Crocs, Inc. (CROX) FY 2021 MD&A

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Business Overview

Crocs, Inc. and its consolidated subsidiaries (collectively, the “Company,” “Crocs,” “we,” “us,” or “our”) are engaged in the design, development, worldwide marketing, distribution, and sale of casual lifestyle footwear and accessories for women, men, and children. We strive to be the world leader in innovative casual footwear for women, men, and children, combining comfort and style with a value that consumers want. The vast majority of shoes within Crocs’ collection contain Croslite™ material, a proprietary, molded footwear technology, delivering extraordinary comfort with each step. The broad appeal of our footwear has allowed us to market our products through a wide range of distribution channels. We currently sell our products in more than 85 countries, through two distribution channels: wholesale and direct-to-consumer. Our wholesale channel includes domestic and international multi-brand retailers, mono-branded partner stores, e-tailers, and distributors; our direct-to-consumer channel includes company-operated retail stores, company-operated e-commerce sites, and third-party marketplaces.

Known or Anticipated Trends

Based on our recent operating results and our assessment of the current operating environment, we anticipate certain trends will continue to impact our future operating results:

•On December 22, 2021, we entered into a definitive agreement to acquire HEYDUDE, a privately-owned casual footwear brand, pursuant to the Securities Purchase Agreement. Upon closing, the HEYDUDE Acquisition will further diversify our product portfolio under two brands. The Securities Purchase Agreement provides that we will purchase all of the issued and outstanding equity securities of HEYDUDE for a purchase price of $2.05 billion in cash and 2,852,280 in Crocs shares. We expect to finance the Cash Consideration by entering into the $2.0 billion Term Loan B Facility and borrowing $50.0 million under the Revolving Facility. The HEYDUDE Acquisition is expected to close in February 2022, subject to customary closing conditions.

•Global industry-wide logistics challenges impacted us to some degree in the year ended December 31, 2021, particularly in the second half of the year, with some of our factories in Vietnam closed for several weeks or not operating at full capacity during the third and fourth quarters, and into the first quarter of 2022. We expect the situation to remain fluid as COVID-19 break-out rates fluctuate, including any deterioration in circumstances related to COVID-19 variants, and whether vaccination rates increase in the country. However, we have taken and will continue to take several measures to ensure continued future growth and strong gross margins in 2022, including: (i) prioritizing top-selling products and narrowing product assortment, which has and should continue to improve factory throughput, (ii) maintaining flexibility by leveraging air freight and reducing our dependency on congested West Coast ports in the United States by adding East Coast trans-shipment capabilities, and (iii) strategically allocating units and prioritizing our key growth initiatives. With the actions taken to date and our future plans, we believe Crocs is well-positioned to withstand these supply challenges.

•Despite these actions, we expect to still be impacted by global logistics challenges in 2022. Specifically, we plan to invest approximately $75 million in air freight in 2022 to bolster our inventory positions for the first half of the year in all regions. Supported by the health of our brand, wholesale orders for the first half of 2022 have been strong. However, we expect to have limitations around demand fulfillment in the first half of the year.

•Global inflation has also begun to impact our business, contributing to incremental freight costs, increased wages, particularly in our distribution centers, and increased raw materials cost. We expect this trend will continue in 2022.

•Consumer demand for the Crocs brand continues to be strong, fueled by increased marketing investment and compelling product, and is leading to strong sales growth, particularly in our clog silhouette and charms.

•In 2021, we invested, and plan to continue to invest, in selling, general and administrative expenses (“SG&A”), including marketing, talent, and digital commerce, to fuel long-term growth, while continuing to leverage revenue growth.

•In the year ended December 31, 2021, we repurchased $1.0 billion of shares, including accelerated share repurchases of $300.0 million in the three months ended June 30, 2021 and $500.0 million in the three months ended December 31, 2021. In the immediate term, we plan to prioritize repayments of debt, including debt incurred to finance a part of the HEYDUDE Acquisition, and thus have suspended our share repurchase program until such time that our gross leverage is under 2.0x. We do not expect this to occur in 2022.

•Our year-over-year results comparing the years ended December 31, 2021 and 2020 discussed below are impacted to some extent by prior year store closures and operating hour reductions as a result of the COVID-19 impact in 2020.

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Use of Non-GAAP Financial Measures

In addition to financial measures presented on the basis of accounting principles generally accepted in the United States of America (“U.S. GAAP”), we present certain information related to our current period results of operations through “constant currency,” which is a non-GAAP financial measure and should be viewed as a supplement to our results of operations and presentation of reportable segments under U.S. GAAP. Constant currency represents current period results that have been retranslated using prior year average foreign exchange rates for the comparative period to enhance the visibility of the underlying business trends excluding the impact of foreign currency exchange rates on reported amounts.

Management uses constant currency to assist in comparing business trends from period to period on a consistent basis in communications with the Board, stockholders, analysts, and investors concerning our financial performance. We believe constant currency is useful to investors and other users of our consolidated financial statements as an additional tool to evaluate operating performance and trends. Investors should not consider constant currency in isolation from, or as a substitute for, financial information prepared in accordance with U.S. GAAP.

2021 Financial and Operational Highlights

Revenues were $2,313.4 million for the year ended December 31, 2021, a 66.9% increase compared to the year ended December 31, 2020. The increase in 2021 revenues compared to 2020 revenues was due to the net effects of: (i) higher sales volumes, which increased revenues by $637.4 million, or 46.0%, driven by continued increased consumer demand for our products, some of which was due to improved sales in our DTC businesses as the pandemic subsided; (ii) higher average selling prices, which increased revenues by $265.9 million, or 19.2%, as a result of increased prices and reduced promotions and discounts; and (iii) favorable changes in exchange rates, which increased revenues by $24.2 million, or 1.7%.

The following were significant developments affecting our businesses during the year ended December 31, 2021:

•Revenues grew in all regional segments and channels compared to the year ended December 31, 2020. Our Americas segment revenues grew 86.1%, or 85.9% on a constant currency basis, while our EMEA segment revenues grew 46.2%, or 41.7% on a constant currency basis, and our Asia segment revenues grew 25.7%, or 21.5% on a constant currency basis.

•We sold 103.0 million pairs of shoes worldwide, an increase from 69.1 million pairs in 2020.

•Gross margin was 61.4% compared to 54.1% in 2020, an increase of 730 basis points, primarily as a result of increased pricing and fewer promotions and discounts, as well as favorable product and channel mix.

•SG&A was $737.2 million, an increase of $222.4 million, or 43.2%, compared to 2020, primarily as a result of increased investments in talent, marketing, and projects to fuel future growth. However, as a percent of revenues, SG&A improved 520 basis points to 31.9% of revenues as a result of strong sales growth and our continued leveraging of operating costs.

•Income from operations was $683.1 million for the year ended December 31, 2021 compared to income from operations of $214.1 million for the year ended December 31, 2020. Our operating margin rose to 29.5%, compared to 15.4% in 2020.

•Net income was $725.7 million compared to $312.9 million in 2020. Diluted net income per common share was $11.39 for the year ended December 31, 2021, compared to a diluted net income per common share of $4.56 for the year ended December 31, 2020.

•During 2021, we issued $700.0 million of senior notes and at December 31, 2021, we had $414.7 million in available borrowing capacity under our Revolving Facility.

•We incurred costs of $6.4 million in the fourth quarter of 2021 in association with our planned HEYDUDE Acquisition, which is expected to close in February 2022, subject to customary closing conditions.

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Results of Operations

Comparison of the Years Ended December 31, 2021 and 2020

A discussion of our comparison between 2021 and 2020 is presented below. A discussion of the changes in our results of operations between the years ended December 31, 2020 and December 31, 2019 has been omitted from this Annual Report on Form 10-K but may be found in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on February 23, 2021, which is available free of charge on the SEC’s website at www.sec.gov and our corporate website (www.crocs.com).

However, as a result of changes made in the presentation of certain costs between ‘Unallocated corporate and other’ and our regional segments in the year ended December 31, 2021, as described in more detail under “Reportable Operating Segments” below, we have included a discussion of the changes between the years ended December 31, 2020 and December 31, 2019, as revised to conform to current period segment presentation. The consolidated results of operations below have not changed from prior year presentation.

(1) Changes for gross margin and operating margin are shown in basis points (“bp”).

(2) Average footwear selling price is calculated as footwear and charms revenues divided by footwear units.

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Revenues by Channel

(1) Reflects year over year change as if the current period results were in constant currency, which is a non-GAAP financial measure. See “Use of Non-GAAP Financial Measures” for more information.

(2) Direct-to-consumer revenues consist of sales generated through our company-operated retail stores (previously our “Retail” channel) and company-operated e-commerce websites and third-party e-commerce marketplaces (previously our “E-commerce” channel).

The primary drivers of the changes in revenues were:

(1) The change due to price is based on the change in average selling price on a constant currency basis (“ASP”).

Revenues. In the year ended December 31, 2021, revenues increased compared to 2020, primarily as a result of volume increases in all segments, led by our Americas segment, and all channels, led by our wholesale channel. This was due to increased consumer demand, attributable in part to cycling prior year negative COVID-19 impacts on prior year wholesale and retail store revenues, including traffic limitations in stores and reduced operating hours. Higher ASPs also contributed to higher revenues in all segments and channels, primarily in our direct-to-consumer (“DTC”) channel, as a result of increased pricing and fewer promotions and discounts, while foreign exchange fluctuations increased revenues due to favorable changes in the Euro, Korean Won, and Chinese Yuan.

Cost of sales. Cost of sales increased compared to 2020, primarily due to higher volume of $280.7 million, or 44.1% and foreign currency fluctuations, which increased cost of sales by $10.6 million, or 1.7%. These increases were partially offset by lower average cost per unit on a constant currency basis (“AUC”) of $34.1 million, or 5.4%, as a result of favorable product mix, moderated by higher freight costs associated with global supply chain disruptions, including the blockage in the Suez Canal in the first quarter of 2021 and container costs, port congestion, and Vietnam factory closures in the third and fourth quarters of 2021.

Gross profit. Gross margin was 61.4% compared to 54.1% in 2020, due to increased pricing, fewer promotions and discounts, and favorable product and channel mix. Gross profit increased $670.3 million, or 89.4%, due to higher volumes of $356.7 million, or 47.6%, the combined impact of higher ASP and lower AUC of $300.1 million, or 40.0%, and favorable foreign currency fluctuations of $13.5 million, or 1.8%.

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Selling, general and administrative expenses. SG&A as a percent of revenue improved to 31.9% during the year ended December 31, 2021 compared to 2020, as a result of strong sales growth and our continued efforts to leverage operating costs, while SG&A expenses increased $222.4 million, or 43.2% in the same period. This increase was driven by additional marketing investments of $80.0 million, which together with higher compensation expense and related costs of $79.0 million as a result of increased employee headcount and higher variable and executive compensation, compounded by the prior year temporary and permanent elimination of certain roles in response to COVID-19, both supported the growth of the business. Services costs increased $43.8 million from increased spending on consulting associated with supply chain investments, higher variable costs associated with sales growth, and costs related to our pending HEYDUDE Acquisition, and facilities expense was up $21.3 million primarily as a result of variable rent associated with higher sales. Other costs, including information technology expenses, were up by $15.3 million, offset in part by lower inventory donations of $8.6 million as a result of prior year COVID-19 donations to frontline healthcare workers and other organizations that did not recur at the same magnitude in the current year and lower bad debt expense of $8.4 million, mostly due to the prior year COVID-19 related impact on our distributors that did not recur in the current year, as well as collections on previously reserved bad debt expense.

Asset impairment charges. During the year ended December 31, 2021, we did not incur impairment charges. During the year ended December 31, 2020, we incurred $20.0 million in impairment charges to the right-of-use asset and store assets for a retail location in New York City and $1.1 million in impairment charges to the right-of-use asset for our former corporate headquarters.

Foreign currency losses, net. Foreign currency losses, net, consists of unrealized and realized foreign currency gains and losses from the remeasurement and settlement of monetary assets and liabilities denominated in non-functional currencies as well as realized and unrealized gains and losses on foreign currency derivative instruments. During the year ended December 31, 2021, we recognized realized and unrealized net foreign currency losses of $0.1 million compared to net losses of $1.1 million during the year ended December 31, 2020.

Income tax benefit. During the year ended December 31, 2021, we recognized an income tax benefit of $61.8 million on pre-tax book income of $663.8 million, representing an effective tax rate of (9.3)%, compared to an income tax benefit of $105.9 million on pre-tax book income of $207.0 million in 2020, which represented an effective tax rate of (51.2)%. The prior year effective tax rate is lower primarily due to the prior year net foreign deferred income tax benefit as a result of an intra-entity intellectual property rights transfer of $127.7 million, partially offset by the current year release of valuation allowances and the current year foreign deferred income tax benefit as a result of an intra-entity intellectual property rights transfer. Our effective tax rate has varied dramatically in recent years due to the intra-entity intellectual property rights transfer, differences in our profitability levels and relative operating earnings across multiple jurisdictions, and by changes in the valuation allowance.

During the three months ended December 31, 2021, we completed an intra-entity transfer of certain intellectual property rights primarily to align with current and future international operations. The transfer resulted in a step-up in tax basis of intellectual property rights and a correlated increase in foreign deferred tax assets based on the fair value of the transferred intellectual property rights. We recorded a deferred tax asset of $40.3 million, net of a reserve for uncertain tax positions of $16.1 million. As such, a net deferred tax asset of $24.2 million was recognized along with a corresponding foreign deferred income tax benefit.

Our valuation allowances are primarily the result of uncertainties regarding the future realization of tax attributes recorded in various jurisdictions. The measurement of deferred tax assets is reduced by a valuation allowance if, based upon available evidence, it is more likely than not that the deferred tax assets will not be realized. We have evaluated the realizability of our deferred tax assets in each jurisdiction by assessing the adequacy of expected taxable income, including the reversal of existing temporary differences, historical and projected operating results, and the availability of prudent and feasible tax planning strategies. In assessing our valuation allowance as of December 31, 2021, we considered all available evidence, including the magnitude of recent and current operating results, the duration of statutory carryforward periods, our historical experience utilizing tax attributes prior to their expiration dates, the historical volatility of operating results of these jurisdictions, and our assessment regarding the sustainability of their profitability. The weight we give to any particular item is, in part, dependent upon the degree to which it can be objectively verified. In 2021, a jurisdiction for which we have historically recorded significant valuation allowances enacted a favorable change in the tax law related to net operating loss carryforwards. This change in tax law impacted the assessment of valuation allowances in the jurisdiction as the reversal of existing deferred tax assets would generate indefinite carryforward net operating losses instead of losses with a limited carryforward period. During 2021, valuation allowances recorded against deferred tax assets decreased by $200.2 million.

The 2021 impact of changes in valuation allowances to the effective tax rate was a favorable impact of $192.3 million, equating to a 29.0% favorable impact. There is also a $7.9 million change in the valuation allowance related to cumulative translation adjustments. We maintain valuation allowances of approximately $26.5 million as of December 31, 2021, which may be

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reduced in the future depending upon the achieved profitability of certain jurisdictions as well as the magnitude of the profitability.

Reportable Operating Segments

The following table sets forth information related to our reportable operating business segments for the years ended December 31, 2021, 2020, and 2019. As a result of changes made in the presentation of certain costs between ‘Unallocated corporate and other’ and our regional segments in the year ended December 31, 2021, as described in more detail below, we have included a discussion of the changes in our results of operations between the years ended December 31, 2020 and December 31, 2019, as revised to conform to current period presentation.

(1)    Reflects year over year change as if the current period results were in constant currency, which is a non-GAAP financial measure. See “Use of Non-GAAP Financial Measures” for more information.

(2) In the first quarter of 2021, certain costs previously reported within ‘Other Businesses’ were shifted to the Americas, Asia Pacific, and EMEA segments. Additionally, any costs remaining in ‘Other Businesses,’ including depreciation and amortization, have been consolidated into ‘Unallocated corporate and other.’ In the second quarter of 2021, certain marketing expenses previously reported within ‘Unallocated corporate and other’ were shifted to the Americas, Asia Pacific, and EMEA segments. The previously reported amounts for income from operations for the years ended December 31, 2020 and 2019 have been revised to conform to current period presentation. See the ‘Impacts of segment composition change’ and ‘Impacts of marketing expense allocations’ tables below for more information.

(3)    “Unallocated corporate and other” includes corporate support and administrative functions, costs associated with share-based compensation, research and development, brand marketing, legal, and depreciation and amortization of corporate and other assets not allocated to operating segments.

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Impacts of segment composition change:

Impacts of marketing expense allocations:

The primary drivers of changes in revenues by operating segment were:

(1) The change due to price for revenues is based on ASP, as defined earlier in this section.

Americas

Revenues. The Americas segment grew revenues 86.1% for the year ended December 31, 2021 compared 2020, as a result of higher volume and higher ASPs in both our wholesale and DTC channels. Volume was up versus prior year as a result of continued increased consumer demand, partially due to the prior year negative impact of COVID-19 on our brick-and-mortar stores. Higher ASPs also contributed to higher sales due mostly to higher pricing and fewer promotions and discounts, primarily in our DTC channel, as well as favorable product mix. Currency fluctuations had an immaterial impact on revenues.

The Americas segment grew in the year ended December 31, 2020, compared to 2019, with significant increases due to both ASP and volume, slightly offset by negative currency fluctuations, primarily in the Brazilian Real. DTC revenues increased 29.4%, primarily due to e-commerce growth, and wholesale revenues increased 42.0%. ASP increased in all channels as a result of less promotional activity, product mix, price increases, and increased sales of charms per shoe, while higher volumes in the

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e-commerce component of our DTC channel and wholesale channel more than offset lower volume in the retail component of our DTC channel. This was in part a result of COVID-19-related closures that drove a consumer shift to online shopping.

Income from Operations. During the year ended December 31, 2021, income from operations for our Americas segment was $778.3 million, an increase of $454.8 million, or 140.6% from 2020. Gross profit for the year ended December 31, 2021 increased $544.2 million, or 108.7%, and gross margin increased 700 basis points to 65.0%, compared to the year ended December 31, 2020. Gross profit increased $299.7 million, or 59.9%, due to sales volume increases in both channels, and increased $241.1 million, or 48.2%, due to higher ASP and lower AUC as a result of favorable product mix, including increased sales of charms per shoe, higher prices and fewer promotions and discounts, favorable channel mix, and increased efficiencies in our U.S. distribution network, partially offset by higher inbound freight costs. Immaterial favorable foreign currency fluctuations also increased gross profit.

During the year ended December 31, 2021, SG&A for our Americas segment increased by $89.4 million, or 50.5%, compared to 2020. This was primarily due to an investment in marketing of $50.0 million to support growth, higher compensation and related costs of $24.7 million as a result of increased headcount associated with the growth of the business and the prior year temporary and permanent elimination of certain roles in response to COVID-19, and $14.4 million in facilities costs, mostly associated with variable rent driven by higher retail sales. Additionally, higher services costs of $6.8 million and other costs of $5.6 million resulted predominantly from variable costs associated with higher sales. These increases were offset by lower donations of inventory of $8.3 million as a result of prior year COVID-19 donations to frontline healthcare workers that did not recur in the current year and lower bad debt expense of $3.8 million as a result of the prior year impact of COVID-19 on our distributors and subsequent collections in the current year.

During the year ended December 31, 2020, income from operations for our Americas segment was $323.5 million, an increase of $144.3 million, or 80.5% from 2019. Gross profit for the year ended December 31, 2020 increased $156.9 million, or 45.7%, and gross margin increased 432 basis points to 58.0%, compared to the year ended December 31, 2019. Gross profit increased $119.1 million, or 34.7%, due to higher ASP and lower AUC. ASP increased as a result of channel mix due to higher DTC e-commerce sales, less promotional activity, and favorable product mix. This was further supplemented by lower AUC as a result of product mix, partially offset by channel mix and higher distribution center costs from the expansion of our U.S. distribution center. Gross profit also increased $40.0 million, or 11.6%, due to sales volume. Foreign currency translation decreased gross profit by $2.2 million, or 0.6%.

During the year ended December 31, 2020, SG&A for our Americas segment increased by $12.6 million, or 7.7%, compared to 2019. This was primarily due to an increase in marketing costs of $5.8 million due to higher variable marketing associated with a higher share of e-commerce sales, $8.3 million of inventory donations associated with COVID-19, and an increase in other net costs of $3.5 million, in part due to bad debt expense recognized related to the impact of COVID-19 on our distributors. These increases were offset by a decrease of $5.0 million in compensation expense, primarily due to the temporary closure of, and reduction of store hours at, our retail stores during the year and the permanent elimination of certain roles in response to COVID-19.

Asia Pacific Operating Segment

Revenues. Revenues in our Asia Pacific segment increased in the year ended December 31, 2021 compared to 2020, as a result of volume increases in our wholesale channel driven in part by cycling prior year negative COVID-19 impacts on our distributor markets and ASP increases in both channels, as a result of increased pricing and fewer promotions and discounts. Revenue also increased as a result of fluctuations in foreign currency, including the Korean Won and Chinese Yuan.

The decrease in revenues in our Asia Pacific segment in the year ended December 31, 2020, compared to 2019, was primarily due to lower sales volumes in our wholesale channel and retail component of our DTC channel, as a result of store closures, decreased customer traffic, and lack of tourism, all of which were brought about by the pandemic. An increase in e-commerce DTC revenues partially offset these declines. Foreign currency fluctuations, primarily in the Korean Won, also decreased revenue slightly. Increased ASP, due to channel mix, fewer promotions and discounts, less discounting, and increased sales of charms per shoe, partially offset these declines.

Income from Operations. During the year ended December 31, 2021, income from operations for our Asia Pacific segment was $71.9 million, an increase of $39.1 million, or 119.1%. Gross profit for the year ended December 31, 2021 increased $63.5 million, or 43.7%, while gross margin increased 740 basis points to 59.6%, compared to the year ended December 31, 2020. The increase in gross profit was largely due to higher ASPs and lower AUCs, on a net basis, of $46.7 million, or 32.1%, resulting from price increases and less promotional activity, favorable product mix, and greater purchasing power from

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currency changes. Higher volume of $8.9 million, or 6.2%, and favorable currency fluctuations of $7.8 million, or 5.4%, also contributed to higher gross profit.

During the year ended December 31, 2021, SG&A for our Asia Pacific segment increased $24.4 million, or 21.7%, compared to the same period in 2020, primarily due to increased investment in marketing of $17.6 million to support growth, an increase in facilities expense of $5.1 million associated with variable rent driven by higher retail sales, an increase in compensation expense and related costs of $4.2 million, and an increase in other net costs, including variable costs associated with revenue growth, of $1.3 million. These increases were partially offset by lower bad debt expense of $2.5 million, primarily from net charges taken in the prior year in response to COVID-19, and prior year inventory donations to healthcare workers and other organizations of $1.4 million, neither of which recurred in 2021.

During the year ended December 31, 2020, income from operations for our Asia Pacific segment was $32.8 million, a decrease of $27.9 million, or 45.9%. Gross profit for the year ended December 31, 2020 decreased $34.0 million, or 19.0%, while gross margin increased 70 basis points to 52.2%, compared to the year ended December 31, 2019. The decrease in gross profit was largely due to lower volume of $33.7 million, or 18.8%, particularly in our wholesale channel, as a result of the lack of tourism in our distributors’ markets and temporary closures of our wholesale partners’ brick-and-mortar stores during the pandemic. Foreign currency fluctuations also decreased gross profit by $1.8 million or 1.0%. Finally, higher ASP, net of AUC, of $3.9 million, due to the shift in direct-to-consumer revenues, was offset by a pandemic-related inventory write-off of $2.4 million.

During the year ended December 31, 2020, SG&A for our Asia Pacific segment decreased $6.1 million, or 5.2%, compared to the same period in 2019. This was due in part to reductions in compensation expense of $3.2 million due to the temporary and permanent elimination of certain roles in response to COVID-19, facilities expense of $3.2 million as a result of store closures in Australia and Hong Kong and COVID-19 related rent abatements, primarily in Singapore, marketing cost of $2.2 million, and travel and related costs of $2.0 million. These decreases were offset by an increase in SG&A from donations of inventory to frontline healthcare workers and other organizations of $1.4 million, higher bad debt expense of $1.2 million, in part due to the impact of COVID-19 on distributor partners, and higher other net costs of $1.9 million.

Europe, Middle East, and Africa Operating Segment

Revenues. Revenues increased for our EMEA segment compared to the year ended December 31, 2020, most significantly as a result of higher volumes in both channels, particularly in wholesale, resulting from increased product demand and cycling prior year negative COVID-19 impacts which further increased the disparity between the two periods. Higher ASPs in all channels, as a result of price increases and fewer promotions and discounts, and favorable foreign currency fluctuations in the Euro also increased revenues.

The increase in revenues for our EMEA segment in the year ended December 31, 2020, compared 2019, was due to increased ASP, primarily in our DTC channel as a result of less discounting, offset in part by lower volumes. Within our DTC channel, e-commerce volume increases of 33.4% were more than offset by retail volume decreases of 36.4%, and wholesale volume decreases of 2.7%, as consumers shifted to online shopping during the pandemic. Negative foreign currency fluctuations in the Russian Ruble, partially offset by positive fluctuations in the Euro, also reduced revenues.

Income from Operations. During the year ended December 31, 2021, income from operations for our EMEA segment was $111.5 million, an increase of $45.6 million, or 69.2%. Gross profit for the year ended December 31, 2021 increased $59.7 million, or 49.5%, and gross margin increased by 110 basis points to 50.6% compared to the year ended December 31, 2020. The increase in our EMEA segment gross profit was due to higher volumes of $42.4 million, or 35.1%, primarily in our wholesale channel, and higher ASPs, supplemented by slightly lower AUCs, of $12.3 million, or 10.2%, as a result of purchasing power gains, favorable product mix, and price increases and fewer promotions and discounts, offset in part by higher freight costs. Favorable foreign currency fluctuations of $5.1 million, or 4.2% also contributed to higher gross profit.

During the year ended December 31, 2021, SG&A for our EMEA segment increased $14.1 million, or 25.8%, compared to the same period in 2020. Additional investments in marketing to support growth of $10.2 million, higher compensation expense and related costs of $3.5 million, and higher facilities and other net costs of $2.2 million were offset in part by $1.8 million lower bad debt expense.

During the year ended December 31, 2020, income from operations for our EMEA segment was $65.9 million, a decrease of $1.1 million, or 1.8%. Gross profit for the year ended December 31, 2020 increased $2.4 million, or 2.0%, and gross margin increased by 60 basis points to 49.5% compared to the year ended December 31, 2019. The decrease in our EMEA segment gross profit was due to lower volumes of $3.6 million, or 3.1%, primarily in the retail component of our DTC channel, and

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negative foreign currency fluctuations of $1.2 million, or 1.1%. Higher ASP in the e-commerce component of our DTC channel as a result of fewer promotions and discounts and price increases led to a total increase to gross profit of $7.2 million or 6.1%.

During the year ended December 31, 2020, SG&A for our EMEA segment increased $1.3 million, or 2.2%, compared to the same period in 2019, primarily due to increased marketing cost of $2.1 million as a result of higher variable marketing associated with a higher share of e-commerce sales and increased other net costs of $0.7 million, offset by a reduction in compensation expense of $1.5 million.

Unallocated Corporate and Other

During the year ended December 31, 2021, total net costs within ‘Unallocated corporate and other’ increased by $70.6 million, or 33.9%, compared to the same period in 2020. This was primarily driven by an increase in compensation expense of $46.6 million due to increased employee headcount and the related hiring costs and higher variable and executive compensation, as well as higher services costs of $35.2 million as a result of supply chain investments, legal expenses, and costs associated with our pending HEYDUDE Acquisition. We also had higher information technology costs of $10.7 million. These increases were partially offset by prior year impairment charges of $21.1 million, primarily related to a retail location in New York City, that did not recur in the current year, and lower other net costs of $0.8 million.

During the year ended December 31, 2020, total net costs within ‘Unallocated Corporate and Other’ increased by $32.1 million, or 18.2%, compared to the same period in 2019. This increase was primarily due to a $20.0 million impairment to the right-of-use asset and store assets for a retail location in New York City, a $1.1 million impairment to the right-of-use asset for our former corporate headquarters, higher compensation expense of $13.2 million due to higher variable compensation and sales commissions associated with higher revenues, and an increase in facilities expense of $3.0 million due to duplicate rent costs associated with our new corporate headquarters and higher insurance premiums. There were also increases in various other costs, including marketing, of $6.2 million. These higher costs were partially offset by lower supply chain costs of $7.6 million due to the impact of favorable foreign currency on purchasing power and favorable sourcing mix and decreases in travel, professional services, and other costs of $3.8 million.

Store Locations and Digital Sales Percentage

The table below illustrates the overall change in the number of our company-operated retail locations by reportable operating segment:

Digital sales, which includes sales through our company-owned website, third-party marketplaces, and e-tailers (which are reported in our wholesale channel), as a percent of total revenues, by operating segment were:

The 2020 digital sales percentages were impacted to some extent by the COVID-19 pandemic, which increased digital penetration when brick-and-mortar stores were closed during such time-frame. Nonetheless, we expect digital sales to continue to increase going forward.

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As a result of temporary store closures across the globe due to COVID-19, primarily in the year ended December 31, 2020, we have not presented direct-to-consumer comparable sales.

Liquidity and Capital Resources

Our liquidity position as of December 31, 2021 was:

As of December 31, 2021, we had $213.2 million in cash and cash equivalents and up to $414.7 million in available borrowings under our Revolving Facility. We believe that our cash flows from operations, our cash and cash equivalents on hand, and available borrowings under our Revolving Facility and other financing agreements will be sufficient to meet our ongoing liquidity needs and capital expenditure requirements for at least the next twelve months. Additionally, in March 2021 and August 2021, we completed the issuance and sale of $350.0 million aggregate principal amount of 2029 Notes (as defined below) and $350.0 million aggregate principal amount of 2031 Notes (as defined below), respectively. In the year ended December 31, 2021, we repurchased $1.0 billion of shares, including accelerated share repurchases of $300.0 million in the three months ended June 30, 2021 and $500.0 million in the three months ended December 31, 2021. As a result of the HEYDUDE Acquisition, we have suspended our share repurchase program, as described in more detail below.

The consideration for the HEYDUDE Acquisition will be comprised of $2.05 billion in cash and 2,852,280 in Crocs shares. The transaction is expected to close in February 2022, subject to customary closing conditions. To finance the Cash Consideration, in the first quarter of 2022, we expect to enter into the $2.0 billion Term Loan B Credit Agreement, as well as borrow $50.0 million under our Revolving Facility, which we will amend to update certain terms and conditions, including covenants, to be more favorable to the pending HEYDUDE Acquisition. We also intend to exercise the accordion provision to increase our borrowing capacity from $500.0 million to $600.0 million. In 2022, we plan to use excess cash generated by our operations to repay our outstanding debt, including debt incurred to finance a part of the HEYDUDE Acquisition, and, as such, we have suspended our share repurchase program until such time that our gross leverage is under 2.0x. We do not expect this to occur in 2022. See the risk factor under “HEYDUDE Acquisition Risks — The incurrence by us of substantial indebtedness in connection with the financing of the HEYDUDE Acquisition may have an adverse impact on our liquidity, limit our flexibility in responding to other business opportunities, and increase our vulnerability to adverse economic and industry conditions” included in Part I - Item 1A. Risk Factors of this Annual Report on Form 10-K for further information on liquidity risks associated with the HEYDUDE Acquisition.

Additional future financing may be necessary to fund our operations and there can be no assurance that, if needed, we will be able to secure additional debt or equity financing on terms acceptable to us or at all. Although we believe we have adequate sources of liquidity over the long term, the success of our operations, the global economic outlook, and the pace of sustainable growth in our markets could each impact our business and liquidity.

Repatriation of Cash

As a global business, we have cash balances in various countries and amounts are denominated in various currencies. Fluctuations in foreign currency exchange rates impact our results of operations and cash positions. Future fluctuations in foreign currencies may have a material impact on our cash flows and capital resources. Cash balances held in foreign countries may have additional restrictions associated with them which could adversely impact our liquidity and our ability to timely access and transfer cash balances between entities.

All of the cash held outside of the U.S. could be repatriated to the U.S. without incurring additional U.S. federal income taxes. As of December 31, 2021, we held $97.7 million of our total $213.2 million in cash in international locations. This cash is primarily used for the ongoing operations of the business in the locations in which the cash is held. None of the $97.7 million held in international locations is limited by local regulations.

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Senior Revolving Credit Facility

In July 2019, Crocs, Inc. and certain of its subsidiaries (the “Borrowers”) entered into a Second Amended and Restated Credit Agreement (as amended, the “Revolving Credit Agreement”), with the lenders named therein and PNC Bank, National Association, as a lender and administrative agent for the lenders, which provides for a revolving credit facility of $500.0 million, which can be increased by an additional $100.0 million subject to certain conditions (the “Revolving Facility”). Borrowings under the Revolving Credit Agreement bear interest at a variable rate based on (A) a domestic base rate (defined as the highest of (i) the Federal Funds open rate, plus 0.25%, (ii) the Prime Rate, and (iii) the Daily LIBOR rate, plus 1.00%), plus an applicable margin ranging from 0.25% to 0.875% based on our leverage ratio, or (B) a LIBOR rate, plus an applicable margin ranging from 1.25% to 1.875% based on our leverage ratio. Borrowings under the Revolving Credit Agreement are secured by all of the assets of the Borrowers and guaranteed by certain other subsidiaries of the Borrowers.

The Revolving Credit Agreement required us to maintain a minimum interest coverage ratio of 4.00 to 1.00 and a maximum leverage ratio of 3.50 to 1.00 from the quarter ended December 31, 2020 to the quarter ended December 31, 2021. Additionally, the Revolving Credit Agreement requires us to maintain a minimum interest coverage ratio of 4.00 to 1.00 and a maximum leverage ratio of 3.25 to 1.00 from the quarter ending March 31, 2022 and thereafter (subject to adjustment in certain circumstances). The Revolving Credit Agreement permits (i) stock repurchases subject to certain restrictions, including after giving effect to such stock repurchases, the maximum leverage ratio does not exceed certain levels; and (ii) certain acquisitions so long as there is borrowing availability under the Revolving Credit Agreement of at least $40.0 million. As of December 31, 2021, we were in compliance with all financial covenants under the Revolving Credit Agreement.

As of December 31, 2021, the total commitments available from the lenders under the Revolving Facility were $500.0 million. At December 31, 2021, we had $85.0 million in outstanding borrowings, which are due when the Revolving Facility matures in July 2024, and $0.3 million in outstanding letters of credit under the Revolving Facility, which reduces amounts available for borrowing under the Revolving Facility. As of December 31, 2021 and 2020, we had $414.7 million and $319.4 million, respectively, of available borrowing capacity under the Revolving Facility. See above regarding our plans to amend and increase our borrowing capacity.

Senior Notes Issuances

On March 12, 2021, the Company completed the issuance and sale of $350.0 million aggregate principal amount of 4.250% Senior Notes due March 15, 2029 (the “2029 Notes”), pursuant to the indenture related thereto (“the March Indenture”). Additionally, on August 10, 2021, the Company completed the issuance and sale of $350.0 million aggregate principal amount of 4.125% Senior Notes due August 15, 2031 (the “2031 Notes”), pursuant to the indenture related thereto (“the August Indenture” and, together with the March Indenture, the “Indentures”). Interest on each of the 2029 Notes and the 2031 Notes (collectively, the “Notes”) is payable semi-annually.

The Company will have the option to redeem all or any portion of the 2029 Notes, at once or over time, at any time on or after March 15, 2024, at a redemption price equal to 100% of the principal amount thereof, plus a premium declining ratably on an annual basis to par and accrued and unpaid interest, if any, to, but excluding, the date of redemption. The Company will also have the option to redeem some or all of the 2029 Notes at any time before March 15, 2024 at a redemption price of 100% of the principal amount to be redeemed, plus a “make-whole” premium and accrued and unpaid interest, if any, to, but excluding, the date of redemption. In addition, at any time before March 15, 2024, the Company may redeem up to 40% of the aggregate principal amount of the 2029 Notes at a redemption price of 104.250% of the principal amount with the proceeds from certain equity issuances, plus accrued and unpaid interest, if any, to, but excluding, the date of redemption.

The Company will have the option to redeem all or any portion of the 2031 Notes, at once or over time, at any time on or after August 15, 2026, at a redemption price equal to 100% of the principal amount thereof, plus a premium declining ratably on an annual basis to par and accrued and unpaid interest, if any, to, but excluding, the date of redemption. The Company will also have the option to redeem some or all of the 2031 Notes at any time before August 15, 2026 at a redemption price of 100% of the principal amount to be redeemed, plus a “make-whole” premium and accrued and unpaid interest, if any, to, but excluding, the date of redemption. In addition, at any time before August 15, 2024, the Company may redeem up to 40% of the aggregate principal amount of the 2031 Notes at a redemption price of 104.125% of the principal amount with the proceeds from certain equity issuances, plus accrued and unpaid interest, if any, to, but excluding, the date of redemption.

The Notes rank pari passu in right of payment with all of the Company’s existing and future senior debt, including the Revolving Credit Agreement, and are senior in right of payment to any of the Company’s future debt that is, by its term, expressly subordinated in right of payment to the Notes. The Notes are unconditionally guaranteed by each of the Company’s restricted subsidiaries that is a borrower or guarantor under the Revolving Credit Agreement and by each of the Company’s

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wholly-owned restricted subsidiaries that guarantees any debt of the Company or any guarantor under any syndicated credit facility or capital markets debt in an aggregate principal amount in excess of $25.0 million.

The Indentures contain covenants that, among other things, limit the ability of the Company and its restricted subsidiaries to incur additional debt or issue certain preferred stock; declare and pay dividends or repurchase or redeem capital stock or make other restricted payments; declare and pay dividends or other payments; incur liens; enter into certain types of transactions with the Company’s affiliates; and consolidate or merge with or into other companies. As of December 31, 2021, we were in compliance with all financial covenants under the Indentures.

Consolidated Statements of Cash Flows

Our consolidated statements of cash flows are summarized as follows:

Operating Activities. Our primary source of liquidity is cash provided by operating activities, consisting of net income adjusted for non-cash items and changes in working capital. Cash provided by operating activities increased $300.3 million for the year ended December 31, 2021 compared to the year ended December 31, 2020. This change was driven by higher net income adjusted for non-cash items of $477.2 million, partly offset by a net decrease in operating assets and liabilities of $176.9 million.

Investing Activities. The $14.2 million increase in cash used in investing activities for the year ended December 31, 2021 compared to the year ended December 31, 2020 is primarily due an increase in the purchases of property, equipment, and software, related to the expansion of our distribution centers.

Financing Activities. The $231.6 million increase in cash used in financing activities for the year ended December 31, 2021 compared to the year ended December 31, 2020 resulted primarily from an increase of $829.1 million in repurchases of our common stock, as detailed below, and a decrease in borrowings of $70.0 million, net of repayments, on our Revolving Facility. Additionally, there was an increase of $17.1 million in repurchases of common stock for tax withholding, an increase of $14.2 million in deferred debt issuance costs, primarily related to the Notes issuances, and an increase of cash used in other financing activities of $1.2 million. The overall increase in cash used in financing activities was offset by an increase in proceeds from the Notes issuances of $700.0 million.

Stock Repurchases

On February 20, 2018, the Board approved and authorized a program to repurchase up to $500.0 million of our common stock, and on May 5, 2019, the Board approved an increase to the repurchase authorization of an additional $500.0 million of our common stock. On April 23, 2021, the Board approved a $712.2 million increase to our share repurchase authorization. Additionally, on September 23, 2021, the Board approved an increase of $1.0 billion to our share repurchase authorization. The number, price, structure, and timing of the repurchases are at our sole discretion and may be made depending on market conditions, liquidity needs, restrictions under the agreements governing our indebtedness, and other factors. The Board of Directors may suspend, modify, or terminate the program at any time without prior notice. Share repurchases may be made in the open market or in privately negotiated transactions. The repurchase authorization does not have an expiration date and does not obligate us to acquire any amount of our common stock. Under Delaware state law, these shares are not retired, and we have the right to resell any of the shares repurchased.

We repurchased 8.2 million shares of our common stock at a cost of $1,000.0 million, including commissions, during the year ended December 31, 2021. This includes 3.2 million shares delivered under the $500.0 million accelerated share repurchase arrangement (“ASR”) entered into in September 2021, 2.9 million shares delivered under the $300.0 million ASR entered into in April 2021, and 0.5 million shares delivered in January 2021 at the conclusion of the purchase period for the ASR entered

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into in November 2020. Under each ASR, a financial institution delivered shares of our common stock during the purchase period in exchange for an up-front payment. The total number of shares ultimately delivered under the ASR, and therefore the average repurchase price paid per share, was determined based on the volume-weighted average price of our common stock during the purchase period. As of December 31, 2021, we had remaining authorization to repurchase approximately $1,050.0 million of our common stock, subject to restrictions under the agreements governing our indebtedness.

During the year ended December 31, 2020, we repurchased 3.2 million shares of our common stock at a cost of $170.8 million, including commissions. This included 1.5 million shares delivered under a $125.0 million November 2020 ASR.

In 2022, we plan to use excess cash generated by our operations to repay debt, including debt incurred to finance a part of the HEYDUDE Acquisition and, as such, we have suspended our share repurchase program until such time that our gross leverage is under 2.0x. We do not expect this to occur in 2022.

See Note 10 — Equity in the accompanying notes to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K for more information on our repurchases and repurchase authorizations.

Contractual Obligations

We believe we have sufficient liquidity to fund our operations and meet our short-term and long-term obligations. Our material future cash obligations as of December 31, 2021 include the following:

(1) Net of $13.6 million of unamortized issuance costs related to the issuance of the Notes.

(2) Represents future interest payment obligations, which are estimated by assuming the amounts outstanding under our Revolving Facility and the interest rates in effect as of December 31, 2021, will remain constant into the future. This is only an estimate, as actual amounts borrowed and rates will vary over time, based on a domestic base rate or LIBOR rate, as described in the “Senior Revolving Credit Facility” section.

(3) Our operating lease obligations consist of leases for real estate, which includes retail, warehouse, distribution center, and office spaces and represent the minimum cash commitment under contract to various third parties for operating lease obligations. For more information on our leases obligations and obligations for leases not yet commenced, refer to Note 6 — Leases in the accompanying notes to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K for more information.

(4) Represents material contractual obligations associated with global distribution and logistics projects.

We also have purchase commitments to our third-party manufacturers, primarily for materials and supplies used in the manufacture of our products, for an aggregate of $274.9 million. We expect to fulfill our commitments under these agreements in the next twelve months in the normal course of business and are only liable for the portion of the purchase obligations that have been purchased by the third-party manufacturer or manufactured by the vendor, with the remainder cancellable without penalty. Refer to Note 15 — Commitments and Contingencies in the accompanying notes to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K for more information.

We had no material off-balance sheet arrangements as of December 31, 2021, other than certain purchase commitments, as described in the preceding paragraph.

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Critical Accounting Policies and Estimates

General

Our discussion and analysis of financial condition and results of operations, outside of discussions regarding constant currency and non-GAAP financial measures, is based on the consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, and contingencies as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We evaluate our assumptions and estimates on an on-going basis.

An accounting policy is considered to be critical if it is important to our results of operations, financial condition, and cash flows, and requires significant judgment and estimates on the part of management in its application. Our estimates are often based on historical experience, complex judgments, assessments of probability, and assumptions that management believes to be reasonable, but that are inherently uncertain and unpredictable. We believe that the following discussion represents those accounting policies that are the most critical to the reporting of our financial condition and results of operations. For a discussion of our significant accounting policies, see Note 1 — Basis of Presentation and Summary of Significant Accounting Policies in the accompanying notes to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K.

Reserves for Uncollectible Accounts Receivable, Sales Returns, Allowances, Discounts, and Rebates

We make ongoing estimates related to the collectability of our accounts receivable and maintain a reserve for estimated losses resulting from the inability or unwillingness of our customers to make required payments. Our estimates are based on a variety of factors, including the length of time receivables are past due, economic trends and conditions affecting our customer base, significant non-recurring events, and historical write-off experience. Specific provisions are recorded for individual receivables when we become aware of a customer’s inability or unwillingness to meet its financial obligations. Because we cannot predict future changes in the financial stability of our customers, actual future losses from uncollectible accounts may differ from our estimates and we may experience changes in the amount of reserves we recognize for accounts receivable that we deem uncollectible. If the financial condition of our customers were to deteriorate, resulting in their inability to make payments, a larger reserve might be required. In the event we determine that a smaller or larger reserve is appropriate, we would record a credit or a charge, respectively, to ‘Selling, general and administrative expenses’ in our consolidated statement of operations in the period in which we made such a determination.

Additionally, a significant area of judgment affecting reported revenues and net income involves estimating reserves for sales returns, allowances, discounts, and rebates, which represent the portion of revenues not expected to be realized. Wholesale revenues are reduced by estimates of returns, allowances, discounts, contractual discounts to major customers, and rebates. We also may accept returns from our wholesale customers, on an exception basis, to ensure that our products are merchandised in the proper assortments, and may provide markdown allowances at our sole discretion to key wholesalers and distributors to facilitate sales of slower moving products. Further, we record reductions to revenues for estimated customer credits as a result of price markdowns in certain markets. Revenues in our retail and e-commerce channels are also reduced by an estimate of returns.

Our estimated sales returns and allowances are based on customer return history and actual outstanding returns yet to be received. Changes to our estimates for customer returns, allowances, discounts, and rebates may be caused by many factors, including, but not limited to whether customers accept our new styles, customer inventory levels, shipping delays or errors, known or suspected product defects, the seasonal nature of our products, and macroeconomic factors affecting our customers. Historically, actual amounts of customer returns, allowances, discounts, and rebates have not differed significantly from our estimates. A hypothetical 1% increase in our reserves for returns, allowances, discounts, and rebates as of December 31, 2021 would have an immaterial impact on our 2021 revenues.

See Schedule II in Part IV - Item 15. Exhibits, Financial Statement Schedule to the accompanying consolidated financial statements of this Annual Report on Form 10-K for an analysis of the activity in our reserves for uncollectible accounts receivable, sales returns, allowances, and discounts.

Impairment of Long-Lived Assets

Property and equipment along with other long-lived assets are evaluated for impairment periodically whenever events or changes in circumstances indicate that their carrying values may not be fully recoverable. Testing of long-lived assets for impairment is at the level of an asset group, which is the lowest level for which identifiable cash flows are largely independent

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of the cash flows of other assets and liabilities. In our retail business, the asset group for impairment testing is each individual retail store. In evaluating long-lived assets for recoverability, we use our best estimate of future cash flows expected to result from the use of the asset and its eventual disposition, where applicable. To the extent that estimated future undiscounted net cash flows attributable to the asset are less than its carrying value, an impairment loss is recognized equal to the difference between the carrying value of such asset and its fair value. Assets to be disposed of and for which there is a committed plan of disposal are reported at the lower of carrying value or fair value, less costs to sell.

In determining future cash flows, we take various factors into account, including the remaining useful life of each asset group, forecasted growth rates, pricing, working capital, capital expenditures, and other cash needs specific to the asset group. Additional considerations when assessing impairment include changes in our strategic operational and financial decisions, global and regional economic conditions, demand for our product and other corporate initiatives which may eliminate or significantly decrease the realization of future benefits from our long-lived assets. Since the determination of future cash flows is an estimate of future performance, future impairments may arise in the event that future cash flows do not meet expectations.

In 2021, we did not record impairments to reduce the net carrying value of certain long-lived assets. In 2020, we recorded non-cash impairments of $20.0 million to reduce the net carrying value of certain long-lived assets to their estimated fair values for a retail store in New York City and $1.1 million for our former corporate headquarters. During 2019, we did not record any impairment charges. See Note 3 — Property and Equipment, Net in the accompanying notes to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K for further information related to long-lived asset impairments.

Income Taxes

In 2020, we completed changes to our international legal structure that created an amortizable step-up in tax basis of the intangible asset and a corresponding increase in foreign deferred tax assets based on the fair value of the intellectual property (“IP”). As of December 31, 2021, the related net deferred tax asset is $449.9 million, net of a reserve for uncertain tax positions of $189.9 million. Additionally, during the three months ended December 31, 2021, we completed an intra-entity transfer of certain IP rights primarily to align with current and future international operations. This transfer also resulted in a step-up in tax basis of IP rights and a correlated increase in foreign deferred tax assets based on the fair value of the transferred IP rights. We recorded a deferred tax asset of $40.3 million, net of a reserve for uncertain tax positions of $16.1 million, which resulted in a net deferred tax asset of $24.2 million, and a corresponding foreign deferred income tax benefit. This transaction was executed using transfer pricing guidelines issued by the relevant taxing authorities. Significant estimates and assumptions were required to compute the valuation of this transaction. These estimates and assumptions include, but are not limited to, estimated future revenue growth and discount rates, which by their nature are inherently uncertain and, therefore, may ultimately differ materially from our actual results.

In order to support and sustain the amortizable tax basis (and associated deferred tax asset, net of uncertain tax position), we must demonstrate economic ownership, including the appropriate authority and expertise to manage the IP owned and serviced in the Netherlands. The determination of economic substance is a judgment that has to be evaluated by management on a continual basis requiring understanding and expertise of local laws of each associated tax jurisdiction. The Netherlands subsidiary serves as the principal Crocs corporate headquarters outside of the U.S. and already performs significant functions in support of the economic ownership of the IP in the Netherlands. In 2021, we undertook many additional activities to align business operations that support the economic substance of the IP in the Netherlands.

We have also recorded certain tax reserves to address potential differences involving our income tax positions. These potential tax liabilities result from the varying application of statutes, rules, regulations and interpretations by different taxing jurisdictions. While our tax position is not uncertain, because of the significant estimates used in the value of certain intellectual property rights, our tax reserves contain assumptions based on past experiences and judgments about the interpretation of statutes, rules and regulations by taxing jurisdictions. It is possible that the costs of the ultimate tax liability or benefit from these matters may be materially more or less than the amount that we estimated.

We account for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of other assets and liabilities. We provide for income taxes at the current and future enacted tax rates and laws applicable in each taxing jurisdiction. We account for the tax effects of GILTI as a component of income tax expense in the period the tax arises, to the extent applicable. We use a two-step approach for recognizing and measuring tax benefits taken or expected to be taken in a tax return and disclosures regarding uncertainties in income tax positions. The impact of an uncertain tax position that is more likely than not to be sustained upon examination by the relevant taxing authority must be recognized at the largest amount that is more likely than not to be sustained. No portion of an uncertain tax position will be recognized if the position has less

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than a 50% likelihood of being sustained. Interest expense is recognized on the full amount of deferred benefits for uncertain tax positions. While the validity of any tax position is a matter of tax law, the body of statutory, regulatory and interpretive guidance on the application of the law is complex and often ambiguous. We recognize interest and penalties related to unrecognized tax benefits within the ‘Income tax expense (benefit)’ line in the accompanying consolidated statements of operations. Accrued interest and penalties are included within the related tax liability line in the consolidated balance sheets.

We evaluate our ability to realize the tax benefits associated with deferred tax assets by analyzing our forecasted taxable income using both historical and projected future operating results, the reversal of existing temporary differences, taxable income in prior carry back years (if permitted) and the availability of tax planning strategies. A valuation allowance is required unless management determines that it is more likely than not that we will ultimately realize the tax benefit associated with a deferred tax asset. We determine on a regular basis the amount of undistributed earnings that will be indefinitely reinvested in our non-U.S. operations. This assessment is based on the cash flow projections and operational and fiscal objectives of each of our U.S. and foreign subsidiaries. Foreign withholding taxes have not been provided on cumulative undistributed foreign earnings of the non-U.S. subsidiaries as of December 31, 2021, which are considered to be indefinitely reinvested outside of the U.S.

See Note 13 — Income Taxes in the accompanying notes to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K for further information related to income taxes.

Recent Accounting Pronouncements

See Note 2 — Recent Accounting Pronouncements in the accompanying notes to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K for a description of recently adopted accounting pronouncements, and issued accounting pronouncements that we believe may have an impact on our consolidated financial statements when adopted.

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