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 1, 2017
 
OR
o     
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                    
 
Commission file number: 000-19848 
__________________________________________________________________ 
FOSSIL GROUP, INC.
(Exact name of registrant as specified in its charter)
 __________________________________________________________________
Delaware
 
75-2018505
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
901 S. Central Expressway, Richardson, Texas
 
75080
(Address of principal executive offices)
 
(Zip Code)
(972) 234-2525
(Registrant’s telephone number, including area code) 
__________________________________________________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act (check one):
Large accelerated filer o
 
Accelerated filer x
 
 
 
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
 
Emerging growth company o
 
 
 



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
 
The number of shares of the registrant’s common stock outstanding as of August 3, 2017: 48,521,969



FOSSIL GROUP, INC.
FORM 10-Q
FOR THE FISCAL QUARTER ENDED JULY 1, 2017
INDEX
 
 
Page
 
 
 
 
 
 
 
 




PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

FOSSIL GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED
IN THOUSANDS
 
July 1, 2017
 
December 31, 2016
Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
319,824

 
297,330

Accounts receivable - net of allowances of $57,097 and $79,707, respectively
240,401

 
375,520

Inventories
618,070

 
542,487

Prepaid expenses and other current assets
126,488

 
131,953

Total current assets
1,304,783

 
1,347,290

Property, plant and equipment - net of accumulated depreciation of $440,155 and $414,761, respectively
255,778

 
273,851

Goodwill
—

 
355,263

Intangible and other assets-net
215,411

 
210,493

Total long-term assets
471,189

 
839,607

Total assets
$
1,775,972

 
$
2,186,897

Liabilities and Stockholders’ Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
163,538

 
$
163,644

Short-term and current portion of long-term debt
32,719

 
26,368

Accrued expenses:
 

 
 

Compensation
57,287

 
52,993

Royalties
17,957

 
30,062

Co-op advertising
17,536

 
29,111

Transaction taxes
28,536

 
26,743

Other
77,166

 
69,565

Income taxes payable
19,361

 
16,099

Total current liabilities
414,100

 
414,585

Long-term income taxes payable
19,064

 
18,584

Deferred income tax liabilities
507

 
55,877

Long-term debt
613,580

 
609,961

Other long-term liabilities
73,907

 
72,452

Total long-term liabilities
707,058

 
756,874

Commitments and contingencies (Note 13)


 


Stockholders’ equity:
 

 
 

Common stock, 48,511 and 48,269 shares issued and outstanding at July 1, 2017 and December 31, 2016, respectively
485

 
483

Additional paid-in capital
227,778

 
213,352

Retained earnings
494,927

 
887,825

Accumulated other comprehensive income (loss)
(80,161
)
 
(95,424
)
Total Fossil Group, Inc. stockholders’ equity
643,029

 
1,006,236

Noncontrolling interest
11,785

 
9,202

Total stockholders’ equity
654,814

 
1,015,438

Total liabilities and stockholders’ equity
$
1,775,972

 
$
2,186,897

 
See notes to the unaudited condensed consolidated financial statements.

4


FOSSIL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)
UNAUDITED
IN THOUSANDS, EXCEPT PER SHARE DATA
 
 
For the 13 Weeks Ended July 1, 2017
 
For the 13 Weeks Ended July 2, 2016
 
For the 26 Weeks Ended July 1, 2017
 
For the 26 Weeks Ended July 2, 2016
Net sales
$
596,846

 
$
685,368

 
$
1,178,636

 
$
1,345,216

Cost of sales
295,499

 
329,618

 
587,771

 
641,129

Gross profit
301,347

 
355,750

 
590,865

 
704,087

Operating expenses:
 

 
 

 
 

 
 

Selling, general and administrative expenses
314,210

 
340,300

 
622,707

 
674,233

Goodwill and trade name impairments

407,128

 
—

 
407,128

 
—

Restructuring charges
9,765

 
—

 
36,049

 
—

Total operating expenses
731,103

 
340,300

 
1,065,884

 
674,233

Operating income (loss)
(429,756
)
 
15,450

 
(475,019
)
 
29,854

Interest expense
11,641

 
6,421

 
20,025

 
12,420

Other income (expense) - net
2,002

 
2,542

 
7,640

 
4,812

Income (loss) before income taxes
(439,395
)
 
11,571

 
(487,404
)
 
22,246

Provision for income taxes
(96,296
)
 
3,499

 
(97,516
)
 
6,778

Net income (loss)
(343,099
)
 
8,072

 
(389,888
)
 
15,468

Less: Net income attributable to noncontrolling interest
1,613

 
2,051

 
3,010

 
3,654

Net income (loss) attributable to Fossil Group, Inc.
$
(344,712
)
 
$
6,021

 
$
(392,898
)
 
$
11,814

Other comprehensive income (loss), net of taxes:
 

 
 

 
 

 
 

Currency translation adjustment
$
16,461

 
$
(9,500
)
 
$
26,856

 
$
7,721

Cash flow hedges - net change
(9,592
)
 
4,331

 
(11,593
)
 
(6,101
)
Pension plan activity
—

 
—

 
—

 
1,714

Total other comprehensive income (loss)
6,869

 
(5,169
)
 
15,263

 
3,334

Total comprehensive income (loss)
(336,230
)
 
2,903

 
(374,625
)
 
18,802

Less: Comprehensive income attributable to noncontrolling interest
1,613

 
2,051

 
3,010

 
3,654

Comprehensive income (loss) attributable to Fossil Group, Inc.
$
(337,843
)
 
$
852

 
$
(377,635
)
 
$
15,148

Earnings (loss) per share:
 

 
 

 
 

 
 

Basic
$
(7.11
)
 
$
0.13

 
$
(8.12
)
 
$
0.25

Diluted
$
(7.11
)
 
$
0.12

 
$
(8.12
)
 
$
0.24

Weighted average common shares outstanding:
 

 
 

 
 

 
 

Basic
48,484

 
48,119

 
48,399

 
48,125

Diluted
48,484

 
48,207

 
48,399

 
48,229

 
See notes to the unaudited condensed consolidated financial statements.

5


FOSSIL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
IN THOUSANDS
 
For the 26 Weeks Ended July 1, 2017
 
For the 26 Weeks Ended July 2, 2016
Operating Activities:
 

 
 

Net income (loss)
$
(389,888
)
 
$
15,468

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

 
 

Depreciation, amortization and accretion
42,085

 
49,666

Stock-based compensation
14,131

 
16,463

Decrease in allowance for returns-net of inventory in transit
(12,129
)
 
(15,473
)
Loss on disposal of assets
1,538

 
1,151

Fixed asset and other long-lived asset impairment losses
2,722

 
—

Goodwill and trade name impairment losses
407,128

 
—

Non-cash restructuring charges
4,420

 
—

Increase (decrease) in allowance for doubtful accounts
2,795

 
(4,841
)
Deferred income taxes and other
(100,272
)
 
(448
)
Changes in operating assets and liabilities, net of effect of acquisitions:
 

 
 

Accounts receivable
166,647

 
139,765

Inventories
(64,483
)
 
(41,107
)
Prepaid expenses and other current assets
(6,494
)
 
(8,656
)
Accounts payable
(1,836
)
 
(17,106
)
Accrued expenses
(28,259
)
 
(54,285
)
Income taxes payable
(2,715
)
 
(8,650
)
Net cash provided by operating activities
35,390

 
71,947

Investing Activities:
 

 
 

Additions to property, plant and equipment
(12,788
)
 
(39,313
)
Decrease in intangible and other assets
676

 
786

Misfit working capital settlement
—

 
788

Proceeds from the sale of property, plant and equipment
25

 
1,955

Net investment hedge settlement
—

 
752

Net cash used in investing activities
(12,087
)
 
(35,032
)
Financing Activities:
 

 
 

Acquisition of common stock
(907
)
 
(6,418
)
Distribution of noncontrolling interest earnings
(427
)
 
(4,544
)
Debt borrowings
766,048

 
424,800

Debt payments
(752,354
)
 
(498,848
)
Payment for shares of Fossil, S.L.
—

 
(8,657
)
Debt issuance costs and other
(5,896
)
 
62

Net cash provided by (used in) financing activities
6,464

 
(93,605
)
Effect of exchange rate changes on cash and cash equivalents
(7,273
)
 
(749
)
Net increase (decrease) in cash and cash equivalents
22,494

 
(57,439
)
Cash and cash equivalents:
 

 
 

Beginning of period
297,330

 
289,275

End of period
$
319,824

 
$
231,836

 
See notes to the unaudited condensed consolidated financial statements.

6


FOSSIL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
 
1. FINANCIAL STATEMENT POLICIES
Basis of Presentation. The condensed consolidated financial statements include the accounts of Fossil Group, Inc., a Delaware corporation, and its wholly and majority-owned subsidiaries (the “Company”).
The condensed consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary to present a fair statement of the Company’s financial position as of July 1, 2017, and the results of operations for the thirteen-week periods ended July 1, 2017 (“Second Quarter”) and July 2, 2016 (“Prior Year Quarter”), respectively, and the twenty-six week periods ended July 1, 2017 (“Year To Date Period”) and July 2, 2016 (“Prior Year YTD Period”). All adjustments are of a normal, recurring nature.
These interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Annual Report on Form 10-K filed by the Company pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), for the fiscal year ended December 31, 2016 (the “2016 Form 10-K”). Operating results for the Second Quarter are not necessarily indicative of the results to be achieved for the full fiscal year.
The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), which require the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the periods reported. Actual results could differ from those estimates. The Company has not made any changes in its significant accounting policies from those disclosed in the 2016 Form 10-K.
Business. The Company is a global design, marketing and distribution company that specializes in consumer fashion accessories. Its principal offerings include an extensive line of men's and women's fashion watches and jewelry, handbags, small leather goods, belts and sunglasses. In the watch and jewelry product categories, the Company has a diverse portfolio of globally recognized owned and licensed brand names under which its products are marketed. The Company's products are distributed globally through various distribution channels, including wholesale in countries where it has a physical presence, direct to the consumer through its retail stores and commercial websites and through third-party distributors in countries where the Company does not maintain a physical presence. The Company's products are offered at varying price points to meet the needs of its customers, whether they are value-conscious or luxury oriented. Based on its extensive range of accessory products, brands, distribution channels and price points, the Company is able to target style-conscious consumers across a wide age spectrum on a global basis.
Hedging Instruments. The Company is exposed to certain market risks relating to foreign exchange rates and interest rates. The Company actively monitors and attempts to mitigate but does not eliminate these exposures using derivative instruments including foreign exchange forward contracts ("forward contracts") and interest rate swaps. The Company’s foreign subsidiaries periodically enter into forward contracts to hedge the future payment of intercompany inventory transactions denominated in U.S. dollars. Additionally, the Company enters into forward contracts to manage fluctuations in Japanese yen exchange rates that will be used to settle future third-party inventory component purchases by a U.S. dollar functional currency subsidiary. If the Company was to settle its euro, Canadian dollar, British pound, Japanese yen, Mexican peso, Australian dollar and U.S dollar forward contracts as of July 1, 2017, the result would have been a net loss of approximately $5.8 million, net of taxes. This unrealized loss is recognized in other comprehensive income (loss), net of taxes on the Company's consolidated statements of income (loss) and comprehensive income (loss). Additionally, to the extent that any of these contracts are not considered to be perfectly effective in offsetting the change in the value of the cash flows being hedged, any changes in fair value relating to the ineffective portion of these contracts would be recognized in other income (expense)-net on the Company's consolidated statements of income (loss) and comprehensive income (loss). Also, the Company has entered into an interest rate swap agreement to effectively convert portions of its variable rate debt obligations to a fixed rate. Changes in the fair value of the interest rate swap is recorded as a component of accumulated other comprehensive income (loss) within stockholders' equity, and is recognized in interest expense in the period in which the payment is settled. To reduce exposure to changes in currency exchange rates adversely affecting the Company’s investment in foreign currency-denominated subsidiaries, the Company periodically enters into forward contracts designated as net investment hedges. Both realized and unrealized gains and losses from net investment hedges are recognized in the cumulative translation adjustment component of other comprehensive income (loss), and will be reclassified into earnings in the event the Company's underlying investments are liquidated or disposed. The Company does not hold or issue derivative financial instruments for trading or speculative

7


purposes. See “Note 10—Derivatives and Risk Management” for additional disclosures about the Company’s use of derivatives.
Operating Expenses. Operating expenses include selling, general and administrative expenses (“SG&A”), goodwill and trade name impairment and restructuring charges. SG&A expenses include selling and distribution expenses primarily consisting of sales and distribution labor costs, sales distribution center and warehouse facility costs, depreciation expense related to sales distribution and warehouse facilities, the four-wall operating costs of the Company’s retail stores, point-of-sale expenses, advertising expenses and art, design and product development labor costs. SG&A also includes general and administrative expenses primarily consisting of administrative support labor and “back office” or support costs such as treasury, legal, information services, accounting, internal audit, human resources, executive management costs and costs associated with stock-based compensation. Restructuring charges include costs to reorganize, refine and optimize the Company’s infrastructure as well as store closure expenses.
Earnings (Loss) Per Share (“EPS”). Basic EPS is based on the weighted average number of common shares outstanding during each period. Diluted EPS adjusts basic EPS for the effects of dilutive common stock equivalents outstanding during each period using the treasury stock method.
The following table reconciles the numerators and denominators used in the computations of both basic and diluted EPS (in thousands, except per share data):
 
For the 13 Weeks Ended July 1, 2017
 
For the 13 Weeks Ended July 2, 2016
 
For the 26 Weeks Ended July 1, 2017
 
For the 26 Weeks Ended July 2, 2016
Numerator:
 

 
 

 
 

 
 

Net income (loss) attributable to Fossil Group, Inc.
$
(344,712
)
 
$
6,021

 
$
(392,898
)
 
$
11,814

Denominator:
 
 
 

 
 

 
 

Basic EPS computation:
 
 
 

 
 

 
 

Basic weighted average common shares outstanding
48,484

 
48,119

 
48,399

 
48,125

Basic EPS
$
(7.11
)
 
$
0.13

 
$
(8.12
)
 
$
0.25

Diluted EPS computation:
 
 
 

 
 

 
 

Basic weighted average common shares outstanding
48,484

 
48,119

 
48,399

 
48,125

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

 
88

 
—

 
104

Diluted weighted average common shares outstanding
48,484

 
48,207

 
48,399

 
48,229

Diluted EPS
$
(7.11
)
 
$
0.12

 
$
(8.12
)
 
$
0.24

At the end of the Second Quarter and Year To Date Period, approximately 4.7 million and 4.1 million weighted shares issuable under stock-based awards, respectively, were not included in the diluted EPS calculation because they were antidilutive. The total antidilutive weighted shares included approximately 1.2 million and 1.1 million weighted performance-based shares at the end of the Second Quarter and Year To Date Period, respectively.
At the end of the Prior Year Quarter and Prior Year YTD Period, approximately 1.9 million and 1.7 million weighted shares issuable under stock-based awards, respectively, were not included in the diluted EPS calculation because they were antidilutive. Approximately 1.1 million weighted performance shares were not included in the diluted EPS calculation at the end of both the Prior Year Quarter and Prior Year YTD Period as the performance targets were not met.
Recently Issued Accounting Standards
In May 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting ("ASU 2017-09"). ASU 2017-09 clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award changes as a result of the modification. The guidance is effective for annual periods beginning after December 15, 2017,

8


including interim periods within those periods. Early adoption is permitted. The Company is still evaluating the effect of adopting ASU 2017-09.
In March 2017, the FASB issued ASU 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities ("ASU 2017-08"). ASU 2017-08 shortens the amortization period for certain callable debt securities held at a premium. The amendment requires the premium to be amortized to the earliest call date. The guidance is effective for annual periods beginning after December 15, 2018, including interim periods within those periods. Early adoption is permitted. This standard will not have a material impact on the Company’s consolidated results of operations or financial position.
In March 2017, the FASB issued ASU 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost ("ASU 2017-07"). ASU 2017-07 requires the service cost component of pension expense to be included in operations in the same line item as other employee compensation costs and other components of pension expense to be presented separately outside of income from operations. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. This standard will not have a material impact on the Company’s consolidated results of operations or financial position.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business ("ASU 2017-01"). ASU 2017-01 clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. This standard will not have a material impact on the Company’s consolidated results of operations or financial position.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash ("ASU 2016-18"). ASU 2016-18 requires that a statement of cash flows explain the change during the period in total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for annual periods, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted. This standard will not have a material impact on the Company’s consolidated results of operations or financial position.
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”). ASU 2016-16 requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. ASU 2016-16 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. This standard will not have a material impact on the Company’s consolidated results of operations or financial position.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 provides guidance on how certain cash receipts and cash payments should be presented and classified in the statement of cash flows with the objective of reducing existing diversity in practice with respect to these items. ASU 2016-15 is effective for annual periods, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted. This standard will not have a material impact on the Company’s consolidated results of operations or financial position.
In March 2016, the FASB issued ASU 2016-04, Liabilities—Extinguishments of Liabilities (Subtopic 405-20)- Recognition of Breakage for Certain Prepaid Stored-Value Products (“ASU 2016-04”). ASU 2016-04 entitles a company to derecognize amounts related to expected breakage to the extent that it is probable a significant reversal of the recognized breakage amount will not subsequently occur. ASU 2016-04 is effective for annual periods, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted. This standard will not have a material impact on the Company’s consolidated results of operations or financial position.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842): Amendments to the FASB Accounting Standards Codification® (“ASU 2016-02”), which supersedes the existing guidance for lease accounting, Leases (Topic 840). ASU 2016-02 requires lessees to recognize leases on their balance sheets, and modifies accounting, presentation and disclosure for both lessors and lessees. ASU 2016-02 requires a modified retrospective approach for all leases existing at, or entered into after, the date of initial application, with an option to elect to use certain transition relief. ASU 2016-02 is effective for annual periods, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted. Many of the Company’s leases are considered operating leases and are not capitalized under ASC 840. Under ASC 842 the majority of these leases will qualify for capitalization and will result in the recognition of lease assets and lease liabilities once the new standard

9


is adopted. The Company is in the process of reviewing lease contracts to determine the impact of adopting ASU 2016-02 but expects the standard to have a material impact on the Company's financial position.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets, unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The FASB later amended ASU-2014-09 with the following:
•ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date
•
ASU 2016-08 Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
•ASU 2016-10 Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing
•ASU 2016-12 Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients
•ASU 2016-20 Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers
The Company has performed a preliminary review of our core revenue streams including reviewing key contracts and comparing current accounting policies and practices to the new standard to identify potential differences that could arise from the application of ASU 2014-09. Based on these efforts, the Company currently anticipates that the performance obligations underlying its core revenue streams (i.e., its retail and standard wholesale businesses), and the timing of recognition thereof, will remain substantially unchanged. Revenues for these businesses are generated through the sale of finished products, and will continue to be generally recognized at the point in time when merchandise is transferred to the customer and in an amount that considers the impacts of estimated allowances. The Company is still evaluating the impact of adoption on ancillary transactions as well as finalizing our review of customer contracts. The standard will require additional disclosures about the nature of revenue as well as the judgment involved in the timing of revenue recognition. While early adoption is permitted, the Company will adopt ASU 2014-09 in the first quarter of fiscal 2018 and is still selecting a method of adoption.
Recently Adopted Accounting Standards
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ("ASU 2017-04"). Under ASU 2017-04, goodwill impairment testing is done by comparing the fair value of the reporting unit to its carrying value. If the carrying amount exceeds the fair value, the Company would recognize an impairment charge for the amount that the reporting unit's carrying value exceeds the fair value, not to exceed the total amount of goodwill allocated to that reporting unit. The Company concluded that ASU 2017-04 is preferable to the current guidance due to efficiency, since ASU 2017-04 eliminates the requirement to determine the fair value of individual assets and liabilities of a reporting unit to measure goodwill impairment. The Company early adopted ASU 2017-04 effective June 15, 2017 in conjunction with the interim impairment test of goodwill for all reporting units and goodwill impairment was recorded according to the new standard. The Company believes the adoption of ASU 2017-04 did not change the amount of impairment charges recorded in the Second Quarter. See “Note 2—Goodwill and Intangibles Impairment Charges” for additional information on our interim goodwill impairment test performed.
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 simplified several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. ASU 2016-09 was effective for the Company beginning fiscal year 2017 and did not have a material impact on the Company’s consolidated results of operations or financial position. As a result of adoption, the Company now recognizes excess tax benefits or deficiencies associated with share-based compensation activity as an income tax expense or benefit in the period the shares vest or are settled. In addition, the Company now presents excess tax benefits from share-based compensation activity with other income tax cash flows as an operating activity on the statement of cash flows, which differs from the Company’s historical classification of excess tax benefits as a financing activity. The Company has elected to apply this change in cash flow presentation on a prospective basis. The standard also permits the Company to make a policy election for how it accounts for forfeitures, and the Company has elected to continue estimating forfeitures.
In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory (“ASU 2015-11”). ASU 2015-11 requires that inventory be measured at the lower of cost and net realizable value. The standard was effective for the Company beginning fiscal year 2017 and did not have a material impact on the Company’s consolidated results of operations or financial position.


10


2. GOODWILL AND INTANGIBLES IMPAIRMENT CHARGES
The Company evaluates its goodwill and intangible assets for impairment on an annual basis, or as facts and circumstances warrant. At the end of the fiscal year 2016, the Company's market capitalization exceeded the carrying amount of its net assets by 23%. At the end of the first quarter of fiscal 2017, the Company experienced a decline in market capitalization and, as a result of the decline, the Company's market capitalization was 14% below the carrying amount of its net assets as of April 1, 2017. During the Second Quarter, the market capitalization continued to decline at which point the Company determined the decrease in stock price to be sustained and thus a strong indicator of impairment. Due to a change in key assumptions used in interim testing, including the decline in market capitalization and decline in sales projections, the Company believed that impairment of goodwill and trade names was probable as of June 15, 2017, and therefore performed interim tests for each reporting unit and trade name. Using a combination of discounted cash flow and guideline public company methodologies, the Company compared the fair value of each of its three reporting units with their fair value and concluded that goodwill was fully impaired. Accordingly, in the Second Quarter, the Company recognized a pre-tax impairment charge in operations of $202.3 million, $114.3 million and $42.9 million in the Americas, Europe and Asia segments, respectively.
The changes in the carrying amount of goodwill were as follows (in thousands):
 
Americas
 
Europe
 
Asia
 
Total
Balance at December 31, 2016
$
202,187

 
$
110,291

 
$
42,785

 
$
355,263

Foreign currency changes
162

 
3,983

 
85

 
4,230

Impairment charges
(202,349
)
 
(114,274
)
 
(42,870
)
 
$
(359,493
)
Balance at July 1, 2017
$
—

 
$
—

 
$
—

 
$
—

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

3. INVENTORIES
Inventories consisted of the following (in thousands):
 
July 1, 2017
 
December 31, 2016
Components and parts
$
67,307

 
$
49,438

Work-in-process
16,719

 
12,345

Finished goods
534,044

 
480,704

Inventories
$
618,070

 
$
542,487


4. WARRANTY LIABILITIES
The Company’s warranty liability is recorded in accrued expenses-other in the Company’s condensed consolidated balance sheets. Warranty liability activity consisted of the following (in thousands):
 
For the 26 Weeks Ended July 1, 2017
 
For the 26 Weeks Ended July 2, 2016
Beginning balance
$
15,421

 
$
13,669

Settlements in cash or kind
(3,838
)
 
(4,795
)
Warranties issued and adjustments to preexisting warranties (1)
4,674

 
4,861

Ending balance
$
16,257

 
$
13,735

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

11


 
5. INCOME TAXES
The Company’s income tax (benefit) expense and related effective rates were as follows (in thousands, except percentage data):
 
For the 13 Weeks Ended July 1, 2017
 
For the 13 Weeks Ended July 2, 2016
 
For the 26 Weeks Ended July 1, 2017
 
For the 26 Weeks Ended July 2, 2016
Income tax (benefit) expense
$
(96,296
)
 
$
3,499

 
$
(97,516
)
 
$
6,778

Effective tax rate
21.9
%
 
30.2
%
 
20.0
%
 
30.5
%
The lower effective tax rate in the Second Quarter and the Year to Date Period as compared to the Prior Year Quarter and Prior Year YTD Period is primarily attributable to a low projected annual effective tax rate for the year, which is the result of the forecasted loss from the Company's U.S. operations which is tax-benefited at a higher tax rate than the tax rates used to calculate the tax expense on the profits from the Company's foreign operations. This positive impact was partially offset by the increased tax expense resulting from all of the foreign and some of the U.S. goodwill impairment charge being permanently nondeductible for tax purposes. In addition, the Company recorded tax expense resulting from the adoption of ASU 2016-09. See "Note 1-Financial Statement Policies" for additional disclosures about ASU 2016-09.
As of July 1, 2017, the total amount of unrecognized tax benefits, excluding interest and penalties, was $23.5 million, of which $20.5 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 2010-2016 tax years, none of which the Company believes are significant, individually or in the aggregate. Tax audit outcomes and timing of tax audit settlements are subject to significant uncertainty.
The Company has classified uncertain tax positions as long-term income taxes payable, unless such amounts are expected to be paid within twelve months of the condensed consolidated balance sheet date. As of July 1, 2017, the Company had recorded $3.4 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 1, 2017, the total amount of accrued income tax-related interest and penalties included in the condensed consolidated balance sheet was $2.9 million and $1.4 million, respectively. For the Second Quarter and Year To Date Period, the Company accrued income tax-related interest expense of $0.3 million and $0.5 million, respectively.
An increase in long-term deferred tax assets is mostly attributable to the future tax amortization of the tax basis in goodwill and trade names which were impaired for GAAP purposes, as well as an increased amount of net operating loss carry forwards.

6. STOCKHOLDERS’ EQUITY
Common Stock Repurchase Programs. Purchases of the Company’s common stock have been made from time to time pursuant to its repurchase programs, subject to market conditions and at prevailing market prices, through the open market. Repurchased shares of common stock are recorded at cost and become authorized but unissued shares which may be issued in the future for general corporate or other purposes. In the event the repurchased shares are canceled, the Company accounts for retirements by allocating the repurchase price to common stock, additional paid-in capital and retained earnings. The repurchase price allocation is based upon the equity contribution associated with historical issuances. The repurchase programs have been conducted pursuant to Rule 10b-18 of the Exchange Act.
At December 31, 2016 and July 1, 2017, all treasury stock had been effectively retired. As of July 1, 2017, the Company had $824.2 million of repurchase authorizations remaining under its combined repurchase programs. However, under the Company's credit agreement, the Company is restricted from making open market repurchases of its common stock.

12


The following tables reflect the Company’s common stock repurchase activity for the periods indicated (in millions):
 
 
 
 
 
For the 13 Weeks Ended July 1, 2017
 
For the 13 Weeks Ended July 2, 2016
Fiscal Year
Authorized
Dollar Value
Authorized
 
Termination Date
 
Number of
Shares
Repurchased
 
Dollar Value
Repurchased
 
Number of
Shares
Repurchased
 
Dollar Value
Repurchased
2014
$
1,000.0

 
December 2018
 
—

 
$
—

 
—

 
$
0.8

2010
$
30.0

 
None
 
—

 
$
—

 
—

 
$
—

 
 
 
 
 
For the 26 Weeks Ended July 1, 2017
 
For the 26 Weeks Ended July 2, 2016
Fiscal Year
Authorized
Dollar Value
Authorized
 
Termination Date
 
Number of
Shares
Repurchased
 
Dollar Value
Repurchased
 
Number of
Shares
Repurchased
 
Dollar Value
Repurchased
2014
$
1,000.0

 
December 2018
 
—

 
$
—

 
0.1

 
$
5.2

2010
$
30.0

 
None
 
—

 
$
—

 
—

 
$
—


    

Controlling and Noncontrolling Interest. The following tables summarize the changes in equity attributable to controlling and noncontrolling interest (in thousands):
 
Fossil Group, Inc.
Stockholders’
Equity
 
Noncontrolling
Interest
 
Total
Stockholders’
Equity
Balance at December 31, 2016
$
1,006,236

 
$
9,202

 
$
1,015,438

Net income (loss)
(392,898
)
 
3,010

 
(389,888
)
Currency translation adjustment
26,856

 
—

 
26,856

Cash flow hedges - net change
(11,593
)
 
—

 
(11,593
)
Distribution of noncontrolling interest earnings
—

 
(427
)
 
(427
)
Acquisition of common stock
(907
)
 
—

 
(907
)
Stock-based compensation expense
15,335

 
—

 
15,335

Balance at July 1, 2017
$
643,029

 
$
11,785

 
$
654,814

 
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

 

13


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 1, 2017
 
2,273

 
$
50.77

 
6.0
 
$
117

Granted
 
—

 
—

 
 
 
 

Exercised
 
—

 
—

 
 
 
—

Forfeited or expired
 
(37
)
 
79.66

 
 
 
 

Outstanding at July 1, 2017
 
2,236

 
50.29

 
5.8
 
—

Exercisable at July 1, 2017
 
871

 
$
69.03

 
4.5
 
$
—

 
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 1, 2017 and (ii) the fair market value of the Company’s common stock on the exercise date for options/rights that were exercised during the 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 1, 2017:

Cash Stock Appreciation Rights Outstanding
 
Cash Stock Appreciation Rights Exercisable
Range of
Exercise Prices
 
Number of
Shares
 
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Term
 
Number of
Shares
 
Weighted- Average Exercise Price
 
 
(in Thousands)
 
 
 
(in Years)
 
(in Thousands)
 
 
$29.78 - $47.99
 
61

 
$
36.73

 
6.5
 
11

 
$
36.73

Total
 
61

 
$
36.73

 
6.5
 
11

 
$
36.73


Stock Options Outstanding
 
Stock Options Exercisable
Range of
Exercise Prices
 
Number of
Shares
 
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Term
 
Number of
Shares
 
Weighted-
Average
Exercise
Price
 
 
(in Thousands)
 
 
 
(in Years)
 
(in Thousands)
 
 
$13.65 - $29.49
 
40

 
$
14.40

 
1.5
 
40

 
$
14.40

$29.78 - $47.99
 
81

 
36.92

 
1.7
 
81

 
36.92

$55.04 - $83.83
 
91

 
80.80

 
3.5
 
91

 
80.80

$95.91 - $131.46
 
130

 
127.97

 
4.4
 
130

 
127.97

Total
 
342

 
$
80.35

 
3.2
 
342

 
$
80.35



14


Stock Appreciation Rights Outstanding
 
Stock Appreciation Rights Exercisable
Range of
Exercise Prices
 
Number of
Shares
 
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Term
 
Number of
Shares
 
Weighted-
Average
Exercise
Price
 
 
(in Thousands)
 
 
 
(in Years)
 
(in Thousands)
 
 
$13.65 - $29.49
 
101

 
$
29.49

 
7.0
 
—

 
$
—

$29.78 - $47.99
 
1,489

 
38.11

 
6.5
 
314

 
39.05

$55.04 - $83.83
 
134

 
78.96

 
4.8
 
97

 
79.73

$95.91 - $131.46
 
109

 
114.42

 
3.8
 
107

 
114.63

Total
 
1,833

 
$
45.14

 
6.2
 
518

 
$
62.26

 
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 1, 2017
 
1,101

 
$
37.16

Granted
 
1,816

 
16.50

Vested
 
(53
)
 
30.82

Forfeited
 
(79
)
 
24.30

Nonvested at July 1, 2017
 
2,785

 
$
24.21

 
The total fair value of restricted stock and restricted stock units vested during the Second Quarter was approximately $0.7 million. Vesting of performance restricted stock units is based on achievement of sales growth and operating margin targets in relation to the performance of a certain identified peer group, particular sales growth in relation to a defined sales plan and achievement of succession plans for key talent.
 

15


8. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following tables illustrate changes in the balances of each component of accumulated other comprehensive income (loss), net of taxes (in thousands):

 
For the 13 Weeks Ended July 1, 2017
 
Currency
Translation
Adjustments
 
Cash Flow Hedges
 
 
 
 
 
 
Forward
Contracts
 
Interest
Rate Swaps
 
Pension
Plan
 
Total
Beginning balance
$
(91,472
)
 
$
8,390

 
$
(41
)
 
$
(3,907
)
 
$
(87,030
)
Other comprehensive income (loss) before reclassifications
16,461

 
(15,306
)
 
(2
)
 
—

 
1,153

Tax (expense) benefit
—

 
6,371

 
1

 
—

 
6,372

Amounts reclassed from accumulated other comprehensive income (loss)
—

 
1,367

 
(131
)
 
—

 
1,236

Tax (expense) benefit
—

 
(628
)
 
48

 
—

 
(580
)
Total other comprehensive income (loss)
16,461

 
(9,674
)
 
82

 
—

 
6,869

Ending balance
$
(75,011
)
 
$
(1,284
)
 
$
41

 
$
(3,907
)
 
$
(80,161
)


 
For the 13 Weeks Ended July 2, 2016
 
Currency
Translation
Adjustments
 
Cash Flow Hedges
 
 
 
 
 
 
Forward
Contracts
 
Interest
Rate Swaps
 
Pension
Plan
 
Total
Beginning balance
$
(64,486
)
 
$
(1,554
)
 
$
(1,457
)
 
$
(4,506
)
 
$
(72,003
)
Other comprehensive income (loss) before reclassifications
(9,396
)
 
8,738

 
(711
)
 
—

 
(1,369
)
Tax (expense) benefit
—

 
(3,576
)
 
259

 
—

 
(3,317
)
Amounts reclassed from accumulated other comprehensive income (loss)
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 26 Weeks Ended July 1, 2017
 
Currency
Translation
Adjustments
 
Cash Flow Hedges
 
 
 
 
 
 
Forward
Contracts
 
Interest
Rate Swaps
 
Pension
Plan
 
Total
Beginning balance
$
(101,867
)
 
$
10,693

 
$
(343
)
 
$
(3,907
)
 
$
(95,424
)
Other comprehensive income (loss) before reclassifications
26,856

 
(16,468
)
 
225

 
—

 
10,613

Tax (expense) benefit
—

 
8,660

 
(82
)
 
—

 
8,578

Amounts reclassed from accumulated other comprehensive income (loss)
—

 
6,920

 
(379
)
 
—

 
6,541

Tax (expense) benefit
—

 
(2,751
)
 
138

 
—

 
(2,613
)
Total other comprehensive income (loss)
26,856

 
(11,977
)
 
384

—

—

 
15,263

Ending balance
$
(75,011
)
 
$
(1,284
)
 
$
41

 
$
(3,907
)
 
$
(80,161
)



16


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

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

 
(1,259
)
 
(2,381
)
 
2,010

 
6,195

Tax (expense) benefit
—

 
1,039

 
868

 
(296
)
 
1,611

Amounts reclassed from accumulated other comprehensive income (loss)
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
)

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

9. SEGMENT INFORMATION
The Company reports segment information based on the “management approach”. The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of the Company’s reportable segments.
The Company manages its business primarily on a geographic basis. The Company’s reportable operating segments are comprised of (i) Americas, (ii) Europe and (iii) Asia. Each reportable operating segment includes sales to wholesale and distributor customers, and sales through Company-owned retail stores and e-commerce activities based on the location of the selling entity. The Americas segment primarily includes sales to customers based in Canada, Latin America and the United States. The Europe segment primarily includes sales to customers based in European countries, the Middle East and Africa. The Asia segment primarily includes sales to customers based in Australia, China, India, Indonesia, Japan, Malaysia, New Zealand, Singapore, South Korea, Taiwan and Thailand. Each reportable operating segment provides similar products and services.
The Company evaluates the performance of its reportable segments based on net sales and operating income (loss). Net sales for geographic segments are based on the location of the selling entity. Operating income (loss) for each segment includes net sales to third parties, related cost of sales and operating expenses directly attributable to the segment. Global strategic initiatives such as brand building and omni channel activities and general corporate expenses, including certain administrative, legal, accounting, technology support costs, equity compensation costs, payroll costs attributable to executive management, brand management, product development, art, creative/product design, marketing, strategy, compliance and back office supply chain expenses are not allocated to the various segments because they are managed at the corporate level internally. The Company does not include intercompany transfers between segments for management reporting purposes.

17


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

 
For the 13 Weeks Ended July 1, 2017
 
For the 13 Weeks Ended July 2, 2016
 
Net Sales
 
Operating Income (Loss)
 
Net Sales
 
Operating Income (Loss)
Americas
$
288,804

 
$
(166,500
)
 
$
345,187

 
$
52,300

Europe
194,702

 
(86,805
)
 
215,936

 
31,669

Asia
113,340

 
(35,658
)
 
124,245

 
18,936

Corporate
—

 
(140,793
)
 
—

 
(87,455
)
Consolidated
$
596,846

 
$
(429,756
)
 
$
685,368

 
$
15,450



 
For the 26 Weeks Ended July 1, 2017
 
For the 26 Weeks Ended July 2, 2016
 
Net Sales
 
Operating Income (Loss)
 
Net Sales
 
Operating Income (Loss)
Americas
$
566,347

 
$
(140,819
)
 
$
680,997

 
$
111,896

Europe
390,382

 
(73,191
)
 
425,937

 
60,180

Asia
221,907

 
(24,701
)
 
238,282

 
36,865

Corporate
 

 
(236,308
)
 
 

 
(179,087
)
Consolidated
$
1,178,636

 
$
(475,019
)
 
$
1,345,216

 
$
29,854



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 1, 2017
 
For the 13 Weeks Ended July 2, 2016
 
Net Sales
 
Percentage of Total
 
Net Sales
 
Percentage of Total
Watches
$
469,461

 
78.6
%
 
$
517,602

 
75.5
%
Leathers
69,597

 
11.7

 
93,152

 
13.6

Jewelry
44,285

 
7.4

 
56,752

 
8.3

Other
13,503

 
2.3

 
17,862

 
2.6

Total
$
596,846

 
100.0
%
 
$
685,368

 
100.0
%


 
For the 26 Weeks Ended July 1, 2017
 
For the 26 Weeks Ended July 2, 2016
 
Net Sales
 
Percentage of Total
 
Net Sales
 
Percentage of Total
Watches
$
919,231

 
78.0
%
 
$
1,014,085

 
75.4
%
Leathers
142,286

 
12.1

 
185,657

 
13.8

Jewelry
92,171

 
7.8

 
111,472

 
8.3

Other
24,948

 
2.1

 
34,002

 
2.5

Total
$
1,178,636

 
100.0
%
 
$
1,345,216

 
100.0
%



 

18


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

19


As of July 1, 2017, the Company had the following outstanding forward contracts designated as cash flow hedges that were entered into to hedge the future payments of inventory transactions (in millions):
Functional Currency
 
Contract Currency
Type
 
Amount
 
Type
 
Amount
Euro
 
258.2

 
U.S. dollar
 
291.4

Canadian dollar
 
95.0

 
U.S. dollar
 
72.3

British pound
 
44.8

 
U.S. dollar
 
60.8

Japanese yen
 
4,622.3

 
U.S. dollar
 
42.4

Mexican peso
 
366.6

 
U.S. dollar
 
19.2

Australian dollar
 
22.3

 
U.S. dollar
 
17.0

U.S. dollar
 
45.8

 
Japanese yen
 
4,930.0

The Company is also exposed to interest rate risk related to its outstanding debt. To manage the interest rate risk related to its U.S.-based term loan (as amended and restated, the "Term Loan") which had an outstanding balance of $173.3 million net of debt issuance costs as of July 1, 2017, the Company entered into an interest rate swap agreement on July 26, 2013 with a term of approximately five years. The objective of this hedge is to offset the variability of future payments associated with interest rates on the Term Loan. The interest rate swap agreement hedges the 1-month London Interbank Offer Rate ("LIBOR") based variable rate debt obligations under the Term Loan. Under the terms of the swap, the Company pays a fixed interest rate of 1.288% per annum to the swap counterparty plus the LIBOR rate applicable margin of 3.50%. See “Note 14—Debt Activity” for additional disclosures about the Company’s Term Loan. The notional amount amortizes through May 17, 2018 and coincides with repayments on the underlying loan. The Company receives interest from the swap counterparty at a variable rate based on 1-month LIBOR. This hedge is designated as a cash flow hedge.
Non-designated Hedges. The Company also periodically enters into forward contracts to manage exchange rate risks associated with certain intercompany transactions and for which the Company does not elect hedge accounting treatment. As of July 1, 2017, the Company had non-designated forward contracts of approximately $2.4 million on 31.7 million rand associated with a South African rand-denominated foreign subsidiary. Changes in the fair value of derivatives not designated as hedging instruments are recognized in earnings when they occur.

20


The effective portion of gains and losses on cash flow hedges that were recognized in other comprehensive income (loss), net of taxes during the 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 1, 2017
 
For the 13 Weeks Ended July 2, 2016
Cash flow hedges:
 

 
 

Forward contracts
$
(8,935
)
 
$
5,162

Interest rate swaps
(1
)
 
(452
)
Total gain (loss) recognized in other comprehensive income (loss), net of taxes
$
(8,936
)
 
$
4,710



 
For the 26 Weeks Ended July 1, 2017
 
For the 26 Weeks Ended July 2, 2016
Cash flow hedges:
 

 
 

Forward contracts
$
(7,808
)
 
$
(220
)
Interest rate swaps
143

 
(1,513
)
Total gain (loss) recognized in other comprehensive income (loss), net of taxes
$
(7,665
)
 
$
(1,733
)

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 (Loss)
and Comprehensive
Income (Loss) Location
 
Effect of Derivative
Instruments
 
For the 13 Weeks Ended July 1, 2017
 
For the 13 Weeks Ended July 2, 2016
Forward contracts designated as cash flow hedging instruments
 
Other income (expense)-net
 
Total gain (loss) reclassified from other comprehensive income (loss)
 
$
739

 
$
665

Forward contracts not designated as hedging instruments
 
Other income (expense)-net
 
Total gain (loss) recognized in income
 
$
50

 
$
74

Interest rate swap designated as a cash flow hedging instrument
 
Interest expense
 
Total gain (loss) reclassified from other comprehensive income (loss)
 
$
(83
)
 
$
(286
)


Derivative Instruments
 
Condensed Consolidated
Statements of Income (Loss)
and Comprehensive
Income (Loss) Location
 
Effect of Derivative
Instruments
 
For the 26 Weeks Ended July 1, 2017
 
For the 26 Weeks Ended July 2, 2016
Forward contracts designated as cash flow hedging instruments
 
Other income (expense)-net
 
Total gain (loss) reclassified from other comprehensive income (loss)
 
$
4,169

 
$
4,951

Forward contracts not designated as hedging instruments
 
Other income (expense)-net
 
Total gain (loss) recognized in income
 
$
77

 
$
(157
)
Interest rate swap designated as a cash flow hedging instrument
 
Interest expense
 
Total gain (loss) reclassified from other comprehensive income (loss)
 
$
(241
)
 
$
(583
)



21


The following table discloses the fair value amounts for the Company’s derivative instruments as separate asset and liability values, presents the fair value of derivative instruments on a gross basis, and identifies the line items in the condensed consolidated balance sheets in which the fair value amounts for these categories of derivative instruments are included (in thousands):
 
 
Asset Derivatives
 
Liability Derivatives
 
 
July 1, 2017
 
December 31, 2016
 
July 1, 2017
 
December 31, 2016
Derivative Instruments
 
Condensed
Consolidated
Balance Sheets
Location
 
Fair
Value
 
Condensed
Consolidated
Balance Sheets
Location
 
Fair
Value
 
Condensed
Consolidated
Balance Sheets
Location
 
Fair
Value
 
Condensed
Consolidated
Balance Sheets
Location
 
Fair
Value
Forward contracts designated as cash flow hedging instruments
 
Prepaid expenses and other current assets
 
$
4,143

 
Prepaid expenses and other current assets
 
$
23,288

 
Accrued expenses- other
 
$
9,199

 
Accrued expenses- other
 
$
4,696

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

 
Prepaid expenses and other current assets
 
—

 
Accrued expenses- other
 
2

 
Accrued expenses- other
 
2

Interest rate swap designated as a cash flow hedging instrument
 
Prepaid expenses and other current assets
 
123

 
Prepaid expenses and other current assets
 
—

 
Accrued expenses- other
 
59

 
Accrued expenses- other
 
613

Forward contracts designated as cash flow hedging instruments
 
Intangible and other assets-net
 
268

 
Intangible and other assets-net
 
5,648

 
Other long-term liabilities
 
3,464

 
Other long-term liabilities
 
268

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

 
Intangible and other assets-net
 
73

 
Other long-term liabilities
 
—

 
Other long-term liabilities
 
—

Total
 
 
 
$
4,534

 
 
 
$
29,009

 
 
 
$
12,724

 
 
 
$
5,579

 
At the end of the Second Quarter, the Company had forward contracts designated as cash flow hedges with maturities extending through June 2019. As of July 1, 2017, an estimated net loss of $3.7 million is expected to be reclassified into earnings within the next twelve months at prevailing foreign currency exchange rates. See “Note 1—Financial Statement Policies” for additional disclosures on foreign currency hedging instruments.
11. FAIR VALUE MEASUREMENTS
The Company defines fair value as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date.
Accounting Standards Codification ("ASC") 820, Fair Value Measurement and Disclosures (“ASC 820”), establishes a fair value hierarchy, which prioritizes the inputs used in measuring fair value into three broad levels as follows:
•Level 1 — Quoted prices in active markets for identical assets or liabilities.
•Level 2 — Inputs, other than quoted prices in active markets, that are observable either directly or indirectly.
•Level 3 — Unobservable inputs based on the Company’s assumptions.
ASC 820 requires the use of observable market data if such data is available without undue cost and effort.

22


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

 
 

 
 

 
 

Forward contracts
$
—

 
$
4,411

 
$
—

 
$
4,411

Deferred compensation plan assets:
 

 
 

 
 

 
 

Investment in publicly traded mutual funds
2,560

 
—

 
—

 
2,560

Interest rate swap
—

 
123

 
—

 
123

Total
$
2,560

 
$
4,534

 
$
—

 
$
7,094

Liabilities:
 

 
 

 
 

 
 

Forward contracts
$
—

 
$
12,665

 
—

 
$
12,665

Interest rate swap
—

 
59

 
—

 
59

Total
$
—

 
$
12,724

 
$
—

 
$
12,724

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

 
 

 
 

 
 

Forward contracts
$
—

 
$
28,936

 
$
—

 
$
28,936

Deferred compensation plan assets:
 

 
 

 
 

 
 

Investment in publicly traded mutual funds
2,385

 
—

 
—

 
2,385

Interest rate swap
—

 
73

 
—

 
73

Total
$
2,385

 
$
29,009

 
$
—

 
$
31,394

Liabilities:
 

 
 

 
 

 
 

Forward contracts
—

 
4,966

 
—

 
4,966

Interest rate swap
—

 
613

 
—

 
613

Total
$
—

 
$
5,579

 
$
—

 
$
5,579

The fair values of the Company’s deferred compensation plan assets are based on quoted prices. The deferred compensation plan assets are recorded in intangible and other assets-net in the Company’s condensed consolidated balance sheets. The fair values of the Company’s forward contracts are based on published quotations of spot currency rates and forward points, which are converted into implied forward currency rates. The fair values of the interest rate swap assets and liabilities are determined using valuation models based on market observable inputs, including forward curves, mid-market price and volatility levels. See “Note 10—Derivatives and Risk Management” for additional disclosures about the interest rate swaps and forward contracts.
As of July 1, 2017, debt, excluding unamortized debt issuance costs and capital leases, was recorded at cost and had a carrying value of $649.0 million and a fair value of approximately $636.0 million. The fair value of debt was obtained from a third-party based on observable market inputs.
The fair value of goodwill and trade names are measured on a non-recurring basis using Level 3 inputs, including forecasted cash flows, discounts rates and implied royalty rates.
During the Second Quarter, the Company fully impaired its goodwill balance and recorded pre-tax impairment charges of $202.3 million, $114.3 million and $42.9 million in the Americas, Europe and Asia segments, respectively.
During the Second Quarter, the SKAGEN trade name with a carrying amount of $55.6 million was written down to its implied fair value of $27.3 million, resulting in a pre-tax impairment charge of $28.3 million, the MISFIT trade name with a carrying amount of $11.8 million was deemed not recoverable, resulting in a pre-tax impairment charge of $11.8 million and the MICHELE trade name with a carrying amount of $18.5 million was written down to its implied fair value of $10.9 million, resulting in a pre-tax impairment charge of $7.6 million. Trade name impairment charges were recorded in the Corporate cost

23


area. See “Note 2—Goodwill and Intangibles Impairment Charges” for additional disclosures about goodwill and trade name impairment.
In accordance with the provisions of ASC 360, Property, Plant and Equipment, property, plant and equipment-net with a carrying amount of $3.7 million related to retail store leasehold improvements and fixturing and related key money in the amount of $0.6 million were deemed not recoverable, resulting in an impairment charge of $4.3 million during the Year To Date Period.
The fair values of assets related to Company-owned retail stores were determined using Level 3 inputs. Of the $4.3 million impairment expense, $1.4 million, $1.3 million, and $0.4 million were recorded in restructuring charges in the Europe, Americas and Asia segments, respectively, and $0.8 million and $0.4 million were recorded in SG&A in the Europe and Asia segments, respectively. 
During the Second Quarter, the Company recorded a pre-tax impairment charge of $1.6 million related to the write off of a cost method investment.

12. INTANGIBLE AND OTHER ASSETS
 
The following table summarizes intangible and other assets (in thousands):
 
 
 
 
July 1, 2017
 
December 31, 2016
 
 
Useful
 
Gross
 
Accumulated
 
Gross
 
Accumulated
 
 
Lives
 
Amount
 
Amortization
 
Amount
 
Amortization
Intangibles-subject to amortization:
 
 
 
 

 
 

 
 

 
 

Trademarks
 
10 yrs.
 
$
4,310

 
$
3,562

 
$
4,310

 
$
3,443

Customer lists
 
5-10 yrs.
 
54,694

 
30,761

 
53,625

 
26,986

Patents
 
3-20 yrs.
 
2,325

 
2,116

 
2,325

 
2,099

Noncompete agreement
 
3-6 yrs.
 
2,535

 
1,956

 
2,505

 
1,662

Developed technology
 
7 yrs.
 
36,100

 
7,736

 
36,100

 
5,157

Trade name
 
6 yrs.
 
—

 
—

 
15,700

 
2,617

Other
 
7-20 yrs.
 
261

 
229

 
253

 
215

Total intangibles-subject to amortization
 
 
 
100,225

 
46,360

 
114,818

 
42,179

Intangibles-not subject to amortization:
 
 
 
 

 
 

 
 

 
 

Trade names
 
 
 
38,651

 
 

 
74,485

 
 

Other assets:
 
 
 
 

 
 

 
 

 
 

Key money deposits
 
 
 
27,325

 
23,472

 
26,948

 
22,038

Other deposits
 
 
 
19,322

 
 

 
19,344

 
 

Deferred compensation plan assets
 
 
 
2,560

 
 

 
2,385

 
 

Deferred tax asset-net
 
 
 
83,844

 
 

 
23,061

 
 

Restricted cash
 
 
 
362

 
 

 
500

 
 

Shop-in-shop
 
 
 
9,907

 
9,437

 
8,807

 
8,019

Interest rate swap
 
 
 
—

 
 
 
73

 
 
Long term tax receivable