Attached files

file filename
EX-10.1 - EXHIBIT 10.1 - Fossil Group, Inc.fosl-07022016xex101.htm
EX-32.2 - EXHIBIT 32.2 - Fossil Group, Inc.fosl-07022016xex322.htm
EX-32.1 - EXHIBIT 32.1 - Fossil Group, Inc.fosl-07022016xex321.htm
EX-31.2 - EXHIBIT 31.2 - Fossil Group, Inc.fosl-07022016xex312.htm
EX-31.1 - EXHIBIT 31.1 - Fossil Group, Inc.fosl-07022016xex311.htm
EX-10.6 - EXHIBIT 10.6 - Fossil Group, Inc.fosl-07022016xex106.htm
EX-10.5 - EXHIBIT 10.5 - Fossil Group, Inc.fosl-07022016xex105.htm
EX-10.4 - EXHIBIT 10.4 - Fossil Group, Inc.fosl-07022016xex104.htm
EX-10.3 - EXHIBIT 10.3 - Fossil Group, Inc.fosl-07022016xex103.htm
EX-10.2 - EXHIBIT 10.2 - Fossil Group, Inc.fosl-07022016xex102.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: July 2, 2016
 
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 August 5, 2016: 48,129,755




FOSSIL GROUP, INC.
FORM 10-Q
FOR THE FISCAL QUARTER ENDED JULY 2, 2016
INDEX





PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

FOSSIL GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED
IN THOUSANDS
 
July 2, 2016
 
January 2, 2016
Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
231,836

 
$
289,275

Accounts receivable - net of allowances of $60,219 and $84,558, respectively
257,053

 
370,761

Inventories
661,748

 
625,344

Prepaid expenses and other current assets
161,723

 
157,290

Total current assets
1,312,360

 
1,442,670

Property, plant and equipment - net of accumulated depreciation of $430,761 and $398,068, respectively
328,004

 
326,370

Goodwill
364,158

 
359,394

Intangible and other assets-net
222,016

 
227,227

Total long-term assets
914,178

 
912,991

Total assets
$
2,226,538

 
$
2,355,661

Liabilities and Stockholders’ Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
195,259

 
$
208,083

Short-term and current portion of long-term debt
26,302

 
23,159

Accrued expenses:
 

 
 

Compensation
53,288

 
61,496

Royalties
21,086

 
38,359

Co-op advertising
18,687

 
28,918

Transaction taxes
25,721

 
44,425

Other
71,109

 
76,592

Income taxes payable
249

 
8,497

Total current liabilities
411,701

 
489,529

Long-term income taxes payable
20,716

 
20,634

Deferred income tax liabilities
70,692

 
75,165

Long-term debt
708,664

 
785,076

Other long-term liabilities
59,251

 
52,714

Total long-term liabilities
859,323

 
933,589

Commitments and contingencies (Note 13)


 


Stockholders’ equity:
 

 
 

Common stock, 48,127 and 48,125 shares issued and outstanding at July 2, 2016 and January 2, 2016, respectively
481

 
481

Additional paid-in capital
201,169

 
187,456

Retained earnings
820,771

 
813,957

Accumulated other comprehensive income (loss)
(77,172
)
 
(80,506
)
Total Fossil Group, Inc. stockholders’ equity
945,249

 
921,388

Noncontrolling interest
10,265

 
11,155

Total stockholders’ equity
955,514

 
932,543

Total liabilities and stockholders’ equity
$
2,226,538

 
$
2,355,661

 
See notes to the condensed consolidated financial statements.

3



FOSSIL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
UNAUDITED
IN THOUSANDS, EXCEPT PER SHARE DATA
 
 
For the 13 Weeks Ended July 2, 2016
 
For the 13 Weeks Ended July 4, 2015
 
For the 26 Weeks Ended July 2, 2016
 
For the 26 Weeks Ended July 4, 2015
Net sales
$
685,368

 
$
739,975

 
$
1,345,216

 
$
1,465,060

Cost of sales
329,618

 
330,510

 
641,129

 
654,870

Gross profit
355,750

 
409,465

 
704,087

 
810,190

Operating expenses:
 

 
 

 
 

 
 

Selling, general and administrative expenses
340,300

 
332,560

 
674,233

 
665,042

Restructuring charges

 
6,471

 

 
18,559

Total operating expenses
340,300

 
339,031

 
674,233

 
683,601

Operating income
15,450

 
70,434

 
29,854

 
126,589

Interest expense
6,421

 
5,014

 
12,420

 
9,193

Other income (expense) - net
2,542

 
14,294

 
4,812

 
21,479

Income before income taxes
11,571

 
79,714

 
22,246

 
138,875

Provision for income taxes
3,499

 
22,894

 
6,778

 
41,417

Net income
8,072

 
56,820

 
15,468

 
97,458

Less: Net income attributable to noncontrolling interest
2,051

 
2,172

 
3,654

 
4,740

Net income attributable to Fossil Group, Inc.
$
6,021

 
$
54,648

 
$
11,814

 
$
92,718

Other comprehensive income (loss), net of taxes:
 

 
 

 
 

 
 

Currency translation adjustment
$
(9,500
)
 
$
5,559

 
$
7,721

 
$
(27,947
)
Cash flow hedges - net change
4,331

 
(246
)
 
(6,101
)
 
(185
)
Pension plan activity

 

 
1,714

 

Total other comprehensive income (loss)
(5,169
)
 
5,313

 
3,334

 
(28,132
)
Total comprehensive income
2,903

 
62,133

 
18,802

 
69,326

Less: Comprehensive income attributable to noncontrolling interest
2,051

 
2,172

 
3,654

 
4,740

Comprehensive income attributable to Fossil Group, Inc.
$
852

 
$
59,961

 
$
15,148

 
$
64,586

Earnings per share:
 

 
 

 
 

 
 

Basic
$
0.13

 
$
1.12

 
$
0.25

 
$
1.87

Diluted
$
0.12

 
$
1.12

 
$
0.24

 
$
1.87

Weighted average common shares outstanding:
 

 
 

 
 

 
 

Basic
48,119

 
48,634

 
48,125

 
49,464

Diluted
48,207

 
48,744

 
48,229

 
49,615

 
See notes to the condensed consolidated financial statements.

4



FOSSIL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
IN THOUSANDS
 
For the 26 Weeks Ended July 2, 2016
 
For the 26 Weeks Ended July 4, 2015
Operating Activities:
 

 
 

Net income
$
15,468

 
$
97,458

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

 
 

Depreciation, amortization and accretion
49,666

 
43,650

Stock-based compensation
16,463

 
9,276

Decrease in allowance for returns-net of inventory in transit
(15,473
)
 
(8,438
)
Loss on disposal of assets
1,151

 
2,519

Impairment losses

 
6,602

Decrease in allowance for doubtful accounts
(4,841
)
 
(2,006
)
Excess tax benefits from stock-based compensation
(5
)
 
(170
)
Deferred income taxes and other
(443
)
 
6,804

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

 
 

Accounts receivable
139,765

 
183,993

Inventories
(41,107
)
 
(91,020
)
Prepaid expenses and other current assets
(8,656
)
 
(19,666
)
Accounts payable
(17,106
)
 
(1,040
)
Accrued expenses
(54,285
)
 
(50,563
)
Income taxes payable
(8,650
)
 
(14,898
)
Net cash provided by operating activities
71,947

 
162,501

Investing Activities:
 

 
 

Additions to property, plant and equipment
(39,313
)
 
(32,464
)
Decrease (increase) in intangible and other assets
786

 
(1,400
)
Skagen Designs arbitration settlement

 
5,968

Misfit working capital settlement
788

 

Proceeds from the sale of property, plant and equipment
1,955

 

Business acquisitions-net of cash acquired

 
(4,820
)
Net investment hedge settlement
752

 

Net cash used in investing activities
(35,032
)
 
(32,716
)
Financing Activities:
 

 
 

Acquisition of common stock
(6,418
)
 
(218,659
)
Distribution of noncontrolling interest earnings
(4,544
)
 
(5,056
)
Excess tax benefits from stock-based compensation
5

 
170

Debt borrowings
424,800

 
1,482,165

Debt payments
(498,848
)
 
(1,419,161
)
Proceeds from exercise of stock options
57

 
582

Payment for shares of Fossil, S.L.
(8,657
)
 

Net cash used in financing activities
(93,605
)
 
(159,959
)
Effect of exchange rate changes on cash and cash equivalents
(749
)
 
3,777

Net decrease in cash and cash equivalents
(57,439
)
 
(26,397
)
Cash and cash equivalents:
 

 
 

Beginning of period
289,275

 
276,261

End of period
$
231,836

 
$
249,864

 
See notes to the condensed consolidated financial statements.

5



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 July 2, 2016, and the results of operations for the thirteen-week periods ended July 2, 2016 (“Second Quarter”) and July 4, 2015 (“Prior Year Quarter”), respectively, and the twenty-six week periods ended July 2, 2016 (“Year To Date Period”) and July 4, 2015 (“Prior Year YTD Period”). All adjustments are of a normal, recurring nature.
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 Securities Exchange Act of 1934, as amended (the “Exchange Act”), for the fiscal year ended January 2, 2016 (the “2015 Form 10-K”). Operating results for the Second 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 2015 Form 10-K.
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 and sunglasses. 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. Additionally, during the first quarter of fiscal year 2016, the Company entered into forward contracts to manage fluctuations in Japanese yen exchange rates that will be used to settle future third-party inventory component purchases by a U.S. dollar functional currency subsidiary. If the Company was to settle its euro, British pound, Canadian dollar, Japanese yen, Mexican peso, Australian dollar and U.S dollar forward contracts as of July 2, 2016, the result would have been a net gain of approximately $3.8 million, net of taxes. This unrealized gain is recognized in other comprehensive income (loss), net of taxes on the Company's consolidated statements of income and comprehensive income. Additionally, to the extent that any of these contracts are not considered to be perfectly effective in offsetting the change in the value of the cash flows being hedged, any changes in fair value relating to the ineffective portion of these contracts would be recognized in other income (expense)-net on the Company's consolidated statements of income and comprehensive income. Also, the Company has entered into interest rate swap agreements to effectively convert portions of its variable rate debt obligations to fixed rates. Changes in the fair value of the interest rate swaps are recorded as a component of accumulated other comprehensive income (loss) within stockholders' equity, and are recognized in interest expense in the period in which the payment is settled. 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. Both realized and unrealized gains and losses from net investment hedges are recognized in the cumulative translation adjustment component of other comprehensive income (loss), and will be reclassified into earnings in the event the Company's underlying investments are liquidated or disposed. The Company does not hold or issue derivative financial instruments for trading or speculative

6



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.
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.
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 July 2, 2016
 
For the 13 Weeks Ended July 4, 2015
 
For the 26 Weeks Ended July 2, 2016
 
For the 26 Weeks Ended July 4, 2015
Numerator:
 

 
 

 
 

 
 

Net income attributable to Fossil Group, Inc.
$
6,021

 
$
54,648

 
$
11,814

 
$
92,718

Denominator:
 

 
 

 
 

 
 

Basic EPS computation:
 

 
 

 
 

 
 

Basic weighted average common shares outstanding
48,119

 
48,634

 
48,125

 
49,464

Basic EPS
$
0.13

 
$
1.12

 
$
0.25

 
$
1.87

Diluted EPS computation:
 

 
 

 
 

 
 

Basic weighted average common shares outstanding
48,119

 
48,634

 
48,125

 
49,464

Effect of stock options, stock appreciation rights, restricted stock units and performance restricted stock units
88

 
110

 
104

 
151

Diluted weighted average common shares outstanding
48,207

 
48,744

 
48,229

 
49,615

Diluted EPS
$
0.12

 
$
1.12

 
$
0.24

 
$
1.87

Approximately 1.9 million, 0.6 million, 1.7 million and 0.4 million weighted shares issuable under stock-based awards were not included in the diluted EPS calculation at the end of the Second Quarter, Prior Year Quarter, Year To Date Period and Prior Year YTD Period, respectively, because they were antidilutive. Approximately 1.1 million weighted performance shares were not included in the diluted EPS calculation at the end of the Second Quarter and Year to Date Period as the performance targets were not met.
Recently Issued Accounting Standards. In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. ASU 2016-09 is effective for annual periods, and interim periods within those years, beginning after December 15, 2016. Early adoption is permitted. The Company is still evaluating the effect of adopting ASU 2016-09. 
In March 2016, the FASB issued ASU 2016-04, Liabilities—Extinguishments of Liabilities (Subtopic 405-20)- Recognition of Breakage for Certain Prepaid Stored-Value Products (“ASU 2016-04”). ASU 2016-04 entitles a company to derecognize amounts related to expected breakage to the extent that it is probable a significant reversal of the recognized breakage amount will not subsequently occur. ASU 2016-04 is effective for annual periods, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted. The Company is still evaluating the effect of adopting ASU 2016-04.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842): Amendments to the FASB Accounting Standards Codification® (“ASU 2016-02”), which supersedes the existing guidance for lease accounting, Leases (Topic 840). ASU 2016-02 requires lessees to recognize leases on their balance sheets, and modifies accounting, presentation and disclosure for

7



both lessors and lessees. ASU 2016-02 requires a modified retrospective approach for all leases existing at, or entered into after, the date of initial application, with an option to elect to use certain transition relief. ASU 2016-02 is effective for annual periods, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted. The Company is still evaluating the effect of adopting ASU 2016-02.
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 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 May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). ASU 2014-09 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 2014-09. 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. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (“ASU 2016-08”). ASU 2016-08 is intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing (“ASU 2016-10”). ASU 2016-10 clarifies the implementation guidance on identifying performance obligations. Early adoption is permitted for periods beginning after December 15, 2016. In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients (“ASU 2016-12”). ASU 2016-12 clarifies three aspects of Topic 606, including the objective of the collectability criterion, the measurement date for noncash consideration and the requirements for a completed contract. ASU 2016-12 also includes a practical expedient for contract modifications. Additionally, the amendments allow an entity to exclude all sales taxes collected from customers from the transaction price. The Company is evaluating the effect of adopting ASU 2014-09 and related ASUs.
Recently Adopted Accounting Standards. In accordance with U.S. GAAP, the following provisions, which had no material impact on the Company’s financial position, results of operations or cash flows, were adopted effective the first quarter of fiscal year 2016:
ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis
ASU 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period

2. ACQUISITIONS AND GOODWILL
Fossil Spain Acquisition.    On August 10, 2012, the Company’s joint venture company, Fossil, S.L. (“Fossil Spain”), entered into a Framework Agreement (the “Framework Agreement”) with several related and unrelated parties, including General De Relojeria, S.A. (“General De Relojeria”), the Company’s joint venture partner. Pursuant to the Framework Agreement, Fossil Spain was granted the right to acquire the outstanding 50% of its shares owned by General De Relojeria upon the expiration of the joint venture agreement on December 31, 2015. The Company completed the acquisition of these shares in the Second Quarter, at which time Fossil Spain became a wholly-owned subsidiary of the Company. The fixed and previously remaining variable components of the purchase price were settled in the amounts of 4.3 million euros

8



(approximately $4.8 million) and 3.5 million euros (approximately $3.9 million), respectively. As of January 1, 2013, pursuant to the Framework Agreement, the Company assumed control over the board of directors and the day-to-day management of Fossil Spain, and began consolidating Fossil Spain, instead of treating it as an equity method investment.
Misfit, Inc. Acquisition. On December 22, 2015, the Company acquired Misfit, Inc. ("Misfit"), an innovator and distributor of wearable technology and stylish connected devices. Misfit was a U.S.-based, privately held company. The primary purpose of the acquisition was to acquire a scalable technology platform that can be integrated across the Company's multi-brand portfolio, a native wearable technology brand and a pipeline of innovative products. Misfit’s position in the wearable technology space combined with their software and hardware engineering teams enables the Company to expand its addressable market with new distribution channels, products, brands and enterprise partnerships.
The purchase price was $215.4 million in cash, net of cash acquired and subject to working capital adjustments, and $1.7 million in replacement awards attributable to precombination service. At closing, $12.5 million of the cash payment was placed into an escrow fund for the Company for working capital adjustments and indemnification obligations of the seller incurred within 12 months from the closing date. The Company received $0.8 million from the escrow during the Second Quarter as a working capital settlement and has recorded a receivable for additional claims incurred. To fund the cash purchase price, the Company utilized cash on hand and approximately $60 million of availability under its $1.05 billion revolving line of credit. The results of Misfit's operations have been included in the Company’s consolidated financial statements since December 22, 2015.
Assets acquired and liabilities assumed in the transaction were recorded at their acquisition date fair values, while transaction costs of $8.4 million associated with the acquisition were expensed as incurred during the fourth quarter of fiscal year 2015. Because the total purchase price exceeded the fair values of the tangible and intangible assets acquired, goodwill was recorded equal to the difference. The element of goodwill that is not separable into identifiable intangible assets represents expected synergies. The following table summarizes the allocation of the purchase price to the preliminary estimated fair value of the assets acquired and the liabilities assumed as of December 22, 2015, the effective date of the acquisition (in thousands):
Cash paid, net of cash acquired
 
$
215,370

Replacement awards attributable to precombination service
 
1,709

Working capital and other adjustments
 
(3,788
)
Total transaction consideration
 
$
213,291

 
 
 
Inventories
 
$
7,011

Prepaid expenses and other current assets
 
25

Property, plant and equipment and other long-term assets
 
1,190

Goodwill
 
168,021

Amortizing Intangibles:
Useful Lives
 
  Trade name
6 yrs.
15,700

  Customer lists
5 yrs.
10,800

  Developed technology
7 yrs.
36,100

  Noncompete agreements
3 yrs.
700

Current liabilities
 
(17,019
)
Long-term liabilities
 
(9,237
)
 Total net assets acquired
 
$
213,291

The amounts shown above may change in the near term as management continues to assess the fair value of acquired assets and liabilities. A change in this valuation may also impact the income tax related accounts and goodwill. The goodwill recognized from the acquisition has an indefinite useful life and will be included in the Company’s annual impairment testing.

9



Goodwill. The changes in the carrying amount of goodwill were as follows (in thousands):
 
Americas
 
Europe
 
Asia
 
Total
Balance at January 2, 2016
$
283,598

 
$
63,981

 
$
11,815

 
$
359,394

Segment allocation and acquisition adjustments (1)
(78,197
)
 
49,760

 
32,053

 
3,616

Currency
(100
)
 
1,223

 
25

 
1,148

Balance at July 2, 2016
$
205,301

 
$
114,964

 
$
43,893

 
$
364,158

__________________________________________________________________________________
(1) All goodwill resulting from the Misfit acquisition was recorded in the Americas segment as of January 2, 2016, on a preliminary basis. This line item includes an allocation of the goodwill across reporting segments and also purchase accounting adjustments made during the Year To Date Period to accounts receivable, inventories, current and long-term liabilities and working capital and other adjustments made to the transaction consideration.

3. INVENTORIES
Inventories consisted of the following (in thousands):
 
July 2, 2016
 
January 2, 2016
Components and parts
$
67,408

 
$
49,539

Work-in-process
10,762

 
12,213

Finished goods
583,578

 
563,592

Inventories
$
661,748

 
$
625,344


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 26 Weeks Ended July 2, 2016
 
For the 26 Weeks Ended July 4, 2015
Beginning balance
$
13,669

 
$
13,500

Settlements in cash or kind
(4,795
)
 
(4,019
)
Warranties issued and adjustments to preexisting warranties (1)
4,861

 
4,038

Liabilities assumed in acquisition

 
44

Ending balance
$
13,735

 
$
13,563

_______________________________________________
(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 rates were as follows (in thousands, except percentage data):
 
For the 13 Weeks Ended July 2, 2016
 
For the 13 Weeks Ended July 4, 2015
 
For the 26 Weeks Ended July 2, 2016
 
For the 26 Weeks Ended July 4, 2015
Income tax expense
$
3,499

 
$
22,894

 
$
6,778

 
$
41,417

Income tax rate
30.2
%
 
28.7
%
 
30.5
%
 
29.8
%

The higher effective tax rates in the Second Quarter and the Year To Date Period, as compared to the Prior Year Quarter and Prior Year YTD Period, respectively, was primarily attributable to the recognition of income tax benefits due to the settlement of audits in the Prior Year Quarter. The impact of this discrete benefit is partially offset by a lower projected

10



effective tax rate for 2016 as compared to 2015, largely due to the projected shift in earnings mix towards foreign income which is taxed at lower statutory rates.

As of July 2, 2016, the total amount of unrecognized tax benefits, excluding interest and penalties, was $22.6 million, of which $19.4 million would favorably impact the effective tax rate in future periods, if recognized. The Company is subject to examinations in various state and foreign jurisdictions for its 2009-2015 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 July 2, 2016, the Company had recorded $0.9 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. At July 2, 2016, the total amount of accrued income tax-related interest and penalties included in the condensed consolidated balance sheet was $2.6 million and $1.8 million, respectively. For the Second Quarter and Year To Date Period, the Company accrued income tax-related interest expense of $0.2 million and $0.4 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 Exchange Act.
During the Year to Date period, the Company effectively retired 0.1 million shares of common stock repurchased under its repurchase programs. The effective retirement of repurchased common stock decreased common stock by $1,100, additional paid-in capital by $0.2 million, retained earnings by $5.0 million and treasury stock by $5.2 million. At January 2, 2016 and July 2, 2016, all treasury stock had been effectively retired. As of July 2, 2016, the Company had $824.2 million of repurchase authorizations remaining under its combined repurchase programs.
The following tables reflect the Company’s common stock repurchase activity for the periods indicated (in millions):
 
 
 
 
 
For the 13 Weeks Ended July 2, 2016
 
For the 13 Weeks Ended July 4, 2015
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
 

 
$
0.8

 
1.3

 
$
102.5

2012
$
1,000.0

 
December 2016 (1)
 

 
$

 

 
$

2010
$
30.0

 
None
 

 
$

 

 
$

 
 
 
 
 
For the 26 Weeks Ended July 2, 2016
 
For the 26 Weeks Ended July 4, 2015
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
 
0.1

 
$
5.2

 
2.2

 
$
188.2

2012
$
1,000.0

 
December 2016 (1)
 

 
$

 
0.3

 
$
28.8

2010
$
30.0

 
None
 

 
$

 

 
$

__________________________________________________________________________________
(1) In the first quarter of fiscal year 2015, the Company completed this repurchase plan.

11



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 2, 2016
$
921,388

 
$
11,155

 
$
932,543

Net income
11,814

 
3,654

 
15,468

Currency translation adjustment
7,721

 

 
7,721

Cash flow hedges - net change
(6,101
)
 

 
(6,101
)
Pension plan activity
1,714

 

 
1,714

Common stock issued upon exercise of stock options
57

 

 
57

Tax expense derived from stock-based compensation
(1,389
)
 

 
(1,389
)
Distribution of noncontrolling interest earnings

 
(4,544
)
 
(4,544
)
Acquisition of common stock
(6,418
)
 

 
(6,418
)
Stock-based compensation expense
16,463

 

 
16,463

Balance at July 2, 2016
$
945,249

 
$
10,265

 
$
955,514

 
Fossil Group, Inc.
Stockholders’
Equity
 
Noncontrolling
Interest
 
Total
Stockholders’
Equity
Balance at January 3, 2015
$
977,860

 
$
5,941

 
$
983,801

Net income
92,718

 
4,740

 
97,458

Currency translation adjustment
(27,947
)
 

 
(27,947
)
Cash flow hedges - net change
(185
)
 

 
(185
)
Common stock issued upon exercise of stock options
582

 

 
582

Tax expense derived from stock-based compensation
(699
)
 

 
(699
)
Distribution of noncontrolling interest earnings

 
(5,056
)
 
(5,056
)
Business acquisition

 
5,831

 
5,831

Acquisition of common stock
(218,659
)
 

 
(218,659
)
Stock-based compensation expense
9,276

 

 
9,276

Balance at July 4, 2015
$
832,946

 
$
11,456

 
$
844,402

 
7. EMPLOYEE BENEFIT PLANS
Stock-Based Compensation Plans. The following table summarizes stock options and stock appreciation rights activity during the Second 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 April 2, 2016
 
2,214

 
$
51.82

 
6.9
 
$
10,828

Granted
 

 
 
 
 
 
 

Exercised
 

 
 
 
 
 
 
Forfeited or expired
 
(8
)
 
117.13

 
 
 
 

Outstanding at July 2, 2016
 
2,206

 
51.59

 
6.7
 
791

Exercisable at July 2, 2016
 
538

 
$
84.14

 
4.4
 
$
791

 

12



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 July 2, 2016 and (ii) the fair market value of the Company’s common stock on the exercise date for options/rights that were exercised during the Second 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 July 2, 2016:
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 - $29.78
 
41

 
$
14.40

 
2.7
 
41

 
$
14.40

$30.71 - $47.99
 
91

 
36.29

 
2.5
 
91

 
36.29

$55.04 - $83.83
 
92

 
80.80

 
4.8
 
92

 
80.80

$95.91 - $131.46
 
144

 
127.98

 
5.7
 
144

 
127.98

Total
 
368

 
$
80.95

 
4.3
 
368

 
$
80.95


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 - $29.78
 
26

 
$
21.97

 
4.2
 
13

 
$
13.65

$30.71 - $47.99
 
1,560

 
38.27

 
7.5
 
9

 
38.40

$55.04 - $83.83
 
143

 
79.05

 
6.1
 
62

 
80.44

$95.91 - $131.46
 
109

 
114.42

 
5.0
 
86

 
115.32

Total
 
1,838

 
$
45.72

 
7.2
 
170

 
$
91.02

 
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 Second 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 April 2, 2016
 
1,063

 
$
47.98

Granted
 
494

 
27.60

Vested
 
(21
)
 
82.08

Forfeited
 
(12
)
 
41.27

Nonvested at July 2, 2016
 
1,524

 
$
40.95

 
The total fair value of restricted stock and restricted stock units vested during the Second 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, particular sales growth in relation to a defined sales plan and achievement of succession plans for key talent.
 

13



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 July 2, 2016
 
Currency
Translation
Adjustments
 
Cash Flow Hedges
 
 
 
 
 
 
Forward
Contracts
 
Interest
Rate Swaps
 
Pension
Plan
 
Total
Beginning balance
$
(64,486
)
 
$
(1,554
)
 
$
(1,457
)
 
$
(4,506
)
 
$
(72,003
)
Other comprehensive income (loss) before reclassifications
(9,396
)
 
8,738

 
(711
)
 

 
(1,369
)
Tax (expense) benefit

 
(3,576
)
 
259

 

 
(3,317
)
Amounts reclassed from accumulated other comprehensive income
104

 
928

 
(450
)
 

 
582

Tax (expense) benefit

 
(263
)
 
164

 

 
(99
)
Total other comprehensive income (loss)
(9,500
)
 
4,497

 
(166
)
 

 
(5,169
)
Ending balance
$
(73,986
)
 
$
2,943

 
$
(1,623
)
 
$
(4,506
)
 
$
(77,172
)


 
For the 13 Weeks Ended July 4, 2015
 
Currency
Translation
Adjustments
 
Cash Flow Hedges
 
 
 
 
 
 
Forward
Contracts
 
Interest
Rate Swaps
 
Pension
Plan
 
Total
Beginning balance
$
(60,747
)
 
$
19,315

 
$
(4,776
)
 
$
(3,647
)
 
$
(49,855
)
Other comprehensive income (loss) before reclassifications
5,559

 
2,701

 
10,460

 

 
18,720

Tax (expense) benefit

 
253

 
(3,812
)
 

 
(3,559
)
Amounts reclassed from accumulated other comprehensive income

 
10,555

 
4,604

 

 
15,159

Tax (expense) benefit

 
(3,634
)
 
(1,677
)
 

 
(5,311
)
Total other comprehensive income (loss)
5,559

 
(3,967
)
 
3,721

 

 
5,313

Ending balance
$
(55,188
)
 
$
15,348

 
$
(1,055
)
 
$
(3,647
)
 
$
(44,542
)

 
For the 26 Weeks Ended July 2, 2016
 
Currency
Translation
Adjustments
 
Cash Flow Hedges
 
 
 
 
 
 
Forward
Contracts
 
Interest
Rate Swaps
 
Pension
Plan
 
Total
Beginning balance
$
(81,707
)
 
$
8,114

 
$
(693
)
 
$
(6,220
)
 
$
(80,506
)
Other comprehensive income (loss) before reclassifications
7,825

 
(1,259
)
 
(2,381
)
 
2,010

 
6,195

Tax (expense) benefit

 
1,039

 
868

 
(296
)
 
1,611

Amounts reclassed from accumulated other comprehensive income
104

 
7,267

 
(918
)
 

 
6,453

Tax (expense) benefit

 
(2,316
)
 
335

 

 
(1,981
)
Total other comprehensive income (loss)
7,721

 
(5,171
)
 
(930
)
 
1,714

 
3,334

Ending balance
$
(73,986
)
 
$
2,943

 
$
(1,623
)
 
$
(4,506
)
 
$
(77,172
)
 

14



 
For the 26 Weeks Ended July 4, 2015
 
Currency
Translation
Adjustments
 
Cash Flow Hedges
 
 
 
 
 
 
Forward
Contracts
 
Interest
Rate Swap
 
Pension
Plan
 
Total
Beginning balance
$
(27,241
)
 
$
14,980

 
$
(502
)
 
$
(3,647
)
 
$
(16,410
)
Other comprehensive income (loss) before reclassifications
(27,947
)
 
21,462

 
3,054

 

 
(3,431
)
Tax (expense) benefit

 
(5,965
)
 
(1,113
)
 

 
(7,078
)
Amounts reclassed from accumulated other comprehensive income

 
22,993

 
3,923

 

 
26,916

Tax (expense) benefit

 
(7,864
)
 
(1,429
)
 

 
(9,293
)
Total other comprehensive income (loss)
(27,947
)
 
368

 
(553
)
 

 
(28,132
)
Ending balance
$
(55,188
)
 
$
15,348

 
$
(1,055
)
 
$
(3,647
)
 
$
(44,542
)
 
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.
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. Global strategic initiatives such as brand building and omni channel activities and 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.

15



Summary information by operating segment was as follows (in thousands):

 
For the 13 Weeks Ended July 2, 2016
 
For the 13 Weeks Ended July 4, 2015
 
Net Sales
 
Operating Income
 
Net Sales
 
Operating Income
Americas
$
345,187

 
$
52,300

 
$
386,088

 
$
86,033

Europe
215,936

 
31,669

 
227,923

 
41,814

Asia
124,245

 
18,936

 
125,964

 
20,555

Corporate
 

 
(87,455
)
 
 

 
(77,968
)
Consolidated
$
685,368

 
$
15,450

 
$
739,975

 
$
70,434



 
For the 26 Weeks Ended July 2, 2016
 
For the 26 Weeks Ended July 4, 2015
 
Net Sales
 
Operating Income
 
Net Sales
 
Operating Income
Americas
$
680,997

 
$
111,896

 
$
752,684

 
$
162,533

Europe
425,937

 
60,180

 
462,179

 
79,152

Asia
238,282

 
36,865

 
250,197

 
41,051

Corporate
 

 
(179,087
)
 
 

 
(156,147
)
Consolidated
$
1,345,216

 
$
29,854

 
$
1,465,060

 
$
126,589


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 July 2, 2016
 
For the 13 Weeks Ended July 4, 2015
 
Net Sales
 
Percentage of Total
 
Net Sales
 
Percentage of Total
Watches
$
517,602

 
75.5
%
 
$
575,804

 
77.8
%
Leathers
93,152

 
13.6

 
89,380

 
12.1

Jewelry
56,752

 
8.3

 
55,780

 
7.5

Other
17,862

 
2.6

 
19,011

 
2.6

Total
$
685,368

 
100.0
%
 
$
739,975

 
100.0
%



 
For the 26 Weeks Ended July 2, 2016
 
For the 26 Weeks Ended July 4, 2015
 
Net Sales
 
Percentage of Total
 
Net Sales
 
Percentage of Total
Watches
$
1,014,085

 
75.4
%
 
$
1,127,661

 
77.0
%
Leathers
185,657

 
13.8

 
182,306

 
12.4

Jewelry
111,472

 
8.3

 
118,767

 
8.1

Other
34,002

 
2.5

 
36,326

 
2.5

Total
$
1,345,216

 
100.0
%
 
$
1,465,060

 
100.0
%
 

16



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. Additionally, during the first quarter of fiscal year 2016, the Company entered into forward contracts to manage fluctuations in Japanese yen exchange rates that will be used to settle future third-party inventory component purchases by a U.S. dollar functional currency subsidiary. 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 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 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 Second Quarter, Prior Year Quarter, Year To Date Period or Prior Year YTD Period.
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 Second 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.

17



As of July 2, 2016, the Company had the following outstanding forward contracts designated as cash flow hedges that were entered into to hedge the future payments of inventory transactions (in millions):
Functional Currency
 
Contract Currency
Type
 
Amount
 
Type
 
Amount
Euro
 
255.1

 
U.S. dollar
 
288.3

British pound
 
52.9

 
U.S. dollar
 
79.0

Canadian dollar
 
80.5

 
U.S. dollar
 
61.0

Japanese yen
 
4,077.9

 
U.S. dollar
 
35.7

Mexican peso
 
335.4

 
U.S. dollar
 
18.3

Australian dollar
 
20.0

 
U.S. dollar
 
14.6

U.S. dollar
 
28.0

 
Japanese yen
 
3,013.0

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, the "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 amortizes over the remaining life of the Term Loan to coincide with repayments on the underlying loan. The Company receives interest from the swap counterparty at a variable rate based on 1-month LIBOR. This hedge is designated as a cash flow hedge.
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. During the first quarter of fiscal year 2016, the Company entered into a forward contract designated as a net investment hedge to reduce exposure to changes in currency exchange rates on 45.0 million euros of its total investment in a wholly-owned, euro-denominated foreign subsidiary. The hedge was settled during the Second Quarter resulting in a net gain of $0.5 million net of taxes that was recognized in the currency translation component of accumulated other comprehensive income (loss).
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 in the cumulative translation adjustment 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 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 intercompany transactions and for which the Company does not elect hedge accounting treatment. As of July 2, 2016, the Company had non-designated forward contracts of approximately $1.4 million on 21.6 million rand associated with a South African rand-denominated foreign subsidiary. Changes in the fair value of derivatives, not designated as hedging instruments, are recognized in earnings when they occur.


18



The effective portion of gains and losses on cash flow hedges that were recognized in other comprehensive income (loss), net of taxes during the Second Quarter, Prior Year Quarter, Year To Date Period and Prior Year YTD Period are set forth below (in thousands):

 
For the 13 Weeks Ended July 2, 2016
 
For the 13 Weeks Ended July 4, 2015
Cash flow hedges:
 

 
 

Forward contracts
$
5,162

 
$
2,954

Interest rate swaps
(452
)
 
6,648

Total gain (loss) recognized in other comprehensive income (loss), net of taxes
$
4,710

 
$
9,602




 
For the 26 Weeks Ended July 2, 2016
 
For the 26 Weeks Ended July 4, 2015
Cash flow hedges:
 

 
 

Forward contracts
$
(220
)
 
$
15,497

Interest rate swaps
(1,513
)
 
1,941

Total gain (loss) recognized in other comprehensive income (loss), net of taxes
$
(1,733
)
 
$
17,438


19



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 Second 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 July 2, 2016
 
For the 13 Weeks Ended July 4, 2015
Forward contracts designated as cash flow hedging instruments
 
Other income (expense)-net
 
Total gain (loss) reclassified from other comprehensive income (loss)
 
$
665

 
$
6,921

Forward contracts not designated as hedging instruments
 
Other income (expense)-net
 
Total gain (loss) recognized in income
 
$
74

 
$
(9
)
Interest rate swap designated as a cash flow hedging instrument
 
Interest expense
 
Total gain (loss) reclassified from other comprehensive income (loss)
 
$
(286
)
 
$
(404
)
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



Derivative Instruments
 
Condensed Consolidated
Statements of Income
and Comprehensive
Income Location
 
Effect of Derivative
Instruments
 
For the 26 Weeks Ended July 2, 2016
 
For the 26 Weeks Ended July 4, 2015
Forward contracts designated as cash flow hedging instruments
 
Other income (expense)-net
 
Total gain (loss) reclassified from other comprehensive income (loss)
 
$
4,951

 
$
15,129

Forward contracts not designated as hedging instruments
 
Other income (expense)-net
 
Total gain (loss) recognized in income
 
$
(157
)
 
$
80

Interest rate swap designated as a cash flow hedging instrument
 
Interest expense
 
Total gain (loss) reclassified from other comprehensive income (loss)
 
$
(583
)
 
$
(837
)
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



20



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
 
 
July 2, 2016
 
January 2, 2016
 
July 2, 2016
 
January 2, 2016
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
 
$
10,709

 
Prepaid expenses and other current assets
 
$
13,184

 
Accrued expenses- other
 
$
6,109

 
Accrued expenses- other
 
$
477

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

 
Prepaid expenses and other current assets
 
167

 
Accrued expenses- other
 
49

 
Accrued expenses- other
 
71

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
 
1,568

 
Accrued expenses- other
 
1,273

Forward contracts designated as cash flow hedging instruments
 
Intangible and other assets-net
 
2,845

 
Intangible and other assets-net
 
2,785

 
Other long-term liabilities
 
1,936

 
Other long-term liabilities
 
250

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

 
Intangible and other assets-net
 
311

 
Other long-term liabilities
 
985

 
Other long-term liabilities
 
128

Total
 
 
 
$
13,554

 
 
 
$
16,447

 
 
 
$
10,647

 
 
 
$
2,199

 
At the end of the Second Quarter, the Company had forward contracts designated as cash flow hedges with maturities extending through June 2018. As of July 2, 2016, an estimated net gain of $3.3 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.
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 July 2, 2016 (in thousands):
 
Fair Value at July 2, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 

 
 

 
 

 
 

Forward contracts
$

 
$
13,554

 
$

 
$
13,554

Deferred compensation plan assets:
 

 
 

 
 

 
 

Investment in publicly traded mutual funds
2,398

 

 

 
2,398

Total
$
2,398

 
$
13,554

 
$

 
$
15,952

Liabilities:
 

 
 

 
 

 
 

Forward contracts

 
8,094

 

 
8,094

Interest rate swap

 
2,553

 

 
2,553

Total
$

 
$
10,647

 
$

 
$
10,647


21



The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of January 2, 2016 (in thousands):
 
Fair Value at January 2, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 

 
 

 
 

 
 

Forward contracts
$

 
$
16,136

 
$

 
$
16,136

Deferred compensation plan assets:
 

 
 

 
 

 
 

Investment in publicly traded mutual funds
2,406

 

 

 
2,406

Interest rate swap

 
311

 

 
311

Total
$
2,406

 
$
16,447

 
$

 
$
18,853

Liabilities:
 

 
 

 
 

 
 

Contingent consideration
$

 
$

 
$
3,643

 
$
3,643

Forward contracts

 
798

 

 
798

Interest rate swap

 
1,401

 

 
1,401

Total
$

 
$
2,199

 
$
3,643

 
$
5,842

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 July 2, 2016 and January 2, 2016 and believes, based on the interest rates, related terms and maturities, that the fair values of such instruments approximated their carrying amounts. As of July 2, 2016 and January 2, 2016, 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.
 

22



12. INTANGIBLE AND OTHER ASSETS
 
The following table summarizes intangible and other assets (in thousands):
 
 
 
 
July 2, 2016
 
January 2, 2016
 
 
Useful
 
Gross
 
Accumulated
 
Gross
 
Accumulated
 
 
Lives
 
Amount
 
Amortization
 
Amount
 
Amortization
Intangibles-subject to amortization:
 
 
 
 

 
 

 
 

 
 

Trademarks
 
10 yrs.
 
$
4,310

 
$
3,321

 
$
4,175

 
$
3,195

Customer lists
 
5-10 yrs.
 
54,064

 
24,166

 
53,825

 
21,001

Patents
 
3-20 yrs.
 
2,302

 
2,082

 
2,273

 
2,064

Noncompete agreement
 
3-6 yrs.
 
2,524

 
1,409

 
2,515

 
1,134

Developed technology
 
7 yrs.
 
36,100

 
2,579

 
36,100

 

Trade name