Edgar Filing: Fossil Group, Inc.

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

__________________________________________________________________

FORM 10-Q

__________________________________________________________________

(Mark One)



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

For the quarterly period ended: July 2, 2016



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

For the transition period from to

Commission file number: 000-19848

__________________________________________________________________

FOSSIL GROUP, INC.

(Exact name of registrant as specified in its charter)

__________________________________________________________________



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

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

(972) 234-2525

(Registrant’s telephone number, including area code)

__________________________________________________________________

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

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

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



Large accelerated filer x		Accelerated filer o

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

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

The number of shares of the registrant’s common stock outstanding as of August 5, 2016: 48,129,755

FOSSIL GROUP, INC.

FORM 10-Q

FOR THE FISCAL QUARTER ENDED JULY 2, 2016

INDEX



		Page
PART I
Item 1.	Financial Statements	3
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Income and Comprehensive Income	4
	Condensed Consolidated Statements of Cash Flow	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	25
	Results of Operations	26
	Liquidity and Capital Resources	31
	Forward-Looking Statements	34
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34
Item 4.	Controls and Procedures	35
PART II
Item 1.	Legal Proceedings	36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 6.	Exhibits	37
	SIGNATURES	39

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

FOSSIL GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

UNAUDITED

IN THOUSANDS



	July 2, 2016			January 2, 2016
Assets
Current assets:
Cash and cash equivalents	$	231,836		$	289,275
Accounts receivable - net of allowances of $60,219 and $84,558, respectively	257,053			370,761
Inventories	661,748			625,344
Prepaid expenses and other current assets	161,723			157,290
Total current assets	1,312,360			1,442,670
Property, plant and equipment - net of accumulated depreciation of $430,761 and $398,068, respectively	328,004			326,370
Goodwill	364,158			359,394
Intangible and other assets-net	222,016			227,227
Total long-term assets	914,178			912,991
Total assets	$	2,226,538		$	2,355,661
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	195,259		$	208,083
Short-term and current portion of long-term debt	26,302			23,159
Accrued expenses:
Compensation	53,288			61,496
Royalties	21,086			38,359
Co-op advertising	18,687			28,918
Transaction taxes	25,721			44,425
Other	71,109			76,592
Income taxes payable	249			8,497
Total current liabilities	411,701			489,529
Long-term income taxes payable	20,716			20,634
Deferred income tax liabilities	70,692			75,165
Long-term debt	708,664			785,076
Other long-term liabilities	59,251			52,714
Total long-term liabilities	859,323			933,589
Commitments and contingencies (Note 13)
Stockholders’ equity:
Common stock, 48,127 and 48,125 shares issued and outstanding at July 2, 2016 and January 2, 2016, respectively	481			481
Additional paid-in capital	201,169			187,456
Retained earnings	820,771			813,957
Accumulated other comprehensive income (loss)	(77,172		)	(80,506		)
Total Fossil Group, Inc. stockholders’ equity	945,249			921,388
Noncontrolling interest	10,265			11,155
Total stockholders’ equity	955,514			932,543
Total liabilities and stockholders’ equity	$	2,226,538		$	2,355,661

See notes to the condensed consolidated financial statements.

FOSSIL GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

UNAUDITED

IN THOUSANDS, EXCEPT PER SHARE DATA



	For the 13 Weeks Ended July 2, 2016			For the 13 Weeks Ended July 4, 2015			For the 26 Weeks Ended July 2, 2016			For the 26 Weeks Ended July 4, 2015
Net sales	$	685,368		$	739,975		$	1,345,216		$	1,465,060
Cost of sales	329,618			330,510			641,129			654,870
Gross profit	355,750			409,465			704,087			810,190
Operating expenses:
Selling, general and administrative expenses	340,300			332,560			674,233			665,042
Restructuring charges	—			6,471			—			18,559
Total operating expenses	340,300			339,031			674,233			683,601
Operating income	15,450			70,434			29,854			126,589
Interest expense	6,421			5,014			12,420			9,193
Other income (expense) - net	2,542			14,294			4,812			21,479
Income before income taxes	11,571			79,714			22,246			138,875
Provision for income taxes	3,499			22,894			6,778			41,417
Net income	8,072			56,820			15,468			97,458
Less: Net income attributable to noncontrolling interest	2,051			2,172			3,654			4,740
Net income attributable to Fossil Group, Inc.	$	6,021		$	54,648		$	11,814		$	92,718
Other comprehensive income (loss), net of taxes:
Currency translation adjustment	$	(9,500	)	$	5,559		$	7,721		$	(27,947	)
Cash flow hedges - net change	4,331			(246		)	(6,101		)	(185		)
Pension plan activity	—			—			1,714			—
Total other comprehensive income (loss)	(5,169		)	5,313			3,334			(28,132		)
Total comprehensive income	2,903			62,133			18,802			69,326
Less: Comprehensive income attributable to noncontrolling interest	2,051			2,172			3,654			4,740
Comprehensive income attributable to Fossil Group, Inc.	$	852		$	59,961		$	15,148		$	64,586
Earnings per share:
Basic	$	0.13		$	1.12		$	0.25		$	1.87
Diluted	$	0.12		$	1.12		$	0.24		$	1.87
Weighted average common shares outstanding:
Basic	48,119			48,634			48,125			49,464
Diluted	48,207			48,744			48,229			49,615

See notes to the condensed consolidated financial statements.

FOSSIL GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

UNAUDITED

IN THOUSANDS



	For the 26 Weeks Ended July 2, 2016			For the 26 Weeks Ended July 4, 2015
Operating Activities:
Net income	$	15,468		$	97,458
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion	49,666			43,650
Stock-based compensation	16,463			9,276
Decrease in allowance for returns-net of inventory in transit	(15,473		)	(8,438		)
Loss on disposal of assets	1,151			2,519
Impairment losses	—			6,602
Decrease in allowance for doubtful accounts	(4,841		)	(2,006		)
Excess tax benefits from stock-based compensation	(5		)	(170		)
Deferred income taxes and other	(443		)	6,804
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable	139,765			183,993
Inventories	(41,107		)	(91,020		)
Prepaid expenses and other current assets	(8,656		)	(19,666		)
Accounts payable	(17,106		)	(1,040		)
Accrued expenses	(54,285		)	(50,563		)
Income taxes payable	(8,650		)	(14,898		)
Net cash provided by operating activities	71,947			162,501
Investing Activities:
Additions to property, plant and equipment	(39,313		)	(32,464		)
Decrease (increase) in intangible and other assets	786			(1,400		)
Skagen Designs arbitration settlement	—			5,968
Misfit working capital settlement	788			—
Proceeds from the sale of property, plant and equipment	1,955			—
Business acquisitions-net of cash acquired	—			(4,820		)
Net investment hedge settlement	752			—
Net cash used in investing activities	(35,032		)	(32,716		)
Financing Activities:
Acquisition of common stock	(6,418		)	(218,659		)
Distribution of noncontrolling interest earnings	(4,544		)	(5,056		)
Excess tax benefits from stock-based compensation	5			170
Debt borrowings	424,800			1,482,165
Debt payments	(498,848		)	(1,419,161		)
Proceeds from exercise of stock options	57			582
Payment for shares of Fossil, S.L.	(8,657		)	—
Net cash used in financing activities	(93,605		)	(159,959		)
Effect of exchange rate changes on cash and cash equivalents	(749		)	3,777
Net decrease in cash and cash equivalents	(57,439		)	(26,397		)
Cash and cash equivalents:
Beginning of period	289,275			276,261
End of period	$	231,836		$	249,864

See notes to the condensed consolidated financial statements.

FOSSIL GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

1. FINANCIAL STATEMENT POLICIES

Basis of Presentation. The condensed consolidated financial statements include the accounts of Fossil Group, Inc., a Delaware corporation, and its wholly and majority-owned subsidiaries (the “Company”).

The condensed consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary to present a fair statement of the Company’s financial position as of July 2, 2016, and the results of operations for the thirteen-week periods ended July 2, 2016 (“Second Quarter”) and July 4, 2015 (“Prior Year Quarter”), respectively, and the twenty-six week periods ended July 2, 2016 (“Year To Date Period”) and July 4, 2015 (“Prior Year YTD Period”). All adjustments are of a normal, recurring nature.

These interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Annual Report on Form 10-K filed by the Company pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), for the fiscal year ended January 2, 2016 (the “2015 Form 10-K”). Operating results for the Second Quarter and Year To Date Period are not necessarily indicative of the results to be achieved for the full fiscal year.

The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), which require the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the periods reported. Actual results could differ from those estimates. The Company has not made any changes in its significant accounting policies from those disclosed in the 2015 Form 10-K.

Business. The Company is a global design, marketing and distribution company that specializes in consumer fashion accessories. Its principal offerings include an extensive line of men's and women's fashion watches and jewelry, handbags, small leather goods, belts and sunglasses. In the watch and jewelry product categories, the Company has a diverse portfolio of globally recognized owned and licensed brand names under which its products are marketed. The Company's products are distributed globally through various distribution channels, including wholesale in countries where it has a physical presence, direct to the consumer through its retail stores and commercial websites and through third-party distributors in countries where the Company does not maintain a physical presence. The Company's products are offered at varying price points to meet the needs of its customers, whether they are value-conscious or luxury oriented. Based on its extensive range of accessory products, brands, distribution channels and price points, the Company is able to target style-conscious consumers across a wide age spectrum on a global basis.

Hedging Instruments. The Company is exposed to certain market risks relating to foreign exchange rates and interest rates. The Company actively monitors and attempts to manage these exposures using derivative instruments including foreign exchange forward contracts ("forward contracts") and interest rate swaps. The Company’s foreign subsidiaries periodically enter into forward contracts to hedge the future payment of intercompany inventory transactions denominated in U.S. dollars. Additionally, during the first quarter of fiscal year 2016, the Company entered into forward contracts to manage fluctuations in Japanese yen exchange rates that will be used to settle future third-party inventory component purchases by a U.S. dollar functional currency subsidiary. If the Company was to settle its euro, British pound, Canadian dollar, Japanese yen, Mexican peso, Australian dollar and U.S dollar forward contracts as of July 2, 2016, the result would have been a net gain of approximately $3.8 million, net of taxes. This unrealized gain is recognized in other comprehensive income (loss), net of taxes on the Company's consolidated statements of income and comprehensive income. Additionally, to the extent that any of these contracts are not considered to be perfectly effective in offsetting the change in the value of the cash flows being hedged, any changes in fair value relating to the ineffective portion of these contracts would be recognized in other income (expense)-net on the Company's consolidated statements of income and comprehensive income. Also, the Company has entered into interest rate swap agreements to effectively convert portions of its variable rate debt obligations to fixed rates. Changes in the fair value of the interest rate swaps are recorded as a component of accumulated other comprehensive income (loss) within stockholders' equity, and are recognized in interest expense in the period in which the payment is settled. To reduce exposure to changes in currency exchange rates adversely affecting the Company’s investment in foreign currency-denominated subsidiaries, the Company periodically enters into forward contracts designated as net investment hedges. Both realized and unrealized gains and losses from net investment hedges are recognized in the cumulative translation adjustment component of other comprehensive income (loss), and will be reclassified into earnings in the event the Company's underlying investments are liquidated or disposed. The Company does not hold or issue derivative financial instruments for trading or speculative

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

Operating expenses. Operating expenses include selling, general and administrative expenses (“SG&A”) and restructuring charges. SG&A expenses include selling and distribution expenses primarily consisting of sales and distribution labor costs, sales distribution center and warehouse facility costs, depreciation expense related to sales distribution and warehouse facilities, the four-wall operating costs of the Company’s retail stores, point-of-sale expenses, advertising expenses and art, design and product development labor costs. SG&A also includes general and administrative expenses primarily consisting of administrative support labor and “back office” or support costs such as treasury, legal, information services, accounting, internal audit, human resources, executive management costs and costs associated with stock-based compensation. Restructuring charges include costs to reorganize, refine and optimize the Company’s infrastructure and store closures.

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

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



	For the 13 Weeks Ended July 2, 2016		For the 13 Weeks Ended July 4, 2015		For the 26 Weeks Ended July 2, 2016		For the 26 Weeks Ended July 4, 2015
Numerator:
Net income attributable to Fossil Group, Inc.	$	6,021	$	54,648	$	11,814	$	92,718
Denominator:
Basic EPS computation:
Basic weighted average common shares outstanding	48,119		48,634		48,125		49,464
Basic EPS	$	0.13	$	1.12	$	0.25	$	1.87
Diluted EPS computation:
Basic weighted average common shares outstanding	48,119		48,634		48,125		49,464
Effect of stock options, stock appreciation rights, restricted stock units and performance restricted stock units	88		110		104		151
Diluted weighted average common shares outstanding	48,207		48,744		48,229		49,615
Diluted EPS	$	0.12	$	1.12	$	0.24	$	1.87

Approximately 1.9 million, 0.6 million, 1.7 million and 0.4 million weighted shares issuable under stock-based awards were not included in the diluted EPS calculation at the end of the Second Quarter, Prior Year Quarter, Year To Date Period and Prior Year YTD Period, respectively, because they were antidilutive. Approximately 1.1 million weighted performance shares were not included in the diluted EPS calculation at the end of the Second Quarter and Year to Date Period as the performance targets were not met.

Recently Issued Accounting Standards. In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. ASU 2016-09 is effective for annual periods, and interim periods within those years, beginning after December 15, 2016. Early adoption is permitted. The Company is still evaluating the effect of adopting ASU 2016-09.

In March 2016, the FASB issued ASU 2016-04, Liabilities—Extinguishments of Liabilities (Subtopic 405-20)- Recognition of Breakage for Certain Prepaid Stored-Value Products (“ASU 2016-04”). ASU 2016-04 entitles a company to derecognize amounts related to expected breakage to the extent that it is probable a significant reversal of the recognized breakage amount will not subsequently occur. ASU 2016-04 is effective for annual periods, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted. The Company is still evaluating the effect of adopting ASU 2016-04.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842): Amendments to the FASB Accounting Standards Codification® (“ASU 2016-02”), which supersedes the existing guidance for lease accounting, Leases (Topic 840). ASU 2016-02 requires lessees to recognize leases on their balance sheets, and modifies accounting, presentation and disclosure for

both lessors and lessees. ASU 2016-02 requires a modified retrospective approach for all leases existing at, or entered into after, the date of initial application, with an option to elect to use certain transition relief. ASU 2016-02 is effective for annual periods, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted. The Company is still evaluating the effect of adopting ASU 2016-02.

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory (“ASU 2015-11”). ASU 2015-11 affects reporting entities that measure inventory using first-in, first-out or average cost. Specifically, ASU 2015-11 requires that inventory be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. ASU 2015-11 is effective for annual periods beginning after December 15, 2016, with early adoption permitted. This standard will not have a material impact on the Company’s consolidated results of operations or financial position.

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”), to provide guidance on management’s responsibility to perform interim and annual assessments of an entity’s ability to continue as a going concern and to provide related disclosure. ASU 2014-15 applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. This standard will not have a material impact on the Company’s consolidated results of operations or financial position.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets, unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date (“ASU 2015-14”), deferring the effective date of ASU 2014-09. The new revenue standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017 and allows either a full retrospective adoption to all periods presented or a modified retrospective adoption approach with the cumulative effect of initial application of the revised guidance recognized at the date of initial application. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (“ASU 2016-08”). ASU 2016-08 is intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing (“ASU 2016-10”). ASU 2016-10 clarifies the implementation guidance on identifying performance obligations. Early adoption is permitted for periods beginning after December 15, 2016. In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients (“ASU 2016-12”). ASU 2016-12 clarifies three aspects of Topic 606, including the objective of the collectability criterion, the measurement date for noncash consideration and the requirements for a completed contract. ASU 2016-12 also includes a practical expedient for contract modifications. Additionally, the amendments allow an entity to exclude all sales taxes collected from customers from the transaction price. The Company is evaluating the effect of adopting ASU 2014-09 and related ASUs.

Recently Adopted Accounting Standards. In accordance with U.S. GAAP, the following provisions, which had no material impact on the Company’s financial position, results of operations or cash flows, were adopted effective the first quarter of fiscal year 2016:

•ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis


•	ASU 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period

2. ACQUISITIONS AND GOODWILL

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

(approximately $4.8 million) and 3.5 million euros (approximately $3.9 million), respectively. As of January 1, 2013, pursuant to the Framework Agreement, the Company assumed control over the board of directors and the day-to-day management of Fossil Spain, and began consolidating Fossil Spain, instead of treating it as an equity method investment.

Misfit, Inc. Acquisition. On December 22, 2015, the Company acquired Misfit, Inc. ("Misfit"), an innovator and distributor of wearable technology and stylish connected devices. Misfit was a U.S.-based, privately held company. The primary purpose of the acquisition was to acquire a scalable technology platform that can be integrated across the Company's multi-brand portfolio, a native wearable technology brand and a pipeline of innovative products. Misfit’s position in the wearable technology space combined with their software and hardware engineering teams enables the Company to expand its addressable market with new distribution channels, products, brands and enterprise partnerships.

The purchase price was $215.4 million in cash, net of cash acquired and subject to working capital adjustments, and $1.7 million in replacement awards attributable to precombination service. At closing, $12.5 million of the cash payment was placed into an escrow fund for the Company for working capital adjustments and indemnification obligations of the seller incurred within 12 months from the closing date. The Company received $0.8 million from the escrow during the Second Quarter as a working capital settlement and has recorded a receivable for additional claims incurred. To fund the cash purchase price, the Company utilized cash on hand and approximately $60 million of availability under its $1.05 billion revolving line of credit. The results of Misfit's operations have been included in the Company’s consolidated financial statements since December 22, 2015.

Assets acquired and liabilities assumed in the transaction were recorded at their acquisition date fair values, while transaction costs of $8.4 million associated with the acquisition were expensed as incurred during the fourth quarter of fiscal year 2015. Because the total purchase price exceeded the fair values of the tangible and intangible assets acquired, goodwill was recorded equal to the difference. The element of goodwill that is not separable into identifiable intangible assets represents expected synergies. The following table summarizes the allocation of the purchase price to the preliminary estimated fair value of the assets acquired and the liabilities assumed as of December 22, 2015, the effective date of the acquisition (in thousands):



Cash paid, net of cash acquired		$	215,370
Replacement awards attributable to precombination service		1,709
Working capital and other adjustments		(3,788		)
Total transaction consideration		$	213,291

Inventories		$	7,011
Prepaid expenses and other current assets		25
Property, plant and equipment and other long-term assets		1,190
Goodwill		168,021
Amortizing Intangibles:	Useful Lives
Trade name	6 yrs.	15,700
Customer lists	5 yrs.	10,800
Developed technology	7 yrs.	36,100
Noncompete agreements	3 yrs.	700
Current liabilities		(17,019		)
Long-term liabilities		(9,237		)
Total net assets acquired		$	213,291

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

Goodwill. The changes in the carrying amount of goodwill were as follows (in thousands):



	Americas			Europe		Asia		Total
Balance at January 2, 2016	$	283,598		$	63,981	$	11,815	$	359,394
Segment allocation and acquisition adjustments (1)	(78,197		)	49,760		32,053		3,616
Currency	(100		)	1,223		25		1,148
Balance at July 2, 2016	$	205,301		$	114,964	$	43,893	$	364,158

__________________________________________________________________________________

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

3. INVENTORIES

Inventories consisted of the following (in thousands):



	July 2, 2016		January 2, 2016
Components and parts	$	67,408	$	49,539
Work-in-process	10,762		12,213
Finished goods	583,578		563,592
Inventories	$	661,748	$	625,344

4. WARRANTY LIABILITIES

The Company’s warranty liability is recorded in accrued expenses-other in the Company’s condensed consolidated balance sheets. Warranty liability activity consisted of the following (in thousands):



	For the 26 Weeks Ended July 2, 2016			For the 26 Weeks Ended July 4, 2015
Beginning balance	$	13,669		$	13,500
Settlements in cash or kind	(4,795		)	(4,019		)
Warranties issued and adjustments to preexisting warranties (1)	4,861			4,038
Liabilities assumed in acquisition	—			44
Ending balance	$	13,735		$	13,563

_______________________________________________

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

5. INCOME TAXES

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



	For the 13 Weeks Ended July 2, 2016			For the 13 Weeks Ended July 4, 2015			For the 26 Weeks Ended July 2, 2016			For the 26 Weeks Ended July 4, 2015
Income tax expense	$	3,499		$	22,894		$	6,778		$	41,417
Income tax rate	30.2		%	28.7		%	30.5		%	29.8		%

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

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

As of July 2, 2016, the total amount of unrecognized tax benefits, excluding interest and penalties, was $22.6 million, of which $19.4 million would favorably impact the effective tax rate in future periods, if recognized. The Company is subject to examinations in various state and foreign jurisdictions for its 2009-2015 tax years, none of which the Company believes are significant, individually or in the aggregate. Tax audit outcomes and timing of tax audit settlements are subject to significant uncertainty.

The Company has classified uncertain tax positions as long-term income taxes payable, unless such amounts are expected to be paid within twelve months of the condensed consolidated balance sheet date. As of July 2, 2016, the Company had recorded $0.9 million of unrecognized tax benefits, excluding interest and penalties, for positions that are expected to be settled within the next twelve months. Consistent with its past practice, the Company recognizes interest and/or penalties related to income tax overpayments and income tax underpayments in income tax expense and income taxes receivable/payable. At July 2, 2016, the total amount of accrued income tax-related interest and penalties included in the condensed consolidated balance sheet was $2.6 million and $1.8 million, respectively. For the Second Quarter and Year To Date Period, the Company accrued income tax-related interest expense of $0.2 million and $0.4 million, respectively.

6. STOCKHOLDERS’ EQUITY

Common Stock Repurchase Programs. Purchases of the Company’s common stock are made from time to time pursuant to its repurchase programs, subject to market conditions and at prevailing market prices, through the open market. Repurchased shares of common stock are recorded at cost and become authorized but unissued shares which may be issued in the future for general corporate or other purposes. The Company may terminate or limit its stock repurchase program at any time. In the event the repurchased shares are canceled, the Company accounts for retirements by allocating the repurchase price to common stock, additional paid-in capital and retained earnings. The repurchase price allocation is based upon the equity contribution associated with historical issuances. The repurchase programs are conducted pursuant to Rule 10b-18 of the Exchange Act.

During the Year to Date period, the Company effectively retired 0.1 million shares of common stock repurchased under its repurchase programs. The effective retirement of repurchased common stock decreased common stock by $1,100, additional paid-in capital by $0.2 million, retained earnings by $5.0 million and treasury stock by $5.2 million. At January 2, 2016 and July 2, 2016, all treasury stock had been effectively retired. As of July 2, 2016, the Company had $824.2 million of repurchase authorizations remaining under its combined repurchase programs.

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



				For the 13 Weeks Ended July 2, 2016			For the 13 Weeks Ended July 4, 2015
Fiscal Year Authorized	Dollar Value Authorized		Termination Date	Number of Shares Repurchased	Dollar Value Repurchased		Number of Shares Repurchased	Dollar Value Repurchased
2014	$	1,000.0	December 2018	—	$	0.8	1.3	$	102.5
2012	$	1,000.0	December 2016 (1)	—	$	—	—	$	—
2010	$	30.0	None	—	$	—	—	$	—



				For the 26 Weeks Ended July 2, 2016			For the 26 Weeks Ended July 4, 2015
Fiscal Year Authorized	Dollar Value Authorized		Termination Date	Number of Shares Repurchased	Dollar Value Repurchased		Number of Shares Repurchased	Dollar Value Repurchased
2014	$	1,000.0	December 2018	0.1	$	5.2	2.2	$	188.2
2012	$	1,000.0	December 2016 (1)	—	$	—	0.3	$	28.8
2010	$	30.0	None	—	$	—	—	$	—

__________________________________________________________________________________

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

Controlling and Noncontrolling Interest. The following tables summarize the changes in equity attributable to controlling and noncontrolling interest (in thousands):



	Fossil Group, Inc. Stockholders’ Equity			Noncontrolling Interest			Total Stockholders’ Equity
Balance at January 2, 2016	$	921,388		$	11,155		$	932,543
Net income	11,814			3,654			15,468
Currency translation adjustment	7,721			—			7,721
Cash flow hedges - net change	(6,101		)	—			(6,101		)
Pension plan activity	1,714			—			1,714
Common stock issued upon exercise of stock options	57			—			57
Tax expense derived from stock-based compensation	(1,389		)	—			(1,389		)
Distribution of noncontrolling interest earnings	—			(4,544		)	(4,544		)
Acquisition of common stock	(6,418		)	—			(6,418		)
Stock-based compensation expense	16,463			—			16,463
Balance at July 2, 2016	$	945,249		$	10,265		$	955,514



	Fossil Group, Inc. Stockholders’ Equity			Noncontrolling Interest			Total Stockholders’ Equity
Balance at January 3, 2015	$	977,860		$	5,941		$	983,801
Net income	92,718			4,740			97,458
Currency translation adjustment	(27,947		)	—			(27,947		)
Cash flow hedges - net change	(185		)	—			(185		)
Common stock issued upon exercise of stock options	582			—			582
Tax expense derived from stock-based compensation	(699		)	—			(699		)
Distribution of noncontrolling interest earnings	—			(5,056		)	(5,056		)
Business acquisition	—			5,831			5,831
Acquisition of common stock	(218,659		)	—			(218,659		)
Stock-based compensation expense	9,276			—			9,276
Balance at July 4, 2015	$	832,946		$	11,456		$	844,402

7. EMPLOYEE BENEFIT PLANS

Stock-Based Compensation Plans. The following table summarizes stock options and stock appreciation rights activity during the Second Quarter:



Stock Options and Stock Appreciation Rights	Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value
	(in Thousands)				(in Years)	(in Thousands)
Outstanding at April 2, 2016	2,214		$	51.82	6.9	$	10,828
Granted	—
Exercised	—
Forfeited or expired	(8	)	117.13
Outstanding at July 2, 2016	2,206		51.59		6.7	791
Exercisable at July 2, 2016	538		$	84.14	4.4	$	791

The aggregate intrinsic value shown in the table above is before income taxes and is based on (i) the exercise price for outstanding and exercisable options/rights at July 2, 2016 and (ii) the fair market value of the Company’s common stock on the exercise date for options/rights that were exercised during the Second Quarter.

Stock Options and Stock Appreciation Rights Outstanding and Exercisable. The following tables summarize information with respect to stock options and stock appreciation rights outstanding and exercisable at July 2, 2016:



Stock Options Outstanding					Stock Options Exercisable
Range of Exercise Prices	Number of Shares	Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term	Number of Shares	Weighted- Average Exercise Price
	(in Thousands)			(in Years)	(in Thousands)
$13.65 - $29.78	41	$	14.40	2.7	41	$	14.40
$30.71 - $47.99	91	36.29		2.5	91	36.29
$55.04 - $83.83	92	80.80		4.8	92	80.80
$95.91 - $131.46	144	127.98		5.7	144	127.98
Total	368	$	80.95	4.3	368	$	80.95



Stock Appreciation Rights Outstanding					Stock Appreciation Rights Exercisable
Range of Exercise Prices	Number of Shares	Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term	Number of Shares	Weighted- Average Exercise Price
	(in Thousands)			(in Years)	(in Thousands)
$13.65 - $29.78	26	$	21.97	4.2	13	$	13.65
$30.71 - $47.99	1,560	38.27		7.5	9	38.40
$55.04 - $83.83	143	79.05		6.1	62	80.44
$95.91 - $131.46	109	114.42		5.0	86	115.32
Total	1,838	$	45.72	7.2	170	$	91.02

Restricted Stock, Restricted Stock Units and Performance Restricted Stock Units. The following table summarizes restricted stock, restricted stock unit and performance restricted stock unit activity during the Second Quarter:



Restricted Stock, Restricted Stock Units and Performance Restricted Stock Units	Number of Shares		Weighted-Average Grant Date Fair Value Per Share
	(in Thousands)
Nonvested at April 2, 2016	1,063		$	47.98
Granted	494		27.60
Vested	(21	)	82.08
Forfeited	(12	)	41.27
Nonvested at July 2, 2016	1,524		$	40.95

The total fair value of restricted stock and restricted stock units vested during the Second Quarter was approximately $0.6 million. Vesting of performance restricted stock units is based on achievement of sales growth and operating margin targets in relation to the performance of a certain identified peer group, particular sales growth in relation to a defined sales plan and achievement of succession plans for key talent.

8. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following tables illustrate changes in the balances of each component of accumulated other comprehensive income (loss), net of taxes (in thousands):



	For the 13 Weeks Ended July 2, 2016
	Currency Translation Adjustments			Cash Flow Hedges
	Currency Translation Adjustments			Forward Contracts			Interest Rate Swaps			Pension Plan			Total
Beginning balance	$	(64,486	)	$	(1,554	)	$	(1,457	)	$	(4,506	)	$	(72,003	)
Other comprehensive income (loss) before reclassifications	(9,396		)	8,738			(711		)	—			(1,369		)
Tax (expense) benefit	—			(3,576		)	259			—			(3,317		)
Amounts reclassed from accumulated other comprehensive income	104			928			(450		)	—			582
Tax (expense) benefit	—			(263		)	164			—			(99		)
Total other comprehensive income (loss)	(9,500		)	4,497			(166		)	—			(5,169		)
Ending balance	$	(73,986	)	$	2,943		$	(1,623	)	$	(4,506	)	$	(77,172	)



	For the 13 Weeks Ended July 4, 2015
	Currency Translation Adjustments			Cash Flow Hedges
	Currency Translation Adjustments			Forward Contracts			Interest Rate Swaps			Pension Plan			Total
Beginning balance	$	(60,747	)	$	19,315		$	(4,776	)	$	(3,647	)	$	(49,855	)
Other comprehensive income (loss) before reclassifications	5,559			2,701			10,460			—			18,720
Tax (expense) benefit	—			253			(3,812		)	—			(3,559		)
Amounts reclassed from accumulated other comprehensive income	—			10,555			4,604			—			15,159
Tax (expense) benefit	—			(3,634		)	(1,677		)	—			(5,311		)
Total other comprehensive income (loss)	5,559			(3,967		)	3,721			—			5,313
Ending balance	$	(55,188	)	$	15,348		$	(1,055	)	$	(3,647	)	$	(44,542	)



	For the 26 Weeks Ended July 2, 2016
	Currency Translation Adjustments			Cash Flow Hedges
	Currency Translation Adjustments			Forward Contracts			Interest Rate Swaps			Pension Plan			Total
Beginning balance	$	(81,707	)	$	8,114		$	(693	)	$	(6,220	)	$	(80,506	)
Other comprehensive income (loss) before reclassifications	7,825			(1,259		)	(2,381		)	2,010			6,195
Tax (expense) benefit	—			1,039			868			(296		)	1,611
Amounts reclassed from accumulated other comprehensive income	104			7,267			(918		)	—			6,453
Tax (expense) benefit	—			(2,316		)	335			—			(1,981		)
Total other comprehensive income (loss)	7,721			(5,171		)	(930		)	1,714			3,334
Ending balance	$	(73,986	)	$	2,943		$	(1,623	)	$	(4,506	)	$	(77,172	)



	For the 26 Weeks Ended July 4, 2015
	Currency Translation Adjustments			Cash Flow Hedges
	Currency Translation Adjustments			Forward Contracts			Interest Rate Swap			Pension Plan			Total
Beginning balance	$	(27,241	)	$	14,980		$	(502	)	$	(3,647	)	$	(16,410	)
Other comprehensive income (loss) before reclassifications	(27,947		)	21,462			3,054			—			(3,431		)
Tax (expense) benefit	—			(5,965		)	(1,113		)	—			(7,078		)
Amounts reclassed from accumulated other comprehensive income	—			22,993			3,923			—			26,916
Tax (expense) benefit	—			(7,864		)	(1,429		)	—			(9,293		)
Total other comprehensive income (loss)	(27,947		)	368			(553		)	—			(28,132		)
Ending balance	$	(55,188	)	$	15,348		$	(1,055	)	$	(3,647	)	$	(44,542	)

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

9. SEGMENT INFORMATION

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

The Company manages its business primarily on a geographic basis. The Company’s reportable operating segments are comprised of (i) Americas, (ii) Europe and (iii) Asia. Each reportable operating segment includes sales to wholesale and distributor customers, and sales through Company-owned retail stores and e-commerce activities based on the location of the selling entity. The Americas segment primarily includes sales to customers based in Canada, Latin America and the United States. The Europe segment primarily includes sales to customers based in European countries, the Middle East and Africa. The Asia segment primarily includes sales to customers based in Australia, China, India, Indonesia, Japan, Malaysia, New Zealand, Singapore, South Korea, Taiwan and Thailand. Each reportable operating segment provides similar products and services.

The Company evaluates the performance of its reportable segments based on net sales and operating income. Net sales for geographic segments are based on the location of the selling entity. Operating income for each segment includes net sales to third parties, related cost of sales and operating expenses directly attributable to the segment. Global strategic initiatives such as brand building and omni channel activities and general corporate expenses, including certain administrative, legal, accounting, technology support costs, equity compensation costs, payroll costs attributable to executive management, brand management, product development, art, creative/product design, marketing, strategy, compliance and back office supply chain expenses are not allocated to the various segments because they are managed at the corporate level internally. The Company does not include intercompany transfers between segments for management reporting purposes.

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



	For the 13 Weeks Ended July 2, 2016					For the 13 Weeks Ended July 4, 2015
	Net Sales		Operating Income			Net Sales		Operating Income
Americas	$	345,187	$	52,300		$	386,088	$	86,033
Europe	215,936		31,669			227,923		41,814
Asia	124,245		18,936			125,964		20,555
Corporate			(87,455		)			(77,968		)
Consolidated	$	685,368	$	15,450		$	739,975	$	70,434



	For the 26 Weeks Ended July 2, 2016					For the 26 Weeks Ended July 4, 2015
	Net Sales		Operating Income			Net Sales		Operating Income
Americas	$	680,997	$	111,896		$	752,684	$	162,533
Europe	425,937		60,180			462,179		79,152
Asia	238,282		36,865			250,197		41,051
Corporate			(179,087		)			(156,147		)
Consolidated	$	1,345,216	$	29,854		$	1,465,060	$	126,589

The following tables reflect net sales for each class of similar products in the periods presented (in thousands, except percentage data):



	For the 13 Weeks Ended July 2, 2016				For the 13 Weeks Ended July 4, 2015
	Net Sales		Percentage of Total		Net Sales		Percentage of Total
Watches	$	517,602	75.5	%	$	575,804	77.8	%
Leathers	93,152		13.6		89,380		12.1
Jewelry	56,752		8.3		55,780		7.5
Other	17,862		2.6		19,011		2.6
Total	$	685,368	100.0	%	$	739,975	100.0	%



	For the 26 Weeks Ended July 2, 2016				For the 26 Weeks Ended July 4, 2015
	Net Sales		Percentage of Total		Net Sales		Percentage of Total
Watches	$	1,014,085	75.4	%	$	1,127,661	77.0	%
Leathers	185,657		13.8		182,306		12.4
Jewelry	111,472		8.3		118,767		8.1
Other	34,002		2.5		36,326		2.5
Total	$	1,345,216	100.0	%	$	1,465,060	100.0	%

10. DERIVATIVES AND RISK MANAGEMENT

Cash Flow Hedges. The primary risks managed by using derivative instruments are the fluctuations in global currencies that will ultimately be used by non-U.S. dollar functional currency subsidiaries to settle future payments of intercompany inventory transactions denominated in U.S. dollars. Specifically, the Company projects future intercompany purchases by its non-U.S. dollar functional currency subsidiaries generally over a period of up to 24 months. The Company enters into forward contracts, generally for up to 85% of the forecasted purchases, to manage fluctuations in global currencies that will ultimately be used to settle such U.S. dollar denominated inventory purchases. Additionally, during the first quarter of fiscal year 2016, the Company entered into forward contracts to manage fluctuations in Japanese yen exchange rates that will be used to settle future third-party inventory component purchases by a U.S. dollar functional currency subsidiary. Forward contracts represent agreements to exchange the currency of one country for the currency of another country at an agreed-upon settlement date and exchange rate. These forward contracts are designated as single cash flow hedges. Fluctuations in exchange rates will either increase or decrease the Company’s U.S. dollar equivalent cash flows from these inventory transactions, which will affect the Company’s U.S. dollar earnings. Gains or losses on the forward contracts are expected to offset these fluctuations to the extent the cash flows are hedged by the forward contracts.

These forward contracts meet the criteria for hedge accounting, which requires that they represent foreign currency-denominated forecasted transactions in which (i) the operating unit that has the foreign currency exposure is a party to the hedging instrument and (ii) the hedged transaction is denominated in a currency other than the hedging unit’s functional currency.

At the inception of each forward contract designated as a cash flow hedge, the hedging relationship is expected to be highly effective in achieving offsetting cash flows attributable to the hedged risk. The Company assesses hedge effectiveness under the critical terms matched method at inception and at least quarterly throughout the life of the hedging relationship. If the critical terms (i.e., amounts, currencies and settlement dates) of the forward contract match the terms of the forecasted transaction, the Company concludes that the hedge is effective.

For a derivative instrument that is designated and qualifies as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income (loss), net of taxes and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. Due to the high degree of effectiveness between the hedging instruments and the underlying exposures being hedged, the Company’s hedges resulted in no ineffectiveness in the condensed consolidated statements of income and comprehensive income, and there were no components excluded from the assessment of hedge effectiveness for the Second Quarter, Prior Year Quarter, Year To Date Period or Prior Year YTD Period.

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

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



Functional Currency		Contract Currency
Type	Amount	Type	Amount
Euro	255.1	U.S. dollar	288.3
British pound	52.9	U.S. dollar	79.0
Canadian dollar	80.5	U.S. dollar	61.0
Japanese yen	4,077.9	U.S. dollar	35.7
Mexican peso	335.4	U.S. dollar	18.3
Australian dollar	20.0	U.S. dollar	14.6
U.S. dollar	28.0	Japanese yen	3,013.0

The Company is also exposed to interest rate risk related to its outstanding debt. To manage the interest rate risk related to its $231.3 million U.S.-based term loan (as amended and restated on March 9, 2015, the "Term Loan”), the Company entered into an interest rate swap agreement on July 26, 2013 with a term of approximately five years. The objective of this hedge is to offset the variability of future payments associated with interest rates on the Term Loan. The interest rate swap agreement hedges the 1-month London Interbank Offer Rate ("LIBOR") based variable rate debt obligations under the Term Loan. Under the terms of the swap, the Company pays a fixed interest rate of 1.288% per annum to the swap counterparty plus the LIBOR rate applicable margin (which varies based upon the Company’s consolidated leverage ratio (the “Ratio”) from 1.25% if the Ratio is less than 1.00 to 1.00, to 2.00% if the Ratio is greater than or equal to 2.00 to 1.00). The notional amount amortizes over the remaining life of the Term Loan to coincide with repayments on the underlying loan. The Company receives interest from the swap counterparty at a variable rate based on 1-month LIBOR. This hedge is designated as a cash flow hedge.

Net Investment Hedges. The Company is also exposed to risk that adverse changes in foreign currency exchange rates could impact its net investment in foreign operations. During the first quarter of fiscal year 2016, the Company entered into a forward contract designated as a net investment hedge to reduce exposure to changes in currency exchange rates on 45.0 million euros of its total investment in a wholly-owned, euro-denominated foreign subsidiary. The hedge was settled during the Second Quarter resulting in a net gain of $0.5 million net of taxes that was recognized in the currency translation component of accumulated other comprehensive income (loss).

The effective portion of derivatives designated as net investment hedges are recorded at fair value at each balance sheet date and the change in fair value is recorded in the cumulative translation adjustment component of other comprehensive income (loss) in the Company’s condensed consolidated statements of income and comprehensive income. The Company uses the hypothetical derivative method to assess the ineffectiveness of net investment hedges. Should any portion of a net investment hedge become ineffective, the ineffective portion will be reclassified to other income (expense)-net on the Company’s condensed consolidated statements of income and comprehensive income. Gains and losses reported in accumulated other comprehensive income (loss) will not be reclassified into earnings until the Company’s underlying investment is liquidated or dissolved.

Non-designated Hedges. The Company also periodically enters into forward contracts to manage exchange rate risks associated with certain intercompany transactions and for which the Company does not elect hedge accounting treatment. As of July 2, 2016, the Company had non-designated forward contracts of approximately $1.4 million on 21.6 million rand associated with a South African rand-denominated foreign subsidiary. Changes in the fair value of derivatives, not designated as hedging instruments, are recognized in earnings when they occur.

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



	For the 13 Weeks Ended July 2, 2016			For the 13 Weeks Ended July 4, 2015
Cash flow hedges:
Forward contracts	$	5,162		$	2,954
Interest rate swaps	(452		)	6,648
Total gain (loss) recognized in other comprehensive income (loss), net of taxes	$	4,710		$	9,602



	For the 26 Weeks Ended July 2, 2016			For the 26 Weeks Ended July 4, 2015
Cash flow hedges:
Forward contracts	$	(220	)	$	15,497
Interest rate swaps	(1,513		)	1,941
Total gain (loss) recognized in other comprehensive income (loss), net of taxes	$	(1,733	)	$	17,438

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



Derivative Instruments	Condensed Consolidated Statements of Income and Comprehensive Income Location	Effect of Derivative Instruments	For the 13 Weeks Ended July 2, 2016			For the 13 Weeks Ended July 4, 2015
Forward contracts designated as cash flow hedging instruments	Other income (expense)-net	Total gain (loss) reclassified from other comprehensive income (loss)	$	665		$	6,921
Forward contracts not designated as hedging instruments	Other income (expense)-net	Total gain (loss) recognized in income	$	74		$	(9	)
Interest rate swap designated as a cash flow hedging instrument	Interest expense	Total gain (loss) reclassified from other comprehensive income (loss)	$	(286	)	$	(404	)
Interest rate swap designated as a cash flow hedging instrument	Other income (expense)-net	Total gain (loss) reclassified from other comprehensive income (loss)	$	—		$	3,331



Derivative Instruments	Condensed Consolidated Statements of Income and Comprehensive Income Location	Effect of Derivative Instruments	For the 26 Weeks Ended July 2, 2016			For the 26 Weeks Ended July 4, 2015
Forward contracts designated as cash flow hedging instruments	Other income (expense)-net	Total gain (loss) reclassified from other comprehensive income (loss)	$	4,951		$	15,129
Forward contracts not designated as hedging instruments	Other income (expense)-net	Total gain (loss) recognized in income	$	(157	)	$	80
Interest rate swap designated as a cash flow hedging instrument	Interest expense	Total gain (loss) reclassified from other comprehensive income (loss)	$	(583	)	$	(837	)
Interest rate swap designated as a cash flow hedging instrument	Other income (expense)-net	Total gain (loss) reclassified from other comprehensive income (loss)	$	—		$	3,331

The following table discloses the fair value amounts for the Company’s derivative instruments as separate asset and liability values, presents the fair value of derivative instruments on a gross basis, and identifies the line items in the condensed consolidated balance sheets in which the fair value amounts for these categories of derivative instruments are included (in thousands):



	Asset Derivatives						Liability Derivatives
	July 2, 2016			January 2, 2016			July 2, 2016			January 2, 2016
Derivative Instruments	Condensed Consolidated Balance Sheets Location	Fair Value		Condensed Consolidated Balance Sheets Location	Fair Value		Condensed Consolidated Balance Sheets Location	Fair Value		Condensed Consolidated Balance Sheets Location	Fair Value
Forward contracts designated as cash flow hedging instruments	Prepaid expenses and other current assets	$	10,709	Prepaid expenses and other current assets	$	13,184	Accrued expenses- other	$	6,109	Accrued expenses- other	$	477
Forward contracts not designated as cash flow hedging instruments	Prepaid expenses and other current assets	—		Prepaid expenses and other current assets	167		Accrued expenses- other	49		Accrued expenses- other	71
Interest rate swap designated as a cash flow hedging instrument	Prepaid expenses and other current assets	—		Prepaid expenses and other current assets	—		Accrued expenses- other	1,568		Accrued expenses- other	1,273
Forward contracts designated as cash flow hedging instruments	Intangible and other assets-net	2,845		Intangible and other assets-net	2,785		Other long-term liabilities	1,936		Other long-term liabilities	250
Interest rate swap designated as a cash flow hedging instrument	Intangible and other assets-net	—		Intangible and other assets-net	311		Other long-term liabilities	985		Other long-term liabilities	128
Total		$	13,554		$	16,447		$	10,647		$	2,199

At the end of the Second Quarter, the Company had forward contracts designated as cash flow hedges with maturities extending through June 2018. As of July 2, 2016, an estimated net gain of $3.3 million is expected to be reclassified into earnings within the next twelve months at prevailing foreign currency exchange rates. See “Note 1—Financial Statement Policies” for additional disclosures on foreign currency hedging instruments.

11. FAIR VALUE MEASUREMENTS

The Company defines fair value as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date.

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

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

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

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

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

The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of July 2, 2016 (in thousands):



	Fair Value at July 2, 2016
	Level 1		Level 2		Level 3		Total
Assets:
Forward contracts	$	—	$	13,554	$	—	$	13,554
Deferred compensation plan assets:
Investment in publicly traded mutual funds	2,398		—		—		2,398
Total	$	2,398	$	13,554	$	—	$	15,952
Liabilities:
Forward contracts	—		8,094		—		8,094
Interest rate swap	—		2,553		—		2,553
Total	$	—	$	10,647	$	—	$	10,647

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



	Fair Value at January 2, 2016
	Level 1		Level 2		Level 3		Total
Assets:
Forward contracts	$	—	$	16,136	$	—	$	16,136
Deferred compensation plan assets:
Investment in publicly traded mutual funds	2,406		—		—		2,406
Interest rate swap	—		311		—		311
Total	$	2,406	$	16,447	$	—	$	18,853
Liabilities:
Contingent consideration	$	—	$	—	$	3,643	$	3,643
Forward contracts	—		798		—		798
Interest rate swap	—		1,401		—		1,401
Total	$	—	$	2,199	$	3,643	$	5,842

The fair values of the Company’s deferred compensation plan assets are based on quoted prices. The deferred compensation plan assets are recorded in intangible and other assets-net in the Company’s condensed consolidated balance sheets. The fair values of the Company’s forward contracts are based on published quotations of spot currency rates and forward points, which are converted into implied forward currency rates. The fair values of the interest rate swap assets and liabilities are determined using valuation models based on market observable inputs, including forward curves, mid-market price and volatility levels. See “Note 10—Derivatives and Risk Management” for additional disclosures about the interest rate swaps and forward contracts.

The Company has evaluated its short-term and long-term debt as of July 2, 2016 and January 2, 2016 and believes, based on the interest rates, related terms and maturities, that the fair values of such instruments approximated their carrying amounts. As of July 2, 2016 and January 2, 2016, the carrying values of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximated their fair values due to the short-term maturities of these accounts.

12. INTANGIBLE AND OTHER ASSETS

The following table summarizes intangible and other assets (in thousands):



		July 2, 2016				January 2, 2016
	Useful	Gross		Accumulated		Gross		Accumulated
	Lives	Amount		Amortization		Amount		Amortization
Intangibles-subject to amortization:
Trademarks	10 yrs.	$	4,310	$	3,321	$	4,175	$	3,195
Customer lists	5-10 yrs.	54,064		24,166		53,825		21,001
Patents	3-20 yrs.	2,302		2,082		2,273		2,064
Noncompete agreement	3-6 yrs.	2,524		1,409		2,515		1,134
Developed technology	7 yrs.	36,100		2,579		36,100		—
Trade name	6 yrs.	15,700		1,308		15,700		—
Other	7-20 yrs.	259		214		256		206
Total intangibles-subject to amortization		115,259		35,079		114,844		27,600
Intangibles-not subject to amortization:
Trade names		74,503				74,493
Other assets:
Key money deposits		28,612		20,349		29,357		19,805
Other deposits		22,303				21,684
Deferred compensation plan assets		2,398				2,406
Deferred tax asset-net		22,131