of observable inputs, where available. The following summarizes the three levels of inputs required:

Level 1: Quoted prices in active markets for identical assets and liabilities.

Level 2: Observable inputs other than quoted prices in active markets for identical assets and liabilities.

Level 3: Unobservable inputs in which little or no market activity exists, therefore requiring the Company to develop its own assumptions.


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DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Nine Months Ended December 31, 2019 and 2018
(dollar amounts in thousands, except per share or share data)

The carrying amount of the Company’s financial instruments, which principally include cash and cash equivalents, trade accounts receivable, net, trade accounts payable, accrued payroll, and other accrued expenses, approximates fair value due to their short-term nature. The carrying amount of the Company’s short-term borrowings and mortgage payable, which are considered Level 2 liabilities, approximates fair value based upon current rates and terms available to the Company for similar debt.

The assets and liabilities that are measured on a recurring basis at fair value in the condensed consolidated balance sheets were as follows:
 
 
 
Measured Using
 
December 31, 2019
Level 1
 
Level 2
 
Level 3
Non-qualified deferred compensation asset
$
7,657

 
$
7,657

 
$

 
$

Non-qualified deferred compensation liability
(4,618
)
 
(4,618
)
 

 

Designated Derivative Contracts asset
273

 

 
273

 

Non-Designated Derivative Contracts asset
165

 

 
165

 

 
 
 
Measured Using
 
March 31, 2019
Level 1
 
Level 2
 
Level 3
Non-qualified deferred compensation asset
$
7,300

 
$
7,300

 
$

 
$

Non-qualified deferred compensation liability
(4,447
)
 
(4,447
)
 

 



The Company sponsors a non-qualified deferred compensation plan that permits a select group of management employees to defer earnings to a future date on a non-qualified basis. Deferred compensation is recognized based on the fair value of the participants' accounts. A rabbi trust was established as a reserve for benefits payable under this plan, with the assets invested in Company-owned life insurance policies. As of December 31, 2019, the non-qualified deferred compensation asset of $7,657 was recorded in other assets in the condensed consolidated balance sheets. As of December 31, 2019, the non-qualified deferred compensation liability of $4,618 was recorded in the condensed consolidated balance sheets, with $873 in other accrued expenses and $3,745 in other long-term liabilities.

The Level 2 inputs consist of forward spot rates at the end of the applicable reporting period. The fair values of assets and liabilities associated with derivative instruments and hedging activities are recorded in other current assets and other accrued expenses, respectively, in the condensed consolidated balance sheets. Refer to Note 9, “Derivative Instruments,” for further information, including definitions of the terms Designated Derivative Contracts and Non-Designated Derivative Contracts.

Note 5. Income Taxes

Effective income tax rate

Income tax expense and the effective income tax rate were as follows:
 
Three Months Ended December 31,
 
Nine Months Ended December 31,
 
2019
 
2018
 
2019
 
2018
Income tax expense
$
55,010

 
$
48,293

 
$
64,169

 
$
55,052

Effective income tax rate
21.4
%
 
19.7
%
 
19.8
%
 
18.6
%


The tax provisions for the three and nine months ended December 31, 2019 and 2018 were computed using the estimated effective income tax rates applicable to each of the domestic and foreign taxable jurisdictions for the full fiscal year and were adjusted for discrete items that occurred within the periods presented.

During the three months ended December 31, 2019, the increase in the effective income tax rate, compared to the prior period, was due to changes in the jurisdictional mix of worldwide income before income taxes forecasted for

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DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Nine Months Ended December 31, 2019 and 2018
(dollar amounts in thousands, except per share or share data)

the fiscal year ending March 31, 2020, as well as higher discrete tax expenses, primarily driven by additional reserves for uncertain tax positions and unfavorable return to provision differences, partially offset by a discrete tax benefit for the release of tax reserves recognized during the current period. During the nine months ended December 31, 2019, the increase in the effective income tax rate, compared to the prior period, was due to changes in the jurisdictional mix of worldwide income before income taxes forecasted for the fiscal year ending March 31, 2020, as well as higher net discrete tax expenses, primarily driven by additional reserves for uncertain tax positions and unfavorable return to provision adjustments, partially offset by the favorable settlement of a state income tax audit completed during the current period.

Due to the enactment of the Tax Cuts and Jobs Act (Tax Reform Act) in December 2017, the Company is subject to US taxation of its foreign subsidiary earnings considered global intangible low-taxed income, as well as limitations on the deductibility of executive compensation, which are included in income tax expense in the condensed consolidated statements of comprehensive income for the periods presented above. The Company continues to evaluate new guidance and legislation as it is issued.

Unrecognized Tax Benefits

During the nine months ended December 31, 2019, the amount of gross unrecognized tax benefits and associated penalties and interest increased by $4,839 to $18,237. This change is primarily related to increases in prior year tax position reserves of $2,050 and $6,061, recorded in income taxes payable and in income tax liability, respectively, in the condensed consolidated balance sheets. These increases were partially offset by a $3,272 release of reserves due to a lapse in a statute of limitations recorded in income tax expense, as well as interest expense for accrued penalties and interest, in the condensed consolidated statements of comprehensive income.

Note 6. Revolving Credit Facilities and Mortgage Payable

Primary Credit Facility

In September 2018, the Company entered into a credit agreement that provides for a five-year, $400,000 unsecured revolving credit facility (Primary Credit Facility), contains a $25,000 sublimit for the issuance of letters of credit, and matures on September 20, 2023.

At the Company's election, interest under the Primary Credit Facility is tied to the adjusted London Interbank Offered Rate (LIBOR) or the Alternate Base Rate (ABR). Interest for borrowings made in foreign currencies is based on currency-specific LIBOR or the Canadian deposit offered rate (CDOR) if made in Canadian dollars. As of December 31, 2019, the effective interest rates for US dollar LIBOR and ABR, with relevant spreads for borrowings made during the reporting period, were 2.89% and 4.88%, respectively.

During the nine months ended December 31, 2019, the Company borrowed and repaid $50,000 under the Primary Credit Facility. As of December 31, 2019, the Company had no outstanding balance under the Primary Credit Facility and had outstanding letters of credit of $549. As of December 31, 2019, available borrowings under the Primary Credit Facility were $399,451.

China Credit Facility

In August 2013, Deckers (Beijing) Trading Co., LTD, a wholly-owned subsidiary of the Company, entered into a credit agreement in China (as amended, the China Credit Facility) that provides for an uncommitted revolving line of credit of up to CNY 300,000, or $43,046, with an overdraft facility sublimit of CNY 100,000, or $14,349.

The China Credit Facility is payable on demand and subject to annual review with a defined aggregate period of borrowing of up to 12 months. The obligations under the China Credit Facility are guaranteed by the Company for 108.5% of the facility amount in US dollars. Interest is based on the People’s Bank of China (PBOC) market rate multiplied by a variable liquidity factor. As of December 31, 2019, the effective interest rate was 4.57%.


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DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Nine Months Ended December 31, 2019 and 2018
(dollar amounts in thousands, except per share or share data)

During the nine months ended December 31, 2019, the Company borrowed $19,318 and made $13,299 of repayments under the China Credit Facility. As of December 31, 2019, the Company had an outstanding balance of $6,019, outstanding bank guarantees of $28, and available borrowings of $36,999 under the China Credit Facility.

Subsequent to December 31, 2019 through January 29, 2020, the Company made repayments of $6,019, had no outstanding balance, outstanding bank guarantees of $28, and had available borrowings of $43,018 under the China Credit Facility.

Japan Credit Facility

In March 2016, Deckers Japan, G.K., a wholly-owned subsidiary of the Company, entered into a credit agreement in Japan (as amended, the Japan Credit Facility) that provides for an uncommitted revolving line of credit of up to JPY 5,500,000, or $50,622, for a maximum term of six months for each draw on the facility. The Japan Credit Facility renews annually and is guaranteed by the Company. Interest is based on the Tokyo Interbank Offered Rate (TIBOR), plus 0.40%. As of December 31, 2019, the effective interest rate was 0.47%.

During the nine months ended December 31, 2019, the Company made no borrowings or repayments under the Japan Credit Facility. As of December 31, 2019, the Company had no outstanding balance under the Japan Credit Facility and available borrowings of $50,622.

Subsequent to December 31, 2019, the Company renewed the Japan Credit Facility through February 1, 2021 for an uncommitted revolving line of credit of up to JPY 3,000,000, or $27,612, for the same interest rate described above.

Mortgage

In July 2014, the Company obtained a mortgage secured by the property on which its corporate headquarters is located for $33,931. As of December 31, 2019, the outstanding principal balance under the mortgage was $31,056, which includes $626 in short-term borrowings and $30,430 in mortgage payable in the condensed consolidated balance sheets. The mortgage has a fixed interest rate of 4.928%. Payments include interest and principal in an amount that amortizes the principal balance over a 30-year period; however, the loan will mature and requires a balloon payment of $23,695, in addition to any then-outstanding balance, on July 1, 2029.

Debt Covenants

As of December 31, 2019, the Company was in compliance with all debt covenants under its revolving credit facilities and mortgage.

Foreign Currency Exchange Rates

The amounts disclosed above for the China Credit Facility and Japan Credit Facility were translated into US dollars using applicable foreign currency exchange spot rates in effect as of December 31, 2019. As a result, there are differences between the net borrowing and repayment amounts within this footnote disclosure and those same amounts recorded in the condensed consolidated statements of cash flows. Any amounts outstanding are recorded in short-term borrowings in the condensed consolidated balance sheets.

Note 7. Leases and Other Commitments

Leases

The Company primarily leases retail stores, showrooms, offices, and distribution facilities under operating lease contracts. Some of the Company's operating leases contain extension options of anywhere from one to 15 years. Historically, the Company has not entered into finance leases and its lease agreements generally do not contain residual value guarantees, options to purchase underlying assets, or material restrictive covenants.

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DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Nine Months Ended December 31, 2019 and 2018
(dollar amounts in thousands, except per share or share data)


Operating lease assets and liabilities. The Company determines if an arrangement contains a lease at inception of a contract. The Company recognizes operating lease assets and lease liabilities in the condensed consolidated balance sheets on the lease commencement date, based on the present value of the outstanding lease payments over the reasonably certain lease term. The lease term includes the non-cancelable period at the lease commencement date, plus any additional periods covered by the Company's options to extend (or not to terminate) the lease that are reasonably certain to be exercised, or an option to extend (or not to terminate) a lease that is controlled by the lessor.

Operating lease assets are initially measured at cost, which comprises the initial amount of the associated lease liabilities, adjusted for lease payments made at or before the lease commencement date, plus any initial direct costs incurred, less any lease incentives, such as tenant allowances.

Operating lease assets are subsequently measured throughout the lease term at the carrying amount of the associated lease liabilities, plus initial direct costs, plus or minus any prepaid or accrued lease payments, less the unamortized balance of lease incentives received. Rent expense for operating lease payments is recognized on a straight-line basis over the lease term in SG&A expenses in the condensed consolidated statements of comprehensive income. Lease payments recognized in the operating lease liability are (1) fixed payments, including in-substance fixed payments and fixed rate increases, owed over the lease term and (2) exclude any lease prepayments as of the periods presented.

Operating lease assets and liabilities are presented separately in the condensed consolidated balance sheets. The current portion of operating lease liabilities is presented within current liabilities, while the long-term portion is presented separately as long-term operating lease liabilities.

Certain leases require additional payments based on (1) actual or forecasted sales volume (either monthly or annually), (2) reimbursement for real estate taxes (tax), (3) common area maintenance (CAM), and (4) insurance (collectively, variable lease payments). Variable lease payments are generally excluded from operating lease assets and liabilities and are recognized in rent expense and recorded as a component of SG&A expenses in the condensed consolidated statements of comprehensive income. Some leases are dependent upon forecasted annual sales volume, and lease payments are recognized on a straight-line basis as rent expense over each annual period when the achievement of the related sales target is reasonably likely to occur. Other variable lease payments, such as tax, CAM and insurance, are recognized in rent expense as incurred. Some leases contain one fixed lease payment that include variable lease payments, which are considered non-lease components. The Company has elected to account for these instances as a single lease component and the total of these fixed payments is used to measure the operating lease assets and lease liabilities.

The Company has elected not to recognize operating lease assets and lease liabilities for short-term leases, which are defined as those operating leases with a term of 12 months or less. Instead, lease payments for short-term leases are recognized on a straight-line basis over the lease term in rent expense and recorded as a component of SG&A expenses in the condensed consolidated statements of comprehensive income.

Discount Rate. The Company discounts its unpaid lease payments using the interest rate implicit in the lease or, if the rate cannot be readily determined, its IBR. Generally, the Company cannot determine the interest rate implicit in the lease because it does not have access to the lessor's estimated residual value or the amount of the lessor's deferred initial direct costs. Therefore, the Company generally derives a discount rate at the lease commencement date by utilizing its IBR, which is based on what the Company would have to pay on a collateralized basis to borrow an amount equal to its lease payments under similar terms. Because the Company does not currently borrow on a collateralized basis under its revolving credit facilities, it uses the interest rate it pays on its noncollateralized borrowings under its Primary Credit Facility as an input for deriving an appropriate IBR, adjusted for the amount of the lease payments, the lease term, and the effect on that rate of designating specific collateral with a value equal to the unpaid lease payments for that lease.


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Table of Contents
DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Nine Months Ended December 31, 2019 and 2018
(dollar amounts in thousands, except per share or share data)

Remeasurements. The Company monitors for events that require a change in estimates for its operating lease assets and liabilities, such as modifications to the terms of the contract, including the lease term, as well as operating lease asset impairments. When a change in estimates results in the remeasurement of the operating lease liability, a corresponding adjustment is made to the carrying amount of the operating lease asset.

At least quarterly, the Company evaluates the carrying amount of its operating lease assets and related leasehold improvements (asset group) for indicators of impairment under the requirements of ASC Subtopic 360-10, Property, Plant, and Equipment – Overall (ASC 360) and in accordance with the long-lived asset impairment policy disclosed in Note 1, "General," in Part IV of its 2019 Annual Report on Form 10-K for the fiscal year ended March 31, 2019. If the carrying amount of the asset group exceeds the estimated undiscounted future cash flows, an impairment charge is recognized for the amount by which the carrying amount exceeds the fair value of the asset group. Fair value of the asset group is measured using an observable or quoted market price. An impairment loss, if any, would only reduce the carrying amount of the asset group based on its fair value limitation and is allocated to individual assets in the asset group, unless doing so would reduce the carrying amount of the operating lease asset to an amount less than zero.

During the three months ended December 31, 2019, the Company recognized impairment charges for certain retail store operating lease assets of $1,103 and related leasehold improvements of $156. These impairment charges were recognized within the Company's DTC reportable operating segment and recorded in SG&A expenses in the condensed consolidated statements of comprehensive income. After impairment, the operating lease assets were remeasured and amortized on a straight-line basis over the remaining lease term, with no impact on the related operating lease liabilities.

Rent Expense. The components of rent expense for operating leases recorded in the condensed consolidated statements of comprehensive income were as follows:
 
Three Months Ended December 31, 2019
 
Nine Months Ended December 31, 2019
Operating
$
14,776

 
$
43,478

Variable
8,602

 
20,191

Short-term
1,177

 
2,437

Total
$
24,555

 
$
66,106


The components of rent expense for operating leases recorded in the condensed consolidated statements of comprehensive income under legacy US GAAP were as follows:
 
Three Months Ended December 31, 2018
 
Nine Months Ended December 31, 2018
Minimum rentals
$
15,886

 
$
46,036

Contingent rentals
7,299

 
10,237

Total
$
23,185

 
$
56,273



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DECKERS OUTDOOR CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Nine Months Ended December 31, 2019 and 2018
(dollar amounts in thousands, except per share or share data)

Operating Lease Liabilities. Maturities of undiscounted operating lease liabilities remaining as of December 31, 2019 under the new lease standard, with a reconciliation to the present value of operating lease liabilities recorded in the condensed consolidated balance sheets, were as follows:
Years Ending March 31,
 
Amount
2020
 
$
10,342

2021
 
52,556

2022
 
44,406

2023
 
39,097

2024
 
33,995

Thereafter
 
87,064

Total undiscounted future lease payments
 
267,460

Less: Imputed interest
 
(27,377
)
Total
 
$
240,083