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EX-32.1 - EXHIBIT 32.1 - Fossil Group, Inc.fosl-1032015xex321.htm
EX-32.2 - EXHIBIT 32.2 - Fossil Group, Inc.fosl-1032015xex322.htm
EX-31.2 - EXHIBIT 31.2 - Fossil Group, Inc.fosl-1032015xex312.htm
EX-31.1 - EXHIBIT 31.1 - Fossil Group, Inc.fosl-1032015xex311.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
__________________________________________________________________ 
FORM 10-Q 
__________________________________________________________________
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended: October 3, 2015
 
OR
o     
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: 000-19848 
__________________________________________________________________ 
FOSSIL GROUP, INC.
(Exact name of registrant as specified in its charter)
 __________________________________________________________________
Delaware
 
75-2018505
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
901 S. Central Expressway, Richardson, Texas
 
75080
(Address of principal executive offices)
 
(Zip Code)
(972) 234-2525
(Registrant’s telephone number, including area code) 
__________________________________________________________________ 
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 x No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes x No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):
Large accelerated filer x
 
Accelerated filer o
 
 
 
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
 
The number of shares of the registrant’s common stock outstanding as of November 5, 2015: 48,118,839




PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

FOSSIL GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED
IN THOUSANDS
 
October 3, 2015
 
January 3, 2015
Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
301,569

 
$
276,261

Accounts receivable - net of allowances of $63,559 and $80,047, respectively
330,396

 
430,498

Inventories
746,343

 
597,281

Deferred income tax assets-net
36,667

 
34,084

Prepaid expenses and other current assets
150,059

 
151,730

Total current assets
1,565,034

 
1,489,854

Property, plant and equipment - net of accumulated depreciation of $387,322 and $360,191, respectively
330,420

 
345,606

Goodwill
197,252

 
197,728

Intangible and other assets-net
162,171

 
174,364

Total long-term assets
689,843

 
717,698

Total assets
$
2,254,877

 
$
2,207,552

Liabilities and Stockholders’ Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
180,698

 
$
159,267

Short-term and current portion of long-term debt
21,722

 
16,646

Accrued expenses:
 

 
 

Compensation
60,554

 
50,776

Royalties
35,620

 
54,013

Co-op advertising
18,125

 
28,591

Transaction taxes
19,965

 
35,301

Other
83,420

 
75,609

Income taxes payable
13,428

 
26,626

Total current liabilities
433,532

 
446,829

Long-term income taxes payable
13,554

 
16,610

Deferred income tax liabilities
87,645

 
87,860

Long-term debt
785,706

 
613,659

Other long-term liabilities
50,798

 
58,793

Total long-term liabilities
937,703

 
776,922

Commitments and contingencies (Note 13)


 


Stockholders’ equity:
 

 
 

Common stock, 48,117 and 50,771 shares issued and outstanding at October 3, 2015 and January 3, 2015, respectively
481

 
508

Additional paid-in capital
182,974

 
171,669

Retained earnings
743,572

 
822,093

Accumulated other comprehensive income (loss)
(57,235
)
 
(16,410
)
Total Fossil Group, Inc. stockholders’ equity
869,792

 
977,860

Noncontrolling interest
13,850

 
5,941

Total stockholders’ equity
883,642

 
983,801

Total liabilities and stockholders’ equity
$
2,254,877

 
$
2,207,552

 
See notes to the condensed consolidated financial statements.

2



FOSSIL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
UNAUDITED
IN THOUSANDS, EXCEPT PER SHARE DATA
 
 
For the 13 Weeks Ended October 3, 2015
 
For the 13 Weeks Ended October 4, 2014
 
For the 39 Weeks Ended October 3, 2015
 
For the 40 Weeks Ended October 4, 2014
Net sales
$
771,303

 
$
894,482

 
$
2,236,363

 
$
2,444,846

Cost of sales
353,569

 
385,444

 
1,008,439

 
1,047,986

Gross profit
417,734

 
509,038

 
1,227,924

 
1,396,860

Operating expenses:
 

 
 

 
 

 
 

Selling, general and administrative expenses
338,888

 
354,105

 
1,003,931

 
1,052,471

Restructuring charges
3,141

 

 
21,700

 

Total operating expenses
342,029

 
354,105

 
1,025,631

 
1,052,471

Operating income
75,705

 
154,933

 
202,293

 
344,389

Interest expense
5,103

 
3,796

 
14,295

 
11,389

Other income (expense) - net
6,830

 
2,198

 
28,310

 
751

Income before income taxes
77,432

 
153,335

 
216,308

 
333,751

Provision for income taxes
17,303

 
46,931

 
58,721

 
103,286

Net income
60,129

 
106,404

 
157,587

 
230,465

Less: Net income attributable to noncontrolling interest
2,595

 
2,683

 
7,335

 
7,884

Net income attributable to Fossil Group, Inc.
$
57,534

 
$
103,721

 
$
150,252

 
$
222,581

Other comprehensive income (loss), net of taxes:
 

 
 

 
 

 
 

Currency translation adjustment
$
(7,435
)
 
$
(43,479
)
 
$
(35,382
)
 
$
(43,080
)
Derivative instruments-net change
(5,258
)
 
11,773

 
(5,443
)
 
11,361

Pension plan activity

 

 

 
(3,293
)
Total other comprehensive income (loss)
(12,693
)
 
(31,706
)
 
(40,825
)
 
(35,012
)
Total comprehensive income
47,436

 
74,698

 
116,762

 
195,453

Less: Comprehensive income attributable to noncontrolling interest
2,595

 
2,683

 
7,335

 
7,884

Comprehensive income attributable to Fossil Group, Inc.
$
44,841

 
$
72,015

 
$
109,427

 
$
187,569

Earnings per share:
 

 
 

 
 

 
 

Basic
$
1.19

 
$
1.97

 
$
3.06

 
$
4.16

Diluted
$
1.19

 
$
1.96

 
$
3.06

 
$
4.15

Weighted average common shares outstanding:
 

 
 

 
 

 
 

Basic
48,153

 
52,691

 
49,027

 
53,454

Diluted
48,242

 
52,871

 
49,148

 
53,653

 
See notes to the condensed consolidated financial statements.

3



FOSSIL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
IN THOUSANDS
 
For the 39 Weeks Ended October 3, 2015
 
For the 40 Weeks Ended October 4, 2014
Operating Activities:
 

 
 

Net income
$
157,587

 
$
230,465

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation, amortization and accretion
63,421

 
73,477

Stock-based compensation
13,997

 
14,238

Decrease in allowance for returns-net of inventory in transit
(7,981
)
 
(727
)
Loss on disposal of assets
2,164

 
643

Impairment losses
5,587

 
6,083

Non-cash restructuring charges
2,381

 

Decrease in allowance for doubtful accounts
(1,867
)
 
(351
)
Excess tax benefits from stock-based compensation
(176
)
 
(885
)
Deferred income taxes and other
7,458

 
(1,144
)
Contingent consideration remeasurement
(114
)
 
1,112

Changes in operating assets and liabilities, net of effect of acquisitions:
 

 
 

Accounts receivable
103,259

 
48,385

Inventories
(172,746
)
 
(146,141
)
Prepaid expenses and other current assets
(20,669
)
 
(49,220
)
Accounts payable
17,871

 
33,216

Accrued expenses
(18,618
)
 
(26,840
)
Income taxes payable
(17,064
)
 
15,600

Net cash provided by operating activities
134,490

 
197,911

Investing Activities:
 

 
 

Additions to property, plant and equipment
(53,171
)
 
(70,792
)
Increase in intangible and other assets
(737
)
 
(11,586
)
Skagen Designs arbitration settlement
5,968

 

Business acquisitions-net of cash acquired
(4,820
)
 

Net investment hedge settlement

 
410

Net cash used in investing activities
(52,760
)
 
(81,968
)
Financing Activities:
 

 
 

Acquisition of common stock
(231,220
)
 
(321,224
)
Distribution of noncontrolling interest earnings and other
(5,257
)
 
(5,392
)
Excess tax benefits from stock-based compensation
176

 
885

Debt borrowings
1,867,550

 
637,000

Debt payments
(1,691,139
)
 
(522,172
)
Proceeds from exercise of stock options
658

 
1,922

Other financing activities
(2,097
)
 
(1,942
)
Net cash used in financing activities
(61,329
)
 
(210,923
)
Effect of exchange rate changes on cash and cash equivalents
4,907

 
(7,404
)
Net increase (decrease) in cash and cash equivalents
25,308

 
(102,384
)
Cash and cash equivalents:
 

 
 

Beginning of period
276,261

 
320,479

End of period
$
301,569

 
$
218,095

 
See notes to the condensed consolidated financial statements.

4



FOSSIL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
 
1. FINANCIAL STATEMENT POLICIES
 
Basis of Presentation. The condensed consolidated financial statements include the accounts of Fossil Group, Inc., a Delaware corporation, and its wholly and majority-owned subsidiaries (the “Company”).
 
The condensed consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary to present a fair statement of the Company’s financial position as of October 3, 2015, and the results of operations for the thirteen-week periods ended October 3, 2015 (“Third Quarter”) and October 4, 2014 (“Prior Year Quarter”), respectively, and the thirty-nine week period ended October 3, 2015 (“Year To Date Period”) and the forty week period ended October 4, 2014 (“Prior Year YTD Period”). All adjustments are of a normal, recurring nature. The Company’s fiscal year periodically results in a 53-week year instead of a normal 52-week year. The prior fiscal year ended January 3, 2015 was a 53-week year, with the additional week included in the first quarter of the fiscal year. Accordingly, the information presented herein includes thirty-nine weeks of operations for the Year To Date Period as compared to forty weeks included in the Prior Year YTD Period.
 
Effective during the first quarter of the current fiscal year, the Company made changes to the presentation of its reportable segments to reflect changes in the way its chief operating decision maker evaluates the performance of its operations, develops strategy and allocates capital resources. The Company has realigned its operating structure. Strategic and brand directions are set centrally and regional management is now fully empowered and responsible to drive those strategies and brand directions across all brands and channels within their regions. As part of the new operating structure, the regional teams manage both the wholesale and retail businesses within their regions whereas previously the retail business was managed globally. Additionally, with the implementation of new reporting systems, the Company has the ability to extract discrete financial information that aligns with its operating structure and is consistent with how management now evaluates the business performance. The Company’s reportable segments now consist of the following: (i) Americas, (ii) Europe and (iii) Asia. Prior to the Company’s first quarter fiscal 2015 Form 10-Q, as reported in the 2014 Form 10-K (as defined below), the Company’s reportable segments consisted of the following: (i) North America wholesale, (ii) Europe wholesale, (iii) Asia Pacific wholesale and (iv) Direct to consumer.
 
These changes to the Company’s reportable segments include the following:
 
(1) Reclassification of the Company’s retail, e-commerce and catalog activities, all of which were previously recorded within the Company’s Direct to consumer segment, to the Americas, Europe and Asia segments based on the geographic location of the activities.
 
(2) The Company’s wholesale operations in North America, Europe and Asia Pacific previously recorded within the North America wholesale, Europe wholesale and Asia Pacific wholesale segments, respectively, have been reclassified to the Americas, Europe and Asia segments, respectively.
 
(3) Intercompany profit attributable to the Company’s factory operations was previously included in the Asia Pacific wholesale and Europe wholesale segments in accordance with the geographic location of the factories, and is now eliminated from all reporting segments.
 
(4) Certain corporate costs are not allocated to the various segments because they are managed at the corporate level for internal purposes. Prior to the change in reporting segments, these expenses included, and after the change in reporting segments, continue to include, general corporate expenses, including certain administrative, legal, accounting, technology support costs, equity compensation costs and payroll costs attributable to executive management. Additionally, certain brand management, product development, art, creative/product design, marketing and back office supply chain expenses which were previously included in North America wholesale, Europe wholesale, Asia Pacific wholesale and Direct to consumer segments prior to the change in reporting segments are now reported in corporate. Conversely, certain back office costs reported in corporate prior to the change in reporting segments are now included in the various reporting segments in which they are now managed.
 
The Company’s historical segment disclosures have been recast to be consistent with the current presentation.
 
These interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Annual Report on Form 10-K filed by the Company pursuant to the

5



Securities Exchange Act of 1934, as amended (the “Exchange Act”), for the fiscal year ended January 3, 2015 (the “2014 Form 10-K”). Operating results for the Third Quarter and Year To Date Period are not necessarily indicative of the results to be achieved for the full fiscal year.

The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), which require the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the periods reported. Actual results could differ from those estimates. The Company has not made any changes in its significant accounting policies from those disclosed in the 2014 Form 10-K. Certain prior year amounts have been reclassified to conform to the current year presentation.
 
Business. The Company is a global design, marketing and distribution company that specializes in consumer fashion accessories. Its principal offerings include an extensive line of men’s and women’s fashion watches and jewelry, handbags, small leather goods, belts, sunglasses, soft accessories and select apparel. In the watch and jewelry product categories, the Company has a diverse portfolio of globally recognized owned and licensed brand names under which its products are marketed. The Company’s products are distributed globally through various distribution channels, including wholesale in countries where it has a physical presence, direct to the consumer through its retail stores and commercial websites and through third-party distributors in countries where the Company does not maintain a physical presence. The Company’s products are offered at varying price points to meet the needs of its customers, whether they are value-conscious or luxury oriented. Based on its extensive range of accessory products, brands, distribution channels and price points, the Company is able to target style-conscious consumers across a wide age spectrum on a global basis.
 
Hedging Instruments. The Company is exposed to certain market risks relating to foreign exchange rates and interest rates. The Company actively monitors and attempts to manage these exposures using derivative instruments including foreign exchange forward contracts ("forward contracts") and interest rate swaps. The Company’s foreign subsidiaries periodically enter into forward contracts to hedge the future payment of intercompany inventory transactions denominated in U.S. dollars. If the Company was to settle its euro, British pound, Canadian dollar, Japanese yen, Australian dollar and Mexican peso forward contracts as of October 3, 2015, the net result would have been a net gain of approximately $10.7 million, net of taxes. To help protect against adverse existing and forecasted fluctuations in interest rates, the Company has entered into interest rate swap agreements to effectively convert portions of its existing and forecasted variable rate debt obligations to fixed rates. To reduce exposure to changes in currency exchange rates adversely affecting the Company’s investment in foreign currency-denominated subsidiaries, the Company periodically enters into forward contracts designated as net investment hedges. The Company does not hold or issue derivative financial instruments for trading or speculative purposes. See “Note 10—Derivatives and Risk Management” for additional disclosures about the Company’s use of derivatives.
 
Operating expenses. Operating expenses include selling, general and administrative expenses (“SG&A”) and restructuring charges. SG&A expenses include selling and distribution expenses primarily consisting of sales and distribution labor costs, sales distribution center and warehouse facility costs, depreciation expense related to sales distribution and warehouse facilities, the four-wall operating costs of the Company’s retail stores, point-of-sale expenses, advertising expenses and art, design and product development labor costs. SG&A also includes general and administrative expenses primarily consisting of administrative support labor and “back office” or support costs such as treasury, legal, information services, accounting, internal audit, human resources, executive management costs and costs associated with stock-based compensation. Restructuring charges include costs to reorganize, refine and optimize the Company’s infrastructure and store closures. See “Note 15—Restructuring” for additional information on the Company’s restructuring plan.
 
Earnings Per Share (“EPS”). Basic EPS is based on the weighted average number of common shares outstanding during each period. Diluted EPS adjusts basic EPS for the effects of dilutive common stock equivalents outstanding during each period using the treasury stock method.


6



The following table reconciles the numerators and denominators used in the computations of both basic and diluted EPS (in thousands, except per share data):
 
For the 13 Weeks Ended October 3, 2015
 
For the 13 Weeks Ended October 4, 2014
 
For the 39 Weeks Ended October 3, 2015
 
For the 40 Weeks Ended October 4, 2014
Numerator:
 

 
 

 
 

 
 

Net income attributable to Fossil Group, Inc.
$
57,534

 
$
103,721

 
$
150,252

 
$
222,581

Denominator:
 

 
 

 
 

 
 

Basic EPS computation:
 

 
 

 
 

 
 

Basic weighted average common shares outstanding
48,153

 
52,691

 
49,027

 
53,454

Basic EPS
$
1.19

 
$
1.97

 
$
3.06

 
$
4.16

Diluted EPS computation:
 

 
 

 
 

 
 

Basic weighted average common shares outstanding
48,153

 
52,691

 
49,027

 
53,454

Effect of stock options, stock appreciation rights, restricted stock units and performance restricted stock units
89

 
180

 
121

 
199

Diluted weighted average common shares outstanding
48,242

 
52,871

 
49,148

 
53,653

Diluted EPS
$
1.19

 
$
1.96

 
$
3.06

 
$
4.15

 
Approximately 557,000, 532,000, 336,000 and 314,000 weighted average common shares issuable under stock-based awards were not included in the diluted EPS calculation at the end of the Third Quarter, Year To Date Period, Prior Year Quarter and Prior Year YTD Period, respectively, because they were antidilutive.
 
Recently Issued Accounting Standards. In September 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments (“ASU 2015-16”). ASU 2015-16 simplifies accounting for adjustments made to provisional amounts recognized in a business combination by eliminating the requirement to retrospectively account for these adjustments. Under the new standard, adjustments to provisional amounts that are identified during the measurement period are recognized in the reporting period in which the adjustment amounts are determined, including the cumulative effect of the change in provisional amounts, as if the accounting had been completed at the acquisition date. The adjustments related to previous reporting periods since the acquisition date must be disclosed by income statement line item either on the face of the income statement or in the notes to the financial statements. ASU 2015-16 is effective for annual periods beginning after December 15, 2015 with early adoption permitted. This standard will not have a material impact on the Company’s consolidated results of operations or financial position.

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory (“ASU 2015-11”). ASU 2015-11 affects reporting entities that measure inventory using first-in, first-out or average cost. Specifically, ASU 2015-11 requires that inventory be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. ASU 2015-11 is effective for annual periods beginning after December 15, 2016, with early adoption permitted. This standard will not have a material impact on the Company’s consolidated results of operations or financial position.
 
In April 2015, the FASB issued ASU 2015-4, Compensation—Retirement Benefits (Topic 715): Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets (“ASU 2015-4”). ASU 2015-4 provides an entity with a fiscal year-end that does not coincide with a month-end a practical expedient that allows the entity to measure defined benefit plan assets and obligations using the month-end that is closest to the entity’s fiscal year-end and apply that practical expedient consistently from year to year. If an entity has a significant event in an interim period that requires the remeasurement of defined benefit plan assets and obligations such as a partial settlement, ASU 2015-4 also provides a practical expedient that permits the entity to remeasure defined benefit plan assets and obligations using the month-end that is closest to the date of the significant event and adjust for any effects of the significant event not captured in the month-end measurement. If an entity applies the practical expedient and a contribution is made between the month-end date used for measurement and the entity’s fiscal year-end, the entity should disclose the amount of the contribution to allow reconciliation of the fair value of plan assets in the fair value hierarchy to the ending balance of the fair value of plan assets. ASU 2015-4 is effective for annual periods beginning after December 15, 2015 with early adoption permitted. This standard will not have a material impact on the Company’s consolidated results of operations or financial position.
 

7



In April 2015, the FASB issued ASU 2015-3, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-3”). ASU 2015-3 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. In August 2015, the FASB issued ASU 2015-15, Interest—Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements (“ASU 2015-15”), which indicates the SEC staff would not object to an entity deferring and presenting debt issuance costs related to line-of-credit arrangements as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. ASU 2015-3 and ASU 2015-15 are effective for annual periods beginning after December 15, 2015 with early adoption permitted. This standard will not have a material impact on the Company’s consolidated results of operations or financial position.
 
In January 2015, the FASB issued ASU 2015-1, Income Statement—Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items (“ASU 2015-1”). ASU 2015-1 eliminates from U.S. GAAP the concept of extraordinary items as part of its initiative to reduce complexity in accounting standards. As a result, an entity will no longer be required to segregate extraordinary items from the results of ordinary operations, to separately present an extraordinary item on its income statement, net of tax, after income from continuing operations or to disclose income taxes and earnings-per-share data applicable to an extraordinary item. However, ASU 2015-1 will still retain the presentation and disclosure guidance for items that are unusual in nature and occur infrequently. ASU 2015-1 is effective for annual periods beginning after December 15, 2015 with early adoption permitted. This standard will not have a material impact on the Company’s consolidated results of operations or financial position.

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”), to provide guidance on management’s responsibility to perform interim and annual assessments of an entity’s ability to continue as a going concern and to provide related disclosure. ASU 2014-15 applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. This standard will not have a material impact on the Company’s consolidated results of operations or financial position.
 
In June 2014, the FASB issued ASU 2014-12, Compensation—Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (“ASU 2014-12”). ASU 2014-12 requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. ASU 2014-12 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015, with early adoption permitted. The Company is evaluating the effect of adopting ASU 2014-12, but does not expect that adoption will have a material impact on the Company’s consolidated results of operations or financial position.
 
In May 2014, the FASB issued ASU 2014-9, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-9”). ASU 2014-9 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets, unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date (“ASU 2015-14”), deferring the effective date of ASU 2014-9. The new revenue standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017 and allows either a full retrospective adoption to all periods presented or a modified retrospective adoption approach with the cumulative effect of initial application of the revised guidance recognized at the date of initial application. Early adoption is permitted for periods beginning after December 15, 2016. The Company is evaluating the effect of adopting ASU 2014-9.
 
Recently Adopted Accounting Standards. In accordance with U.S. GAAP, the following provision, which had no material impact on the Company’s financial position, results of operations or cash flows, was adopted effective the first quarter of fiscal year 2015: ASU 2014-8, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.
 

8



2. ACQUISITION AND GOODWILL
 
Fossil Accessories South Africa Acquisition. On February 1, 2015, the Company closed a share purchase agreement with S. Keren Watch Group (“SKWG”), pursuant to which the Company acquired 51% ownership in the Cape Town, South Africa-based distributor for approximately $4.8 million in cash, net of cash acquired and including working capital adjustments (the “SKWG Acquisition”). SKWG had been a distribution partner for the Company for over 23 years, representing all Fossil brands and most of the Company’s licensed brands in South Africa. Upon closing of the share purchase, SKWG was renamed Fossil Accessories South Africa Pty, Ltd. The Company recorded $4.5 million of goodwill related to the acquisition.
 
Goodwill is the excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed. The changes in the carrying amount of goodwill, which is not subject to amortization, were as follows (in thousands):
 
Americas
 
Europe
 
Asia
 
Total
Balance at January 3, 2015
$
119,438

 
$
66,433

 
$
11,857

 
$
197,728

Acquisitions

 
4,487

 

 
4,487

Foreign currency changes
(215
)
 
(4,711
)
 
(37
)
 
(4,963
)
Balance at October 3, 2015
$
119,223

 
$
66,209

 
$
11,820

 
$
197,252

 
3. INVENTORIES
 
Inventories consisted of the following (in thousands):
 
October 3, 2015
 
January 3, 2015
Components and parts
$
54,154

 
$
48,797

Work-in-process
8,791

 
13,719

Finished goods
683,398

 
534,765

Inventories
$
746,343

 
$
597,281


4. WARRANTY LIABILITIES
 
The Company’s warranty liability is recorded in accrued expenses-other in the Company’s condensed consolidated balance sheets. Warranty liability activity consisted of the following (in thousands):
 
For the 39 Weeks Ended October 3, 2015
 
For the 40 Weeks Ended October 4, 2014
Beginning balance
$
13,500

 
$
15,658

Settlements in cash or kind
(6,627
)
 
(7,750
)
Warranties issued and adjustments to preexisting warranties (1)
7,305

 
6,614

Liabilities assumed in acquisition
44

 

Ending balance
$
14,222

 
$
14,522

_______________________________________________
(1) Changes in cost estimates related to preexisting warranties are aggregated with accruals for new standard warranties issued and foreign currency changes.
 
5. INCOME TAXES
 
The Company’s income tax expense and related effective rate were as follows (in thousands, except percentage data):
 
For the 13 Weeks Ended October 3, 2015
 
For the 13 Weeks Ended October 4, 2014
 
For the 39 Weeks Ended October 3, 2015
 
For the 40 Weeks Ended October 4, 2014
Income tax expense
$
17,303

 
$
46,931

 
$
58,721

 
$
103,286

Income tax rate
22.3
%
 
30.6
%
 
27.1
%
 
30.9
%
 

9



The lower effective tax rate in the Third Quarter, as compared to the Prior Year Quarter, was primarily due to foreign tax credits generated from management's decision to no longer permanently reinvest the earnings of certain high-taxed foreign subsidiaries and a reduction in foreign earnings subject to U.S. taxation. The lower effective tax rate for the Year to Date Period, as compared to the Prior Year YTD Period, was primarily attributable to foreign tax credits generated from management's decision to no longer permanently reinvest the earnings of certain high-taxed foreign subsidiaries, the recognition of income tax benefits due to the settlement of audits and a reduction in foreign earnings subject to U.S. taxation.

As of October 3, 2015, the total amount of unrecognized tax benefits, excluding interest and penalties, was $13.1 million, of which $10.3 million would favorably impact the effective tax rate in future periods, if recognized. During the second quarter of fiscal year 2015, the U.S. Internal Revenue Service closed its examination of the Company’s 2010-2012 federal income tax returns, and the Company received a refund of $2.2 million. The Company is subject to examinations in various state and foreign jurisdictions for its 2008-2014 tax years, none of which the Company believes are significant, individually or in the aggregate. Tax audit outcomes and timing of tax audit settlements are subject to significant uncertainty.
 
The Company has classified uncertain tax positions as long-term income taxes payable, unless such amounts are expected to be paid within twelve months of the condensed consolidated balance sheet date. As of October 3, 2015, the Company had recorded $1.8 million of unrecognized tax benefits, excluding interest and penalties, for positions that are expected to be settled within the next twelve months. Consistent with its past practice, the Company recognizes interest and/or penalties related to income tax overpayments and income tax underpayments in income tax expense and income taxes receivable/payable, respectively. The total amount of accrued income tax-related interest and penalties included in the condensed consolidated balance sheets at October 3, 2015 was $1.9 million and $0.4 million, respectively. For the Third Quarter and Year To Date Period, the Company accrued income tax-related interest expense of $0.2 million and $0.6 million, respectively.
 
6. STOCKHOLDERS’ EQUITY
 
Common Stock Repurchase Programs. Purchases of the Company’s common stock are made from time to time pursuant to its repurchase programs, subject to market conditions and at prevailing market prices, through the open market. Repurchased shares of common stock are recorded at cost and become authorized but unissued shares which may be issued in the future for general corporate or other purposes. The Company may terminate or limit its stock repurchase program at any time. In the event the repurchased shares are canceled, the Company accounts for retirements by allocating the repurchase price to common stock, additional paid-in capital and retained earnings. The repurchase price allocation is based upon the equity contribution associated with historical issuances. The repurchase programs are conducted pursuant to Rule 10b-18 of the Securities Exchange Act of 1934.

During the Year To Date Period, the Company effectively retired 2.7 million shares of common stock repurchased under its repurchase programs. The effective retirement of repurchased common stock decreased common stock by approximately $27,300, additional paid-in capital by $0.7 million, retained earnings by $228.8 million and treasury stock by $229.5 million. At January 3, 2015 and October 3, 2015, all treasury stock had been effectively retired. As of October 3, 2015, the Company had $829.3 million of repurchase authorizations remaining under its combined repurchase programs.
 

10



The following tables reflect the Company’s common stock repurchase activity for the periods indicated (in millions):
 
 
 
 
 
For the 13 Weeks Ended 
 October 3, 2015
 
For the 13 Weeks Ended 
 October 4, 2014
Fiscal Year
Authorized
Dollar Value
Authorized
 
Termination Date
 
Number of
Shares
Repurchased
 
Dollar Value
Repurchased
 
Number of
Shares
Repurchased
 
Dollar Value
Repurchased
2014
$
1,000.0

 
December 2018
 
0.2

 
$
12.4

 

 
$

2012
$
1,000.0

 
December 2016 (1)
 

 
$

 
1.3

 
$
133.8

2010
$
30.0

 
None
 

 
$

 

 
$

 
 
 
 
 
 
For the 39 Weeks Ended 
 October 3, 2015
 
For the 40 Weeks Ended 
 October 4, 2014
Fiscal Year
Authorized
Dollar Value
Authorized
 
Termination Date
 
Number of
Shares
Repurchased
 
Dollar Value
Repurchased
 
Number of
Shares
Repurchased
 
Dollar Value
Repurchased
2014
$
1,000.0

 
December 2018
 
2.4

 
$
200.7

 

 
$

2012
$
1,000.0

 
December 2016 (1)
 
0.3

 
$
28.8

 
3.0

 
$
318.4

2010
$
30.0

 
None
 

 
$

 

 
$

______________________________________________
(1) In the first quarter of fiscal year 2015, the Company completed this repurchase plan.
 
Controlling and Noncontrolling Interest. The following tables summarize the changes in equity attributable to controlling and noncontrolling interest (in thousands):
 
Fossil Group, Inc.
Stockholders’
Equity
 
Noncontrolling
Interest
 
Total
Stockholders’
Equity
Balance at January 3, 2015
$
977,860

 
$
5,941

 
$
983,801

Net income
150,252

 
7,335

 
157,587

Currency translation adjustment
(35,382
)
 

 
(35,382
)
Derivative instruments-net change
(5,443
)
 

 
(5,443
)
Common stock issued upon exercise of stock options
658

 

 
658

Tax expense derived from stock-based compensation
(930
)
 

 
(930
)
Distribution of noncontrolling interest earnings

 
(5,257
)
 
(5,257
)
Business acquisition

 
5,831

 
5,831

Acquisition of common stock
(231,220
)
 

 
(231,220
)
Stock-based compensation expense
13,997

 

 
13,997

Balance at October 3, 2015
$
869,792

 
$
13,850

 
$
883,642



11



 
Fossil Group, Inc.
Stockholders’
Equity
 
Noncontrolling
Interest
 
Total
Stockholders’
Equity
Balance at December 28, 2013
$
1,068,677

 
$
6,690

 
$
1,075,367

Net income
222,581

 
7,884

 
230,465

Currency translation adjustment
(43,080
)
 

 
(43,080
)
Derivative instruments-net change
11,361

 

 
11,361

Common stock issued upon exercise of stock options
1,922

 

 
1,922

Tax benefit derived from stock-based compensation
885

 

 
885

Distribution of noncontrolling interest earnings and other

 
(5,392
)
 
(5,392
)
Pension plan activity
(3,293
)
 

 
(3,293
)
Acquisition of common stock
(321,224
)
 

 
(321,224
)
Stock-based compensation expense
14,238

 

 
14,238

Balance at October 4, 2014
$
952,067

 
$
9,182

 
$
961,249

 
7. EMPLOYEE BENEFIT PLANS
 
Stock-Based Compensation Plans. The following table summarizes stock options and stock appreciation rights activity during the Third Quarter:
Stock Options and Stock Appreciation Rights
 
Shares
 
Weighted-
Average
Exercise Price
 
Weighted-
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value
 
 
(in Thousands)
 
 
 
(in Years)
 
(in Thousands)
Outstanding at July 4, 2015
 
744

 
$
84.94

 
5.5
 
$
7,667

Granted
 
5

 
70.12

 
 
 
 

Exercised
 
(3
)
 
25.27

 
 
 
123

Forfeited or expired
 
(28
)
 
103.07

 
 
 
 

Outstanding at October 3, 2015
 
718

 
84.39

 
5.3
 
4,580

Exercisable at October 3, 2015
 
526

 
$
82.73

 
4.7
 
$
4,580

 
The aggregate intrinsic value shown in the table above is before income taxes and is based on (i) the exercise price for outstanding and exercisable options/rights at October 3, 2015 and (ii) the fair market value of the Company’s common stock on the exercise date for options/rights that were exercised during the Third Quarter.
 
Stock Options and Stock Appreciation Rights Outstanding and Exercisable. The following tables summarize information with respect to stock options and stock appreciation rights outstanding and exercisable at October 3, 2015:
Stock Options Outstanding
 
Stock Options Exercisable
Range of
Exercise Prices
 
Number of
Shares
 
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Term
 
Number of
Shares
 
Weighted-
Average
Exercise
Price
 
 
(in Thousands)
 
 
 
(in Years)
 
(in Thousands)
 
 
$13.65 - $30.71
 
72

 
$
19.96

 
2.7
 
72

 
$
19.96

$31.24 - $67.10
 
69

 
38.11

 
3.5
 
69

 
38.11

$69.53 - $106.40
 
93

 
80.85

 
5.5
 
92

 
80.78

$106.89 - $131.46
 
156

 
127.97

 
6.2
 
156

 
127.97

Total
 
390

 
$
80.86

 
4.9
 
389

 
$
80.85



12



Stock Appreciation Rights Outstanding
 
Stock Appreciation Rights Exercisable
Range of
Exercise Prices
 
Number of
Shares
 
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Term
 
Number of
Shares
 
Weighted-
Average
Exercise
Price
 
 
(in Thousands)
 
 
 
(in Years)
 
(in Thousands)
 
 
$13.65 - $30.71
 
23

 
$
18.01

 
1.2
 
23

 
$
18.01

$31.24 - $67.10
 
11

 
45.09

 
3.0
 
11

 
45.09

$69.53 - $106.40
 
190

 
83.95

 
6.7
 
43

 
90.96

$106.89 - $131.46
 
104

 
117.93

 
5.6
 
60

 
121.68

Total
 
328

 
$
88.59

 
5.8
 
137

 
$
88.06

 
Restricted Stock, Restricted Stock Units and Performance Restricted Stock Units. The following table summarizes restricted stock, restricted stock unit and performance restricted stock unit activity during the Third Quarter:
Restricted Stock, Restricted Stock Units
and Performance Restricted Stock Units
 
Number of Shares
 
Weighted-Average
Grant Date Fair
Value Per Share
 
 
(in Thousands)
 
 
Nonvested at July 4, 2015
 
437

 
$
89.22

Granted
 
6

 
67.72

Vested
 
(8
)
 
103.06

Forfeited
 
(14
)
 
89.69

Nonvested at October 3, 2015
 
421

 
$
88.61

 
The total fair value of restricted stock and restricted stock units vested during the Third Quarter was approximately $0.6 million. Vesting of performance restricted stock units is based on achievement of sales growth and operating margin targets in relation to the performance of a certain identified peer group.
 
8. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
 
The following tables illustrate changes in the balances of each component of accumulated other comprehensive income (loss), net of taxes (in thousands):
 
For the 13 Weeks Ended October 3, 2015
 
Currency
Translation
Adjustments
 
Cash Flow Hedges
 
 
 
 
 
 
Forward
Contracts
 
Interest
Rate Swaps
 
Pension
Plan
 
Total
Beginning balance
$
(55,188
)
 
$
15,348

 
$
(1,055
)
 
$
(3,647
)
 
$
(44,542
)
Other comprehensive income (loss) before reclassifications
(7,435
)
 
3,825

 
(2,044
)
 

 
(5,654
)
Tax (expense) benefit

 
(1,177
)
 
745

 

 
(432
)
Amounts reclassed from accumulated other comprehensive income

 
10,553

 
(623
)
 

 
9,930

Tax (expense) benefit

 
(3,549
)
 
226

 

 
(3,323
)
Total other comprehensive income (loss)
(7,435
)
 
(4,356
)
 
(902
)
 

 
(12,693
)
Ending balance
$
(62,623
)
 
$
10,992

 
$
(1,957
)
 
$
(3,647
)
 
$
(57,235
)

13



d
For the 13 Weeks Ended October 4, 2014
 
Currency
Translation
Adjustments
 
Cash Flow Hedges
 
 
 
Net
Investment
Hedges
 
 
 
 
Forward
Contracts
 
Interest
Rate Swap
 
Pension
Plan
 
 
Total
Beginning balance
$
38,551

 
$
(2,547
)
 
$
(319
)
 
$
(2,557
)
 
$
257

 
$
33,385

Other comprehensive income (loss) before reclassifications
(43,479
)
 
21,752

 
(91
)
 

 

 
(21,818
)
Tax (expense) benefit

 
(9,341
)
 
33

 

 

 
(9,308
)
Amounts reclassed from accumulated other comprehensive income

 
1,560

 
(680
)
 

 

 
880

Tax (expense) benefit

 
(548
)
 
248

 

 

 
(300
)
Total other comprehensive income (loss)
(43,479
)
 
11,399

 
374

 

 

 
(31,706
)
Ending balance
$
(4,928
)
 
$
8,852

 
$
55

 
$
(2,557
)
 
$
257

 
$
1,679

 
 
For the 39 Weeks Ended October 3, 2015
 
Currency
Translation
Adjustments
 
Cash Flow Hedges
 
 
 
 
 
 
Forward
Contracts
 
Interest
Rate Swaps
 
Pension
Plan
 
Total
Beginning balance
$
(27,241
)
 
$
14,980

 
$
(502
)
 
$
(3,647
)
 
$
(16,410
)
Other comprehensive income (loss) before reclassifications
(35,382
)
 
25,287

 
1,010

 

 
(9,085
)
Tax (expense) benefit

 
(7,142
)
 
(368
)
 

 
(7,510
)
Amounts reclassed from accumulated other comprehensive income

 
33,546

 
3,300

 

 
36,846

Tax (expense) benefit

 
(11,413
)
 
(1,203
)
 

 
(12,616
)
Total other comprehensive income (loss)
(35,382
)
 
(3,988
)
 
(1,455
)
 

 
(40,825
)
Ending balance
$
(62,623
)
 
$
10,992

 
$
(1,957
)
 
$
(3,647
)
 
$
(57,235
)
 
 
For the 40 Weeks Ended October 4, 2014
 
Currency
Translation
Adjustments
 
Cash Flow Hedges
 
 
 
Net
Investment
Hedges
 
 
 
 
Forward
Contracts
 
Interest
Rate Swap
 
Pension
Plan
 
 
Total
Beginning balance
$
38,152

 
$
(2,091
)
 
$
(106
)
 
$
736

 
$

 
$
36,691

Other comprehensive income (loss) before reclassifications
(43,080
)
 
19,652

 
(1,850
)
 
(2,946
)
 
410

 
(27,814
)
Tax (expense) benefit

 
(9,228
)
 
676

 
(347
)
 
(153
)
 
(9,052
)
Amounts reclassed from accumulated other comprehensive income

 
(839
)
 
(2,103
)
 

 

 
(2,942
)
Tax (expense) benefit

 
320

 
768

 

 

 
1,088

Total other comprehensive income (loss)
(43,080
)
 
10,943

 
161

 
(3,293
)
 
257

 
(35,012
)
Ending balance
$
(4,928
)
 
$
8,852

 
$
55

 
$
(2,557
)
 
$
257

 
$
1,679

 
See “Note 10—Derivatives and Risk Management” for additional disclosures about the Company’s use of derivatives.

9. SEGMENT INFORMATION
 
The Company reports segment information based on the “management approach”. The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of the Company’s reportable segments.
 

14



The Company manages its business primarily on a geographic basis. The Company’s reportable operating segments are comprised of (i) Americas, (ii) Europe and (iii) Asia. Each reportable operating segment includes sales to wholesale and distributor customers, and sales through Company-owned retail stores and e-commerce activities based on the location of the selling entity. The Americas segment primarily includes sales to customers based in Canada, Latin America and the United States. The Europe segment primarily includes sales to customers based in European countries, the Middle East and Africa. The Asia segment primarily includes sales to customers based in Australia, China, India, Indonesia, Japan, Malaysia, New Zealand, Singapore, South Korea, Taiwan and Thailand. Each reportable operating segment provides similar products and services.
 
The Company evaluates the performance of its reportable segments based on net sales and operating income. Net sales for geographic segments are based on the location of the selling entity. Operating income for each segment includes net sales to third parties, related cost of sales and operating expenses directly attributable to the segment. General corporate expenses, including certain administrative, legal, accounting, technology support costs, equity compensation costs, payroll costs attributable to executive management, brand management, product development, art, creative/product design, marketing, strategy, compliance and back office supply chain expenses are not allocated to the various segments because they are managed at the corporate level internally. The Company does not include intercompany transfers between segments for management reporting purposes.
 
Certain reclassifications have been made to prior year amounts to conform with current year presentation. Due to changes in the Company’s reportable segments as discussed in Note 1 to the condensed consolidated financial statements, segment results for fiscal year 2014 have been recast to present results on a comparable basis.
 
Summary information by operating segment was as follows (in thousands):
 
For the 13 Weeks Ended 
 October 3, 2015
 
For the 13 Weeks Ended 
 October 4, 2014
 
Net Sales
 
Operating Income
 
Net Sales
 
Operating Income
Americas
$
391,201

 
$
84,353

 
$
441,181

 
$
119,453

Europe
260,263

 
58,577

 
304,880

 
80,470

Asia
119,839

 
14,173

 
148,421

 
29,035

Corporate
 

 
(81,398
)
 
 

 
(74,025
)
Consolidated
$
771,303

 
$
75,705

 
$
894,482

 
$
154,933

 
 
For the 39 Weeks Ended 
 October 3, 2015
 
For the 40 Weeks Ended 
 October 4, 2014
 
Net Sales
 
Operating Income
 
Net Sales
 
Operating Income
Americas
$
1,143,885

 
$
246,886

 
$
1,204,540

 
$
307,308

Europe
722,442

 
137,729

 
824,220

 
179,748

Asia
370,036

 
55,223

 
416,086

 
87,105

Corporate
 

 
(237,545
)
 
 

 
(229,772
)
Consolidated
$
2,236,363

 
$
202,293

 
$
2,444,846

 
$
344,389

 
 
October 3, 2015
 
January 3, 2015
 
Long-Term Assets
 
Total Assets
 
Long-Term Assets
 
Total Assets
Americas
$
264,689

 
$
843,354

 
$
263,324

 
$
809,548

Europe
203,342

 
543,210

 
220,742

 
561,486

Asia
52,443

 
211,518

 
57,508

 
233,881

Corporate
169,369

 
656,795

 
176,124

 
602,637

Total
$
689,843

 
$
2,254,877

 
$
717,698

 
$
2,207,552



15



The following tables reflect net sales for each class of similar products in the periods presented (in thousands, except percentage data):
 
For the 13 Weeks Ended 
 October 3, 2015
 
For the 13 Weeks Ended 
 October 4, 2014
 
Net Sales
 
Percentage of Total
 
Net Sales
 
Percentage of Total
Watches
$
581,069

 
75.3
%
 
$
696,291

 
77.8
%
Leathers
104,777

 
13.6

 
107,954

 
12.1

Jewelry
66,984

 
8.7

 
70,718

 
7.9

Other
18,473

 
2.4

 
19,519

 
2.2

Total
$
771,303

 
100.0
%
 
$
894,482

 
100.0
%
 
 
For the 39 Weeks Ended 
 October 3, 2015
 
For the 40 Weeks Ended 
 October 4, 2014
 
Net Sales
 
Percentage of Total
 
Net Sales
 
Percentage of Total
Watches
$
1,708,730

 
76.4
%
 
$
1,908,887

 
78.1
%
Leathers
287,083

 
12.8

 
295,001

 
12.1

Jewelry
185,751

 
8.3

 
183,419

 
7.5

Other
54,799

 
2.5

 
57,539

 
2.3

Total
$
2,236,363

 
100.0
%
 
$
2,444,846

 
100.0
%
 
10. DERIVATIVES AND RISK MANAGEMENT
 
Cash Flow Hedges. The primary risks managed by using derivative instruments are the fluctuations in global currencies that will ultimately be used by non-U.S. dollar functional currency subsidiaries to settle future payments of intercompany inventory transactions denominated in U.S. dollars. Specifically, the Company projects future intercompany purchases by its non-U.S. dollar functional currency subsidiaries generally over a period of up to 24 months. The Company enters into forward contracts, generally for up to 85% of the forecasted purchases, to manage fluctuations in global currencies that will ultimately be used to settle such U.S. dollar denominated inventory purchases. Forward contracts represent agreements to exchange the currency of one country for the currency of another country at an agreed-upon settlement date and exchange rate. These forward contracts are designated as single cash flow hedges. Fluctuations in exchange rates will either increase or decrease the Company’s U.S. dollar equivalent cash flows from these intercompany inventory transactions, which will affect the Company’s U.S. dollar earnings. Gains or losses on the forward contracts are expected to offset these fluctuations to the extent the cash flows are hedged by the forward contracts.
 
These forward contracts meet the criteria for hedge accounting, which requires that they represent foreign-currency-denominated forecasted inter-entity transactions in which (i) the operating unit that has the foreign currency exposure is a party to the hedging instrument and (ii) the hedged transaction is denominated in a currency other than the hedging unit’s functional currency.
 
At the inception of each forward contract designated as a cash flow hedge, the hedging relationship is expected to be highly effective in achieving offsetting cash flows attributable to the hedged risk. The Company assesses hedge effectiveness under the critical terms matched method at inception and at least quarterly throughout the life of the hedging relationship. If the critical terms (i.e., amounts, currencies and settlement dates) of the forward contract match the terms of the forecasted transaction, the Company concludes that the hedge is effective.
 
For a derivative instrument that is designated and qualifies as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income (loss), net of taxes and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. Due to the high degree of effectiveness between the hedging instruments and the underlying exposures being hedged, the Company’s hedges resulted in no ineffectiveness in the condensed consolidated statements of income and comprehensive income, and there were no components excluded from the assessment of hedge effectiveness for the Third Quarter, Prior Year Quarter, Year To Date Period or Prior Year YTD Period.


16



All derivative instruments are recognized as either assets or liabilities at fair value in the condensed consolidated balance sheets. Derivatives designated as cash flow hedges are recorded at fair value at each balance sheet date and the change in fair value is recorded to accumulated other comprehensive income (loss) within the equity section of the Company’s condensed consolidated balance sheet until such derivative’s gains or losses become realized or the cash flow hedge relationship is terminated. If the cash flow hedge relationship is terminated, the derivative’s gains or losses that are recorded in accumulated other comprehensive income (loss) will be recognized in earnings when the hedged cash flows occur. However, for cash flow hedges that are terminated because the forecasted transaction is not expected to occur in the original specified time period, the derivative’s gains or losses are immediately recognized in earnings. There were no gains or losses reclassified into earnings as a result of the discontinuance of cash flow hedges in the Third Quarter, Prior Year Quarter, Year To Date Period or Prior Year YTD Period. Hedge accounting is discontinued if it is determined that the derivative is not highly effective. The Company records all forward contract hedge assets and liabilities on a gross basis as they do not meet the balance sheet netting criteria because the Company does not have master netting agreements established with the derivative counterparties that would allow for net settlement.
 
As of October 3, 2015, the Company had the following outstanding forward contracts designated as cash flow hedges that were entered into to hedge the future payments of intercompany inventory transactions (in millions):
Functional Currency
 
Contract Currency
Type
 
Amount
 
Type
 
Amount
Euro
 
225.9

 
U.S. dollar
 
264.0

British pound
 
47.1

 
U.S. dollar
 
73.6

Canadian dollar
 
60.3

 
U.S. dollar
 
48.5

Japanese yen
 
3,992.6

 
U.S. dollar
 
33.9

Mexican peso
 
346.5

 
U.S. dollar
 
21.3

Australian dollar
 
19.4

 
U.S. dollar
 
14.3

 
The Company is also exposed to interest rate risk related to its outstanding debt. To manage the interest rate risk related to its $231.3 million U.S.-based term loan, as amended and restated on March 9, 2015 (“Term Loan”), the Company entered into an interest rate swap agreement on July 26, 2013 with a term of approximately five years. The objective of this hedge is to offset the variability of future payments associated with interest rates on the Term Loan. The interest rate swap agreement hedges the 1-month London Interbank Offer Rate ("LIBOR") based variable rate debt obligations under the Term Loan. Under the terms of the swap, the Company pays a fixed interest rate of 1.288% per annum to the swap counterparty plus the LIBOR rate applicable margin (which varies based upon the Company’s consolidated leverage ratio (the “Ratio”) from 1.25% if the Ratio is less than 1.00 to 1.00, to 2.00% if the Ratio is greater than or equal to 2.00 to 1.00). The notional amount will amortize over the remaining life of the Term Loan to coincide with repayments on the underlying loan. The Company will receive interest from the swap counterparty at a variable rate based on 1-month LIBOR. This hedge is designated as a cash flow hedge. Additionally, to manage interest rate risk related to forecasted debt issuances, the Company entered into a forward starting interest rate swap agreement on March 20, 2015 with a term of approximately 10 years. The objective of this hedge was to offset the variability of future interest payments associated with forecasted debt issuances. The forecasted debt issuances did not occur, and in May 2015, the Company entered into an agreement to offset and unwind the forward starting interest rate swap. As a result of this transaction, a gain of $3.3 million net of taxes was reclassified from accumulated other comprehensive income (loss) to other income (expense)-net during the second quarter of fiscal year 2015.
 
Net Investment Hedges. The Company is also exposed to risk that adverse changes in foreign currency exchange rates could impact its net investment in foreign operations. To manage this risk, during the first quarter of fiscal year 2014, the Company entered into a forward contract designated as a net investment hedge to reduce exposure to changes in currency exchange rates on 25.0 million euros of its total investment in a wholly-owned euro-denominated foreign subsidiary. The hedge was settled during the second quarter of fiscal year 2014. During the Third Quarter, the Company entered into forward contracts designated as net investment hedges to reduce exposure to changes in currency exchange rates on 58.9 million euros of its total investment in two wholly-owned, euro-denominated foreign subsidiaries and on 1.8 billion yen of its total investment in a wholly-owned Japanese yen-denominated foreign subsidiary.

The effective portion of derivatives designated as net investment hedges are recorded at fair value at each balance sheet date and the change in fair value is recorded as a component of other comprehensive income (loss) in the Company’s condensed consolidated statements of income and comprehensive income. The Company uses the hypothetical derivative method to assess the ineffectiveness of net investment hedges. Should any portion of a net investment hedge become ineffective, the ineffective portion will be reclassified to other income (expense)-net on the Company’s condensed consolidated

17



statements of income and comprehensive income. Gains and losses reported in accumulated other comprehensive income (loss) will not be reclassified into earnings until the Company’s underlying investment is liquidated or dissolved.
 
Non-designated Hedges. The Company also periodically enters into forward contracts to manage exchange rate risks associated with certain non-inventory intercompany transactions and for which the Company does not elect cash flow hedge accounting treatment. As of October 3, 2015, the Company had approximately $1.3 million in non-designated forward contracts on 17.7 million rand associated with a majority-owned, South African rand-denominated foreign subsidiary, for which the Company does not elect cash flow hedge accounting treatment. As of January 3, 2015, all of the Company’s outstanding forward contracts were designated as hedging instruments. Changes in the fair value of derivatives not designated as hedging instruments are recognized in earnings when they occur.

The effective portion of gains and losses on derivative instruments that were recognized in other comprehensive income (loss), net of taxes during the Third Quarter, Prior Year Quarter, Year To Date Period and Prior Year YTD Period are set forth below (in thousands):
 
For the 13 Weeks Ended October 3, 2015
 
For the 13 Weeks Ended October 4, 2014
Cash flow hedges:
 

 
 

Forward contracts
$
2,648

 
$
12,411

Interest rate swaps
(1,299
)
 
(58
)
Net investment hedges:
 

 
 

Forward contracts
1,218

 

Total gain (loss) recognized in other comprehensive income (loss), net of taxes
$
2,567

 
$
12,353

 
 
For the 39 Weeks Ended October 3, 2015
 
For the 40 Weeks Ended October 4, 2014
Cash flow hedges:
 

 
 

Forward contracts
$
18,145

 
$
10,424

Interest rate swaps
642

 
(1,174
)
Net investment hedges:
 

 
 

Forward contracts
1,218

 
257

Total gain (loss) recognized in other comprehensive income (loss), net of taxes
$
20,005

 
$
9,507

 
The following table illustrates the effective portion of gains and losses on derivative instruments recorded in other comprehensive income (loss), net of taxes during the term of the hedging relationship and reclassified into earnings, and gains and losses on derivatives not designated as hedging instruments recorded directly to earnings during the Third Quarter, Prior Year Quarter, Year To Date Period and Prior Year YTD Period (in thousands):
Derivative Instruments
 
Condensed Consolidated
Statements of Income
and Comprehensive
Income Location
 
Effect of Derivative
Instruments
 
For the 13 Weeks Ended October 3, 2015
 
For the 13 Weeks Ended October 4, 2014
Forward contracts designated as cash flow hedging instruments
 
Other income (expense)-net
 
Total gain (loss) reclassified from other comprehensive income (loss)
 
$
7,004

 
$
1,012

Forward contracts not designated as hedging instruments
 
Other income (expense)-net
 
Total gain (loss) recognized in income
 
$
(205
)
 
$

Interest rate swap designated as a cash flow hedging instrument
 
Interest expense
 
Total gain (loss) reclassified from other comprehensive income (loss)
 
$
(397
)
 
$
(432
)


18



Derivative Instruments
 
Condensed Consolidated
Statements of Income
and Comprehensive
Income Location
 
Effect of Derivative
Instruments
 
For the 39 Weeks Ended October 3, 2015
 
For the 40 Weeks Ended October 4, 2014
Forward contracts designated as cash flow hedging instruments
 
Other income (expense)-net
 
Total gain (loss) reclassified from other comprehensive income (loss)
 
$
22,133

 
$
(519
)
Forward contracts not designated as hedging instruments
 
Other income (expense)-net
 
Total gain (loss) recognized in income
 
$
(125
)
 
$
(148
)
Interest rate swap designated as a cash flow hedging instrument
 
Interest expense
 
Total gain (loss) reclassified from other comprehensive income (loss)
 
$
(1,234
)
 
$
(1,335
)
Interest rate swap designated as a cash flow hedging instrument
 
Other income (expense)-net
 
Total gain (loss) reclassified from other comprehensive income (loss)
 
$
3,331

 
$

 
The following table discloses the fair value amounts for the Company’s derivative instruments as separate asset and liability values, presents the fair value of derivative instruments on a gross basis, and identifies the line items in the condensed consolidated balance sheets in which the fair value amounts for these categories of derivative instruments are included (in thousands):
 
 
Asset Derivatives
 
Liability Derivatives
 
 
October 3, 2015
 
January 3, 2015
 
October 3, 2015
 
January 3, 2015
Derivative Instruments
 
Condensed
Consolidated
Balance Sheets
Location
 
Fair
Value
 
Condensed
Consolidated
Balance Sheets
Location
 
Fair
Value
 
Condensed
Consolidated
Balance Sheets
Location
 
Fair
Value
 
Condensed
Consolidated
Balance Sheets
Location
 
Fair
Value
Forward contracts designated as cash flow hedging instruments
 
Prepaid expenses and other current assets
 
$
16,278

 
Prepaid expenses and other current assets
 
$
25,867

 
Accrued expenses- other
 
$
1,438

 
Accrued expenses- other
 
$

Forward contracts not designated as hedging instruments
 
Prepaid expenses and other current assets
 
34

 
Prepaid expenses and other current assets
 

 
Accrued expenses- other
 

 
Accrued expenses- other
 

Forward contracts designated as net investment hedges
 
Prepaid expenses and other current assets
 
1,917

 
Prepaid expenses and other current assets
 

 
Accrued expenses- other
 

 
Accrued expenses- other
 

Interest rate swap designated as a cash flow hedging instrument
 
Prepaid expenses and other current assets
 

 
Prepaid expenses and other current assets
 

 
Accrued expenses- other
 
2,018

 
Accrued expenses- other
 
2,157

Forward contracts designated as cash flow hedging instruments
 
Intangible and other assets-net
 
1,356

 
Intangible and other assets-net
 
1,802

 
Other long-term liabilities
 
237

 
Other long-term liabilities
 

Interest rate swap designated as a cash flow hedging instrument
 
Intangible and other assets-net
 

 
Intangible and other assets-net
 
1,724

 
Other long-term liabilities
 
1,061

 
Other long-term liabilities
 
357

Total
 
 
 
$
19,585

 
 
 
$
29,393

 
 
 
$
4,754

 
 
 
$
2,514

 
At the end of the Third Quarter, the Company had forward contracts with maturities extending through September 2017. As of October 3, 2015, an estimated net gain of $9.9 million is expected to be reclassified into earnings within the next twelve months at prevailing foreign currency exchange rates. See “Note 1—Financial Statement Policies” for additional disclosures on foreign currency hedging instruments.
 
11. FAIR VALUE MEASUREMENTS
 
The Company defines fair value as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date.
 
Accounting Standards Codification ("ASC") 820, Fair Value Measurement and Disclosures (“ASC 820”), establishes a fair value hierarchy, which prioritizes the inputs used in measuring fair value into three broad levels as follows:

Level 1 — Quoted prices in active markets for identical assets or liabilities.
Level 2 — Inputs, other than quoted prices in active markets, that are observable either directly or indirectly.
Level 3 — Unobservable inputs based on the Company’s assumptions.
 

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ASC 820 requires the use of observable market data if such data is available without undue cost and effort.
 
The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of October 3, 2015 (in thousands):
 
Fair Value at October 3, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 

 
 

 
 

 
 

Forward contracts
$

 
$
17,668

 
$

 
$
17,668

Deferred compensation plan assets:
 

 
 

 
 

 
 

Investment in publicly traded mutual funds
2,401

 

 

 
2,401

Net investment hedges

 
1,917

 

 
$
1,917

Total
$
2,401

 
$
19,585

 
$

 
$
21,986

Liabilities:
 

 
 

 
 

 
 

Contingent consideration
$

 
$

 
$
5,276

 
$
5,276

Forward contracts

 
1,675

 

 
1,675

Interest rate swap

 
3,079

 

 
3,079

Total
$

 
$
4,754

 
$
5,276

 
$
10,030

 
The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of January 3, 2015 (in thousands):
 
Fair Value at January 3, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 

 
 

 
 

 
 

Forward contracts
$

 
$
27,669

 
$

 
$
27,669

Deferred compensation plan assets:
 

 
 

 
 

 
 

Investment in publicly traded mutual funds
2,477

 

 

 
2,477

Interest rate swap

 
1,724

 

 
1,724

Total
$
2,477

 
$
29,393

 
$

 
$
31,870

Liabilities:
 

 
 

 
 

 
 

Contingent consideration
$

 
$

 
$
7,114

 
$
7,114

Interest rate swap

 
2,514

 

 
2,514

Total
$

 
$
2,514

 
$
7,114

 
$
9,628

 
The fair values of the Company’s deferred compensation plan assets are based on quoted prices. The deferred compensation plan assets are recorded in intangible and other assets-net in the Company’s condensed consolidated balance sheets. The fair values of the Company’s forward contracts are based on published quotations of spot currency rates and forward points, which are converted into implied forward currency rates. The fair values of the interest rate swap assets and liabilities are determined using valuation models based on market observable inputs, including forward curves, mid market price and volatility levels. See “Note 10—Derivatives and Risk Management” for additional disclosures about the interest rate swaps and forward contracts.
 
The Company has evaluated its short-term and long-term debt as of October 3, 2015 and January 3, 2015 and believes, based on the interest rates, related terms and maturities, that the carrying amounts of such instruments approximated their fair values. As of October 3, 2015 and January 3, 2015, the carrying values of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximated their fair values due to the short-term maturities of these accounts.

The fair value of the contingent consideration liability related to the acquisition of the Company’s joint venture company, Fossil, S.L. (“Fossil Spain”), was determined using Level 3 inputs. The contingent consideration recorded as of October 3, 2015 is based on Fossil Spain’s earnings for fiscal year 2014 and actual and forecasted earnings for fiscal year 2015. During the second quarter of fiscal year 2015, the Company made a 1.9 million euro payment towards the 2014 contingent consideration, leaving a remaining liability of 1.5 million euros (approximately $1.7 million) which will be paid during the remaining part of

20



fiscal year 2015. The contingent consideration for calendar year 2015 will be paid upon the execution of the purchase agreement in 2016. The fair value of the contingent consideration was determined using present value techniques with forecasted future cash flows for Fossil Spain as the significant unobservable input. Future revenue growth based on management’s projections for the 2015 calendar year is approximately 13%. Operating expenses are projected to be approximately 25% of revenues for calendar year 2015. A discount rate of 19% was used to calculate the present value of the contingent consideration. The contingent consideration liability for calendar year 2015 is valued at the maximum annual variable price of 3.5 million euros (approximately $3.9 million). A decrease in future cash flows may result in a lower estimated fair value of the calendar year 2015 contingent consideration liability. Future changes in the estimated fair value of the contingent consideration liability, if any, will be reflected in earnings.
 
In accordance with the provisions of ASC 360, Property, Plant and Equipment, property, plant and equipment—net with a carrying amount of $7.2 million related to retail store leasehold improvements and fixturing was written down to a fair value of $0.1 million, and related key money in the amount of $0.1 million was deemed not recoverable, resulting in an impairment charge of $7.2 million for the Year To Date Period.
 
The fair values of assets related to the Company-owned retail stores were determined using Level 3 inputs. Of the $7.2 million impairment expense, $4.1 million, $1.1 million and $0.4 million were recorded in SG&A in the Europe, Americas and Asia segments, respectively, and $1.6 million was recorded in restructuring charges in the Americas segment.
 
12. INTANGIBLE AND OTHER ASSETS
 
The following table summarizes intangible and other assets (in thousands):
 
 
 
 
October 3, 2015
 
January 3, 2015
 
 
Useful
 
Gross
 
Accumulated
 
Gross
 
Accumulated
At Fiscal Year End
 
Lives
 
Amount
 
Amortization
 
Amount
 
Amortization
Intangibles-subject to amortization:
 
 
 
 

 
 

 
 

 
 

Trademarks
 
10 yrs.
 
$
4,175