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EX-32.2 - EXHIBIT 32.2 - Fossil Group, Inc.fosl-q39302017xex322.htm
EX-32.1 - EXHIBIT 32.1 - Fossil Group, Inc.fosl-q39302017xex321.htm
EX-31.2 - EXHIBIT 31.2 - Fossil Group, Inc.fosl-q39302017xex312.htm
EX-31.1 - EXHIBIT 31.1 - Fossil Group, Inc.fosl-q39302017xex311.htm
EX-10.1 - EXHIBIT 10.1 - Fossil Group, Inc.fosl-q39302017xex101.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: September 30, 2017
 
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, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act (check one):
Large accelerated filer o
 
Accelerated filer x
 
 
 
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
 
Emerging growth company o
 
 
 




If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act o
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 2, 2017: 48,527,898




FOSSIL GROUP, INC.
FORM 10-Q
FOR THE FISCAL QUARTER ENDED SEPTEMBER 30, 2017
INDEX





PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

FOSSIL GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED
IN THOUSANDS
 
September 30, 2017
 
December 31, 2016
Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
166,922

 
$
297,330

Accounts receivable - net of allowances of $70,081 and $79,707, respectively
310,895

 
375,520

Inventories
682,986

 
542,487

Prepaid expenses and other current assets
125,533

 
131,953

Total current assets
1,286,336

 
1,347,290

Property, plant and equipment - net of accumulated depreciation of $453,894 and $414,761, respectively
243,448

 
273,851

Goodwill

 
355,263

Intangible and other assets-net
220,588

 
210,493

Total long-term assets
464,036

 
839,607

Total assets
$
1,750,372

 
$
2,186,897

Liabilities and Stockholders’ Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
248,824

 
$
163,644

Short-term and current portion of long-term debt
40,209

 
26,368

Accrued expenses:
 

 
 

Compensation
64,862

 
52,993

Royalties
26,897

 
30,062

Co-op advertising
17,772

 
29,111

Transaction taxes
40,482

 
26,743

Other
101,390

 
69,565

Income taxes payable
13,077

 
16,099

Total current liabilities
553,513

 
414,585

Long-term income taxes payable
22,951

 
18,584

Deferred income tax liabilities
500

 
55,877

Long-term debt
444,303

 
609,961

Other long-term liabilities
76,107

 
72,452

Total long-term liabilities
543,861

 
756,874

Commitments and contingencies (Note 13)


 


Stockholders’ equity:
 

 
 

Common stock, 48,524 and 48,269 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively
485

 
483

Additional paid-in capital
235,990

 
213,352

Retained earnings
489,528

 
887,825

Accumulated other comprehensive income (loss)
(84,710
)
 
(95,424
)
Total Fossil Group, Inc. stockholders’ equity
641,293

 
1,006,236

Noncontrolling interest
11,705

 
9,202

Total stockholders’ equity
652,998

 
1,015,438

Total liabilities and stockholders’ equity
$
1,750,372

 
$
2,186,897

 
See notes to the unaudited condensed consolidated financial statements.

4



FOSSIL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)
UNAUDITED
IN THOUSANDS, EXCEPT PER SHARE DATA
 
 
For the 13 Weeks Ended September 30, 2017
 
For the 13 Weeks Ended October 1, 2016
 
For the 39 Weeks Ended September 30, 2017
 
For the 39 Weeks Ended October 1, 2016
Net sales
$
688,722

 
$
737,990

 
$
1,867,358

 
$
2,083,206

Cost of sales
368,829

 
352,910

 
956,600

 
994,039

Gross profit
319,893

 
385,080

 
910,758

 
1,089,167

Operating expenses:
 

 
 

 
 

 
 

Selling, general and administrative expenses
314,623

 
339,432

 
937,330

 
1,013,664

Goodwill and trade name impairments


 

 
407,128

 

Restructuring charges
5,769

 
14,473

 
41,818

 
14,473

Total operating expenses
320,392

 
353,905

 
1,386,276

 
1,028,137

Operating income (loss)
(499
)
 
31,175

 
(475,518
)
 
61,030

Interest expense
12,070

 
6,967

 
32,096

 
19,386

Other income (expense) - net
3,860

 
1,591

 
11,501

 
6,402

Income (loss) before income taxes
(8,709
)
 
25,799

 
(496,113
)
 
48,046

Provision for income taxes
(3,230
)
 
6,451

 
(100,746
)
 
13,230

Net income (loss)
(5,479
)
 
19,348

 
(395,367
)
 
34,816

Less: Net income attributable to noncontrolling interest
(80
)
 
1,992

 
2,931

 
5,646

Net income (loss) attributable to Fossil Group, Inc.
$
(5,399
)
 
$
17,356

 
$
(398,298
)
 
$
29,170

Other comprehensive income (loss), net of taxes:
 

 
 

 
 

 
 

Currency translation adjustment
$
5,222

 
$
1,662

 
$
32,078

 
$
9,383

Cash flow hedges - net change
(9,771
)
 
1,360

 
(21,364
)
 
(4,741
)
Pension plan activity

 

 

 
1,714

Total other comprehensive income (loss)
(4,549
)
 
3,022

 
10,714

 
6,356

Total comprehensive income (loss)
(10,028
)
 
22,370

 
(384,653
)
 
41,172

Less: Comprehensive income attributable to noncontrolling interest
(80
)
 
1,992

 
2,931

 
5,646

Comprehensive income (loss) attributable to Fossil Group, Inc.
$
(9,948
)
 
$
20,378

 
$
(387,584
)
 
$
35,526

Earnings (loss) per share:
 

 
 

 
 

 
 

Basic
$
(0.11
)
 
$
0.36

 
$
(8.22
)
 
$
0.61

Diluted
$
(0.11
)
 
$
0.36

 
$
(8.22
)
 
$
0.60

Weighted average common shares outstanding:
 

 
 

 
 

 
 

Basic
48,521

 
48,130

 
48,439

 
48,127

Diluted
48,521

 
48,291

 
48,439

 
48,286

 
See notes to the unaudited condensed consolidated financial statements.

5



FOSSIL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
IN THOUSANDS
 
For the 39 Weeks Ended September 30, 2017
 
For the 39 Weeks Ended October 1, 2016
Operating Activities:
 

 
 

Net income (loss)
$
(395,367
)
 
$
34,816

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 

 
 

Depreciation, amortization and accretion
61,526

 
73,198

Stock-based compensation
22,384

 
23,894

Decrease in allowance for returns-net of inventory in transit
(6,129
)
 
(14,955
)
Loss (gain) on disposal of assets
1,686

 
(9,866
)
Fixed asset and other long-lived asset impairment losses
2,726

 
2,213

Goodwill and trade name impairment losses
407,128

 

Non-cash restructuring charges
7,031

 
12,523

Increase (decrease) in allowance for doubtful accounts
4,161

 
(3,915
)
Deferred income taxes and other
(111,177
)
 
(9,309
)
Changes in operating assets and liabilities, net of effect of acquisitions:
 

 
 

Accounts receivable
85,078

 
74,706

Inventories
(116,002
)
 
(76,869
)
Prepaid expenses and other current assets
(5,620
)
 
17,640

Accounts payable
80,146

 
(16,887
)
Accrued expenses
20,863

 
(38,572
)
Income taxes payable
1,734

 
(9,257
)
Net cash provided by operating activities
60,168

 
59,360

Investing Activities:
 

 
 

Additions to property, plant and equipment
(17,239
)
 
(53,524
)
Decrease in intangible and other assets
478

 
2,509

Misfit working capital settlement

 
788

Proceeds from the sale of property, plant and equipment
533

 
44,584

Net investment hedge settlement

 
752

Net cash used in investing activities
(16,228
)
 
(4,891
)
Financing Activities:
 

 
 

Acquisition of common stock
(947
)
 
(6,448
)
Distribution of noncontrolling interest earnings
(428
)
 
(4,543
)
Debt borrowings
1,162,074

 
756,000

Debt payments
(1,311,597
)
 
(839,629
)
Payment for shares of Fossil, S.L.

 
(8,657
)
Debt issuance costs and other
(5,579
)
 
(2,585
)
Net cash used in financing activities
(156,477
)
 
(105,862
)
Effect of exchange rate changes on cash and cash equivalents
(17,871
)
 
(1,930
)
Net decrease in cash and cash equivalents
(130,408
)
 
(53,323
)
Cash and cash equivalents:
 

 
 

Beginning of period
297,330

 
289,275

End of period
$
166,922

 
$
235,952

 
See notes to the unaudited condensed consolidated financial statements.

6



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 September 30, 2017, and the results of operations for the thirteen-week periods ended September 30, 2017 (“Third Quarter”) and October 1, 2016 (“Prior Year Quarter”), respectively, and the thirty-nine week periods ended September 30, 2017 (“Year To Date Period”) and October 1, 2016 (“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 December 31, 2016 (the “2016 Form 10-K”). Operating results for the Third Quarter 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 2016 Form 10-K other than the adoption of ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ("ASU 2017-04").
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 mitigate but does not eliminate 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, the Company enters 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, Canadian dollar, British pound, Japanese yen, Mexican peso, Australian dollar and U.S dollar forward contracts as of September 30, 2017, the result would have been a net loss of approximately $12.1 million, net of taxes. This unrealized loss is recognized in other comprehensive income (loss), net of taxes on the Company's consolidated statements of income (loss) and comprehensive income (loss). 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 (loss) and comprehensive income (loss). Also, the Company has entered into an interest rate swap agreement to effectively convert portions of its variable rate debt obligations to a fixed rate. Changes in the fair value of the interest rate swap is recorded as a component of accumulated other comprehensive income (loss) within stockholders' equity, and is 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

7



are liquidated or disposed. 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”), goodwill and trade name impairment 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 as well as store closure expenses.
Earnings (Loss) 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 September 30, 2017
 
For the 13 Weeks Ended October 1, 2016
 
For the 39 Weeks Ended September 30, 2017
 
For the 39 Weeks Ended October 1, 2016
Numerator:
 

 
 

 
 

 
 

Net income (loss) attributable to Fossil Group, Inc.
$
(5,399
)
 
$
17,356

 
$
(398,298
)
 
$
29,170

Denominator:
 
 
 

 
 

 
 

Basic EPS computation:
 
 
 

 
 

 
 

Basic weighted average common shares outstanding
48,521

 
48,130

 
48,439

 
48,127

Basic EPS
$
(0.11
)
 
$
0.36

 
$
(8.22
)
 
$
0.61

Diluted EPS computation:
 
 
 

 
 

 
 

Basic weighted average common shares outstanding
48,521

 
48,130

 
48,439

 
48,127

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

 
161

 

 
159

Diluted weighted average common shares outstanding
48,521

 
48,291

 
48,439

 
48,286

Diluted EPS
$
(0.11
)
 
$
0.36

 
$
(8.22
)
 
$
0.60

At the end of the Third Quarter and Year To Date Period, approximately 5.1 million and 4.4 million weighted shares issuable under stock-based awards, respectively, were not included in the diluted EPS calculation because they were antidilutive. The total antidilutive weighted shares included approximately 1.2 million weighted performance-based shares at the end of both the Third Quarter and Year To Date Period.
At the end of the Prior Year Quarter and Prior Year YTD Period, approximately 1.6 million and 1.5 million weighted shares issuable under stock-based awards, respectively, were not included in the diluted EPS calculation because they were antidilutive. Approximately 1.1 million weighted performance-based shares were not included in the diluted EPS calculation at the end of both the Prior Year Quarter and Prior Year YTD Period as the performance targets were not met.
Recently Issued Accounting Standards
In August 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities ("ASU 2017-12"). ASU 2017-12 amends and simplifies hedge accounting guidance in order to enable entities to better portray the economics of their risk management activities. The guidance is effective for fiscal years beginning after December 15, 2018, including

8



interim periods within those periods. Early adoption is permitted. The Company is currently evaluating the impact of the standard on its consolidated financial statements and related disclosures.
In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting ("ASU 2017-09"). ASU 2017-09 clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award changes as a result of the modification. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. Early adoption is permitted. The Company is still evaluating the effect of adopting ASU 2017-09.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business ("ASU 2017-01"). ASU 2017-01 clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. This standard will not have a material impact on the Company’s consolidated results of operations or financial position.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash ("ASU 2016-18"). ASU 2016-18 requires that a statement of cash flows explain the change during the period in total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for annual periods, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted. This standard will not have a material impact on the Company’s consolidated results of operations or financial position.
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”). ASU 2016-16 requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. ASU 2016-16 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. This standard will not have a material impact on the Company’s consolidated results of operations or financial position.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 provides guidance on how certain cash receipts and cash payments should be presented and classified in the statement of cash flows with the objective of reducing existing diversity in practice with respect to these items. ASU 2016-15 is effective for annual periods, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted. This standard will not have a material impact on the Company’s consolidated results of operations or financial position.
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. This standard will not have a material impact on the Company’s consolidated results of operations or financial position.
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 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. Many of the Company’s leases are considered operating leases and are not capitalized under ASC 840. Under ASC 842 the majority of these leases will qualify for capitalization and will result in the recognition of lease assets and lease liabilities once the new standard is adopted. The Company is in the process of reviewing lease contracts to determine the impact of adopting ASU 2016-02, but expects the standard to have a material impact on the Company's 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. The FASB later amended ASU-2014-09 with the following:

9



ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date
ASU 2016-08 Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
ASU 2016-10 Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing
ASU 2016-12 Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients
ASU 2016-20 Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers
ASU 2017-13 Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842)
The Company has performed a review of our revenue streams including reviewing key contracts and comparing current accounting policies and practices to the new standard to identify potential differences that could arise from the application of ASU 2014-09. The Company currently anticipates that the performance obligations underlying its core revenue streams (i.e., its retail and standard wholesale businesses) will remain substantially unchanged. Revenues for these businesses are generated through the sale of finished products, and will continue to be generally recognized at the point in time when merchandise is transferred to the customer and in an amount that considers the impacts of estimated allowances. The Company does anticipate some timing changes, including accelerated recognition of markdowns given to customers and a change in classification of certain customer considerations between gross profit and SG&A expenses. The Company does not believe these changes will have a material impact on the Company's financial position or results of operations. The Company is currently finalizing its review of customer contracts. The standard will require additional disclosures about the nature of revenue as well as the judgment involved in the timing of revenue recognition. The Company will adopt ASU 2014-09 in the first quarter of fiscal 2018 and will use the modified retrospective approach.
Recently Adopted Accounting Standards
In January 2017, the FASB issued ASU 2017-04. Under ASU 2017-04, goodwill impairment testing is done by comparing the fair value of the reporting unit to its carrying value. If the carrying amount exceeds the fair value, the Company would recognize an impairment charge for the amount that the reporting unit's carrying value exceeds the fair value, not to exceed the total amount of goodwill allocated to that reporting unit. The Company concluded that ASU 2017-04 is preferable to the current guidance due to efficiency, since ASU 2017-04 eliminates the requirement to determine the fair value of individual assets and liabilities of a reporting unit to measure goodwill impairment. The Company early adopted ASU 2017-04 effective June 15, 2017 in conjunction with the interim impairment test of goodwill for all reporting units and goodwill impairment was recorded according to the new standard. The Company believes the adoption of ASU 2017-04 did not change the amount of impairment charges recorded in the second quarter of fiscal 2017. See “Note 2—Goodwill and Intangibles Impairment Charges” for additional information on our interim goodwill impairment test performed.
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 simplified 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 was effective for the Company beginning fiscal year 2017 and did not have a material impact on the Company’s consolidated results of operations or financial position. As a result of adoption, the Company now recognizes excess tax benefits or deficiencies associated with share-based compensation activity as an income tax expense or benefit in the period the shares vest or are settled. In addition, the Company now presents excess tax benefits from share-based compensation activity with other income tax cash flows as an operating activity on the statement of cash flows, which differs from the Company’s historical classification of excess tax benefits as a financing activity. The Company has elected to apply this change in cash flow presentation on a prospective basis. The standard also permits the Company to make a policy election for how it accounts for forfeitures, and the Company has elected to continue estimating forfeitures.
In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory (“ASU 2015-11”). ASU 2015-11 requires that inventory be measured at the lower of cost and net realizable value. The standard was effective for the Company beginning fiscal year 2017 and did not have a material impact on the Company’s consolidated results of operations or financial position.

2. GOODWILL AND INTANGIBLES IMPAIRMENT CHARGES
The Company evaluates its goodwill and intangible assets for impairment on an annual basis, or as facts and circumstances warrant. At the end of the fiscal year 2016, the Company's market capitalization exceeded the carrying amount of its net assets by 23%. At the end of the first quarter of fiscal 2017, the Company experienced a decline in market

10



capitalization and, as a result of the decline, the Company's market capitalization was 14% below the carrying amount of its net assets as of April 1, 2017. During the second quarter of fiscal 2017, the Company's market capitalization continued to decline, at which point the Company determined the decrease in stock price to be sustained and thus a strong indicator of impairment. Due to a change in key assumptions used in interim testing, including the decline in market capitalization and decline in sales projections, the Company believed that impairment of goodwill and trade names was probable as of June 15, 2017, and therefore performed interim tests for each reporting unit and trade name. Using a combination of discounted cash flow and guideline public company methodologies, the Company compared the fair value of each of its three reporting units with their carrying value and concluded that goodwill was fully impaired. Accordingly, in the second quarter of fiscal 2017, the Company recognized a pre-tax impairment charge in operations of $202.3 million, $114.3 million and $42.9 million in the Americas, Europe and Asia segments, respectively.
The changes in the carrying amount of goodwill were as follows (in thousands):
 
Americas
 
Europe
 
Asia
 
Total
Balance at December 31, 2016
$
202,187

 
$
110,291

 
$
42,785

 
$
355,263

Foreign currency changes
162

 
3,983

 
85

 
4,230

Impairment charges
(202,349
)
 
(114,274
)
 
(42,870
)
 
$
(359,493
)
Balance at September 30, 2017
$

 
$

 
$

 
$

During the second quarter of fiscal 2017, the SKAGEN trade name with a carrying amount of $55.6 million was written down to its implied fair value of $27.3 million, resulting in a pre-tax impairment charge of $28.3 million; the MISFIT trade name with a carrying amount of $11.8 million was deemed not recoverable, resulting in a pre-tax impairment charge of $11.8 million and the MICHELE trade name with a carrying amount of $18.5 million was written down to its implied fair value of $10.9 million, resulting in a pre-tax impairment charge of $7.6 million. The fair values of the Company's indefinite-lived SKAGEN and MICHELE trade names were estimated using the relief from royalty method. The fair value of the Company's definite-lived MISFIT trade name was estimated using a discounted cash flow methodology. A reduction in expected future cash flows negatively affected the valuation compared to previous valuation assumptions.

3. INVENTORIES
Inventories consisted of the following (in thousands):
 
September 30, 2017
 
December 31, 2016
Components and parts
$
60,258

 
$
49,438

Work-in-process
9,471

 
12,345

Finished goods
613,257

 
480,704

Inventories
$
682,986

 
$
542,487


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 September 30, 2017
 
For the 39 Weeks Ended October 1, 2016
Beginning balance
$
15,421

 
$
13,669

Settlements in cash or kind
(11,608
)
 
(7,338
)
Warranties issued and adjustments to preexisting warranties (1)
14,984

 
8,604

Ending balance
$
18,797

 
$
14,935

_______________________________________________
(1) Changes in cost estimates related to preexisting warranties are aggregated with accruals for new standard warranties issued and foreign currency changes.
 

11



5. INCOME TAXES
The Company’s income tax (benefit) expense and related effective rates were as follows (in thousands, except percentage data):
 
For the 13 Weeks Ended September 30, 2017
 
For the 13 Weeks Ended October 1, 2016
 
For the 39 Weeks Ended September 30, 2017
 
For the 39 Weeks Ended October 1, 2016
Income tax (benefit) expense
$
(3,230
)
 
$
6,451

 
$
(100,746
)
 
$
13,230

Effective tax rate
37.1
%
 
25.0
%
 
20.3
%
 
27.5
%
The higher effective tax rate in the Third Quarter as compared to the Prior Year Quarter is attributable to a higher structural rate resulting from an increased forecasted loss from the Company's U.S. operations which is tax-benefited at a higher tax rate than the tax rates used to calculate the tax expense on the profits from the Company's foreign operations. There were also favorable discrete items occurring in the quarter. These positive impacts were partially offset by the increased tax expense resulting from all of the foreign and some of the U.S. goodwill impairment charge being permanently nondeductible for tax purposes. The lower effective tax rate for the Year to Date Period as compared to the Prior Year YTD Period is primarily attributable to the increased tax expense resulting from all of the foreign and some of the U.S. goodwill impairment charge being permanently nondeductible for tax purposes and unfavorable discrete items that occurred in the Year to Date Period, mostly due to the additional tax expense resulting from the adoption of ASU 2016-09. See "Note 1-Financial Statement Policies" for additional disclosures about ASU 2016-09.
As of September 30, 2017, the total amount of unrecognized tax benefits, excluding interest and penalties, was $21.7 million, of which $19.0 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 2011-2016 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 September 30, 2017, the Company had recorded $2.3 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 September 30, 2017, the total amount of accrued income tax-related interest and penalties included in the condensed consolidated balance sheet was $2.8 million and $1.3 million, respectively. The income tax related interest expense accrued in the Third Quarter was offset by reductions of interest expense associated with the derecognition of uncertain tax benefits. For the Year To Date Period, the Company accrued income tax-related interest expense $0.5 million.
An increase in long-term deferred tax assets is mostly attributable to the future tax amortization of the tax basis in goodwill and trade names which were impaired for GAAP purposes, as well as an increased amount of foreign tax credit carry forwards.
As of September 30, 2017, as a result of proposed U.S. Tax Reform and the planned refinancing of existing debt obligations, the Company is continuing to evaluate its current assertions with respect to certain undistributed earnings in various foreign jurisdictions. At present, the Company believes it can meet its future U.S. obligations through a combination of earnings not considered indefinitely reinvested, future current earnings of foreign subsidiaries, and distributions of earnings in jurisdictions within which no additional U.S. tax would be incurred as a result of excess foreign tax credits associated with such earnings. The Company will continue to monitor its indefinite reinvestment assertions with respect to all foreign jurisdictions as developments occur within proposed U.S. Tax Reform proposals and the planned refinancing of its existing debt obligations.

6. STOCKHOLDERS’ EQUITY
Common Stock Repurchase Programs. Purchases of the Company’s common stock have been 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. 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 have been conducted pursuant to Rule 10b-18 of the Exchange Act.

12



At December 31, 2016 and September 30, 2017, all treasury stock had been effectively retired. As of September 30, 2017, the Company had $824.2 million of repurchase authorizations remaining under its combined repurchase programs. However, under the Company's credit agreement, the Company is restricted from making open market repurchases of its common stock.
The following tables reflect the Company’s common stock repurchase activity for the periods indicated (in millions):
 
 
 
 
 
For the 13 Weeks Ended September 30, 2017
 
For the 13 Weeks Ended October 1, 2016
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
 

 
$

 

 
$

2010
$
30.0

 
None
 

 
$

 

 
$

 
 
 
 
 
For the 39 Weeks Ended September 30, 2017
 
For the 39 Weeks Ended October 1, 2016
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

2010
$
30.0

 
None
 

 
$

 

 
$


    
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 December 31, 2016
$
1,006,236

 
$
9,202

 
$
1,015,438

Net income (loss)
(398,298
)
 
2,931

 
(395,367
)
Currency translation adjustment
32,078

 

 
32,078

Cash flow hedges - net change
(21,364
)
 

 
(21,364
)
Distribution of noncontrolling interest earnings

 
(428
)
 
(428
)
Acquisition of common stock
(947
)
 

 
(947
)
Stock-based compensation expense
23,588

 

 
23,588

Balance at September 30, 2017
$
641,293

 
$
11,705

 
$
652,998

 
Fossil Group, Inc.
Stockholders’
Equity
 
Noncontrolling
Interest
 
Total
Stockholders’
Equity
Balance at January 2, 2016
$
921,388

 
$
11,155

 
$
932,543

Net income
29,170

 
5,646

 
34,816

Currency translation adjustment
9,383

 

 
9,383

Cash flow hedges - net change
(4,741
)
 

 
(4,741
)
Pension plan activity
1,714

 

 
1,714

Common stock issued upon exercise of stock options
57

 

 
57

Tax expense derived from stock-based compensation
(1,756
)
 

 
(1,756
)
Distribution of noncontrolling interest earnings

 
(4,543
)
 
(4,543
)
Acquisition of common stock
(6,448
)
 

 
(6,448
)
Stock-based compensation expense
23,894

 

 
23,894

Balance at October 1, 2016
$
972,661

 
$
12,258

 
$
984,919

 

13



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 1, 2017
 
2,236

 
$
50.29

 
5.8
 
$

Granted
 

 

 
 
 
 

Exercised
 

 

 
 
 

Forfeited or expired
 
(27
)
 
63.35

 
 
 
 

Outstanding at September 30, 2017
 
2,209

 
50.14

 
5.6
 

Exercisable at September 30, 2017
 
882

 
$
67.67

 
4.5
 
$

 
Aggregate intrinsic value is before income taxes and is based on (i) the exercise price for outstanding and exercisable options/rights at September 30, 2017 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 September 30, 2017:

Cash Stock Appreciation Rights Outstanding
 
Cash 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)
 
 
$29.78 - $47.99
 
61

 
$
36.73

 
6.2
 
11

 
$
36.73

Total
 
61

 
$
36.73

 
6.2
 
11

 
$
36.73


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 - $29.49
 
35

 
$
14.12

 
1.4
 
35

 
$
14.12

$29.78 - $47.99
 
79

 
37.00

 
1.5
 
79

 
37.00

$55.04 - $83.83
 
91

 
80.80

 
3.2
 
91

 
80.80

$95.91 - $131.46
 
129

 
127.97

 
4.1
 
129

 
127.97

Total
 
334

 
$
81.69

 
3.0
 
334

 
$
81.69



14



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 - $29.49
 
101

 
$
29.49

 
6.8
 
34

 
$
29.49

$29.78 - $47.99
 
1,485

 
38.07

 
6.2
 
310

 
38.91

$55.04 - $83.83
 
125

 
79.16

 
4.8
 
90

 
79.91

$95.91 - $131.46
 
103

 
114.46

 
3.7
 
103

 
114.46

Total
 
1,814

 
$
44.78

 
6.0
 
537

 
$
59.74

 
Restricted Stock, Restricted Stock Units and Performance Restricted Stock Units. The following table summarizes restricted stock, restricted stock units and performance restricted stock units 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 1, 2017
 
2,785

 
$
24.21

Granted
 
254

 
9.98

Vested
 
(17
)
 
37.81

Forfeited
 
(57
)
 
23.86

Nonvested at September 30, 2017
 
2,965

 
$
22.92

 
The total fair value of restricted stock and restricted stock units vested during the Third Quarter was approximately $0.2 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.
 

15



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 September 30, 2017
 
Currency
Translation
Adjustments
 
Cash Flow Hedges
 
 
 
 
 
 
Forward
Contracts
 
Interest
Rate Swaps
 
Pension
Plan
 
Total
Beginning balance
$
(75,011
)
 
$
(1,284
)
 
$
41

 
$
(3,907
)
 
$
(80,161
)
Other comprehensive income (loss) before reclassifications
5,222

 
(16,776
)
 
5

 

 
(11,549
)
Tax (expense) benefit

 
2,853

 
(2
)
 

 
2,851

Amounts reclassed from accumulated other comprehensive income (loss)

 
(4,940
)
 
(25
)
 

 
(4,965
)
Tax (expense) benefit

 
807

 
9

 

 
816

Total other comprehensive income (loss)
5,222

 
(9,790
)
 
19

 

 
(4,549
)
Ending balance
$
(69,789
)
 
$
(11,074
)
 
$
60

 
$
(3,907
)
 
$
(84,710
)


 
For the 13 Weeks Ended October 1, 2016
 
Currency
Translation
Adjustments
 
Cash Flow Hedges
 
 
 
 
 
 
Forward
Contracts
 
Interest
Rate Swaps
 
Pension
Plan
 
Total
Beginning balance
$
(73,986
)
 
$
2,943

 
$
(1,623
)
 
$
(4,506
)
 
$
(77,172
)
Other comprehensive income (loss) before reclassifications
1,942

 
3,313

 
466

 

 
5,721

Tax (expense) benefit
(280
)
 
(605
)
 
(170
)
 

 
(1,055
)
Amounts reclassed from accumulated other comprehensive income (loss)

 
2,621

 
(413
)
 

 
2,208

Tax (expense) benefit

 
(714
)
 
150

 

 
(564
)
Total other comprehensive income (loss)
1,662

 
801

 
559

 

 
3,022

Ending balance
$
(72,324
)
 
$
3,744

 
$
(1,064
)
 
$
(4,506
)
 
$
(74,150
)


 
For the 39 Weeks Ended September 30, 2017
 
Currency
Translation
Adjustments
 
Cash Flow Hedges
 
 
 
 
 
 
Forward
Contracts
 
Interest
Rate Swaps
 
Pension
Plan
 
Total
Beginning balance
$
(101,867
)
 
$
10,693

 
$
(343
)
 
$
(3,907
)
 
$
(95,424
)
Other comprehensive income (loss) before reclassifications
32,078

 
(33,243
)
 
230

 

 
(935
)
Tax (expense) benefit

 
11,512

 
(84
)
 

 
11,428

Amounts reclassed from accumulated other comprehensive income (loss)

 
1,981

 
(404
)
 

 
1,577

Tax (expense) benefit

 
(1,945
)
 
147

 

 
(1,798
)
Total other comprehensive income (loss)
32,078

 
(21,767
)
 
403



 
10,714

Ending balance
$
(69,789
)
 
$
(11,074
)
 
$
60

 
$
(3,907
)
 
$
(84,710
)



16



 
For the 39 Weeks Ended October 1, 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
9,767

 
2,055

 
(1,915
)
 
2,010

 
11,917

Tax (expense) benefit
(280
)
 
433

 
698

 
(296
)
 
555

Amounts reclassed from accumulated other comprehensive income (loss)
104

 
9,888

 
(1,331
)
 

 
8,661

Tax (expense) benefit

 
(3,030
)
 
485

 

 
(2,545
)
Total other comprehensive income (loss)
9,383

 
(4,370
)
 
(371
)
 
1,714

 
6,356

Ending balance
$
(72,324
)
 
$
3,744

 
$
(1,064
)
 
$
(4,506
)
 
$
(74,150
)

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 (loss). Net sales for geographic segments are based on the location of the selling entity. Operating income (loss) 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. The Company does not include intercompany transfers between segments for management reporting purposes.

17



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

 
For the 13 Weeks Ended September 30, 2017
 
For the 13 Weeks Ended October 1, 2016
 
Net Sales
 
Operating Income (Loss)
 
Net Sales
 
Operating Income (Loss)
Americas
$
308,102

 
$
18,843

 
$
361,226

 
$
56,455

Europe
247,184

 
39,332

 
243,139

 
49,013

Asia
133,436

 
21,999

 
133,625

 
23,654

Corporate

 
(80,673
)
 

 
(97,947
)
Consolidated
$
688,722

 
$
(499
)
 
$
737,990

 
$
31,175



 
For the 39 Weeks Ended September 30, 2017
 
For the 39 Weeks Ended October 1, 2016
 
Net Sales
 
Operating Income (Loss)
 
Net Sales
 
Operating Income (Loss)
Americas
$
874,449

 
$
(121,976
)
 
$
1,042,223

 
$
168,352

Europe
637,566

 
(33,859
)
 
669,076

 
109,193

Asia
355,343

 
(2,702
)
 
371,907

 
60,519

Corporate

 
(316,981
)
 

 
(277,034
)
Consolidated
$
1,867,358

 
$
(475,518
)
 
$
2,083,206

 
$
61,030



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 September 30, 2017
 
For the 13 Weeks Ended October 1, 2016
 
Net Sales
 
Percentage of Total
 
Net Sales
 
Percentage of Total
Watches
$
551,913

 
80.1
%
 
$
567,148

 
76.9
%
Leathers
75,660

 
11.0

 
93,338

 
12.6

Jewelry
47,729

 
6.9

 
60,237

 
8.2

Other
13,420

 
2.0

 
17,267

 
2.3

Total
$
688,722

 
100.0
%
 
$
737,990

 
100.0
%


 
For the 39 Weeks Ended September 30, 2017
 
For the 39 Weeks Ended October 1, 2016
 
Net Sales
 
Percentage of Total
 
Net Sales
 
Percentage of Total
Watches
$
1,471,144

 
78.8
%
 
$
1,581,233

 
75.9
%
Leathers
217,946

 
11.7

 
278,995

 
13.4

Jewelry
139,900

 
7.5

 
171,709

 
8.2

Other
38,368

 
2.0

 
51,269

 
2.5

Total
$
1,867,358

 
100.0
%
 
$
2,083,206

 
100.0
%



 

18



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, the Company enters 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 accumulated 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 (loss) and comprehensive income (loss), 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.
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.

19



As of September 30, 2017, 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
 
253.4

 
U.S. dollar
 
291.0

Canadian dollar
 
95.0

 
U.S. dollar
 
73.2

British pound
 
43.5

 
U.S. dollar
 
58.1

Japanese yen
 
4,636.4

 
U.S. dollar
 
42.8

Mexican peso
 
378.6

 
U.S. dollar
 
20.3

Australian dollar
 
21.2

 
U.S. dollar
 
16.5

U.S. dollar
 
41.1

 
Japanese yen
 
4,470.0

The Company is also exposed to interest rate risk related to its outstanding debt. To manage the interest rate risk related to its U.S.-based term loan (as amended and restated, the "Term Loan") which had an outstanding balance of $168.3 million net of debt issuance costs as of September 30, 2017, 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 of 3.50%. See “Note 14—Debt Activity” for additional disclosures about the Company’s Term Loan. The notional amount amortizes through May 17, 2018 and coincides 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.
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 September 30, 2017, the Company had non-designated forward contracts of approximately $2.2 million on 28.3 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.

20



The effective portion of gains and losses on cash flow hedges 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 September 30, 2017
 
For the 13 Weeks Ended October 1, 2016
Cash flow hedges:
 

 
 

Forward contracts
$
(13,923
)
 
$
2,708

Interest rate swaps
3

 
296

Total gain (loss) recognized in other comprehensive income (loss), net of taxes
$
(13,920
)
 
$
3,004



 
For the 39 Weeks Ended September 30, 2017
 
For the 39 Weeks Ended October 1, 2016
Cash flow hedges:
 

 
 

Forward contracts
$
(21,731
)
 
$
2,488

Interest rate swaps
146

 
(1,217
)
Total gain (loss) recognized in other comprehensive income (loss), net of taxes
$
(21,585
)
 
$
1,271


The following table illustrates the effective portion of gains and losses on derivative instruments recorded in accumulated 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 (Loss)
and Comprehensive
Income (Loss) Location
 
Effect of Derivative
Instruments
 
For the 13 Weeks Ended September 30, 2017
 
For the 13 Weeks Ended October 1, 2016
Forward contracts designated as cash flow hedging instruments
 
Other income (expense)-net
 
Total gain (loss) reclassified from accumulated other comprehensive income (loss)
 
$
(4,133
)
 
$
1,907

Forward contracts not designated as hedging instruments
 
Other income (expense)-net
 
Total gain (loss) recognized in income
 
$
(12
)
 
$
75

Interest rate swap designated as a cash flow hedging instrument
 
Interest expense
 
Total gain (loss) reclassified from accumulated other comprehensive income (loss)
 
$
(16
)
 
$
(263
)


Derivative Instruments
 
Condensed Consolidated
Statements of Income (Loss)
and Comprehensive
Income (Loss) Location
 
Effect of Derivative
Instruments
 
For the 39 Weeks Ended 
September 30, 2017
 
For the 39 Weeks Ended 
October 1, 2016
Forward contracts designated as cash flow hedging instruments
 
Other income (expense)-net
 
Total gain (loss) reclassified from accumulated other comprehensive income (loss)
 
$
36

 
$
6,858

Forward contracts not designated as hedging instruments
 
Other income (expense)-net
 
Total gain (loss) recognized in income
 
$
170

 
$
(222
)
Interest rate swap designated as a cash flow hedging instrument
 
Interest expense
 
Total gain (loss) reclassified from accumulated other comprehensive income (loss)
 
$
(257
)
 
$
(846
)



21



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
 
 
September 30, 2017
 
December 31, 2016
 
September 30, 2017
 
December 31, 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
 
$
2,710

 
Prepaid expenses and other current assets
 
$
23,288

 
Accrued expenses- other
 
$
15,215

 
Accrued expenses- other
 
$
4,696

Forward contracts not designated as cash flow hedging instruments
 
Prepaid expenses and other current assets
 
72

 
Prepaid expenses and other current assets
 

 
Accrued expenses- other
 
1

 
Accrued expenses- other
 
2

Interest rate swap designated as a cash flow hedging instrument
 
Prepaid expenses and other current assets
 
109

 
Prepaid expenses and other current assets
 

 
Accrued expenses- other
 
15

 
Accrued expenses- other
 
613

Forward contracts designated as cash flow hedging instruments
 
Intangible and other assets-net
 
448

 
Intangible and other assets-net
 
5,648

 
Other long-term liabilities
 
4,557

 
Other long-term liabilities
 
268

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

 
Intangible and other assets-net
 
73

 
Other long-term liabilities
 

 
Other long-term liabilities
 

Total
 
 
 
$
3,339

 
 
 
$
29,009

 
 
 
$
19,788

 
 
 
$
5,579

 
At the end of the Third Quarter, the Company had forward contracts designated as cash flow hedges with maturities extending through June 2019. As of September 30, 2017, an estimated net loss of $9.2 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.

22



The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of September 30, 2017 (in thousands):
 
Fair Value at September 30, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 

 
 

 
 

 
 

Forward contracts
$

 
$
3,230

 
$

 
$
3,230

Deferred compensation plan assets:
 

 
 

 
 

 
 

Investment in publicly traded mutual funds
2,605

 

 

 
2,605

Interest rate swap

 
109

 

 
109

Total
$
2,605

 
$
3,339

 
$

 
$
5,944

Liabilities:
 

 
 

 
 

 
 

Forward contracts
$

 
$
19,773

 

 
$
19,773

Interest rate swap

 
15

 

 
15

Total
$

 
$
19,788

 
$

 
$
19,788

The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of December 31, 2016 (in thousands):
 
Fair Value at December 31, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 

 
 

 
 

 
 

Forward contracts
$

 
$
28,936

 
$

 
$
28,936

Deferred compensation plan assets:
 

 
 

 
 

 
 

Investment in publicly traded mutual funds
2,385

 

 

 
2,385

Interest rate swap

 
73

 

 
73

Total
$
2,385

 
$
29,009

 
$

 
$
31,394

Liabilities:
 

 
 

 
 

 
 

Forward contracts

 
4,966

 

 
4,966

Interest rate swap

 
613

 

 
613

Total
$

 
$
5,579

 
$

 
$
5,579

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.
As of September 30, 2017, debt, excluding unamortized debt issuance costs and capital leases, was recorded at cost and had a carrying value of $486.1 million and a fair value of approximately $480.6 million. The fair value of debt was obtained from a third-party based on observable market inputs.
The fair value of goodwill and trade names are measured on a non-recurring basis using Level 3 inputs, including forecasted cash flows, discounts rates and implied royalty rates.
During the second quarter of fiscal 2017, the Company fully impaired its goodwill balance and recorded pre-tax impairment charges of $202.3 million, $114.3 million and $42.9 million in the Americas, Europe and Asia segments, respectively.
During the second quarter of fiscal 2017, the SKAGEN trade name with a carrying amount of $55.6 million was written down to its implied fair value of $27.3 million, resulting in a pre-tax impairment charge of $28.3 million; the MISFIT trade name with a carrying amount of $11.8 million was deemed not recoverable, resulting in a pre-tax impairment charge of $11.8 million and the MICHELE trade name with a carrying amount of $18.5 million was written down to its implied fair value of

23



$10.9 million, resulting in a pre-tax impairment charge of $7.6 million. Trade name impairment charges were recorded in the Corporate cost area. See “Note 2—Goodwill and Intangibles Impairment Charges” for additional disclosures about goodwill and trade name impairment.
In accordance with the provisions of ASC 360, Property, Plant and Equipment, property, plant and equipment-net with a carrying amount of $6.0 million related to retail store leasehold improvements and fixturing and related key money in the amount of $0.6 million were deemed not recoverable, resulting in an impairment charge of $6.6 million during the Year To Date Period.
The fair values of assets related to Company-owned retail stores were determined using Level 3 inputs. Of the $6.6 million impairment expense, $3.6 million$1.4 million and $0.5 million were recorded in restructuring charges in the Americas, Europe and Asia segments, respectively, and $0.8 million and $0.3 million were recorded in SG&A in the Europe and Asia segments, respectively. 
During the second quarter of fiscal 2017, the Company recorded a pre-tax impairment charge of $1.6 million related to the write off of a cost method investment.

12. INTANGIBLE AND OTHER ASSETS
 
The following table summarizes intangible and other assets (in thousands):
 
 
 
 
September 30, 2017
 
December 31, 2016
 
 
Useful
 
Gross
 
Accumulated
 
Gross
 
Accumulated
 
 
Lives
 
Amount
 
Amortization
 
Amount
 
Amortization
Intangibles-subject to amortization:
 
 
 
 

 
 

 
 

 
 

Trademarks
 
10 yrs.
 
$
4,310

 
$
3,621

 
$
4,310

 
$
3,443

Customer lists
 
5-10 yrs.
 
54,875

 
32,417

 
53,625

 
26,986

Patents
 
3-20 yrs.
 
2,325

 
2,124

 
2,325

 
2,099

Noncompete agreement
 
3-6 yrs.
 
2,548

 
2,102

 
2,505

 
1,662

Developed technology
 
7 yrs.
 
36,100

 
9,025

 
36,100

 
5,157

Trade name
 
6 yrs.
 

 

 
15,700

 
2,617

Other
 
7-20 yrs.
 
265

 
236

 
253

 
215

Total intangibles-subject to amortization
 
 
 
100,423

 
49,525

 
114,818

 
42,179

Intangibles-not subject to amortization:
 
 
 
 

 
 

 
 

 
 

Trade names
 
 
 
38,645

 
 

 
74,485

 
 

Other assets:
 
 
 
 

 
 

 
 

 
 

Key money deposits
 
 
 
27,841

 
24,195

 
26,948

 
22,038

Other deposits
 
 
 
19,579

 
 

 
19,344

 
 

Deferred compensation plan assets
 
 
 
2,605

 
 

 
2,385

 
 

Deferred tax asset-net
 
 
 
98,374

 
 

 
23,061

 
 

Restricted cash
 
 
 
373

 
 

 
500

 
 

Shop-in-shop
 
 
 
10,161

 
9,816

 
8,807

 
8,019

Tax receivable
 
 
 
404

 
 
 

 
 
Forward contracts
 
 
 
448

 
 

 
5,648

 
 

Investments
 
 
 
500

 
 
 
2,078

 
 
Other
 
 
 
4,771

 
 

 
4,655

 
 

Total other assets
 
 
 
165,056

 
34,011

 
93,426

 
30,057

Total intangible and other assets
 
 
 
$
304,124

 
$
83,536

 
$
282,729

 
$
72,236

Total intangible and other assets-net
 
 
 
 

 
$
220,588

 
 

 
$
210,493

 
Key money is the amount of funds paid to a landlord or tenant to acquire the rights of tenancy under a commercial property lease for a certain property. Key money represents the “right to lease” with an automatic right of renewal. This right

24



can be subsequently sold by the Company or can be recovered should the landlord refuse to allow the automatic right of renewal to be exercised. Key money is amortized over the initial lease term, which ranges from approximately four to 18 years.
Amortization expense for intangible assets was approximately $3.0 million and $3.7 million for the Third Quarter and Prior Year Quarter, respectively, and $10.4 million and $11.2 million for the Year To Date Period and Prior Year YTD Period, respectively. Estimated aggregate future amortization expense by fiscal year for intangible assets is as follows (in thousands):
Fiscal Year
 
Amortization
Expense
2017 (remaining)
 
$
3,028

2018
 
$
11,848

2019
 
$
11,518

2020
 
$
10,979

2021
 
$
7,143

2022
 
$
6,263

 

13. COMMITMENTS AND CONTINGENCIES
Litigation. The Company is occasionally subject to litigation or other legal proceedings in the normal course of its business. The Company does not believe that the outcome of any currently pending legal matters, individually or collectively, will have a material effect on the business or financial condition of the Company. 
14. DEBT ACTIVITY
On March 10, 2017, the Company entered into the Second Amendment to the Amended and Restated Credit Agreement (the “Second Amendment”). The Second Amendment reduced the Company's revolving credit facility (the "Revolving Credit Facility") available under the Company’s existing credit amendment from $1.05 billion to $850.0 million. The Second Amendment also removed the incremental term loan that was available under the credit agreement, extended the maturity date of the credit agreement to May 17, 2019 and removed the Company’s ability to make offers to the lenders to extend the maturity date of the Term Loan or the Revolving Credit Facility. The Second Amendment also amended the repayment schedule for the Term Loan and requires the Company to make monthly payments on the last business day of each month beginning April 30, 2018. On and after April 1, 2018, interest on the Term Loan that is based upon the base rate will be due and payable in arrears on the last business day of each calendar month, and interest on the Term Loan that is based upon the LIBOR rate will be due and payable on the last day of the applicable interest period; provided, that if such interest period extends for over one month, then interest will be due and payable at the end of each one month interval during such interest period. The Second Amendment also amended the mandatory prepayment provisions under the credit agreement and provides that to the extent there are excess proceeds remaining from the issuance of debt by the Company following the repayment in full of the Term Loan, the Company will be required to repay the Revolving Credit Facility in the amount of such excess proceeds, with a corresponding permanent reduction in the Revolving Credit Facility in the amount of up to $50.0 million. In accordance with the Second Amendment, dividends paid from foreign subsidiaries to U.S. subsidiaries or Fossil Group, Inc., must first be used to repay the Term Loan and then up to $50.0 million of the Revolving Credit Facility.
The Second Amendment amended the applicable margin used to calculate the interest rate that is applicable to base rate loans and LIBOR rate loans under the Company’s credit agreement. As of September 30, 2017, the interest rate margin for base rate loans was 2.50% per annum and the interest rate margin for LIBOR rate loans was 3.50% per annum. On October 1, 2017, the applicable margin on the Term Loan automatically increased to 2.75% per annum for base rate loans and 3.75% per annum for LIBOR rate loans. If the Term Loan has not been repaid in full on or prior to March 31, 2018, then on such date, the applicable margin will automatically increase to 3.25% per annum for base rate loans and 4.25% per annum for LIBOR rate loans. The Second Amendment also changed the commitment fee payable by the Company with respect to the Revolving Credit Facility to 0.50% per annum. The Company will incur an additional fee of 0.25% times the outstanding principal amount of the total credit exposure under the credit agreement if the Term Loan has not been repaid in full on or prior to March 31, 2018. Furthermore, the Second Amendment changed the consolidated total leverage ratio that the Company must comply with from 3.25 to 1.00 to the ratios as set forth below:

25



Period
 
Maximum Ratio
July 2, 2017 through and including September 30, 2017
 
3.50 to 1.00
October 1, 2017 through and including March 31, 2018
 
3.25 to 1.00
April 1, 2018 through and including September 29, 2018
 
3.50 to 1.00
September 30, 2018 and thereafter
 
3.25 to 1.00
The Company made principal payments of $6.3 million and $18.8 million under the Term Loan during the Third Quarter and Year To Date Period, respectively. The Company also made net payments of $158.0 million and $131.3 million under the Revolving Credit Facility during the Third Quarter and Year To Date Period, respectively. Amounts available under the Revolving Credit Facility are reduced by any amounts outstanding under standby letters of credit. As of September 30, 2017, the Company had available borrowing capacity of $270.5 million under the Revolving Credit Facility. The Company's domestic subsidiary receives short-term loans from certain of its foreign subsidiaries at the end of each fiscal quarter which are used to reduce its external borrowings. These intercompany loans are repaid at the beginning of the following fiscal quarter. At the end of the Third Quarter, these intercompany loans totaled $411.8 million. The Company incurred approximately $2.2 million and $6.3 million of interest expense related to the Term Loan during the Third Quarter and Year To Date Period, respectively, including the impact of the related interest rate swap. The Company incurred approximately $8.1 million and $20.5 million of interest expense related to the Revolving Credit Facility during the Third Quarter and Year To Date Period, respectively. The Company incurred approximately $0.9 million and $2.7 million of interest expense related to the amortization of debt issuance costs during the Third Quarter and Year To Date Period, respectively.

15. RESTRUCTURING
The Company implemented a multi-year restructuring program that began in fiscal year 2016 called New World Fossil ("NWF"). As part of NWF, the Company targets to improve operating profit and support sales growth through a leaner infrastructure and an enhanced business model. The Company is working to achieve greater efficiencies from production to distribution through activities such as organizational changes, reducing its overall product assortment, optimizing its base cost structure and consolidating facilities. The Company also intends to build a quicker and more responsive operating platform. The Company is reducing its retail footprint to reflect the evolving shopping habits of today's consumer, which includes restructuring costs, such as store impairment, recorded lease obligations and termination fees and accelerated depreciation. Of the total estimated $150 million restructuring charges, approximately $27.8 million and $41.8 million were recorded during fiscal year 2016 and the Year To Date period, respectively. The Company estimates total fiscal year 2017 NWF restructuring charges of approximately $45 million.

The following table shows a rollforward of the accrued liability related to the Company’s restructuring plan (in thousands):
 
For the 13 Weeks Ended September 30, 2017
 
Liabilities
 
 
 
 
 
 
 
Liabilities
 
July 1, 2017
 
Charges
 
Cash Payments
 
Non-cash Items
 
September 30, 2017
Store closures
$
4,893

 
$
2,482

 
$
4,237

 
$
2,320

 
$
818

Professional services and other
116

 
765

 
48

 
291

 
542

Severance and employee-related benefits
1,535

 
2,522

 
2,467

 

 
1,590

Total
$
6,544

 
$
5,769

 
$
6,752

 
$
2,611

 
$
2,950



26



 
For the 13 Weeks Ended October 1, 2016
 
Liabilities
 
 
 
 
 
 
 
Liabilities
 
July 2, 2016
 
Charges
 
Cash Payments
 
Non-cash Items
 
October 1, 2016
Store closures
$

 
$
12,523

 
$

 
$
12,523

 
$

Professional services and other

 
1,950

 
1,300

 

 
650

Severance and employee-related benefits

 

 

 

 

Total
$

 
$
14,473

 
$
1,300

 
$
12,523

 
$
650


 
For the 39 Weeks Ended September 30, 2017
 
Liabilities
 
 
 
 
 
 
 
Liabilities
 
December 31, 2016
 
Charges
 
Cash Payments
 
Non-cash Items
 
September 30, 2017
Store closures
$
4,546

 
$
8,223

 
$
6,415

 
$
5,536

 
$
818

Professional services and other
794

 
2,195

 
2,156

 
291

 
542

Severance and employee-related benefits

 
31,400

 
28,606

 
1,204

 
1,590

Total
$
5,340

 
$
41,818

 
$
37,177

 
$
7,031

 
$
2,950


 
For the 39 Weeks Ended October 1, 2016
 
Liabilities
 
 
 
 
 
 
 
Liabilities
 
January 2, 2016
 
Charges
 
Cash Payments
 
Non-cash Items
 
October 1, 2016
Store closures
$

 
$
12,523

 
$

 
$
12,523

 
$

Professional services and other

 
1,950

 
1,300

 

 
650

Severance and employee-related benefits

 

 

 

 

Total
$

 
$
14,473

 
$
1,300

 
$
12,523

 
$
650


Restructuring charges by operating segment were as follows (in thousands):

 
For the 13 Weeks Ended September 30, 2017
 
For the 13 Weeks Ended October 1, 2016
Americas
$
2,771

 
$
10,548

Europe
1,445

 
1,639

Asia
1,144

 
336

Corporate
409

 
1,950

Consolidated
$
5,769

 
$
14,473


 
For the 39 Weeks Ended September 30, 2017
 
For the 39 Weeks Ended October 1, 2016
Americas
$
10,567

 
$
10,548

Europe
9,127

 
1,639

Asia
9,283

 
336

Corporate
12,841

 
1,950

Consolidated
$
41,818

 
$
14,473




27



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following is a discussion of the financial condition and results of operations of Fossil Group, Inc. and its subsidiaries for the thirteen and thirty-nine week periods ended September 30, 2017 (the “Third Quarter” and “Year To Date Period,” respectively) as compared to the thirteen and thirty-nine week periods ended October 1, 2016 (the “Prior Year Quarter” and “Prior Year YTD Period,” respectively). This discussion should be read in conjunction with the condensed consolidated financial statements and the related notes thereto.
General
We are a global design, marketing and distribution company that specializes in consumer fashion accessories. Our 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, we have a diverse portfolio of globally recognized owned and licensed brand names under which our products are marketed. Our products are distributed globally through various distribution channels, including wholesale in countries where we have a physical presence, direct to the consumer through our retail stores and commercial websites and through third party distributors in countries where we do not maintain a physical presence. Our products are offered at varying price points to meet the needs of our customers, whether they are value conscious or luxury oriented. Based on our extensive range of accessory products, brands, distribution channels and price points, we are able to target style conscious consumers across a wide age spectrum on a global basis.
Domestically, we sell our products through a diversified distribution network that includes department stores, specialty retail locations, specialty watch and jewelry stores, Company-owned retail and outlet stores, mass market stores and through our FOSSIL® website. Our wholesale customer base includes, among others, Amazon, Best Buy, Dillard’s, JCPenney, Kohl’s, Macy’s, Neiman Marcus, Nordstrom, Saks Fifth Avenue, Target and Wal-Mart. In the United States, our network of Company-owned stores included 84 retail stores located in premier retail sites and 122 outlet stores located in major outlet malls as of September 30, 2017. In addition, we offer an extensive collection of our FOSSIL brand products on our website, www.fossil.com, as well as proprietary and licensed watch and jewelry brands through other managed and affiliated websites.
Internationally, our products are sold to department stores, specialty retail stores and specialty watch and jewelry stores in approximately 150 countries worldwide through 23 Company-owned foreign sales subsidiaries and through a network of approximately 80 independent distributors. Internationally, our network of Company-owned stores included 216 retail stores and 134 outlet stores as of September 30, 2017. Our products are also sold through licensed and franchised FOSSIL retail stores, retail concessions operated by us and kiosks in certain international markets. In addition, we offer an extensive collection of our FOSSIL brand products on our websites in certain countries.
Our business is subject to economic cycles and retail industry conditions. Purchases of discretionary fashion accessories, such as our watches, handbags, sunglasses and other products, tend to decline during recessionary periods when disposable income is low and consumers are hesitant to use available credit. In addition, acts of terrorism, acts of war and military action both in the U.S. and abroad can have a significant effect on economic conditions and may negatively affect our ability to procure our products from manufacturers for sale to our customers. Any significant declines in general economic conditions, public safety concerns or uncertainties regarding future economic prospects that affect consumer spending habits could have a material adverse effect on consumer purchases of our products.
Our business is also subject to the risks inherent in global sourcing supply. Certain key components in our products come from limited sources of supply, which exposes us to potential supply shortages that could disrupt the manufacture and sale of our products. Any interruption or delay in the supply of key components could significantly harm our ability to meet scheduled product deliveries to our customers and cause us to lose sales. Interruptions or delays in supply may be caused by a number of factors that are outside of our and our contract manufacturers’ control.
Future sales and earnings growth are also contingent upon our ability to anticipate and respond to changing fashion trends and consumer preferences in a timely manner while continuing to develop innovative products in the respective markets in which we compete. As is typical with new products, including our lines of connected accessories, market acceptance of new designs and products that we may introduce is subject to uncertainty. In addition, we generally make decisions regarding product designs several months in advance of the time when consumer acceptance can be measured. We believe that we can drive long-term growth with brand building, innovation through design, fashion and new materials and introducing new technology and functionality into our accessories, while continuing to provide a solid value proposition to consumers across all of our brands.
Our international operations are subject to many risks, including foreign currency fluctuations and risks related to the global economy. Generally, a strengthening of the U.S. dollar against currencies of other countries in which we operate will reduce the translated amounts of sales and operating expenses of our subsidiaries, which results in a reduction of our

28



consolidated operating income. We manage these currency risks by using derivative instruments. The primary risks managed by using derivative instruments are the future payments by non-U.S. dollar functional currency subsidiaries of intercompany inventory transactions denominated in U.S. dollars. We enter into foreign exchange forward contracts ("forward contracts") to manage fluctuations in global currencies that will ultimately be used to settle such U.S. dollar denominated inventory purchases. We are also exposed to interest rate risk associated with our variable rate debt, which we manage with an interest rate swap.
For a more complete discussion of the risks facing our business, see “Part I, Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 and "Part II, Item 1A. Risk Factors" of this Quarter Report on Form 10-Q.

Results of Operations
Executive Summary. During the Third Quarter, net sales decreased 7% (8% in constant currency), as compared to the Prior Year Quarter, driven by declines in traditional watches, leathers and jewelry, and partially offset by continued growth in wearables. The Third Quarter was favorably impacted by customers accelerating certain deliveries from the fourth quarter of fiscal year 2017 into the Third Quarter, primarily to take advantage of pending price increases. We estimate that this acceleration of sales favorably impacted the Third Quarter sales growth rate by roughly three percentage points, and we expect this favorable impact will largely reverse in the fourth quarter of fiscal year 2017. While the overall business remains challenging and the retail environment remains in flux, we continue to bring innovative new products to the market and work towards operational efficiencies to ultimately enhance our profitability. We remain confident wearables can be one of the key catalysts that could eventually offset the sales declines we have seen in our traditional watch business for some time now. Wearables products accounted for approximately 10% of our net sales in the Third Quarter, compared to 7% and 9% in the first and second quarters of fiscal year 2017, respectively. Our third generation of connected devices, which are in the market now, add additional features through Android Wear 2.0, such as fitness and standalone applications. In addition, our latest generation wearables are thinner, and they have brighter screens and improved functionality. We are supporting these new products with our celebrity influencer campaigns to attract our wearable customers in the digital and social space.
During the Third Quarter, sales of FOSSIL branded products decreased 5% (7% in constant currency), as compared to the Prior Year Quarter. Effectively all of the decline in the FOSSIL branded sales was driven by weakness in our leathers and jewelry categories, partially offset by modest growth in watches led by wearables. Wearables positively impacted the FOSSIL watch category growth rate by approximately 11 percentage points in the Third Quarter. Sales of our SKAGEN branded products decreased 10% (12% in constant currency) as compared to the Prior Year Quarter, with growth in Asia more than offset by declines in the Americas and Europe. Growth in SKAGEN connected watches partially offset the decline in SKAGEN traditional watches.
Our multi-brand global watch portfolio decreased 3% (4% in constant currency) during the Third Quarter, as compared to the Prior Year Quarter, representing decreases in the majority of the brands in our portfolio. Growth in wearable products partially offset the declines in traditional watches. In the MICHAEL KORS brand, we launched next generation connected product in August and expanded the distribution channels later during the Third Quarter with positive results. EMPORIO ARMANI hybrid watches launched during the Third Quarter, driving positive sales growth overall for the brand. We launched DIESEL hybrid and display watches and EMPORIO ARMANI display watches on our wearable platform towards the end of the Third Quarter, and preliminary results have been favorable.
We plan to launch five more brands onto the hybrid platform this year, including DKNY, MARC JACOBS, MICHELE, RELIC and TORY BURCH. These new launches will bring us to a total of 14 brands in wearables and support our goal to at least double the wearables business in fiscal year 2017 from fiscal year 2016.
The following table presents as reported and constant currency net sales percentage change information for FOSSIL for the Third Quarter as compared to the Prior Year Quarter:
 
 
Growth Percentage
 
 
Brand
As Reported
 
Constant Currency
 
FOSSIL
5.2
%
 
7.0
%
 
SKAGEN
10.0
%
 
11.6
%

29



Global comparable retail sales (including e-commerce) decreased 6% during the Third Quarter, compared to a decrease of 1% in the Prior Year Quarter, due to continued declines in retail store traffic trends partially offset by consistent growth in e-commerce. During the Third Quarter, we continued to improve conversion through promotional activity, but we were not able overcome the negative traffic we experienced in all regions. During the Third Quarter, our comparable e-commerce sales increased 26% compared to the Prior Year Quarter, led by the Americas, but with increases in all regions.
We continue to make progress on our New World Fossil ("NWF") initiative. The goal of NWF continues to be to build a leaner, more nimble operating platform that can support improved profitability in the future while better serving our customers and competing in the new retail environment. When we launched NWF in fiscal year 2016, we set a target to drive $200 million of profit improvements in the near term, and we are well on our way to delivering that. During a challenging retail environment, we continue to make strong progress on transforming Fossil. This year we expect our NWF initiatives to drive underlying improvement in our product costs as well as significant reductions in our expense structure that we estimate will be over $100 million this year on a run rate basis. We recognize this transformation will take time, but we are making significant progress to evolve our key categories and streamline our business to position us for profitable growth over the long term.
In the Third Quarter, we managed our resources and capital tightly. We are also working to ensure that we have the proper capital structure needed to support our long-term financial objectives. Our goal continues to be to diversify our capital structure beyond just our existing bank partners with longer tenors to support our long term strategic objectives. We are taking the necessary steps to strengthen our financial position to further enable us to execute our strategies well into the future and position our business model for continued strong cash flow generation. During the past year, we have reduced our net debt by $170 million, reduced our net working capital by $230 million and generated positive cash flow from operations.
During the Third Quarter as compared to the Prior Year Quarter, gross profit decreased due to lower sales and a decreased margin rate. The decrease in gross margin rate was primarily driven by the impact of connected products due to both lower connected margins as well as additional valuation charges. Our strategy this year has been to invest in margin to drive significant volume in wearables and leverage that volume to drive future cost efficiencies. So far this year, we have tripled our connected sales volumes compared to the same periods as last year and are well ahead of the initial cost goals that we set for ourselves this year. However, we have not hit the aggressive sales goals that we set for ourselves this year in this new category and are consequently carrying greater levels of connected products that we will need to clear and have deferred some receipts into the first quarter of fiscal year 2018. In the Third Quarter, we recorded a $23 million valuation charge to support our efforts to clear this inventory, which negatively impacted our overall gross margins by 330 basis points. The gross margin rate was also negatively impacted by ongoing promotional activity in our outlets and the e-commerce channel and by an unfavorable currency impact of approximately 60 basis points. Higher sales volumes through off-price channels also modestly reduced gross margins in the Third Quarter. Product cost benefits generated from our NWF supply chain initiatives partially offset these headwinds. Total operating expenses for the Third Quarter decreased to $320 million including $6 million of restructuring costs associated with our NWF initiative. Other income increased as a result of increased net foreign currency gains during the Third Quarter as compared to the Prior Year Quarter. The tax benefit in the Third Quarter was favorably impacted by the increased effective tax rate in the Third Quarter as compared to the Prior Year Quarter. During the Third Quarter, our financial performance resulted in a loss of $0.11 per diluted share.
Constant Currency Financial Information
As a multinational enterprise, we are exposed to changes in foreign currency exchange rates. The translation of the operations of our foreign-based entities from their local currencies into U.S. dollars is sensitive to changes in foreign currency exchange rates and can have a significant impact on our reported financial results. In general, our overall financial results are affected positively by a weaker U.S. dollar and are affected negatively by a stronger U.S. dollar as compared to the foreign currencies in which we conduct our business.
As a result, in addition to presenting financial measures in accordance with accounting principles generally accepted in the United States of America (“GAAP”), our discussions contain references to constant currency financial information, which is a non-GAAP financial measure. To calculate net sales on a constant currency basis, net sales for the current year for entities reporting in currencies other than the U.S. dollar are translated into U.S. dollars at the average rates during the comparable period of the prior fiscal year. We present constant currency information to provide investors with a basis to evaluate how our underlying business performed excluding the effects of foreign currency exchange rate fluctuations. The constant currency financial information presented herein should not be considered a substitute for, or superior to, the measures of financial performance prepared in accordance with GAAP. Reconciliations between constant currency financial information and the most directly comparable GAAP measure are included where applicable.


30



Quarterly Periods Ended September 30, 2017 and October 1, 2016
Consolidated Net Sales. Net sales decreased $49.3 million or 6.7% (8.0% in constant currency), for the Third Quarter as compared to the Prior Year Quarter. During the Third Quarter, our leathers products decreased $17.6 million or 18.9% (19.9% in constant currency) primarily as a result of the current product assortment not resonating well with consumers. Global watch sales decreased $15.3 million or 2.7% (4.1% in constant currency) driven by declines in traditional watches partially offset by increases in connected watches. Our jewelry business decreased $12.5 million or 20.8% (22.8% in constant currency).
Net sales information by product category is summarized as follows (dollars in millions):
 
For the 13 Weeks Ended September 30, 2017
 
For the 13 Weeks Ended October 1, 2016
 
 
 
 
 
 
 
 
 
Growth (Decline)
 
Net Sales
 
Percentage
of Total
 
Net Sales
 
Percentage
of Total
 
Dollars
 
Percentage As Reported
 
Percentage Constant Currency
Watches
$
551.9

 
80.1
%
 
$
567.2

 
76.9
%
 
$
(15.3
)
 
(2.7
)%
 
(4.1
)%
Leathers
75.7

 
11.0

 
93.3

 
12.6

 
(17.6
)
 
(18.9
)
 
(19.9
)
Jewelry
47.7

 
6.9

 
60.2

 
8.2

 
(12.5
)
 
(20.8
)
 
(22.8
)
Other
13.4

 
2.0

 
17.3

 
2.3

 
(3.9
)
 
(22.5
)
 
(23.6
)
Total
$
688.7

 
100.0
%
 
$
738.0

 
100.0
%
 
$
(49.3
)
 
(6.7
)%
 
(8.0
)%
In the Third Quarter, the translation of foreign-based net sales into U.S. dollars increased reported net sales by approximately $10.1 million, including favorable impacts of $9.2 million and $1.6 million in our Europe and Americas segments, respectively, and an unfavorable impact of $0.7 million in our Asia segment when compared to the Prior Year Quarter.
The following table sets forth consolidated net sales by segment (dollars in millions):
 
For the 13 Weeks Ended September 30, 2017
 
For the 13 Weeks Ended October 1, 2016
 
Growth (Decline)
 
Net Sales
 
Percentage
of Total
 
Net Sales
 
Percentage
of Total
 
Dollars
 
Percentage As Reported
 
Percentage Constant Currency
Americas
$
308.1

 
44.7
%
 
$
361.2

 
48.9
%
 
$
(53.1
)
 
(14.7
)%
 
(15.1
)%
Europe
247.2

 
35.9

 
243.2

 
33.0

 
4.0

 
1.6

 
(2.1
)
Asia
133.4

 
19.4

 
133.6

 
18.1

 
(0.2
)
 
(0.1
)
 
0.4

Total
$
688.7

 
100.0
%
 
$
738.0

 
100.0
%
 
$
(49.3
)
 
(6.7
)%
 
(8.0
)%
Americas Net Sales. Americas net sales decreased $53.1 million or 14.7% (15.1% in constant currency), during the Third Quarter in comparison to the Prior Year Quarter. During the Third Quarter, watches decreased $32.1 million or 11.7% (12.1% in constant currency), while our leathers business decreased $12.7 million or 21.6% (22.1% in constant currency) and our jewelry category decreased $6.6 million or 29.5% (29.9% in constant currency). Sales declines in the U.S. and Canada were partially offset by growth in Mexico. During the Third Quarter, most brands in the portfolio declined while our EMPORIO ARMANI watch business increased with the introduction of EMPORIO ARMANI Connected. Decreases in traditional watches were partially offset by increases in connected watches, with the strongest performance coming from FOSSIL connected watches. While both our wholesale and retail businesses declined in the Third Quarter, our retail business was relatively stronger. Comparable retail sales including e-commerce declined moderately in the region as negative comparable sales in our stores were partially offset by positive comparable sales in our e-commerce business.

31



The following table sets forth product net sales for the Americas segment on a reported and constant currency basis (dollars in millions):
 
For the 13 Weeks Ended September 30, 2017
 
For the 13 Weeks Ended October 1, 2016
 
 
 
 
 
 
Growth (Decline)
 
Net Sales
 
Net Sales
 
Dollars
 
Percentage
As Reported
 
Percentage
Constant Currency
Watches
$
242.2

 
$
274.3

 
$
(32.1
)
 
(11.7
)%
 
(12.1
)%
Leathers
46.2

 
58.9

 
(12.7
)
 
(21.6
)
 
(22.1
)
Jewelry
15.8

 
22.4

 
(6.6
)
 
(29.5
)
 
(29.9
)
Other
3.9

 
5.6

 
(1.7
)
 
(30.4
)
 
(28.6
)
Total
$
308.1

 
$
361.2

 
$
(53.1
)
 
(14.7
)%
 
(15.1
)%

Europe Net Sales. Europe net sales increased $4.0 million or 1.6% (decreased 2.1% in constant currency) during the Third Quarter in comparison to the Prior Year Quarter. Watches increased $11.6 million or 6.4% (2.5% in constant currency), jewelry declined $3.6 million or 10.6% (13.5% in constant currency) and our leathers business decreased $2.3 million or 11.4% (14.4% in constant currency) in the Third Quarter. Third Quarter sales in Europe benefited from early deliveries to certain wholesale customers who opted to take shipments planned for the fourth quarter of fiscal year 2017, given price adjustments, which were required to be announced to customers in advance. During the Third Quarter, sales growth was led by MICHAEL KORS watches, and we also experienced growth in EMPORIO ARMANI, ARMANI EXCHANGE, FOSSIL and DIESEL branded watches, as the watch category more than offset declines in leathers and jewelry. The sales increases in watches were primarily driven from wearables and benefited from our third generation product launching towards the end of the Third Quarter. Within the region, modest growth in the U.K. and Poland was more than offset by declines in the Middle East. Comparable retail sales were moderately negative during the Third Quarter, as positive comparable e-commerce sales were more than offset by negative comparative retail store sales amid declining traffic.
The following table sets forth product net sales for the Europe segment on a reported and constant currency basis (dollars in millions):
 
For the 13 Weeks Ended September 30, 2017
 
For the 13 Weeks Ended October 1, 2016
 
 
 
 
 
 
Growth (Decline)
 
Net Sales
 
Net Sales
 
Dollars
 
Percentage
As Reported
 
Percentage Constant Currency
Watches
$
192.3

 
$
180.7

 
$
11.6

 
6.4
 %
 
2.5
 %
Leathers
17.9

 
20.2

 
(2.3
)
 
(11.4
)
 
(14.4
)
Jewelry
30.5

 
34.1

 
(3.6
)
 
(10.6
)
 
(13.5
)
Other
6.5

 
8.2

 
(1.7
)
 
(20.7
)
 
(25.3
)
Total
$
247.2

 
$
243.2

 
$
4.0

 
1.6
 %
 
(2.1
)%

Asia Net Sales. Net sales in Asia decreased $0.2 million or 0.1% (increased 0.4% in constant currency), driven by declines in leathers and jewelry largely offset by growth in watches. Continued growth in India and China was offset by a decline in nearly all other countries. During the Third Quarter as compared to the Prior Year Quarter, our leathers category decreased $2.7 million or 19.0% (18.3% in constant currency), our jewelry category decreased $2.4 million or 63.2% (same in constant currency) while our watch category increased $5.2 million or 4.6% (5.2% in constant currency). The watch category was led by growth in wearables, FOSSIL and EMPORIO ARMANI brands in particular, while traditional watches continued to decline. Comparable retail sales in the region decreased moderately largely driven by traffic declines.

32



The following table sets forth product net sales for the Asia segment on a reported and constant currency basis (dollars in millions):
 
For the 13 Weeks Ended September 30, 2017
 
For the 13 Weeks Ended October 1, 2016
 
 
 
 
 
 
Growth (Decline)
 
Net Sales
 
Net Sales
 
Dollars
 
Percentage
As Reported
 
Percentage Constant Currency
Watches
$
117.3

 
$
112.1

 
$
5.2

 
4.6
 %
 
5.2
 %
Leathers
11.5

 
14.2

 
(2.7
)
 
(19.0
)
 
(18.3
)
Jewelry
1.4

 
3.8

 
(2.4
)
 
(63.2
)
 
(63.2
)
Other
3.2

 
3.5

 
(0.3
)
 
(8.6
)
 
(8.6
)
Total
$
133.4

 
$
133.6

 
$
(0.2
)
 
(0.1
)%
 
0.4
 %

The following table sets forth the number of stores by concept on the dates indicated below:
 
September 30, 2017

October 1, 2016
 
Americas

Europe

Asia

Total

Americas

Europe

Asia

Total
Full price accessory
112


109


61


282


128


122


66


316

Outlets
136


74


46


256


156


73


46


275

Full priced multi-brand


8


10


18




7


12


19

Total stores
248


191


117


556


284


202


124


610

During the Third Quarter, we closed 8 stores and did not open any new stores.
Both stores and e-commerce sites are included in comparable retail sales in the thirteenth month of operation. Stores that experience a gross square footage increase of 10% or more due to an expansion and/or relocation are removed from the comparable retail sales base, but are included in total sales. These stores are returned to the comparable retail sales base in the thirteenth month following the expansion and/or relocation. Comparable retail sales also exclude the effects of foreign currency fluctuations.
Gross Profit. Gross profit of $319.9 million in the Third Quarter decreased 16.9% in comparison to $385.1 million in the Prior Year Quarter driven by lower sales and decreased margin rates. Gross profit margin rate decreased 580 basis points to 46.4% in the Third Quarter compared to 52.2% in the Prior Year Quarter. The decrease in gross margin rate was primarily driven by the impact of connected products due to both lower connected margins as well as additional valuation charges. Our strategy this year has been to invest in margin to drive significant volume in wearables and leverage that volume to drive future cost efficiencies. So far this year, we have tripled our connected sales volumes and are well ahead of the initial cost goals that we set for ourselves this year. However, we have not hit the aggressive sales goals that we set for ourselves this year in this new category and are consequently carrying greater levels of connected products that we will need to clear and have deferred some receipts into the first quarter of fiscal 2018. In the Third Quarter, we recorded a $23 million valuation charge to support our efforts to clear this inventory, which negatively impacted our overall gross margins by 330 basis points. The gross margin rate was also negatively impacted by ongoing promotional activity in our outlets and the e-commerce channel and by an unfavorable currency impact of approximately 60 basis points. Higher sales volumes through off-price channels also modestly reduced gross margins in the Third Quarter. Product cost benefits generated from our NWF supply chain initiatives partially offset these headwinds.
Operating Expenses. Total operating expenses in the Third Quarter decreased by $33.5 million or 9.5% to $320.4 million compared to $353.9 million in the Prior Year Quarter. Third Quarter operating expenses included restructuring costs of $5.8 million under our NWF initiative, while the Prior Year Quarter included $14.5 million in restructuring costs as well as a $10 million benefit resulting from real estate gains.
In the Third Quarter, SG&A expenses were $24.8 million lower compared to the Prior Year Quarter primarily as a result of corporate and regional overhead reductions and lower retail store expenses, given the significant number of stores we have closed since the Prior Year Quarter. Advertising royalties were also lower in the Third Quarter driven by the decline in sales of licensed products. The translation of foreign-denominated expenses during the Third Quarter increased operating expenses by

33



approximately $4.1 million as a result of the weaker U.S. dollar. As a percentage of net sales, SG&A expenses decreased to 45.7% in the Third Quarter as compared to 46.0% in the Prior Year Quarter.
Consolidated Operating Income (Loss). Operating income (loss) decreased to a loss of $0.5 million in the Third Quarter as compared to income of $31.2 million in the Prior Year Quarter, primarily driven by both decreased sales and gross margin rate. As a percentage of net sales, operating margin (loss) was (0.1%) in the Third Quarter compared to 4.2% in the Prior Year Quarter. Operating margin rate in the Third Quarter included a negative impact of approximately 50 basis points due to changes in foreign currencies. During the Third Quarter as compared to the Prior Year Quarter, we faced continued retail pressure, most significantly in our traditional businesses in all segments. Additionally, the gross margin rate was negatively impacted by connected products, due to both lower connected margins as well as additional product valuation charges, and lower retail margins due to increased promotional activity in outlets and the e-commerce channel in all segments. Decreased restructuring costs incurred under our NWF plan, as well as corporate and regional overhead reductions and lower retail store expenses favorably impacted operating income (loss) during the Third Quarter as compared to the Prior Year Quarter.
Operating income (loss) by segment is summarized as follows (dollars in millions):
 
For the 13 Weeks Ended September 30, 2017
 
For the 13 Weeks Ended October 1, 2016
 
Growth (Decline)
 
Operating Margin %
 
 
 
Dollars
 
Percentage
 
2017
 
2016
Americas
$
18.9

 
$
56.4

 
$
(37.5
)
 
(66.5
)%
 
6.1
 %
 
15.6
%
Europe
39.3

 
49.0

 
(9.7
)
 
(19.8
)
 
15.9

 
20.2

Asia
22.0

 
23.7

 
(1.7
)
 
(7.2
)
 
16.5

 
17.7

Corporate
(80.7
)
 
(97.9
)
 
17.2

 
(17.6
)
 
 
 
 
Total operating income (loss)
$
(0.5
)
 
$
31.2

 
$
(31.7
)
 
(101.6
)%
 
(0.1
)%
 
4.2
%
Interest Expense. Interest expense increased by $5.1 million during the Third Quarter as a result of higher interest rate spreads due to our amended credit facility.
Other Income (Expense)-Net. During the Third Quarter, other income (expense)-net increased by $2.3 million to $3.9 million in comparison to the Prior Year Quarter. This change was primarily driven by more favorable foreign currency activity compared to the Prior Year Quarter.
Provision for Income Taxes. The income tax benefit for the Third Quarter was $3.2 million, resulting in an effective income tax rate of 37.1%. For the Prior Year Quarter, income tax expense was $6.5 million, resulting in an effective income tax rate of 25.0%. The higher effective tax rate in the Third Quarter as compared to the Prior Year Quarter was attributable to a higher structural rate resulting from an increased forecasted loss from the Company's U.S. operations which was tax-benefited at a higher tax rate than the tax rates used to calculate the tax expense on the profits from the Company's foreign operations. There were also favorable discrete items occurring in the quarter. These positive impacts were partially offset by the increased tax expense resulting from all of the foreign and some of the U.S. goodwill impairment charge being permanently nondeductible for tax purposes.
Additionally, income taxes are provided for under the asset and liability method for temporary differences in the recognition of assets and liabilities recognized for income tax and GAAP purposes. Deferred tax assets are periodically assessed for the likelihood of whether they are more likely than not to be realized. We have previously established a valuation allowance in those jurisdictions where we believe recovery is not more likely than not, which generally increases tax expense in the period such determination is made.  For those jurisdictions with deferred tax assets not currently subject to a valuation allowance, including the U.S., we have determined that the realization of deferred tax assets continues to be more likely than not.
Net Income (Loss) Attributable to Fossil Group, Inc. Third Quarter net income (loss) attributable to Fossil Group, Inc. decreased to $(5.4) million, or $(0.11) per diluted share, in comparison to $17.4 million, or $0.36 per diluted share, in the Prior Year Quarter. Diluted earnings (loss) per share in the Third Quarter included a restructuring charge of $0.08 as compared to a restructuring charge of $0.22 in the Prior Year Quarter. Excluding restructuring, the decline in diluted earnings (loss) per share in the Third Quarter as compared to the Prior Year Quarter was driven by lower sales and gross margins, mainly due to connected mix, and higher interest expenses, partially offset by lower operating expenses and taxes. The tax benefit in the Third Quarter was positively impacted by the increased effective tax rate in the Third Quarter as compared to the Prior Year Quarter. The translation impact of a stronger U.S. dollar decreased diluted earnings per share by approximately $0.02 year-over-year.


34



Fiscal Year To Date Periods Ended September 30, 2017 and October 1, 2016
Consolidated Net Sales. Net sales decreased $215.8 million or 10.4% (10.0% in constant currency), for the Year To Date Period as compared to the Prior Year YTD Period. Global watch sales decreased $110.1 million or 7.0% (6.7% in constant currency) driven by declines in traditional watches partially offset by increases in connected watches. Our leathers category decreased $61.0 million or 21.9% (21.6% in constant currency) primarily as a result of the current product assortment not resonating well with consumers, and our jewelry product category decreased $31.8 million or 18.5% (17.8% in constant currency) during the Year To Date Period as compared to the Prior Year YTD Period. Global comparable retail sales decreased 9% for the Year To Date Period representing declines in all product categories and all store concepts partially offset by strong e-commerce comparable sales growth.
Net sales information by product category is summarized as follows (dollars in millions):
 
For the 39 Weeks Ended September 30, 2017
 
For the 39 Weeks Ended October 1, 2016
 
Growth (Decline)
 
Net Sales
 
Percentage
of Total
 
Net Sales
 
Percentage
of Total
 
Dollars
 
Percentage As Reported
 
Percentage Constant Currency
Watches
$
1,471.1

 
78.8
%
 
$
1,581.2

 
75.9
%
 
$
(110.1
)
 
(7.0
)%
 
(6.7
)%
Leathers
218.0

 
11.7

 
279.0

 
13.4

 
(61.0
)
 
(21.9
)
 
(21.6
)
Jewelry
139.9

 
7.5

 
171.7

 
8.2

 
(31.8
)
 
(18.5
)
 
(17.8
)
Other
38.4

 
2.0

 
51.3

 
2.5

 
(12.9
)
 
(25.1
)
 
(24.8
)
Total
$
1,867.4

 
100.0
%
 
$
2,083.2

 
100.0
%
 
$
(215.8
)
 
(10.4
)%
 
(10.0
)%
In the Year To Date Period, the translation of foreign-based net sales into U.S. dollars decreased reported net sales by approximately $6.6 million, including unfavorable impacts of $5.5 million, $0.6 million and $0.5 million in our Europe, Americas and Asia segments, respectively, compared to the Prior Year YTD Period.
The following table sets forth consolidated net sales by segment (dollars in millions):
 
For the 39 Weeks Ended September 30, 2017
 
For the 39 Weeks Ended October 1, 2016
 
Growth (Decline)
 
Net Sales
 
Percentage
of Total
 
Net Sales
 
Percentage
of Total
 
Dollars
 
Percentage As Reported
 
Percentage Constant Currency
Americas
$
874.5

 
46.9
%
 
$
1,042.2

 
50.0
%
 
$
(167.7
)
 
(16.1
)%
 
(16.0
)%
Europe
637.6

 
34.1

 
669.1

 
32.1

 
(31.5
)
 
(4.7
)
 
(3.9
)
Asia
355.3

 
19.0

 
371.9

 
17.9

 
(16.6
)
 
(4.5
)
 
(4.3
)
Total
$
1,867.4

 
100.0
%
 
$
2,083.2

 
100.0
%
 
$
(215.8
)
 
(10.4
)%
 
(10.0
)%
Americas Net Sales. For the Year To Date Period, Americas net sales decreased $167.7 million or 16.1% (16.0% in constant currency), compared to the Prior Year YTD Period. During the Year To Date Period, watches decreased $103.0 million or 13.1% (13.0% in constant currency). Our leathers and jewelry categories declined $41.5 million or 23.6% (23.6% in constant currency) and $16.8 million or 26.3% (26.6% in constant currency), respectively. Sales declined in the U.S. and Canada and were partially offset by sales increases in Mexico. During the Year To Date Period, nearly all brands in the portfolio declined driven by decreases in traditional watches that were partially offset by increases in connected watches, with the strongest performance coming from MICHAEL KORS ACCESS and FOSSIL connected watches. Both wholesale and retail sales declined at similar rates. Comparable retail sales declined moderately in the region with negative comparable store sales partially offset by moderate increases in comparable sales in our e-commerce business.

35



The following table sets forth product net sales for the Americas segment on a reported and constant currency basis (dollars in millions):
 
For the 39 Weeks Ended September 30, 2017
 
For the 39 Weeks Ended October 1, 2016
 
 
 
 
 
 
Growth (Decline)
 
Net Sales
 
Net Sales
 
Dollars
 
Percentage As Reported
 
Percentage Constant Currency
Watches
$
681.1

 
$
784.1

 
$
(103.0
)
 
(13.1
)%
 
(13.0
)%
Leathers
134.5

 
176.0

 
(41.5
)
 
(23.6
)
 
(23.6
)
Jewelry
47.2

 
64.0

 
(16.8
)
 
(26.3
)
 
(26.6
)
Other
11.7

 
18.1

 
(6.4
)
 
(35.4
)
 
(34.8
)
Total
$
874.5

 
$
1,042.2

 
$
(167.7
)
 
(16.1
)%
 
(16.0
)%

Europe Net Sales. For the Year To Date Period, Europe net sales decreased $31.5 million or 4.7% (3.9% in constant currency), compared to the Prior Year YTD Period. Watches declined $4.7 million or 1.0% (0.3% in constant currency) and our leathers and jewelry categories declined $9.9 million or 16.9% (15.7% in constant currency) and $10.9 million or 11.1% (9.8% in constant currency), respectively. During the Year To Date Period, most of the brands in the portfolio declined driven by decreases in traditional watches that were partially offset by increases in connected watches. Growth in Spain and Poland were offset by declines in most other markets with the greatest decline in our Middle East business. Both wholesale and retail channels decreased at similar rates. Comparable retail sales were moderately negative during the Year To Date Period with negative comparable sales in the leathers and jewelry categories while comparable sales in our watch category were flat.
The following table sets forth product net sales for the Europe segment on a reported and constant currency basis (dollars in millions):
 
For the 39 Weeks Ended September 30, 2017
 
For the 39 Weeks Ended October 1, 2016
 
 
 
 
 
 
Growth (Decline)
 
Net Sales
 
Net Sales
 
Dollars
 
Percentage As Reported
 
Percentage Constant Currency
Watches
$
483.7

 
$
488.4

 
$
(4.7
)
 
(1.0
)%
 
(0.3
)%
Leathers
48.8

 
58.7

 
(9.9
)
 
(16.9
)
 
(15.7
)
Jewelry
87.6

 
98.5

 
(10.9
)
 
(11.1
)
 
(9.8
)
Other
17.5

 
23.5

 
(6.0
)
 
(25.5
)
 
(25.1
)
Total
$
637.6

 
$
669.1

 
$
(31.5
)
 
(4.7
)%
 
(3.9
)%

Asia Net Sales. For the Year To Date Period, Asia net sales decreased $16.6 million or 4.5% (4.3% in constant currency), compared to the Prior Year YTD Period. Leathers declined $9.7 million or 21.9% (21.7% in constant currency), jewelry declined $4.1 million or 44.6% (44.6% in constant currency) and watch sales decreased $2.2 million or 0.7% (0.6% in constant currency). Growth in India and China was offset by declines in Japan, Australia and most other markets. Comparable retail sales in the region decreased moderately with negative comparable sales in the leathers and jewelry categories partially offset by positive comparable sales in our watch category for the Year To Date Period.

36



The following table sets forth product net sales for the Asia segment on a reported and constant currency basis (dollars in millions):
 
For the 39 Weeks Ended September 30, 2017
 
For the 39 Weeks Ended October 1, 2016
 
 
 
 
 
 
Growth (Decline)
 
Net Sales
 
Net Sales
 
Dollars
 
Percentage As Reported
 
Percentage Constant Currency
Watches
$
306.5

 
$
308.7

 
$
(2.2
)
 
(0.7
)%
 
(0.6
)%
Leathers
34.6

 
44.3

 
(9.7
)
 
(21.9
)
 
(21.7
)
Jewelry
5.1

 
9.2

 
(4.1
)
 
(44.6
)
 
(44.6
)
Other
9.1

 
9.7

 
(0.6
)
 
(6.2
)
 
(4.1
)
Total
$
355.3

 
$
371.9

 
$
(16.6
)
 
(4.5
)%
 
(4.3
)%

Gross Profit. For the Year To Date Period, gross profit margin decreased 350 basis points to 48.8% compared to 52.3% in the Prior Year YTD Period. The decreased gross profit margin was primarily driven by the same factors impacting the Third Quarter. Changes in foreign currency rates negatively impacted gross profit margin by approximately 60 basis points.
Operating Expenses. For the Year To Date Period, total operating expenses increased to $1.4 billion compared to $1.0 billion in the Prior Year YTD Period, primarily due to intangible impairment charges recorded in the second quarter of fiscal 2017. During the second quarter of fiscal year 2017, interim impairment tests were performed on goodwill and trade names due to the sustained declines in our market capitalization and sales trends, resulting in impairment expenses of $359.5 million for goodwill and $47.6 million for trade names. For additional information, please refer to "Note 2 - Goodwill and Intangibles Impairment Charges" to the condensed consolidated financial statements. During the Year To Date Period, we incurred restructuring costs of $41.8 million under our NWF initiative compared with restructuring costs of $14.5 million in the Prior Year YTD Period. SG&A expenses were lower compared to the Prior Year YTD Period due to lower infrastructure and store costs driven by NWF and reduced marketing expenses. The translation of foreign-denominated expenses during the Year To Date Period decreased operating expenses by approximately $3.4 million as a result of the stronger U.S. dollar. As a percentage of net sales, SG&A expenses increased to 50.2% in the Year To Date Period as compared to 48.7% in the Prior Year YTD Period.
Consolidated Operating Income (Loss). Operating income (loss) decreased to a loss of $475.5 million in the Year To Date Period as compared to income of $61.0 million in the Prior Year YTD Period, primarily driven by non-cash intangible impairment charges of $407.1 million and also by decreased sales and gross margin rate. As a percentage of net sales, operating margin was (25.5)% in the Year To Date Period as compared to 2.9% in the Prior Year YTD Period and was negatively impacted by approximately 70 basis points due to changes in foreign currencies. During the Year To Date Period as compared to the Prior Year YTD Period, we faced continued retail pressure, most significantly in our traditional businesses in all segments. Additionally, the gross margin rate was negatively impacted by connected products, due to both lower connected margins as well as additional product valuation charges, and lower retail margins due to increased promotional activity in outlets and the e-commerce channel in all segments. Operating expenses increased significantly, primarily due to non-cash impairment charges recorded on our goodwill in the Americas, Europe and Asia segments and trade names in corporate. Increased restructuring charges were more than offset by savings in our infrastructure, store costs and marketing expenses.
Operating income (loss) by segment is summarized as follows (dollars in millions): 
 
For the 39 Weeks Ended September 30, 2017
 
For the 39 Weeks Ended October 1, 2016
 
Growth (Decline)
 
Operating Margin %
 
 
 
Dollars
 
Percentage
 
2017
 
2016
Americas
$
(122.0
)
 
$
168.3

 
$
(290.3
)
 
(172.5
)%
 
(13.9
)%
 
16.2
%
Europe
(33.8
)
 
109.2

 
(143.0
)
 
(131.0
)
 
(5.3
)
 
16.3

Asia
(2.7
)
 
60.5

 
(63.2
)
 
(104.5
)
 
(0.8
)
 
16.3

Corporate
(317.0
)
 
(277.0
)
 
(40.0
)
 
14.4

 
 
 
 
Total operating income (loss)
$
(475.5
)
 
$
61.0

 
$
(536.5
)
 
(879.5
)%
 
(25.5
)%
 
2.9
%
Interest Expense. Interest expense increased by $12.7 million during the Year To Date Period as a result of higher interest rate spreads due to our amended credit facility.

37



Other Income (Expense)-Net. During the Year To Date Period, other income (expense)-net increased by $5.1 million to $11.5 million in comparison to the Prior Year YTD Period. This change was largely driven by favorable foreign currency activity compared to the Prior Year YTD Period.
Provision for Income Taxes. Income tax benefit for the Year To Date Period was $100.7 million, resulting in an effective income tax rate of 20.3%. For the Prior Year YTD Period, income tax expense was $13.2 million, resulting in an effective income tax rate of 27.5%. The tax benefit in the Year To Date Period was negatively impacted by the increased tax expense resulting from all of the foreign and some of the U.S. goodwill impairment charge being permanently nondeductible for tax purposes as compared to the Prior Year YTD Period combined with the impact of unfavorable discrete items, mostly due to the additional tax expense resulting from the adoption of ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.
Additionally, income taxes are provided for under the asset and liability method for temporary differences in the recognition of assets and liabilities recognized for income tax and GAAP purposes. Deferred tax assets are periodically assessed for the likelihood of whether they are more likely than not to be realized. We have previously established a valuation allowance in those jurisdictions where we believe recovery is not more likely than not, which generally increases tax expense in the period such determination is made.  For those jurisdictions with deferred tax assets not currently subject to a valuation allowance, including the U.S., we have determined that the realization of deferred tax assets continues to be more likely than not.
Net Income (Loss) Attributable to Fossil Group, Inc. Year To Date Period net income (loss) attributable to Fossil Group, Inc. decreased to $(398.3) million, or $(8.22) per diluted share, in comparison to $29.2 million, or $0.60 per diluted share, in the Prior Year YTD Period, primarily due to a $(6.51) per diluted share impact of intangible impairment charges recorded during the Year To Date Period. Diluted earnings (loss) per share was negatively impacted by restructuring charges of $0.56 in the Year To Date Period and $0.22 in the Prior Year YTD Period. The tax benefit in the Year To Date Period was negatively impacted by the decreased effective tax rate in the Year To Date Period as compared to the Prior Year YTD Period. Diluted earnings per share in the Year To Date Period as compared to the Prior Year YTD Period decreased $0.11 due to the currency impact of a stronger U.S. dollar.
Liquidity and Capital Resources
Our cash and cash equivalents balance at the end of the Third Quarter was $166.9 million, including $165.8 million held in banks outside the U.S., in comparison to cash and cash equivalents of $236.0 million at the end of the Prior Year Quarter and $297.3 million at the end of fiscal year 2016. Historically, our business operations have not required substantial cash during the first several months of our fiscal year. Generally, starting in the third quarter, our cash needs begin to increase, typically reaching a peak in the September-November time frame as we increase inventory levels in advance of the holiday season. Our quarterly cash requirements are also impacted by strategic investments such as acquisitions, other capital expenditures and restructuring charges. We believe cash from operating activities as well as amounts available under our U.S. credit facilities are sufficient to meet our cash needs in the U.S. for the next 12 months.
For the Year To Date Period, we generated operating cash flow of $60.2 million. This operating cash flow combined with cash on hand was utilized to fund net debt payments of $149.5 million and $17.2 million of capital expenditures. Net losses of $395.4 million were offset by net non-cash items of $389.3 million and a net decrease in working capital items of $66.2 million. Non-cash items primarily consisted of goodwill and trade name impairment charges of $407.1 million. The net decrease in working capital items primarily consisted of a decrease in accounts receivable of $85.1 million and an increase in accounts payable of $80.1 million, partially offset by a net increase in inventory of $116.0 million.
Accounts receivable, net of allowances, decreased by 3.2% to $310.9 million at the end of the Third Quarter compared to $321.3 million at the end of the Prior Year Quarter. Days sales outstanding for our wholesale businesses for the Third Quarter increased to 56 days compared to 53 days in the Prior Year Quarter primarily due to shifts in customer mix and timing of payments.
Accounts payable at the end of the Third Quarter was $248.8 million, which increased by 28.5% from the end of the Prior Year Quarter ending accounts payable balance of $193.6 million. The increase in accounts payable in the Third Quarter was largely due to our effective working capital management and timing of payments, some of which will have an offsetting effect in the fourth quarter of fiscal 2017.
Inventory at the end of the Third Quarter was $683.0 million, which decreased by 2.4% from the end of the Prior Year Quarter ending inventory balance of $699.6 million. We have reduced our traditional watch inventories significantly and we are working to clear the previous generation connected products over the next few quarters.
At the end of the Third Quarter, we had working capital of $732.8 million compared to working capital of $965.5 million at the end of the Prior Year Quarter. At the end of the Third Quarter, we had approximately $40.2 million of short-term borrowings and $444.3 million in long-term debt.
On March 9, 2015, we entered into an Amended and Restated Credit Agreement (as amended, the “Credit Agreement”). The Credit Agreement provides for (i) revolving credit loans (the “Revolving Credit Facility”), with an up to $20.0 million subfacility for swingline loans (the “Swingline Loan”), and an up to $10.0 million subfacility for letters of credit, and (ii) a term loan in the amount of $231.3 million (the “Term Loan”). The Credit Agreement amended and restated that certain credit agreement, dated as of May 17, 2013, as amended (the “Prior Agreement”).
On March 10, 2017, we entered into the Second Amendment to the Amended and Restated Credit Agreement (the “Second Amendment”). The Second Amendment reduced the Revolving Credit Facility under the Credit Agreement from $1.05 billion to $850.0 million. The Second Amendment also removed the incremental term loan that was available under the Credit Agreement, extended the maturity date of the Credit Agreement to May 17, 2019 and removed our ability to make offers to the lenders to extend the maturity date of the Term Loan or the Revolving Credit Facility. The Second Amendment also amended the repayment schedule for the Term Loan and requires us to make monthly payments on the last business day of each month beginning April 30, 2018. On and after April 1, 2018, interest on the Term Loan that is based upon the base rate will be due and payable in arrears on the last business day of each calendar month, and interest on the Term Loan that is based upon the London Interbank Offer Rate ("LIBOR") will be due and payable on the last day of the applicable interest period; provided, that if such interest period extends for over one month, then interest will be due and payable at the end of each one month interval during such interest period. The Second Amendment also amended the mandatory prepayment provisions under the Credit Agreement and provides that to the extent there are excess proceeds remaining from the issuance of debt following the repayment in full of the Term Loan, we are required to repay the Revolving Credit Facility in the amount of such excess proceeds, with a corresponding permanent reduction in the Revolving Credit Facility in the amount of up to $50.0 million.
The Second Amendment amended the applicable margin used to calculate the interest rate that is applicable to base rate loans and LIBOR rate loans and provides that the interest rate margin for base rate loans is 2.50% per annum and the interest rate margin for LIBOR rate loans is 3.50% per annum. On October 1, 2017, the applicable margin on the Term Loan automatically increased to 2.75% per annum for base rate loans and 3.75% per annum for LIBOR rate loans. If the Term Loan has not been repaid in full on or prior to March 31, 2018, then on such date, the applicable margin will automatically increase to 3.25% per annum for base rate loans and 4.25% per annum for LIBOR rate loans. The Second Amendment also changed the commitment fee payable with respect to the Revolving Credit Facility to 0.50% per annum. We will incur an additional fee of 0.25% times the outstanding principal amount of the total credit exposure under the Credit Agreement if the Term Loan has not been repaid in full on or prior to March 31, 2018. Furthermore, the Second Amendment changed the consolidated total leverage ratio that we must comply with from 3.25 to 1.00 to the ratios as set forth below:
Period
 
Maximum Ratio
July 2, 2017 through and including September 30, 2017
 
3.50 to 1.00
October 1, 2017 through and including March 31, 2018
 
3.25 to 1.00
April 1, 2018 through and including September 29, 2018
 
3.50 to 1.00
September 30, 2018 and thereafter
 
3.25 to 1.00
As of September 30, 2017, amounts outstanding under the Revolving Credit Facility and the Term Loan under the Credit Agreement bear interest, at our option, at (i) the base rate plus 2.50% or (ii) the LIBOR rate (defined as the quotient obtained by dividing (a) LIBOR by (b) 1.00 minus the Eurodollar reserve percentage) plus 3.50%.
Amounts outstanding under the Swingline Loan under the Credit Agreement or upon any drawing under a letter of credit bear interest at the base rate plus the applicable margin.
During the Year To Date Period, we made principal payments of $18.8 million under the Term Loan. Additionally, we had net principal payments of $131.3 million under the Revolving Credit Facility during the Year To Date Period at an average annual interest rate of 4.27%. As of September 30, 2017, we had $175.0 million and $309.7 million outstanding under the Term Loan and the Revolving Credit Facility, respectively. As of September 30, 2017, we also had unamortized debt issuance costs, which reduce the corresponding debt liability, of $6.7 million. In addition, we had $0.9 million of outstanding standby letters of credit at September 30, 2017. Amounts available under the Revolving Credit Facility are reduced by any amounts outstanding under standby letters of credit. As of September 30, 2017, we had available borrowing capacity of $270.5 million under the Revolving Credit Facility. Our domestic subsidiary receives short-term loans from certain of our foreign subsidiaries at the end of each fiscal quarter which are used to reduce our external borrowings. These intercompany loans are repaid at the beginning

38



of the following fiscal quarter. At the end of the Third Quarter, these intercompany loans totaled $411.8 million. Borrowings under the Revolving Credit Facility were mainly used to fund normal operating expenses and capital expenditures. At September 30, 2017, we were in compliance with all debt covenants related to all our credit facilities. We continue to focus on diversifying our capital structure beyond just our existing bank partners with longer tenors to support our long-term strategic objectives.
As part of our NWF initiative, we have adopted a disciplined approach to capital management. During the Year To Date Period, we took actions that will reduce costs and better position the organization to support our growth driving initiatives while focusing fewer resources on areas of the business that are not as high of a priority currently. For fiscal year 2017, we expect total capital expenditures to be approximately $30 million. Of this amount, we expect approximately 55% will be for strategic growth, including investments in omni-channel, global concessions and technology, approximately 20% will be for retail store expansion and renovation and approximately 25% will be for technology and facilities maintenance. Our capital expenditure budget and allocation of it to the foregoing investments are estimates and are subject to change. We believe that cash flows from operations combined with existing cash on hand and amounts available under the Revolving Credit Facility will be sufficient to fund our working capital needs and planned capital expenditures for the next twelve months. We will continue to be focused on efforts to minimize our cash needs and improve our working capital efficiency.

Off Balance Sheet Arrangements
As of September 30, 2017, there were no material changes to our off balance sheet arrangements as set forth in commitments and contingencies in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP requires us 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. On an on-going basis, we evaluate our estimates and judgments, including those related to product returns, bad debt, inventories, long-lived asset impairment, impairment of goodwill and trade names, income taxes, warranty costs, hedge accounting, litigation reserves and stock-based compensation. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances. Our estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
At the end of the fiscal year 2016, our market capitalization exceeded the carrying amount of our net assets by 23%. At the end of the first quarter of fiscal 2017, we experienced a decline in our market capitalization and, as a result of the decline, our market capitalization was 14% below the carrying amount of our net assets as of April 1, 2017. During the second quarter of fiscal 2017, the market capitalization continued to decline at which point we determined the decrease in stock price to be sustained and thus a strong indicator of impairment. Interim testing was performed as of June 15, 2017 for each reporting unit and trade name. Due to a change in key assumptions used in interim testing, including the decline in market capitalization and decline in sales projections, impairment was indicated for goodwill and trade names. Goodwill was fully impaired resulting in pre-tax impairment charges during the second quarter of fiscal 2017 of $202.3 million, $114.3 million and $42.9 million in the Americas, Europe and Asia segments, respectively. Also during the second quarter of fiscal 2017, the SKAGEN trade name with a carrying amount of $55.6 million was written down to its implied fair value of $27.3 million, resulting in a pre-tax impairment charge of $28.3 million; the MISFIT trade name with a carrying amount of $11.8 million was deemed not recoverable, resulting in a pre-tax impairment charge of $11.8 million and the MICHELE trade name with a carrying amount of $18.5 million was written down to its implied fair value of $10.9 million, resulting in a pre-tax impairment charge of $7.6 million.
Other than noted above and in "Note 1—Financial Statement Policies" to the condensed consolidated financial statements, there have been no changes to the critical accounting policies disclosed in “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.


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Forward-Looking Statements
The statements contained and incorporated by reference in this Quarterly Report on Form 10-Q that are not historical facts, including, but not limited to, statements regarding our expected financial position, results of operations, business and financing plans found in this “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 3. Quantitative and Qualitative Disclosures About Market Risk,” constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and involve a number of risks and uncertainties. The words “may,” “believes,” “expects,” “plans,” “intends,” “estimates,” “anticipates” and similar expressions identify forward-looking statements. The actual results of the future events described in such forward-looking statements could differ materially from those stated in such forward-looking statements. Among the factors that could cause actual results to differ materially are: the effect of worldwide economic conditions; significant changes in consumer spending patterns or preferences; interruptions or delays in the supply of key components; acts of war or acts of terrorism; changes in foreign currency valuations in relation to the U.S. dollar; lower levels of consumer spending resulting from a general economic downturn or generally reduced shopping activity caused by public safety or consumer confidence concerns; the performance of our products within the prevailing retail environment; customer acceptance of both new designs and newly-introduced product lines, including risks related to the expanded launch of connected accessories; financial difficulties encountered by customers; the effects of vigorous competition in the markets in which we operate; the integration of the organizations and operations of any acquired businesses into our existing organization and operations; risks related to the success of NWF; the termination or non-renewal of material licenses, foreign operations and manufacturing; changes in the costs of materials, labor and advertising; government regulation; our ability to secure and protect trademarks and other intellectual property rights; and the outcome of current and possible future litigation.
In addition to the factors listed above, our actual results may differ materially due to the other risks and uncertainties discussed in this Quarterly Report on Form 10-Q and the risks and uncertainties set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016. Accordingly, readers of this Quarterly Report on Form 10-Q should consider these facts in evaluating the information and are cautioned not to place undue reliance on the forward-looking statements contained herein. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

Item 3. Quantitative and Qualitative Disclosures about Market Risk
Foreign Currency Exchange Rate Risk
As a multinational enterprise, we are exposed to changes in foreign currency exchange rates. Our most significant foreign currency risk relates to the euro and, to a lesser extent, the Canadian dollar, British pound, Japanese yen, Mexican peso and Australian dollar as compared to the U.S. dollar. Due to our vertical nature whereby a significant portion of goods are sourced from our owned entities, we face foreign currency risks related to the necessary current settlement of intercompany inventory transactions. We employ a variety of operating practices to manage these market risks relative to foreign currency exchange rate changes and, where deemed appropriate, utilize forward contracts. These operating practices include, among others, our ability to convert foreign currency into U.S. dollars at spot rates and to maintain U.S. dollar pricing relative to sales of our products to certain distributors located outside the U.S. Additionally, we enter 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. The use of forward contracts allows us to offset exposure to rate fluctuations because the gains or losses incurred on the derivative instruments will offset, in whole or in part, losses or gains on the underlying foreign currency exposure. We use derivative instruments only for risk management purposes and do not use them for speculation or for trading. There were no significant changes in how we managed foreign currency transactional exposure in the Third Quarter, and management does not anticipate any significant changes in such exposures or in the strategies we employ to manage such exposure in the near future.

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The following table shows our outstanding forward contracts designated as cash flow hedges for inventory transactions (in millions) at September 30, 2017 and their expiration dates.
Functional Currency
 
Contract Currency
 
 
Type
 
Amount
 
Type
 
Amount
 
Expiring Through
Euro
 
253.4

 
U.S. dollar
 
291.0

 
August 2019
Canadian dollar
 
95.0

 
U.S. dollar
 
73.2

 
September 2019
British pound
 
43.5

 
U.S. dollar
 
58.1

 
September 2019
Japanese yen
 
4,636.4

 
U.S. dollar
 
42.8

 
September 2019
Mexican peso
 
378.6

 
U.S. dollar
 
20.3

 
June 2018
Australian dollar
 
21.2

 
U.S. dollar
 
16.5

 
June 2018
U.S. dollar
 
41.1

 
Japanese yen
 
4,470.0

 
November 2018
If we were to settle our euro, Canadian dollar, British pound, Japanese yen, Mexican peso, Australian dollar and U.S. dollar based forward contracts hedging inventory transactions as of September 30, 2017, the net result would have been a net loss of approximately $12.1 million, net of taxes. As of September 30, 2017, a 10% unfavorable change in the U.S. dollar strengthening against foreign currencies to which we have balance sheet transactional exposures would have decreased net pre-tax income by $27.0 million. The translation of the balance sheets of our foreign-based operations from their local currencies into U.S. dollars is also sensitive to changes in foreign currency exchange rates. As of September 30, 2017, a 10% unfavorable change in the exchange rate of the U.S. dollar strengthening against the foreign currencies to which we have exposure would have reduced consolidated stockholders' equity by approximately $66.0 million.
Interest Rate Risk
We are subject to interest rate volatility with regard to debt borrowings. Effective July 26, 2013, we entered into an interest rate swap agreement with a term of approximately five years to manage our exposure to interest rate fluctuations on our Term Loan. We will continue to evaluate our interest rate exposure and the use of interest rate swaps in future periods to mitigate our risk associated with adverse fluctuations in interest rates.
Based on our variable-rate debt outstanding as of September 30, 2017, a 100 basis point increase in interest rates would increase annual interest expense by approximately $3.1 million. This amount excludes the $168.3 million outstanding, net of debt issuance costs, under our Term Loan hedged with an interest rate swap agreement.

Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We conducted an evaluation of the effectiveness of our “disclosure controls and procedures” (“Disclosure Controls”), as defined by Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this Quarterly Report on Form 10-Q. The Disclosure Controls evaluation was done under the supervision and with the participation of management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”). There are inherent limitations to the effectiveness of any system of disclosure controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
Based upon this evaluation, our CEO and CFO have concluded that our Disclosure Controls were effective as of September 30, 2017.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the Third Quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings
There are no legal proceedings to which we are a party or to which our properties are subject, other than routine litigation incidental to our business, which is not material to our consolidated financial condition, results of operations or cash flows.


Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There were no shares of common stock repurchased under any of our repurchase programs during the Third Quarter.

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Item 6. Exhibits
(a)                  Exhibits
Exhibit
Number
 
Document Description
 
 
 
3.1
 
 
 
 
3.2
 
 
 
 
3.3
 
 
 
 
10.1(1)(2)
 
 
 
 
10.2(2)
 
 
 
 
31.1(1)
 
 
 
 
31.2(1)
 
 
 
 
32.1(3)
 
 
 
 
32.2(3)
 
 
 
 
101.INS(1)
 
XBRL Instance Document.
 
 
 
101.SCH(1)
 
XBRL Taxonomy Extension Schema Document.
 
 
 
101.DEF(1)
 
XBRL Taxonomy Extension Definition Linkbase Document.
 
 
 
101.CAL(1)
 
XBRL Taxonomy Extension Calculation Linkbase Document.
 
 
 
101.LAB(1)
 
XBRL Taxonomy Extension Label Linkbase Document.
 
 
 
101.PRE(1)
 
XBRL Taxonomy Extension Presentation Linkbase Document.
_______________________________________________
(1)                  Filed herewith.
(2)                 Management contract or compensatory plan or arrangement.
(3)                  Furnished herewith.

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. 
 
FOSSIL GROUP, INC.
 
 
November 9, 2017
/S/ JEFFREY N. BOYER
 
Jeffrey N. Boyer
 
Executive Vice President, Chief Financial Officer and Treasurer (Principal financial and accounting officer duly authorized to sign on behalf of the Registrant)

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