Edgar Filing: Fossil Group, Inc.

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 28, 2013

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 000-19848

FOSSIL GROUP, INC.

(Exact name of registrant as specified in its charter)

Delaware		75-2018505
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

901 S. Central Expressway, Richardson, Texas		75080
(Address of principal executive offices)		(Zip Code)

(972) 234-2525

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):

Large accelerated filer x		Accelerated filer o

Non-accelerated filer o		Smaller reporting company o
(Do not check if a smaller reporting company)

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

The number of shares of the registrant’s common stock outstanding as of November 1, 2013: 55,204,589.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

FOSSIL GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

UNAUDITED

IN THOUSANDS

	September 28, 2013		December 29, 2012

Assets
Current assets:
Cash and cash equivalents	$	228,899	$	177,236
Securities available for sale	0		127
Accounts receivable - net of allowances of $67,482 and $82,362, respectively	360,580		363,456
Inventories	656,585		506,314
Deferred income tax assets-net	35,027		34,238
Prepaid expenses and other current assets	74,359		62,741
Total current assets	1,355,450		1,144,112

Investments	25		6,965
Property, plant and equipment - net of accumulated depreciation of $302,076 and $262,041, respectively	351,626		335,446
Goodwill	204,975		184,793
Intangible and other assets-net	178,115		170,673
Total long-term assets	734,741		697,877
Total assets	$	2,090,191	$	1,841,989

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	164,541	$	149,561
Short-term debt	14,567		2,794
Accrued expenses:
Compensation	69,407		55,563
Royalties	44,491		53,547
Co-op advertising	16,366		24,500
Transaction taxes	22,781		27,973
Other	72,371		61,575
Income taxes payable	32,680		31,265
Total current liabilities	437,204		406,778

Long-term income taxes payable	11,053		8,662
Deferred income tax liabilities	81,724		79,756
Long-term debt	468,369		75,140
Other long-term liabilities	53,039		31,189
Total long-term liabilities	614,185		194,747
Commitments and contingencies (Note 12)

Stockholders’ equity:
Common stock, 55,647 and 59,631 shares issued at September 28, 2013 and December 29, 2012, respectively	556		596
Additional paid-in capital	149,906		138,097
Retained earnings	848,002		1,066,082
Accumulated other comprehensive income	30,958		28,760
Total Fossil Group, Inc. stockholders’ equity	1,029,422		1,233,535
Noncontrolling interest	9,380		6,929
Total stockholders’ equity	1,038,802		1,240,464
Total liabilities and stockholders’ equity	$	2,090,191	$	1,841,989

See notes to the condensed consolidated financial statements.

FOSSIL GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

UNAUDITED

IN THOUSANDS, EXCEPT PER SHARE DATA

	For the 13 Weeks Ended						For the 39 Weeks Ended
	September 28, 2013			September 29, 2012			September 28, 2013			September 29, 2012

Net sales	$	810,396		$	684,170		$	2,197,544		$	1,909,807
Cost of sales	345,427			302,646			945,203			842,942
Gross profit	464,969			381,524			1,252,341			1,066,865

Operating expenses:
Selling and distribution	229,095			193,276			649,747			570,979
General and administrative	94,842			75,161			260,293			211,841
Total operating expenses	323,937			268,437			910,040			782,820

Operating income	141,032			113,087			342,301			284,045
Interest expense	3,036			1,437			6,016			3,680
Other income-net	259			2,211			9,082			6,185

Income before income taxes	138,255			113,861			345,367			286,550
Provision for income taxes	45,881			33,984			108,604			85,213

Net income	92,374			79,877			236,763			201,337
Less: Net income attributable to noncontrolling interest	2,640			3,086			7,130			9,068
Net income attributable to Fossil Group, Inc.	$	89,734		$	76,791		$	229,633		$	192,269

Other comprehensive income (loss), net of taxes:
Currency translation adjustment	$	19,277		$	12,249		$	2,424		$	6,639
Unrealized gain (loss) on securities available for sale	558			(4		)	475			25
Cash flow hedges-change in fair value	(5,691		)	(1,983		)	(701		)	(1,075		)
Total other comprehensive income	14,144			10,262			2,198			5,589

Total comprehensive income	106,518			90,139			238,961			206,926
Less: Comprehensive income attributable to noncontrolling interest	2,640			3,086			7,130			9,068
Comprehensive income attributable to Fossil Group, Inc.	$	103,878		$	87,053		$	231,831		$	197,858

Earnings per share:
Basic	$	1.59		$	1.27		$	3.95		$	3.13
Diluted	$	1.58		$	1.26		$	3.93		$	3.11
Weighted average common shares outstanding:
Basic	56,458			60,573			58,150			61,342
Diluted	56,704			60,955			58,433			61,804

See notes to the condensed consolidated financial statements.

FOSSIL GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

UNAUDITED

IN THOUSANDS

	For the 39 Weeks Ended
	September 28, 2013			September 29, 2012
Operating Activities:
Net income	$	236,763		$	201,337
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion	59,639			47,146
Stock-based compensation	11,062			12,858
Decrease in allowance for returns-net of inventory in transit	(3,586		)	(2,929		)
Loss on disposal of assets	660			1,473
Impairment losses	0			256
Equity in income of joint venture	0			(815		)
Gain on equity method investment	(6,510		)	0
Decrease in allowance for doubtful accounts	(6,200		)	(3,047		)
Excess tax benefits from stock-based compensation	(7,204		)	(11,223		)
Deferred income taxes and other	5,968			4,836
Contingent consideration revaluation	0			(3,585		)

Changes in operating assets and liabilities:
Accounts receivable	22,919			41,043
Inventories	(144,726		)	(78,487		)
Prepaid expenses and other current assets	(9,512		)	(1,866		)
Accounts payable	14,368			(28,586		)
Accrued expenses	(4,806		)	(50,141		)
Income taxes payable	11,118			40,231
Net cash provided by operating activities	179,953			168,501

Investing Activities:
Additions to property, plant and equipment	(66,334		)	(59,710		)
Increase in intangible and other assets	(8,959		)	(4,980		)
Proceeds from the sale of property, plant and equipment, and other	2,027			21
Net change in restricted cash	424			6,903
Business acquisitions-net of cash acquired	(14,896		)	(229,151		)
Net cash used in investing activities	(87,738		)	(286,917		)

Financing Activities:
Acquisition of common stock	(460,413		)	(205,631		)
Distribution of noncontrolling interest earnings	(4,679		)	(4,406		)
Excess tax benefits from stock-based compensation	7,204			11,223
Debt borrowings	960,116			399,198
Debt payments	(554,078		)	(235,688		)
Proceeds from exercise of stock options	6,203			5,279
Net cash used in financing activities	(45,647		)	(30,025		)
Effect of exchange rate changes on cash and cash equivalents	5,095			3,780
Net increase (decrease) in cash and cash equivalents	51,663			(144,661		)
Cash and cash equivalents:
Beginning of period	177,236			287,498
End of period	$	228,899		$	142,837

See notes to the condensed consolidated financial statements.

FOSSIL GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

1. FINANCIAL STATEMENT POLICIES

Basis of Presentation. On May 22, 2013, the company changed its corporate name from “Fossil, Inc.” to “Fossil Group, Inc.” 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 28, 2013, and the results of operations for the thirteen week periods ended September 28, 2013 (“Third Quarter”) and September 29, 2012 (“Prior Year Quarter”), and the thirty-nine week periods ended September 28, 2013 (“Year To Date Period”) and September 29, 2012 (“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 29, 2012 (the “2012 Form 10-K”). Operating results for the Third Quarter and Year to Date Period are not necessarily indicative of the results to be achieved for the full fiscal year.

The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), which require the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the periods reported. Actual results could differ from those estimates. The Company has not made any changes in its significant accounting policies from those disclosed in the 2012 Form 10-K.

Business. The Company is a global design, marketing and distribution company that specializes in consumer fashion accessories. Its principal offerings include an extensive line of men’s and women’s fashion watches and jewelry, handbags, small leather goods, belts, sunglasses, soft accessories and clothing. 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’s derivative instruments consist of foreign exchange forward contracts and an interest rate swap. The Company’s foreign subsidiaries periodically enter into foreign exchange forward contracts to hedge the future payment of intercompany inventory transactions denominated in U.S. dollars. If the Company’s foreign subsidiaries were to settle their contracts designated as cash flow hedges that were denominated in Euros, British Pounds, Canadian Dollars, Japanese Yen, Mexican Pesos, and Australian Dollars, the net result would have been a loss of approximately $3.3 million, net of taxes, as of September 28, 2013. Also, the Company has entered into an interest rate swap agreement to effectively convert a portion of variable rate debt obligations from a floating rate to a fixed rate. The Company applies the hedge accounting rules as required by Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging (“ASC 815”). See “Note 8—Derivatives and Risk Management” for additional disclosures about the Company’s use of derivatives.

Earnings Per Share (“EPS”). Basic EPS is based on the weighted average number of common shares outstanding during each period. Diluted EPS adjusts basic EPS for the effects of dilutive common stock equivalents outstanding during each period using the treasury stock method.

The following table reconciles the numerators and denominators used in the computations of both basic and diluted EPS (in thousands, except per share data):

	For the 13 Weeks Ended				For the 39 Weeks Ended
	September 28, 2013		September 29, 2012		September 28, 2013		September 29, 2012

Numerator:
Net income attributable to Fossil Group, Inc.	$	89,734	$	76,791	$	229,633	$	192,269

Denominator:
Basic EPS computation:
Basic weighted average common shares outstanding	56,458		60,573		58,150		61,342
Basic EPS	$	1.59	$	1.27	$	3.95	$	3.13

Diluted EPS computation:
Basic weighted average common shares outstanding	56,458		60,573		58,150		61,342
Stock options, stock appreciation rights and restricted stock units	246		382		283		462
Diluted weighted average common shares outstanding	56,704		60,955		58,433		61,804
Diluted EPS	$	1.58	$	1.26	$	3.93	$	3.11

Approximately 227,000, 252,000, 370,000 and 215,000 shares issuable under stock-based awards were not included in the diluted EPS calculation at the end of the Third Quarter, Year To Date Period, Prior Year Quarter and Prior Year YTD Period, respectively, because they were antidilutive.

Restricted Cash. As of September 28, 2013 and December 29, 2012, the Company had short-term restricted cash balances of $41,000 and $0.3 million, respectively, and long-term restricted cash balances of $0.7 million and $1.0 million, respectively, primarily pledged as collateral to secure bank guarantees for the purpose of obtaining retail space. Short-term restricted cash is reported in prepaid expenses and other current assets in the Company’s condensed consolidated balance sheets as a component of current assets. Long-term restricted cash is reported in intangible and other assets-net in the Company’s condensed consolidated balance sheets as a component of long-term assets.

Recently Issued Accounting Standards. In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11”). ASU 2013-11 requires, unless certain conditions exist, an unrecognized tax benefit to be presented as a reduction to a deferred tax asset in the financial statements for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. The guidance in ASU 2013-11 will become effective for the Company prospectively for annual periods beginning after December 15, 2013, and interim periods within those years, with early adoption permitted. Retrospective application is also permitted. The Company is currently assessing the impact, if any, the adoption of ASU 2013-11 will have on its condensed consolidated results of operations and financial position.

In March 2013, FASB issued ASU 2013-05, Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity (“ASU 2013-05”). ASU 2013-05 addresses the accounting for the cumulative translation adjustment when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. The guidance outlines the events when cumulative translation adjustments should be released into net income and is intended by FASB to eliminate some disparity in current accounting practice. The guidance in ASU 2013-05 will become effective for the Company for annual periods beginning after December 15, 2013, and interim periods within those years. The Company will apply the guidance prospectively to any derecognition events that may occur after the effective date and does not expect the adoption of ASU 2013-05 to have a material impact on the Company’s condensed consolidated results of operations or financial position.

In December 2011, FASB issued ASU 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”), to address certain comparability issues between financial statements prepared in accordance with GAAP and those prepared in accordance with International Financial Reporting Standards. In January 2013, FASB issued ASU 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities (“ASU 2013-01”), which clarifies which instruments and transactions are subject to the offsetting disclosure requirements established by ASU 2011-11. ASU 2011-11 will require an entity to provide enhanced disclosures about certain financial instruments and derivatives, as defined in ASU 2013-01, to enable users to understand the effects of offsetting in the financial statements as well as the effects of master netting arrangements on an entity’s financial condition. The amendments in ASU 2011-11 and ASU 2013-01 are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those years, with respective disclosures required for all comparative periods presented. The Company does not expect the adoption of ASU 2011-11 and ASU 2013-01 to have a material impact on the Company’s condensed consolidated results of operations or financial position.

Recently Adopted Accounting Standards. In July 2012, FASB issued ASU 2012-02, Intangibles—Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment (“ASU 2012-02”). The amendments in this update permit an entity to make a qualitative assessment to determine if it is more likely than not that an indefinite-lived intangible asset other than goodwill is impaired. If an entity concludes that it is more likely than not that the fair value of an indefinite-lived intangible asset other than goodwill is less than its carrying amount, it is required to perform the quantitative impairment test for that asset. This ASU aligns the guidance of impairment testing for indefinite-lived intangible assets other than goodwill with that in ASU 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment (“ASU 2011-08”). The guidance in ASU 2012-02 was effective for the Company beginning December 30, 2012 and did not have a material impact on the Company’s condensed consolidated results of operations or financial position.

In February 2013, FASB issued ASU 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“ASU 2013-02”). FASB issued ASU 2013-02 to improve the transparency of changes in other comprehensive income (“OCI”) and items reclassified out of accumulated other comprehensive income (“AOCI”) in financial statements. ASU 2013-12 requires an entity to provide information about amounts reclassified out of AOCI by component. In addition, an entity must present either on the face of the income statement or in the notes, significant amounts reclassified out of AOCI by the respective line items of net income. See “Note 6—Stockholders’ Equity and Benefit Plans” for additional disclosures about the Company’s OCI. The guidance in ASU 2013-02 became effective for the Company on December 30, 2012 and did not have a material impact on the Company’s condensed consolidated results of operations or financial position.

2. ACQUISITIONS, DIVESTITURE AND GOODWILL

Skagen Designs, Ltd. Acquisition. On April 2, 2012, the Company acquired Skagen Designs, Ltd. and certain of its international affiliates (“Skagen Designs”). Skagen Designs was a privately held Nevada-based company that globally marketed and distributed contemporary Danish design accessories including watches, clocks, jewelry and sunglasses. The primary purpose of the acquisition was to add an attractive brand to the Company’s portfolio that the Company could grow using its established distribution channels. The purchase price was $231.7 million in cash and 150,000 shares of the Company’s common stock valued at $19.9 million based on the mean between the highest and lowest sales price of the Company’s common stock on NASDAQ on April 2, 2012. To fund the cash purchase price, the Company utilized approximately $200 million of availability under its revolving line of credit and excess cash available in its international subsidiaries to fund the international portion of the purchase price. In addition, subject to the purchase agreement, the sellers could have received up to 100,000 additional shares of the Company’s common stock if the Company’s net sales of SKAGEN® branded products exceeded certain thresholds over a defined period of time (the “Earnout”).

The Company recorded the Earnout as a $9.9 million contingent consideration liability in accrued expenses-other in the Company’s condensed consolidated balance sheets as of the acquisition date. As of December 29, 2012, the contingent consideration liability was remeasured at zero, which resulted in a decrease in operating expenses of $9.9 million during fiscal year 2012. During fiscal year 2013, the contingent consideration liability remained valued at zero as the Earnout criteria was not met. The results of Skagen Designs’ operations have been included in the Company’s consolidated financial statements since April 2, 2012.

Prior to closing the Skagen Designs acquisition, the Company incurred approximately $600,000 of acquisition-related expenses for legal, accounting and valuation services during fiscal year 2011 and the first quarter of fiscal year 2012. The Company incurred additional acquisition and integration related costs of approximately $8.2 million in fiscal year 2012, subsequent to the closing date. Acquisition and integration costs were reflected in general and administrative expenses on the Company’s condensed consolidated statements of comprehensive income. There were no acquisition and integration costs incurred during the Year To Date Period.

During the first quarter of fiscal year 2013, the Company finalized the purchase accounting for the acquisition, with no change since fiscal year end 2012. Assets acquired and liabilities assumed in the transaction were recorded at their acquisition date fair values, while transaction costs associated with the acquisition were expensed as incurred.

Because the total purchase price exceeded the fair values of the tangible and intangible assets acquired, goodwill was recorded equal to the difference. The element of goodwill that is not separable into identifiable intangible assets represents expected synergies. The following table summarizes the allocation of the purchase price to the fair value of the assets acquired and the liabilities assumed as of April 2, 2012, the effective date of the acquisition (in thousands):

Cash paid, net of cash acquired	$	229,012
Value of common stock issued	19,899
Contingent consideration	9,950
Total transaction consideration:	$	258,861
Accounts receivable	$	16,595
Inventories	22,638
Prepaid expenses and other current assets	3,306
Property, plant and equipment	4,232
Goodwill	140,387
Trade name	64,700
Customer lists	24,400
Patents	1,500
Noncompete agreement	1,900
Other long-term assets	2,972
Current liabilities	(20,840		)
Long-term liabilities	(2,929		)
Total net assets acquired	$	258,861

The goodwill and trade name assets recognized from the acquisition have indefinite useful lives, were tested for impairment at fiscal year end 2012 and will continue to be tested for impairment annually or on an interim basis if indicators are present. The amortization periods for the acquired customer lists, patents and noncompete agreements range from three years to nine years. Approximately $133.8 million of the goodwill recognized in the acquisition is expected to be deductible for tax purposes.

The following unaudited pro forma information presents the combined results of operations of Fossil Group, Inc. and Skagen Designs as if the acquisition had occurred at the beginning of the prior year period. The pro forma information is not necessarily indicative of what the financial position or results of operations actually would have been had the acquisition been completed at the beginning of the prior year period presented below. In addition, the unaudited pro forma financial information is not indicative of, nor does it purport to project, the future financial position or operating results of Fossil Group, Inc. The unaudited pro forma information does not give effect to any potential cost savings or other operating efficiencies that could result from the acquisition. The following table presents the unaudited pro forma financial information (in thousands, except per share data):

	For the 39 Weeks Ended September 29, 2012

Net sales	$	1,940,251
Net income attributable to Fossil Group, Inc.	197,861
Earnings per share:
Basic	$	3.23
Diluted	$	3.20

Fossil Spain Acquisition. On August 10, 2012, the Company’s joint venture company, Fossil, S.L. (“Fossil Spain”), entered into a Framework Agreement (the “Framework Agreement”) with several related and unrelated parties, including General De Relojeria, S.A. (“General De Relojeria”), the Company’s joint venture partner. Pursuant to the Framework Agreement, Fossil Spain was granted the right to acquire the outstanding 50% of its shares owned by General De Relojeria upon the expiration of the joint venture agreement on December 31, 2015. Upon the acquisition of these shares, Fossil Spain will become a wholly owned subsidiary of the Company.

Effective January 1, 2013, pursuant to the Framework Agreement, the Company assumed control over the board of directors and the day-to-day management of Fossil Spain. As a result of this change, the Company now controls Fossil Spain and began consolidating it in accordance with ASC 810, Consolidation, instead of treating it as an equity method investment.

In accordance with ASC 805, Business Combinations, the Company remeasured its preexisting investment in Fossil Spain to fair value as of January 1, 2013, resulting in a gain of $6.5 million, which was recorded in other income-net on the Company’s condensed consolidated statements of comprehensive income. The results of Fossil Spain’s operations have been included in the Company’s condensed consolidated financial statements since January 1, 2013. The Company recorded approximately $10.6 million of goodwill related to the acquisition.

The purchase price for the shares has a fixed and variable component. The fixed portion is based on 50% of the net book value of Fossil Spain as of December 31, 2012. The fixed portion was measured at 5.2 million Euros (approximately $6.8 million at the purchase date). The Company recorded a contingent consideration liability of 5.9 million Euros (approximately $7.8 million at the purchase date) related to the variable portion of the purchase price as of January 1, 2013. The variable portion will be determined based on Fossil Spain’s aggregated results of operations less dividends distributed by Fossil Spain to General De Relojeria with a minimum annual variable price of 2.0 million Euros (approximately $2.6 million at the purchase date) and a maximum annual variable price of 3.5 million Euros (approximately $4.6 million at the purchase date) for each of the calendar years 2013, 2014, and 2015. See “Note 9 — Fair Value Measurements” for additional information about the contingent consideration liability for Fossil Spain.

Of the total consideration for Fossil Spain, 2.2 million Euros (approximately $3.0 million) relating to the contingent consideration for calendar year 2013 was recorded in accrued expenses — other, and 8.9 million Euros (approximately $12.0 million) of the total consideration was recorded in other long-term liabilities in the condensed consolidated balance sheets at September 28, 2013.

Bentrani Watches, LLC Acquisition. On December 31, 2012, the Company purchased substantially all of the assets of Bentrani Watches, LLC (“Bentrani”). Bentrani was a distributor of watch products in 16 Latin American countries and was based in Miami, Florida. Bentrani was the Company’s largest third-party distributor and had partnered with the Company for ten years. The purchase price was $26.0 million, comprised of $18.7 million in cash and $7.3 million in forgiveness of a payable to the Company. The Company recorded approximately $8.3 million of goodwill related to the acquisition. The results of Bentrani’s operations have been included in the Company’s condensed consolidated financial statements since the acquisition date. On June 28, 2013, the Company also obtained control of Bentrani Chile SpA (“Bentrani Chile”), and the results of Bentrani Chile’s operations have been included in the Company’s condensed consolidated financial statements since that date. The terms of the Bentrani Chile acquisition were not significant.

Swiss Technology Components AG Divestiture. On April 24, 2013, Swiss Technology Holding GmbH (“STH”), a wholly owned subsidiary of the Company, sold 80% of STH’s share in Swiss Technology Components AG (“STC”). During the second quarter of fiscal year 2013, STC was deconsolidated as a result of the Company’s termination of control and is now accounted for under the cost method.

Goodwill is the excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed. The changes in the carrying amount of goodwill, which is not subject to amortization, were as follows (in thousands):

	North America wholesale			Europe wholesale		Asia Pacific wholesale			Total
Balance at December 29, 2012	$	109,270		$	63,884	$	11,639		$	184,793
Acquisitions	8,265			10,641		0			18,906
Foreign currency changes	(19		)	1,322		(27		)	1,276
Balance at September 28, 2013	$	117,516		$	75,847	$	11,612		$	204,975

3. INVENTORIES

Inventories consisted of the following (in thousands):

	September 28, 2013		December 29, 2012
Components and parts	$	49,658	$	62,731
Work-in-process	9,600		8,071
Finished goods	597,327		435,512
Inventories	$	656,585	$	506,314

4. WARRANTY RESERVE

The Company’s warranty liabilities are primarily related to watch products. The Company’s FOSSIL® watch products sold in the U.S. are covered by a limited warranty against defects in materials or workmanship for a period of 11 years from the date of purchase. RELIC® watch products sold in the U.S. are covered by a comparable 12 year warranty, while certain other watches sold by the Company are covered by a comparable two year limited warranty. SKAGEN branded watches are covered by a lifetime warranty against defects due to faulty material or workmanship, subject to normal conditions of use. The Company’s warranty liability is recorded using historical warranty repair expense and is recorded in accrued expenses-other in the condensed consolidated balance sheets. As changes in warranty costs are experienced, the warranty accrual is adjusted as necessary. Warranty liability activity consisted of the following (in thousands):

	For the 39 Weeks Ended
	September 28, 2013			September 29, 2012
Beginning balance	$	13,383		$	10,996
Settlements in cash or kind	(7,624		)	(4,591		)
Warranties issued and adjustments to preexisting warranties (1)	8,622			6,561
Liabilities assumed in acquisition	340			595
Ending balance	$	14,721		$	13,561

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

5. INCOME TAXES

The Company’s income tax expense and related effective rate were as follows (in thousands, except percentage data):

	For the 13 Weeks Ended						For the 39 Weeks Ended
	September 28, 2013			September 29, 2012			September 28, 2013			September 29, 2012
Income tax expense	$	45,881		$	33,984		$	108,604		$	85,213
Income tax rate	33.2		%	29.8		%	31.4		%	29.7		%

The higher effective tax rate in the Third Quarter and the Year To Date Period was primarily due to the impact of adjusting the estimated full year rate to reflect a shift in geographical earnings mix.

As of September 28, 2013, the total amount of unrecognized tax benefits, excluding interest and penalties, was $10.0 million, of which $6.1 million would favorably impact the effective tax rate in future periods, if recognized. The U.S. Internal Revenue Service completed its examination of the Company’s 2007-2009 federal income tax returns, and the Company has settled all outstanding federal income tax liabilities for those years. The Company is subject to examinations in various state and foreign jurisdictions for its 2006-2012 tax years, none of which the Company believes are individually significant. Audit outcomes and timing of 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 28, 2013, the Company had recorded $0.2 million of unrecognized tax benefits, excluding interest and penalties, for positions that could be settled within the next twelve months. Consistent with its past practice, the Company recognizes interest and/or penalties related to income tax overpayments and income tax underpayments in income tax expense and income taxes receivable/payable, respectively. The total amount of accrued income tax-related interest and penalties included in the condensed consolidated balance sheets at September 28, 2013 was $1.0 million and $0.3 million, respectively. For the Third Quarter, the Company accrued income tax-related interest expense of $0.1 million.

6. STOCKHOLDERS’ EQUITY AND BENEFIT PLANS

Common Stock Repurchase Programs. Purchases of the Company’s common stock are made from time to time pursuant to its repurchase programs, subject to market conditions and at prevailing market prices, through the open market. Repurchased shares of common stock are recorded at cost and become authorized but unissued shares which may be issued in the future for general corporate or other purposes. The Company may terminate or limit its stock repurchase program at any time. In the event the repurchased shares are cancelled, the Company accounts for retirements by allocating the repurchase price to common stock, additional paid-in capital and retained earnings.

The repurchase price allocation is based upon the equity contribution associated with historical issuances. The repurchase programs are conducted pursuant to Rule 10b-18 of the Exchange Act.

During the Year To Date Period, the Company effectively retired 4.3 million shares of common stock repurchased under its repurchase programs. The effective retirement of repurchased common stock decreased common stock by $42,700, additional paid-in capital by $6.2 million, retained earnings by $447.7 million and treasury stock by $454.0 million. At December 29, 2012 and September 28, 2013, all treasury stock had been effectively retired. As of September 28, 2013, the Company had $614.6 million of repurchase authorizations remaining under the combined repurchase plans.

The following table reflects the Company’s common stock repurchase activity for the periods indicated (in millions):

				For the 13 Weeks Ended September 28, 2013			For the 39 Weeks Ended September 28, 2013
Fiscal Year Authorized	Dollar Value Authorized		Termination Date	Number of Shares Repurchased	Dollar Value Repurchased		Number of Shares Repurchased	Dollar Value Repurchased
2012	$	1,000.0	December 2016	2.0	$	228.2	3.9	$	415.4
2010	$	30.0	None	0.0	$	0.0	0.0	$	0.0
2010	$	750.0	December 2013(1)	0.0	$	0.0	0.4	$	38.6

(1) In the first quarter of fiscal year 2013, the Company completed this repurchase plan.

Stock-Based Compensation Plans. The Company accounts for stock-based compensation in accordance with the provisions of ASC 718, Compensation-Stock Compensation (“ASC 718”), using the Black-Scholes option pricing model to determine the fair value of stock options and stock appreciation rights at the date of grant. Grants under the Company’s stock-based compensation plans generally include: (i) stock options, restricted stock and restricted stock units for its international employees, (ii) restricted stock units for its non-employee directors and (iii) stock appreciation rights, restricted stock and restricted stock units for its U.S.-based employees.

The following table summarizes stock options and stock appreciation rights activity during the Third Quarter:

Stock Options and Stock Appreciation Rights	Number of Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
	in thousands					in thousands
Outstanding at June 29, 2013	823		$	72.14	6.3	$	31,815
Granted	3		108.15
Exercised	(49	)	39.05			3,934
Forfeited or expired	(28	)	101.50
Outstanding at September 28, 2013	749		73.42		6.2	34,909
Exercisable at September 28, 2013	451		$	56.95	5.4	$	27,838

The aggregate intrinsic value shown in the table above is before income taxes and is based on (i) the exercise price for outstanding and exercisable options/rights at September 28, 2013 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 table summarizes information with respect to stock options and stock appreciation rights outstanding and exercisable at September 28, 2013:

	Stock Options Outstanding				Stock Options Exercisable
				Weighted-
		Weighted-		Average		Weighted-
		Average		Remaining		Average
	Number of	Exercise		Contractual	Number of	Exercise
Range of Exercise Prices	Shares	Price		Term (Years)	Shares	Price
	in thousands				in thousands
$13.65 - $21.51	89	$	15.38	4.6	68	$	15.93
$21.51 - $34.59	82	28.70		3.1	82	28.70
$34.59 - $67.10	85	39.66		5.9	85	39.66
$67.10 - $106.40	126	81.04		7.5	71	80.85
$106.40 - $131.46	184	128.08		8.3	66	128.08
Total	566	$	72.16	6.4	372	$	56.42

	Stock Appreciation Rights Outstanding				Stock Appreciation Rights Exercisable
				Weighted-
		Weighted-		Average		Weighted-
		Average		Remaining		Average
	Number of	Exercise		Contractual	Number of	Exercise
Range of Exercise Prices	Shares	Price		Term (Years)	Shares	Price
	in thousands				in thousands
$13.65 - $21.51	23	$	13.65	3.5	9	$	13.65
$21.51 - $34.59	20	29.13		2.3	20	29.13
$34.59 - $67.10	24	41.31		4.7	21	39.46
$67.10 - $106.40	69	92.37		6.7	11	81.23
$106.40 - $131.46	47	126.40		6.2	18	127.95
Total	183	$	77.29	5.4	79	$	59.39

Restricted Stock and Restricted Stock Units. The following table summarizes restricted stock and restricted stock unit activity during the Third Quarter:

			Weighted-Average
	Number of		Grant Date Fair
Restricted Stock and Restricted Stock Units	Shares		Value
	in thousands
Nonvested at June 29, 2013	221		$	96.47
Granted	19		110.91
Vested	(6	)	69.73
Forfeited	(9	)	91.76
Nonvested at September 28, 2013	225		$	98.61

The total fair value of restricted stock and restricted stock units vested during the Third Quarter was approximately $0.6 million.

Accumulated Other Comprehensive Income. The following table illustrates changes in the balances of each component of accumulated other comprehensive income, net of taxes (in thousands):

	For the 13 Weeks Ended September 28, 2013
	Currency Translation Adjustments		Securities Available for Sale			Forward Contracts			Interest Rate Swap			Total
Beginning balance	$	13,328	$	(558	)	$	4,044		$	0		$	16,814
Other comprehensive income (loss) before reclassifications, net of tax benefit of $4,457	19,277		558			(4,733		)	(922		)	14,180

Amounts reclassed from accumulated other comprehensive income, net of tax expense of $31	0		0			326			(290		)	36

Total other comprehensive income (loss)	19,277		558			(5,059		)	(632		)	14,144

Ending balance	$	32,605	$	0		$	(1,015	)	$	(632	)	$	30,958

	For the 13 Weeks Ended September 29, 2012
	Currency Translation Adjustments		Securities Available for Sale			Forward Contracts			Interest Rate Swap		Total
Beginning balance	$	13,343	$	(417	)	$	4,581		$	0	$	17,507
Other comprehensive income (loss) before reclassifications, net of tax benefit of $1,849	12,249		(4		)	(121		)	0		12,124

Amounts reclassed from accumulated other comprehensive income, net of tax expense of $973	0		0			1,862			0		1,862

Total other comprehensive income (loss)	12,249		(4		)	(1,983		)	0		10,262

Ending balance	$	25,592	$	(421	)	$	2,598		$	0	$	27,769

	For the 39 Weeks Ended September 28, 2013
	Currency Translation Adjustments		Securities Available for Sale			Forward Contracts			Interest Rate Swap			Total
Beginning balance	$	30,181	$	(475	)	$	(946	)	$	0		$	28,760
Other comprehensive income (loss) before reclassifications, net of tax benefit of $651	2,424		475			1,055			(922		)	3,032

Amounts reclassed from accumulated other comprehensive income, net of tax expense of $623	0		0			1,124			(290		)	834

Total other comprehensive income (loss)	2,424		475			(69		)	(632		)	2,198

Ending balance	$	32,605	$	0		$	(1,015	)	$	(632	)	$	30,958

	For the 39 Weeks Ended September 29, 2012
	Currency Translation Adjustments		Securities Available for Sale			Forward Contracts			Interest Rate Swap		Total
Beginning balance	$	18,953	$	(446	)	$	3,673		$	0	$	22,180
Other comprehensive income (loss) before reclassifications, net of tax expense of $133	6,639		25			3,090			0		9,754

Amounts reclassed from accumulated other comprehensive income, net of tax expense of $2,138	0		0			4,165			0		4,165

Total other comprehensive income (loss)	6,639		25			(1,075		)	0		5,589

Ending balance	$	25,592	$	(421	)	$	2,598		$	0	$	27,769

See “Note 8—Derivatives and Risk Management” for additional disclosures about the Company’s use of derivatives.

7. SEGMENT INFORMATION

The Company manages its business primarily on a geographic basis. The Company’s reportable operating segments are comprised of North America wholesale, Europe wholesale, Asia Pacific wholesale and Direct to consumer. The North America wholesale, Europe wholesale and Asia Pacific wholesale segments do not include activities related to the Direct to consumer segment. The North America wholesale segment primarily includes sales to wholesale or distributor customers based in Canada, Mexico, the United States and countries in South America. The Europe wholesale segment primarily includes sales to wholesale or distributor customers based in European countries, the Middle East and Africa. The Asia Pacific wholesale segment primarily includes sales to wholesale or distributor customers based in Australia, China (including the Company’s assembly and procurement operations), India, Indonesia, Japan, Malaysia, New Zealand, Singapore, South Korea, Taiwan and Thailand. The Direct to consumer segment includes Company-owned retail stores, e-commerce sales and catalog activities. Each reportable operating segment provides similar products and services.

The Company evaluates the performance of its reportable segments based on net sales and operating income. Net sales for geographic segments are generally based on the location of the customers. Operating income for each segment includes net sales to third-parties, related cost of sales and operating expenses directly attributable to the segment. General corporate expenses, including certain administrative, legal, accounting, technology support costs, equity compensation costs, payroll costs attributable to executive management and amounts related to intercompany eliminations are not allocated to the various segments. Intercompany sales of products between segments are referred to as intersegment items.

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

	For the 13 Weeks Ended September 28, 2013						For the 13 Weeks Ended September 29, 2012
	Net Sales			Operating Income			Net Sales			Operating Income

North America wholesale:
External customers	$	300,707		$	76,689		$	253,997		$	55,328
Intersegment	54,318						44,891
Europe wholesale:
External customers	209,507			56,180			163,453			39,267
Intersegment	51,888						43,913
Asia Pacific wholesale:
External customers	104,835			36,046			97,636			36,258
Intersegment	287,100						254,841
Direct to consumer	195,347			18,567			169,084			22,865
Intersegment items	(393,306		)				(343,645		)
Corporate				(46,450		)				(40,631		)
Consolidated	$	810,396		$	141,032		$	684,170		$	113,087

	For the 39 Weeks Ended September 28, 2013						For the 39 Weeks Ended September 29, 2012
	Net Sales			Operating Income			Net Sales			Operating Income

North America wholesale:
External customers	$	816,565		$	203,418		$	728,808		$	154,695
Intersegment	149,280						133,770
Europe wholesale:
External customers	554,171			131,178			464,114			$	101,899
Intersegment	131,289						113,126
Asia Pacific wholesale:
External customers	287,798			94,069			258,689			$	95,062
Intersegment	742,190						582,559
Direct to consumer	539,010			41,784			458,196			$	46,957
Intersegment items	(1,022,759		)				(829,455		)
Corporate				(128,148		)				(114,568		)
Consolidated	$	2,197,544		$	342,301		$	1,909,807		$	284,045

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 28, 2013				For the 13 Weeks Ended September 29, 2012
	Net Sales		Percentage of Total		Net Sales		Percentage of Total

Watches	$	619,087	76.4	%	$	516,994	75.6	%
Leathers	114,692		14.1		106,976		15.6
Jewelry	57,320		7.1		39,973		5.8
Other	19,297		2.4		20,227		3.0
Total	$	810,396	100.0	%	$	684,170	100.0	%

	For the 39 Weeks Ended				For the 39 Weeks Ended
	September 28, 2013				September 29, 2012
	Net Sales		Percentage of Total		Net Sales		Percentage of Total

Watches	$	1,679,329	76.4	%	$	1,412,181	74.0	%
Leathers	309,228		14.1		307,931		16.1
Jewelry	146,677		6.7		116,903		6.1
Other	62,310		2.8		72,792		3.8
Total	$	2,197,544	100.0	%	$	1,909,807	100.0	%

8. DERIVATIVES AND RISK MANAGEMENT

The Company is exposed to certain risks relating to its ongoing business operations, which it attempts to manage by using derivative instruments. 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 18 months. The Company enters into foreign currency forward contracts (“forward contracts”) generally for up to 65% of the forecasted purchases to manage fluctuations in global currencies that will ultimately be used to settle such U.S. dollar denominated inventory purchases. Forward contracts represent agreements to exchange the currency of one country for the currency of another country at an agreed-upon settlement date. The majority of the Company’s forward contracts are designated as single cash flow hedges. Fluctuations in exchange rates will either increase or decrease the Company’s U.S. dollar equivalent cash flows from these intercompany inventory transactions, which will affect the Company’s U.S. dollar earnings. Gains or losses on the forward contracts are expected to offset these fluctuations to the extent the cash flows are hedged by the forward contracts. The Company also periodically enters into forward contracts to manage exchange rate risks associated with certain non-inventory intercompany transactions and to which the Company does not elect hedge treatment. All of the Company’s outstanding forward contracts were designated as hedging instruments as of September 28, 2013 and December 29, 2012.

The forward contracts that the Company purchased to hedge exchange rate risk associated with intercompany inventory transactions meet the criteria for hedge eligibility, which requires that they represent foreign-currency-denominated forecasted intra-entity transactions in which (i) the operating unit that has the foreign currency exposure is a party to the hedging instrument and (ii) the hedged transaction is denominated in a currency other than the hedging unit’s functional currency.

At the inception of each forward contract 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.

The Company is also exposed to interest rate risk related to its U.S.-based term loan (“Term Loan”). To manage the interest rate risk related to this loan, the Company entered into an interest rate swap agreement on July 26, 2013 with a term of approximately five years. The objective of this hedge is to offset the variability of future payments associated with interest rates on the Term Loan. The interest rate swap agreement hedges approximately $250 million of 1-month LIBOR-based variable rate debt obligations under the Term Loan. Under the terms of the agreement, the Company will pay a fixed interest rate of 1.288% per annum on a notional amount of $250 million to the swap counterparty, which will amortize over the remaining life of the Term Loan to coincide with the amortization of the underlying loan.

The Company will receive interest from the swap counterparty at a variable rate based on 1-month LIBOR. This hedge is designated as a cash flow hedge.

The accounting for gains and losses that result from changes in the fair values of derivative instruments depends on whether the derivatives have been designated and qualify as hedging instruments. Changes in the fair value of derivatives not designated as hedging instruments are recognized in earnings when they occur. For a derivative instrument that is designated and qualifies as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income (loss), net of taxes and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. Due to the high degree of effectiveness between the hedging instruments and the underlying exposures being hedged, the Company’s hedges resulted in no ineffectiveness in the condensed consolidated statements of comprehensive income, and there were no components excluded from the assessment of hedge effectiveness for the Third Quarter, Prior Year Quarter, Year To Date Period or Prior Year YTD Period.

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 balance sheet until such derivative’s gains (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 discontinuation 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 cash flow hedge assets and liabilities on a gross basis as they do not meet the balance sheet netting criteria because the Company does not have master netting agreements established with the derivative counterparties that would allow for net settlement.

As of September 28, 2013, the Company had the following outstanding forward contracts that were entered into to hedge the future payments of intercompany inventory transactions (in millions):

Functional Currency		Contract Currency
Type	Amount	Type	Amount
Euro	175.8	U.S. Dollar	231.6
British Pound	21.7	U.S. Dollar	33.7
Canadian Dollar	31.0	U.S. Dollar	30.1
Japanese Yen	2,342.0	U.S. Dollar	25.6
Mexican Peso	166.0	U.S. Dollar	12.8
Australian Dollar	12.1	U.S. Dollar	11.4

The effective portion of gains and losses on derivative instruments that was recognized in other comprehensive income (loss), net of taxes during the Third Quarter, Prior Year Quarter, Year To Date Period and the Prior Year YTD Period is set forth below (in thousands):

Derivatives Designated as Cash	For the 13 Weeks Ended			For the 13 Weeks Ended
Flow Hedges Under ASC 815	September 28, 2013			September 29, 2012
Foreign exchange forward contracts	$	(4,733	)	$	(121	)
Interest rate swap	(922		)	0
Total loss recognized in other comprehensive income	$	(5,655	)	$	(121	)

	For the 39 Weeks			For the 39 Weeks
Derivatives Designated as Cash	Ended			Ended
Flow Hedges Under ASC 815	September 28, 2013			September 29, 2012
Foreign exchange forward contracts	$	1,055		$	3,090
Interest rate swap	(922		)	0
Total gain recognized in other comprehensive income	$	133		$	3,090

The following table illustrates the effective portion of gains and losses on derivative instruments recorded in other comprehensive income (loss), net of taxes during the term of the hedging relationship and reclassified into earnings, and gains and losses on derivatives not designated as hedging instruments recorded directly to earnings during the Third Quarter, Prior Year Quarter, Year To Date Period, and Prior Year YTD Period (in thousands):

	Condensed
	Consolidated
	Statements of Comprehensive		For the 13 Weeks			For the 13 Weeks
Derivative Contracts Under	Income		Ended			Ended
ASC 815	Location		September 28, 2013			September 29, 2012
Foreign exchange contracts designated as cash flow hedging instruments	Other income-net	Total gain reclassified from other comprehensive income	$	326		$	1,862

Foreign exchange contracts not designated as hedging instruments	Other income-net	Total gain (loss) recognized in income	$	0		$	0
Interest rate swap designated as cash flow hedging instruments	Interest expense	Total loss reclassified from other comprehensive income	$	(290	)	$	0

	Condensed
	Consolidated
	Statements of		For the 39 Weeks			For the 39 Weeks
Derivative Contracts Under	Comprehensive		Ended September 28,			Ended September 29,
ASC 815	Income Location		2013			2012
Foreign exchange contracts designated as cash flow hedging instruments	Other income-net	Total gain reclassified from other comprehensive income	$	1,124		$	4,165

Foreign exchange contracts not designated as hedging instruments	Other income-net	Total (loss) recognized in income	$	(74	)	$	0

Interest rate swap designated as cash flow hedging instruments	Interest expense	Total loss reclassified from other comprehensive income	$	(290	)	$	0

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 28, 2013

December 29, 2012

September 28, 2013

December 29, 2012

Condensed

Consolidated

Derivative Contracts Under

Balance

Fair

Balance

Fair

Balance

Fair

Balance

Fair

ASC 815

Sheets Location

Value

Sheets Location

Value

Sheets Location

Value

Sheets Location

Value

Foreign exchange contracts designated as cash flow hedging instruments

Prepaid expenses and other current assets

2,893

Prepaid expenses and other current assets

2,336

Accrued expenses- other

6,857

Accrued expenses- other

4,560

Interest rate contracts designated as cash flow hedging instruments

Prepaid expenses and other current assets

Accrued expenses- other

219

Accrued expenses- other

Foreign exchange contracts designated as cash flow hedging instruments

Intangible and other assets- net

240

Other long-term liabilities

1,065

Other long-term liabilities

582

Interest rate contracts designated as cash flow hedging instruments

Intangible and other assets- net

Other long-term liabilities

784

Other long-term liabilities

Total

2,942

2,576

8,925

5,142

At the end of the Third Quarter, the Company had forward contracts with maturities extending through March 2015. The estimated net amount of the existing gains or losses at September 28, 2013 that is expected to be reclassified into earnings within the next twelve months is a loss of $2.7 million. See “Note 1—Financial Statement Policies” for additional disclosures on foreign currency hedging instruments.

9. 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.

ASC 820, Fair Value Measurement and Disclosures (“ASC 820”), establishes a fair value hierarchy, which prioritizes the inputs used in measuring fair value into three broad levels as follows:

· Level 1 — Quoted prices in active markets for identical assets or liabilities.

· Level 2 — Inputs, other than quoted prices in active markets, that are observable either directly or indirectly.

· Level 3 — Unobservable inputs based on the Company’s assumptions.

ASC 820 requires the use of observable market data if such data is available without undue cost and effort.

The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of September 28, 2013 (in thousands):

	Fair Value at September 28, 2013
	Level 1		Level 2		Level 3		Total
Assets:
Forward contracts	$	0	$	2,942	$	0	$	2,942
Deferred compensation plan assets:
Investment in publicly traded mutual funds	2,329		0		0		2,329
Total	$	2,329	$	2,942	$	0	$	5,271
Liabilities:
Contingent consideration	$	0	$	0	$	7,936	$	7,936
Forward contracts	0		7,922		0		7,922
Interest rate swaps	0		1,003		0		1,003
Total	$	0	$	8,925	$	7,936	$	16,861

The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of December 29, 2012 (in thousands):

Fair Value at December 29, 2012

Level 1

Level 2

Level 3

Total

Assets: