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 4, 2015
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 000-19848
FOSSIL GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware
75-2018505
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
901 S. Central Expressway, Richardson, Texas
75080
(Address of principal executive offices)
(Zip Code)
(972) 234-2525
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The number of shares of the registrant’s common stock outstanding as of August 6, 2015: 48,146,973
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED
IN THOUSANDS
July 4,
January 3,
2015
Assets
Current assets:
Cash and cash equivalents
$
249,864
276,261
Accounts receivable - net of allowances of $61,773 and $80,047, respectively
254,517
430,498
Inventories
669,334
597,281
Deferred income tax assets-net
34,833
34,084
Prepaid expenses and other current assets
157,791
151,730
Total current assets
1,366,339
1,489,854
Property, plant and equipment - net of accumulated depreciation of $377,782 and $360,191, respectively
329,160
345,606
Goodwill
197,741
197,728
Intangible and other assets-net
166,201
174,364
Total long-term assets
693,102
717,698
Total assets
2,059,441
2,207,552
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
161,380
159,267
Short-term and current portion of long-term debt
20,288
16,646
Accrued expenses:
Compensation
59,593
50,776
Royalties
21,224
54,013
Co-op advertising
17,504
28,591
Transaction taxes
15,552
35,301
Other
71,068
75,609
Income taxes payable
15,301
26,626
Total current liabilities
381,910
446,829
Long-term income taxes payable
13,540
16,610
Deferred income tax liabilities
87,395
87,860
Long-term debt
674,445
613,659
Other long-term liabilities
57,749
58,793
Total long-term liabilities
833,129
776,922
Commitments and contingencies (Note 13)
Stockholders’ equity:
Common stock, 48,291 and 50,771 shares issued and outstanding at July 4, 2015 and January 3, 2015, respectively
483
508
Additional paid-in capital
178,633
171,669
Retained earnings
698,372
822,093
Accumulated other comprehensive income (loss)
(44,542
)
(16,410
Total Fossil Group, Inc. stockholders’ equity
832,946
977,860
Noncontrolling interest
11,456
5,941
Total stockholders’ equity
844,402
983,801
Total liabilities and stockholders’ equity
See notes to the condensed consolidated financial statements.
2
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
IN THOUSANDS, EXCEPT PER SHARE DATA
For the 13
For the 26
For the 27
Weeks Ended
July 4, 2015
July 5, 2014
Net sales
739,975
773,820
1,465,060
1,550,365
Cost of sales
330,510
329,218
654,870
662,542
Gross profit
409,465
444,602
810,190
887,823
Operating expenses:
Selling, general and administrative expenses
332,560
359,844
665,042
698,366
Restructuring charges
6,471
0
18,559
Total operating expenses
339,031
683,601
Operating income
70,434
84,758
126,589
189,457
Interest expense
5,014
3,887
9,193
7,593
Other income (expense) - net
14,294
(1,097
21,479
(1,448
Income before income taxes
79,714
79,774
138,875
180,416
Provision for income taxes
22,894
24,875
41,417
56,355
Net income
56,820
54,899
97,458
124,061
Less: Net income attributable to noncontrolling interest
2,172
2,382
4,740
5,201
Net income attributable to Fossil Group, Inc.
54,648
52,517
92,718
118,860
Other comprehensive income (loss), net of taxes:
Currency translation adjustment
5,559
1,524
(27,947
399
Derivative instruments-net change
(246
(651
(185
(412
Pension plan activity
(3,293
Total other comprehensive income (loss)
5,313
(2,420
(28,132
(3,306
Total comprehensive income
62,133
52,479
69,326
120,755
Less: Comprehensive income attributable to noncontrolling interest
Comprehensive income attributable to Fossil Group, Inc.
59,961
50,097
64,586
115,554
Earnings per share:
Basic
1.12
0.98
1.87
2.21
Diluted
2.20
Weighted average common shares outstanding:
48,634
53,494
49,464
53,821
48,744
53,678
49,615
54,028
3
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Operating Activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion
43,650
48,978
Stock-based compensation
9,276
9,637
Decrease in allowance for returns-net of inventory in transit
(8,438
(3,685
Loss on disposal of assets
2,519
423
Impairment losses
6,602
5,501
Decrease in allowance for doubtful accounts
(2,006
(887
Excess tax benefits from stock-based compensation
(170
(950
Deferred income taxes and other
6,804
(973
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable
183,993
158,595
(91,020
(95,426
(19,666
(36,280
(1,040
9,377
Accrued expenses
(50,563
(60,033
(14,898
(2,842
Net cash provided by operating activities
162,501
155,496
Investing Activities:
Additions to property, plant and equipment
(32,464
(43,440
Increase in intangible and other assets
(1,400
(6,598
Skagen Designs arbitration settlement
5,968
Business acquisitions-net of cash acquired
(4,820
Net investment hedge settlement
410
Net cash used in investing activities
(32,716
(49,628
Financing Activities:
Acquisition of common stock
(218,659
(187,158
Distribution of noncontrolling interest earnings and other
(5,056
(5,392
170
950
Debt borrowings
1,482,165
401,800
Debt payments
(1,419,161
(363,694
Proceeds from exercise of stock options
582
1,508
Net cash used in financing activities
(159,959
(151,986
Effect of exchange rate changes on cash and cash equivalents
3,777
(1,719
Net decrease in cash and cash equivalents
(26,397
(47,837
Cash and cash equivalents:
Beginning of period
320,479
End of period
272,642
4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 4, 2015, and the results of operations for the thirteen-week periods ended July 4, 2015 (“Second Quarter”) and July 5, 2014 (“Prior Year Quarter”), respectively, and the twenty-six week period ended July 4, 2015 (“Year To Date Period”) and the twenty-seven week period ended July 5, 2014 (“Prior Year YTD Period”). All adjustments are of a normal, recurring nature. The Company’s fiscal year periodically results in a 53-week year instead of a normal 52-week year. The prior fiscal year ended January 3, 2015 was a 53-week year, with the additional week included in the first quarter of the fiscal year. Accordingly, the information presented herein includes twenty-six weeks of operations for the Year To Date Period as compared to twenty-seven weeks included in the Prior Year YTD Period.
Effective during the first quarter of the current fiscal year, the Company made changes to the presentation of its reportable segments to reflect changes in the way its chief operating decision maker evaluates the performance of its operations, develops strategy and allocates capital resources. The Company has realigned its operating structure. Strategic and brand directions are set centrally and regional management is now fully empowered and responsible to drive those strategies and brand directions across all brands and channels within their regions. As part of the new operating structure, the regional teams manage both the wholesale and retail businesses within their regions whereas previously the retail business was managed globally. Additionally, with the implementation of new reporting systems, the Company has the ability to extract discrete financial information that aligns with its operating structure and is consistent with how management now evaluates the business performance. The Company’s reportable segments now consist of the following: (i) Americas, (ii) Europe and (iii) Asia. Prior to the Company’s first quarter fiscal 2015 Form 10-Q, as reported in the 2014 Form 10-K (as defined below), the Company’s reportable segments consisted of the following: (i) North America wholesale, (ii) Europe wholesale, (iii) Asia Pacific wholesale and (iv) Direct to consumer.
These changes to the Company’s reportable segments include the following:
(1) Reclassification of the Company’s retail, e-commerce and catalog activities, all of which were previously recorded within the Company’s Direct to consumer segment, to the Americas, Europe and Asia segments based on the geographic location of the activities.
(2) The Company’s wholesale operations in North America, Europe and Asia Pacific previously recorded within the North America wholesale, Europe wholesale and Asia Pacific wholesale segments, respectively, have been reclassified to the Americas, Europe and Asia segments, respectively.
(3) Intercompany profit attributable to the Company’s factory operations was previously included in the Asia Pacific wholesale and Europe wholesale segments in accordance with the geographic location of the factories, and is now eliminated from all reporting segments.
(4) Certain corporate costs are not allocated to the various segments because they are managed at the corporate level for internal purposes. Prior to the change in reporting segments, these expenses included, and after the change in reporting segments, continue to include, general corporate expenses, including certain administrative, legal, accounting, technology support costs, equity compensation costs and payroll costs attributable to executive management. Additionally, certain brand management, product development, art, creative/product design, marketing and back office supply chain expenses which were previously included in North America wholesale, Europe wholesale, Asia Pacific wholesale and Direct to consumer segments prior to the change in reporting segments are now reported in corporate. Conversely, certain back office costs reported in corporate prior to the change in reporting segments are now included in the various reporting segments in which they are now managed.
The Company’s historical segment disclosures have been recast to be consistent with the current presentation.
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 3, 2015 (the “2014 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.
5
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 2014 Form 10-K. Certain prior year amounts have been reclassified to conform to the current year presentation.
Business. The Company is a global design, marketing and distribution company that specializes in consumer fashion accessories. Its principal offerings include an extensive line of men’s and women’s fashion watches and jewelry, handbags, small leather goods, belts, sunglasses, soft accessories and select apparel. 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 currency forward contracts and interest rate swaps. The Company’s foreign subsidiaries periodically enter into foreign exchange forward contracts to hedge the future payment of intercompany inventory transactions denominated in U.S. dollars. If the Company was to settle its euro, British pound, Canadian dollar, Japanese yen, Australian dollar and Mexican peso forward contracts as of July 4, 2015, the net result would have been a net gain of approximately $14.6 million, net of taxes. To help protect against adverse existing and forecasted fluctuations in interest rates, the Company has entered into interest rate swap agreements to effectively convert portions of its existing and forecasted variable rate debt obligations to fixed rates. To reduce exposure to changes in currency exchange rates adversely affecting the Company’s investment in a euro-denominated subsidiary, the Company entered into a forward contract designated as a net investment hedge that was settled during the Prior Year Quarter. 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. See “Note 15—Restructuring” for additional information on the Company’s restructuring plan.
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.
6
The following table reconciles the numerators and denominators used in the computations of both basic and diluted EPS (in thousands, except per share data):
Numerator:
Net income attributable to Fossil Group, Inc
Denominator:
Basic EPS computation:
Basic weighted average common shares outstanding
Basic EPS
Diluted EPS computation:
Effect of stock options, stock appreciation rights, restricted stock units and performance restricted stock units
110
184
151
207
Diluted weighted average common shares outstanding
Diluted EPS
Approximately 569,000, 400,000, 334,000 and 302,000 weighted average common shares issuable under stock-based awards were not included in the diluted EPS calculation at the end of the Second Quarter, Year To Date Period, Prior Year Quarter and Prior Year YTD Period, respectively, because they were antidilutive.
Recently Issued Accounting Standards. In July 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 April 2015, FASB issued ASU 2015-04, Compensation—Retirement Benefits (Topic 715): Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets (“ASU 2015-04”). ASU 2015-04 provides an entity with a fiscal year-end that does not coincide with a month-end a practical expedient that allows the entity to measure defined benefit plan assets and obligations using the month-end that is closest to the entity’s fiscal year-end and apply that practical expedient consistently from year to year. If an entity has a significant event in an interim period that requires the remeasurement of defined benefit plan assets and obligations such as a partial settlement, ASU 2015-04 also provides a practical expedient that permits the entity to remeasure defined benefit plan assets and obligations using the month-end that is closest to the date of the significant event and adjust for any effects of the significant event not captured in the month-end measurement. If an entity applies the practical expedient and a contribution is made between the month-end date used for measurement and the entity’s fiscal year-end, the entity should disclose the amount of the contribution to allow reconciliation of the fair value of plan assets in the fair value hierarchy to the ending balance of the fair value of plan assets. ASU 2015-04 is effective for annual periods beginning after December 15, 2015 with early adoption permitted. This standard will not have a material impact on the Company’s consolidated results of operations or financial position.
In April 2015, FASB issued ASU 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU 2015-03 is effective for annual periods beginning after December 15, 2015 with early adoption permitted. This standard will not have a material impact on the Company’s consolidated results of operations or financial position.
In January 2015, FASB issued ASU 2015-01, Income Statement—Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items (“ASU 2015-01”). ASU 2015-01 eliminates from U.S. GAAP the concept of extraordinary items as part of its initiative to reduce complexity in accounting standards. As a result, an entity will no longer be required to segregate extraordinary items from the results of ordinary operations, to separately present an extraordinary item on its income statement, net of tax, after income from continuing operations or to disclose income taxes and earnings-per-share data applicable to an extraordinary item. However, ASU 2015-01 will still retain the presentation and disclosure guidance for items that are unusual in nature and occur infrequently. ASU 2015-01 is effective for annual periods beginning after December 15, 2015 with early adoption permitted. This standard will not have a material impact on the Company’s consolidated results of operations or financial position.
7
In August 2014, 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 June 2014, FASB issued ASU 2014-12, Compensation—Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (“ASU 2014-12”). ASU 2014-12 requires that a performance target, that affects vesting and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. ASU 2014-12 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015, with early adoption permitted. The Company is evaluating the effect of adopting ASU 2014-12, but does not expect that adoption will have a material impact on the Company’s consolidated results of operations or financial position.
In May 2014, 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 July 2015, FASB deferred 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. Early adoption is permitted for periods beginning after December 15, 2016. The Company is evaluating the effect of adopting ASU 2014-09, but does not expect that adoption will have a material impact on the Company’s consolidated results of operations or financial position.
Recently Adopted Accounting Standards. In accordance with U.S. GAAP, the following provision, which had no material impact on the Company’s financial position, results of operations or cash flows, was adopted effective the first quarter of fiscal year 2015: ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.
2. ACQUISITION AND GOODWILL
Fossil Accessories South Africa Acquisition. On February 1, 2015, the Company closed a share purchase agreement with S. Keren Watch Group (“SKWG”), pursuant to which the Company acquired 51% ownership in the Cape Town, South Africa-based distributor for approximately $4.8 million in cash, net of cash acquired and including working capital adjustments (the “SKWG Acquisition”). SKWG had been a distribution partner for the Company for over 23 years, representing all Fossil brands and most of the Company’s licensed brands in South Africa. Upon closing of the share purchase, SKWG was renamed Fossil Accessories South Africa Pty, Ltd. The Company recorded $4.5 million of goodwill related to the acquisition.
Goodwill is the excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed. The changes in the carrying amount of goodwill, which is not subject to amortization, were as follows (in thousands):
Americas
Europe
Asia
Total
Balance at January 3, 2015
119,438
66,433
11,857
Acquisitions
4,487
Foreign currency changes
(102
(4,413
41
(4,474
Balance at July 4, 2015
119,336
66,507
11,898
3. INVENTORIES
Inventories consisted of the following (in thousands):
Components and parts
58,942
48,797
Work-in-process
9,352
13,719
Finished goods
601,040
534,765
8
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):
Beginning balance
13,500
15,658
Settlements in cash or kind
(4,019
(5,576
Warranties issued and adjustments to preexisting warranties (1)
4,038
5,925
Liabilities assumed in acquisition
44
Ending balance
13,563
16,007
(1) Changes in cost estimates related to preexisting warranties are aggregated with accruals for new standard warranties issued and foreign currency changes.
5. INCOME TAXES
The Company’s income tax expense and related effective rate were as follows (in thousands, except percentage data):
Income tax expense
Income tax rate
28.7
%
31.2
29.8
The lower 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.
As of July 4, 2015, the total amount of unrecognized tax benefits, excluding interest and penalties, was $13.1 million, of which $10.3 million would favorably impact the effective tax rate in future periods, if recognized. During the Second Quarter, the U.S. Internal Revenue Service closed its examination of the Company’s 2010-2012 federal income tax returns, and the Company expects a refund of $2.2 million, which is recorded in prepaid expenses and other current assets in the Company’s condensed consolidated balance sheets. The Company is subject to examinations in various state and foreign jurisdictions for its 2007-2013 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 4, 2015, the Company had recorded $1.7 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, respectively. The total amount of accrued income tax-related interest and penalties included in the condensed consolidated balance sheets at July 4, 2015 was $1.7 million and $0.4 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 cancelled, the Company accounts for retirements by allocating the repurchase price to common stock, additional paid-in capital and retained earnings. The repurchase price allocation is based upon the equity contribution associated with historical issuances. The repurchase programs are conducted pursuant to Rule 10b-18 of the Securities Exchange Act of 1934.
9
During the Year To Date Period, the Company effectively retired 2.5 million shares of common stock repurchased under its repurchase programs. The effective retirement of repurchased common stock decreased common stock by approximately $25,500, additional paid-in capital by $0.6 million, retained earnings by $216.4 million and treasury stock by $217.0 million. At January 3, 2015 and July 4, 2015, all treasury stock had been effectively retired. As of July 4, 2015, the Company had $841.7 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
Fiscal Year Authorized
Dollar Value Authorized
Termination Date
Number of Shares Repurchased
Dollar Value Repurchased
2014
1,000.0
December 2018
1.3
102.5
0.0
2012
December 2016 (1)
0.6
67.3
2010
30.0
None
For the 26 Weeks Ended
For the 27 Weeks Ended
2.2
188.2
0.3
28.8
1.6
184.6
(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’
Noncontrolling
Equity
Interest
Common stock issued upon exercise of stock options
Tax expense derived from stock-based compensation
(699
Distribution of noncontrolling interest earnings
Business acquisition
5,831
Stock-based compensation expense
10
Balance at December 28, 2013
1,068,677
6,690
1,075,367
Tax benefit derived from stock-based compensation
Distribution of noncontrolling interest earnings and other.
Balance at July 5, 2014
1,009,168
6,499
1,015,667
7. EMPLOYEE BENEFIT PLANS
Stock-Based Compensation Plans. The following table summarizes stock options and stock appreciation rights activity during the Second Quarter:
Weighted-
Average
Remaining
Aggregate
Contractual
Intrinsic
Stock Options and Stock Appreciation Rights
Shares
Exercise Price
Term
Value
(in Thousands)
(in Years)
Outstanding at April 4, 2015
775
84.93
5.8
10,714
Granted
Exercised
(7
41.30
244
Forfeited or expired
(24
98.15
Outstanding at July 4, 2015
744
84.94
5.5
7,667
Exercisable at July 4, 2015
540
83.20
4.8
7,664
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 4, 2015 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 4, 2015:
Stock Options Outstanding
Stock Options Exercisable
Range of
Number of
Exercise
Exercise Prices
Price
$13.65 - $21.51
51
15.13
3.0
$30.71 - $67.10
93
36.32
3.5
$69.53 - $106.40
96
80.86
5.6
94
80.79
$106.89 - $131.46
165
128.10
6.2
405
81.56
5.0
403
81.55
11
Stock Appreciation Rights Outstanding
Stock Appreciation Rights Exercisable
17
13.65
1.7
40.16
2.4
38.71
197
84.25
6.9
43
90.35
108
117.73
6.0
60
121.69
339
88.98
6.1
137
88.08
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:
Weighted-Average
Restricted Stock, Restricted Stock Units
Grant Date Fair
and Performance Restricted Stock Units
Number of Shares
Nonvested at April 4, 2015
446
90.39
23
79.23
Vested
(16
103.84
Forfeited
92.96
Nonvested at July 4, 2015
437
89.22
The total fair value of restricted stock and restricted stock units vested during the Second Quarter was approximately $1.3 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.
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 4, 2015
Currency
Cash Flow Hedges
Translation
Forward
Pension
Adjustments
Contracts
Rate Swaps
Plan
(60,747
19,315
(4,776
(3,647
(49,855
Other comprehensive income (loss) before reclassifications
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
(3,634
(1,677
(5,311
(3,967
3,721
(55,188
15,348
(1,055
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For the 13 Weeks Ended July 5, 2014
Net
Translation Adjustments
Forward Contracts
Interest Rate Swap
Pension Plan
Investment Hedges
37,027
(1,941
(179
736
162
35,805
(1,834
(912
(2,946
155
(4,013
195
333
(347
(60
121
(1,570
(691
(2,261
537
252
789
(606
(140
95
38,551
(2,547
(319
(2,557
257
33,385
For the 26 Weeks Ended July 4, 2015
Interest Rate Swaps
(27,241
14,980
(502
21,462
3,054
(3,431
(5,965
(1,113
(7,078
22,993
3,923
26,916
(7,864
(1,429
(9,293
368
(553
For the 27 Weeks Ended July 5, 2014
38,152
(2,091
(106
36,691
(2,100
(1,760
(5,997
113
643
(153
256
(2,399
(1,424
(3,823
868
520
1,388
(456
(213
See “Note 10—Derivatives and Risk Management” for additional disclosures about the Company’s use of derivatives.
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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. 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.
Certain reclassifications have been made to prior year amounts to conform with current year presentation. Due to changes in the Company’s reportable segments as discussed in Note 1 to the condensed consolidated financial statements, segment results for fiscal year 2014 have been recast to present results on a comparable basis.
Summary information by operating segment was as follows (in thousands):
Net Sales
Operating Income
386,088
86,033
380,699
88,786
227,923
41,814
258,987
46,770
125,964
20,555
134,134
27,172
Corporate
(77,968
(77,970
Consolidated
752,684
162,533
763,360
187,856
462,179
79,152
519,340
99,278
250,197
41,051
267,665
58,070
(156,147
(155,747
January 3, 2015
Long-Term Assets
Total Assets
262,507
772,618
263,324
809,548
202,586
488,965
220,742
561,486
54,993
213,381
57,508
233,881
173,016
584,477
176,124
602,637
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The following tables reflect net sales for each class of similar products in the periods presented (in thousands, except percentage data):
Percentage of Total
Watches
575,804
77.8
611,208
79.0
Leathers
89,380
12.1
87,325
11.3
Jewelry
55,780
7.5
56,183
7.2
19,011
2.6
19,104
2.5
100.0
1,127,661
77.0
1,212,596
78.2
182,306
12.4
187,047
118,767
8.1
112,701
7.3
36,326
38,021
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 foreign currency forward contracts (“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. 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 intercompany inventory transactions, which will affect the Company’s U.S. dollar earnings. Gains or losses on the forward contracts are expected to offset these fluctuations to the extent the cash flows are hedged by the forward contracts.
These forward contracts meet the criteria for hedge accounting, which requires that they represent foreign-currency-denominated forecasted inter-entity transactions in which (i) the operating unit that has the foreign currency exposure is a party to the hedging instrument and (ii) the hedged transaction is denominated in a currency other than the hedging unit’s functional currency.
At the inception of each forward contract 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.
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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 4, 2015, the Company had the following outstanding forward contracts designated as cash flow hedges that were entered into to hedge the future payments of intercompany inventory transactions (in millions):
Functional Currency
Contract Currency
Type
Amount
Euro
209.3
U.S. dollar
250.2
British pound
41.9
65.9
Canadian dollar
51.5
42.9
Japanese yen
3,788.1
32.7
Mexican peso
306.6
19.9
Australian dollar
19.0
14.7
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 (“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 will amortize over the remaining life of the Term Loan to coincide with the amortization of the underlying loan. The Company will receive interest from the swap counterparty at a variable rate based on 1-month LIBOR. This hedge is designated as a cash flow hedge. Additionally, to manage interest rate risk related to forecasted debt issuances, the Company entered into a forward starting interest rate swap agreement on March 20, 2015 with a term of approximately 10 years. The objective of this hedge was to offset the variability of future interest payments associated with forecasted debt issuances. The forecasted debt issuances did not occur, and in May 2015, the Company entered into an agreement to offset and unwind the forward starting interest rate swap. As a result of this transaction, a gain of $3.3 million net of taxes was reclassed out of accumulated other comprehensive income (loss) to other income (expense).
Net Investment Hedge. The Company is also exposed to risk that adverse changes in foreign currency exchange rates could impact its net investment in foreign operations. To manage this risk, during the first quarter of fiscal year 2014, the Company entered into a forward contract designated as a net investment hedge to reduce exposure to changes in currency exchange rates on €25.0 million of its total investment in a wholly-owned euro-denominated foreign subsidiary. The hedge was settled in the Prior Year Quarter. 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 as a 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-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 non-inventory intercompany transactions and to which the Company does not elect hedge treatment. As of July 4, 2015, the Company had approximately $0.1 million in assets of outstanding forward exchange contracts acquired as part of the SKWG Acquisition, for which the Company did not elect hedge treatment. As of January 3, 2015, all of the Company’s outstanding forward contracts were designated as hedging instruments. Changes in the fair value of derivatives not designated as hedging instruments are recognized in earnings when they occur.
16
The effective portion of gains and losses on derivative instruments 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):
Cash flow hedges:
Forward contracts
2,954
(1,639
Interest rate swaps
6,648
(579
Net investment hedge:
Forward contract
Total gain (loss) recognized in other comprehensive income (loss), net of taxes
9,602
(2,123
15,497
(1,987
1,941
(1,117
17,438
(2,847
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):
Condensed Consolidated
Statements of Income
and Comprehensive
Effect of Derivative
Derivative Instruments
Income Location
Instruments
Forward contracts designated as cash flow hedging instruments
Other income (expense)-net
Total gain (loss) reclassified from other comprehensive income (loss)
6,921
(1,033
Forward contracts not designated as hedging instruments
Total gain (loss) recognized in income
(9
Interest rate swap designated as a cash flow hedging instrument
(404
(439
3,331
15,129
(1,531
80
(148
(837
(904
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
Condensed
Balance Sheets
Fair
Location
22,887
25,867
Accrued expenses- other
1,021
Forward contracts not designated as cash flow hedging instruments
123
1,991
2,157
664
1,802
246
743
1,724
412
357
24,417
29,393
3,670
2,514
At the end of the Second Quarter, the Company had forward contracts with maturities extending through June 2017. As of July 4, 2015, an estimated net gain of $14.3 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.
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:
18
· 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 4, 2015 (in thousands):
Fair Value at July 4, 2015
Level 1
Level 2
Level 3
Assets:
23,674
Deferred compensation plan assets:
Investment in publicly traded mutual funds
2,515
26,932
Liabilities:
Contingent consideration
4,929
1,267
2,403
8,599
The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of January 3, 2015 (in thousands):
Fair Value at January 3, 2015
27,669
2,477
Interest rate swap
31,870
7,114
9,628
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 4, 2015 and January 3, 2015 and believes, based on the interest rates, related terms and maturities, that the carrying amounts of such instruments approximated their fair values. As of July 4, 2015 and January 3, 2015, 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.
19
The fair value of the contingent consideration liability related to the acquisition of the Company’s joint venture company, Fossil, S.L. (“Fossil Spain”), was determined using Level 3 inputs. The contingent consideration recorded as of July 4, 2015 is based on Fossil Spain’s earnings for fiscal year 2014 and forecasted earnings for fiscal year 2015. During the Second Quarter, the Company made a 1.9 million euro payment towards the 2014 contingent consideration, leaving a remaining liability of 1.5 million euros (approximately $1.7 million) which will be paid during the remaining part of fiscal year 2015. The contingent consideration for calendar year 2015 will be paid upon the execution of the purchase agreement in 2016. The fair value of the contingent consideration was determined using present value techniques with forecasted future cash flows for Fossil Spain as the significant unobservable input. Future revenue growth based on management’s projections for the 2015 calendar year is approximately 18%. Operating expenses are projected to be approximately 25% of revenues for calendar year 2015. A discount rate of 19% was used to calculate the present value of the contingent consideration. The contingent consideration liability for calendar year 2015 is valued at the maximum annual variable price of 3.5 million euros (approximately $3.9 million). A decrease in future cash flows may result in a lower estimated fair value of the calendar year 2015 contingent consideration liability. Future changes in the estimated fair value of the contingent consideration liability, if any, will be reflected in earnings.
In accordance with the provisions of ASC 360, Property, Plant and Equipment, property, plant and equipment—net with a carrying amount of $6.5 million, as of July 4, 2015, related to retail store leasehold improvements and fixturing was fully impaired, and related key money in the amount of $0.1 million was deemed not recoverable, resulting in an impairment charge of $6.6 million for the Year To Date Period.
The fair values of assets related to the Company-owned retail stores were determined using Level 3 inputs. Of the $6.6 million impairment expense, $3.8 million, $0.8 million and $0.4 million was recorded in SG&A in the Europe, Americas and Asia segments, respectively, and $1.6 million was recorded in restructuring charges in the Americas segment.
12. INTANGIBLE AND OTHER ASSETS
The following table summarizes intangible and other assets (in thousands):
Useful
Gross
Accumulated
At Fiscal Year End
Lives
Amortization
Intangibles-subject to amortization:
Trademarks
10 yrs.
4,175
3,074
4,174
2,950
Customer lists
5-10 yrs.
44,096
19,211
41,703
17,457
Patents
3-20 yrs.
2,273
2,046
1,902
Noncompete agreement
6 yrs.
1,823
987
1,855
851
7-20 yrs.
573
465
353
341
Total intangibles-subject to amortization
52,940
25,783
50,358
23,501
Intangibles-not subject to amortization:
Trade names
83,634
83,610
Other assets:
Key money deposits
30,165
19,117
31,892
18,661
Other deposits
22,159
21,854
Deferred compensation plan assets
Deferred tax asset-net
7,617
8,583
Restricted cash
529
575
Shop-in-shop
12,655
9,587
16,333
9,660
7,067
6,978
Total other assets
84,114
28,704
92,218
28,321
Total intangible and other assets
220,688
54,487
226,186
51,822
Total intangible and other assets-net
Key money is the amount of funds paid to a landlord or tenant to acquire the rights of tenancy under a commercial property lease for a certain property. Key money represents the “right to lease” with an automatic right of renewal. This right can be subsequently sold by the Company or can be recovered should the landlord refuse to allow the automatic right of renewal to be exercised. Key money is amortized over the initial lease term, which ranges from approximately four to 18 years.
20
Amortization expense for intangible assets was approximately $1.4 million and $1.3 million for the Second Quarter and Prior Year Quarter, respectively, and $2.5 million and $2.6 million for the Year To Date Period and Prior Year YTD Period, respectively. Estimated aggregate future amortization expense by fiscal year for intangible assets is as follows (in thousands):
Fiscal Year
Amortization Expense
2015 (remaining)
2,441
2016
4,871
2017
4,613
2018
4,258
2019
4,163
2020
3,655
13. COMMITMENTS AND CONTINGENCIES
Litigation. The Company is occasionally subject to litigation or other legal proceedings in the normal course of its business. The Company does not believe that the outcome of any currently pending legal matters, individually or collectively, will have a material effect on the business or financial condition of the Company.
14. DEBT ACTIVITY
On March 9, 2015, the Company entered into an Amended and Restated Credit Agreement (the “Credit Agreement”). The Credit Agreement provides for (i) revolving credit loans in the amount of $1.05 billion (the “Revolving Credit Facility”), with an up to $20.0 million subfacility for swingline loans (the “Swingline Loan”), and an up to $10.0 million subfacility for letters of credit, and (ii) a term loan in the amount of $231.3 million (the “Term Loan”). The Credit Agreement expires and is due and payable on May 17, 2018.
The Company’s obligations under the Credit Agreement are unsecured, and none of the Company’s subsidiaries are guarantors of the Company’s obligations under the Credit Agreement. Upon the occurrence of both (i) the Moody’s Investor Service, Inc. rating of the Company falling below Ba1 and (ii) the Standard & Poor’s Financial Services LLC rating of the Company falling below BB+, the Company’s obligations under the Credit Agreement will be required to be guaranteed by all direct and indirect material domestic subsidiaries of the Company, as provided in a subsidiary guaranty agreement, and secured by 65% of the total outstanding voting capital stock and 100% of the non-voting capital stock of the Company’s material first-tier foreign subsidiaries, pursuant to a pledge agreement. The Credit Agreement refinanced the indebtedness under the Prior Agreement (as defined below) and may be used (i) to finance the acquisition of capital assets, (ii) for ongoing working capital and other general corporate purposes and (iii) to repurchase the Company’s capital stock to the extent permitted under the Credit Agreement.
The Credit Agreement amended and restated that certain credit agreement, dated as of May 17, 2013, as amended, which was scheduled to mature on May 17, 2018 (the “Prior Agreement”). Under the Prior Agreement, the Company incurred approximately $1.6 million and $1.0 million of interest expense during the first quarter of fiscal 2015 related to outstanding revolving credit loans and term loans, respectively, including the impact of the related interest rate swap. As of March 9, 2015, the Company had $555.0 million in aggregate principal amount of revolving credit loans (the “Prior Revolver”) outstanding and $231.3 million in aggregate principal amount of term loans (the “Prior Term Loan”) outstanding under the Prior Agreement, all of which was refinanced on March 9, 2015 with borrowings under the Credit Agreement. No penalties or other early termination fees were incurred in connection with the amendment and restatement of the Prior Agreement.
Amounts outstanding under the Revolving Credit Facility and the Term Loan under the Credit Agreement bear interest, at the Company’s option, at (i) the base rate (defined as the highest of (a) the prime rate publicly announced by Wells Fargo, (b) the federal funds rate plus 0.5% and (c) LIBOR for an interest period of one month plus 1.0%) plus the base rate applicable margin (which varies, based upon the Company’s consolidated total leverage ratio, from 0.25%, if the consolidated total leverage ratio is less than 1.00 to 1.00, to 1.00%, if the consolidated total leverage ratio is greater than or equal to 2.00 to 1.00) or (ii) the LIBOR rate (defined as the quotient obtained by dividing (a) LIBOR by (b) 1.00 minus the Eurodollar reserve percentage) plus the LIBOR rate applicable margin (which varies, based upon the consolidated total leverage ratio, from 1.25%, if the consolidated total leverage ratio is less than 1.00 to 1.00, to 2.00%, if the consolidated total leverage ratio is greater than or equal to 2.00 to 1.00). Amounts outstanding under the Swingline Loan under the Credit Agreement or upon any drawing under a letter of credit bear interest at the base rate plus the applicable margin. Interest based upon the base rate is payable quarterly in arrears. Interest based upon the LIBOR rate is payable on the last day of the applicable interest period.
21
Financial covenants governing the Credit Agreement require the Company to maintain (i) a consolidated total leverage ratio no greater than 2.50 to 1.00 and (ii) a consolidated interest coverage ratio no less than 3.50 to 1.00. The Credit Agreement contains representations, warranties, covenants, events of default and indemnities that are customary for agreements of this type.
The Company is required to pay a commitment fee on the unused amounts of the commitments under the Revolving Credit Facility under the Credit Agreement, payable quarterly in arrears, ranging from 0.20% to 0.35%, based on the consolidated total leverage ratio. In connection with any letter of credit, the Company is required to pay (i) a letter of credit commission, payable quarterly in arrears, in an amount equal to the daily amount available to be drawn under such letter of credit multiplied by the applicable margin with respect to revolving credit loans that are LIBOR rate loans, (ii) a fronting fee, payable quarterly in arrears, as set forth in the applicable letter of credit application or as otherwise separately agreed by the Company and the issuing lender and (iii) normal and customary costs and expenses incurred or charged by the issuing lender in issuing, effecting payment under, amending or otherwise administering the letter of credit.
Loans under the Credit Agreement may be prepaid, in whole or in part, at the option of the Company, in minimum principal amounts of (i) $2.0 million or increments of $1.0 million in excess thereof, with respect to a base rate loan under the Revolving Credit Facility, (ii) $5.0 million or increments of $1.0 million in excess thereof, with respect to a LIBOR rate loan under the Revolving Credit Facility, (iii) $5.0 million or increments of $1.0 million in excess thereof, with respect to the Term Loan and (iv) $0.1 million or increments of $0.1 million in excess thereof, with respect to a Swingline Loan. Loans under the Credit Agreement must be repaid with the net cash proceeds of certain asset sales or insurance and condemnation events. The Company may permanently reduce the revolving credit commitment at any time, in whole or in part, without premium or penalty, in a minimum aggregate principal amount of not less than $3.0 million or increments of $1.0 million in excess thereof.
The repayment obligation under the Credit Agreement can be accelerated upon the occurrence of an event of default, including the failure to pay principal or interest, a material inaccuracy of a representation or warranty, violation of covenants, cross-default, change in control, bankruptcy events, failure of a loan document provision, certain ERISA events and material judgments.
The Company made net principal payments of $3.1 million under the Term Loan during the Second Quarter and $6.3 million in the aggregate under the Term Loan and Prior Term Loan during the Year To Date Period. The Company had net borrowings of $51.7 million under the Revolving Credit Facility during the Second Quarter and $69.7 million in the aggregate under the Revolving Credit Facility and Prior Revolver during the Year To Date Period. Borrowings were primarily used to fund stock repurchases, capital expenditures and normal operating expenses. As of July 4, 2015, the Company had $225.0 million and $458.7 million outstanding under the Term Loan and the Revolving Credit Facility, respectively. Amounts available under the Revolving Credit Facility are reduced by any amounts outstanding under standby letters of credit. As of July 4, 2015, the Company had available borrowing capacity of approximately $590.4 million under the Revolving Credit Facility, which was favorably impacted by a $400.0 million international cash balance. The Company incurred approximately $1.5 million and $2.0 million of interest expense related to the Term Loan during the Second Quarter and Year To Date Period, respectively, including the impact of the related interest rate swap. The Company incurred approximately $2.8 million and $3.5 million of interest expense related to the Revolving Credit Facility during the Second Quarter and Year To Date Period, respectively. The Company was in compliance with all covenants in the Term Loan and Revolving Credit Facility as of July 4, 2015.
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15. RESTRUCTURING
The Company implemented a restructuring program in the first quarter of fiscal year 2015 to optimize its operating structure and store locations. The costs associated with this plan include various charges, including severance and other employment related costs, professional services and costs related to store closures. The following tables show a rollforward of the liability incurred for the Company’s restructuring plan (in thousands):
For the 13 Weeks ended July 4, 2015
Organizational Realignment
Retail Profitability
Balance at April 4, 2015
3,075
Charges to expense (1)
4,586
1,885
Cash payments
(3,763
Non-cash items
(1,885
3,898
For the 26 Weeks ended July 4, 2015
12,317
6,242
(8,419
(3,861
(12,280
(2,381
(1) Charges to expense include changes in estimates
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following is a discussion of the financial condition and results of operations of Fossil Group, Inc. and its subsidiaries for the thirteen and twenty-six week periods ended July 4, 2015 (the “Second Quarter” and “Year To Date Period,” respectively) as compared to the thirteen and twenty-seven week periods ended July 5, 2014 (the “Prior Year Quarter” and “Prior Year YTD Period,” respectively). The Company’s fiscal year periodically results in a 53-week year instead of a normal 52-week year. The prior fiscal year ended January 3, 2015 was a 53-week year, with the additional week included in the first quarter of the fiscal year. Accordingly, the information presented herein includes twenty-six weeks of operations for the Year To Date Period as compared to twenty-seven weeks included in the Prior Year YTD Period. This discussion should be read in conjunction with the condensed consolidated financial statements and the related notes thereto.
General
We are a global design, marketing and distribution company that specializes in consumer fashion accessories. Our principal offerings include an extensive line of men’s and women’s fashion watches and jewelry, handbags, small leather goods, belts, sunglasses, soft accessories and select apparel. In the watch and jewelry product categories, we have a diverse portfolio of globally recognized owned and licensed brand names under which our products are marketed. Our products are distributed globally through various distribution channels, including wholesale in countries where we have a physical presence, direct to the consumer through our retail stores and commercial websites and through third party distributors in countries where we do not maintain a physical presence. Our products are offered at varying price points to meet the needs of our customers, whether they are value conscious or luxury oriented. Based on our extensive range of accessory products, brands, distribution channels and price points, we are able to target style conscious consumers across a wide age spectrum on a global basis.
Domestically, we sell our products through a diversified distribution network that includes department stores, specialty retail locations, specialty watch and jewelry stores, Company-owned retail and outlet stores, mass market stores and through our FOSSIL® website. Our wholesale customer base includes, among others, Dillard’s, JCPenney, Kohl’s, Macy’s, Neiman Marcus, Nordstrom, Saks Fifth Avenue, Target and Wal-Mart. In the United States, our network of Company-owned stores included 110 retail stores located in premier retail sites and 133 outlet stores located in major outlet malls as of July 4, 2015. In addition, we offer an extensive collection of our FOSSIL brand products on our website, www.fossil.com, as well as proprietary and licensed watch and jewelry brands through other managed and affiliate websites.
Internationally, our products are sold to department stores, specialty retail stores and specialty watch and jewelry stores in approximately 150 countries worldwide through 26 Company-owned foreign sales subsidiaries and through a network of approximately 75 independent distributors. Our products are offered on airlines and cruise ships and in international Company-owned retail stores. Internationally, our network of Company-owned stores included 245 retail stores and 120 outlet stores in select international markets as of July 4, 2015. Our products are also sold through licensed and franchised FOSSIL retail stores, retail concessions operated by us and kiosks in certain international markets, as well as our websites in certain countries.
Our business is subject to economic cycles and consumer spending conditions. Purchases of discretionary fashion accessories, such as our watches, handbags, jewelry and other products, tend to decline during recessionary periods when disposable income is lower and consumers are hesitant to use available credit. If economic conditions worsen, or if the global or regional economies slip back into a recession, our revenues and earnings could be negatively impacted.
Our business is also subject to the risks inherent in global sourcing of supply. Certain key components in our products come from limited sources of supply, which exposes us to potential supply shortages that could disrupt the manufacture and sale of our products. Any interruption or delay in the supply of key components could significantly harm our ability to meet scheduled product deliveries to our customers and cause us to lose sales. Interruptions or delays in supply may be caused by a number of factors that are outside of our and our contract manufacturers’ control, such as natural disasters like the earthquake and tsunami in Japan in early fiscal year 2011.
Future sales and earnings growth are also contingent upon our ability to anticipate and respond to changing fashion trends and consumer preferences in a timely manner while continuing to develop innovative products in the respective markets in which we compete. As is typical with new products, market acceptance of new designs and products that we may introduce is subject to uncertainty. In addition, we generally make decisions regarding product designs several months in advance of the time when consumer acceptance can be measured. We believe our historical sales growth is the result of our ability to design innovative watch products that not only differentiate us from our competition but also continue to provide a solid value proposition to consumers across all of our brands.
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The majority of our products are sold at price points ranging from $85 to $600. We believe that the price/value relationship and the differentiation and innovation of our products, in comparison to those of our competitors, will allow us to maintain or grow our market share in those markets in which we compete. Historically, during recessionary periods, the strength of our balance sheet, our strong operating cash flow and the relative size of our business with our wholesale customers, in comparison to that of our competitors, have allowed us to weather recessionary periods for longer periods of time and generally resulted in market share gains to us.
Our international operations are subject to many risks, including foreign currency fluctuations and risks related to the global economy. Generally, a strengthening of the U.S. dollar against currencies of other countries in which we operate will reduce the translated amounts of sales and operating expenses of our subsidiaries, which results in a reduction of our consolidated operating income. We manage these currency risks by using derivative instruments. The primary risks managed by using derivative instruments are the future payments by non-U.S. dollar functional currency subsidiaries of intercompany inventory transactions denominated in U.S. dollars. We enter into foreign exchange forward contracts to manage fluctuations in global currencies that will ultimately be used to settle such U.S. dollar denominated inventory purchases.
For a more complete discussion of the risks facing our business, see “Part I, Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended January 3, 2015.
Results of Operations
Executive Summary. During the Second Quarter, net sales decreased 4% (increased 2% in constant currency), as compared to the Prior Year Quarter. On a constant currency basis, sales growth included modest increases in the Americas, Europe and Asia as well as growth in our owned FOSSIL and SKAGEN® lifestyle brands, which we believe are early indicators that our demand creation initiatives are working. During the Second Quarter, sales of our FOSSIL branded products decreased 2% (increased 6% in constant currency), and our SKAGEN branded products increased 10% (21% in constant currency), while our multi-brand global watch portfolio decreased 6% (flat in constant currency). On a constant currency basis, FOSSIL brand sales expanded across all regions during the Second Quarter with solid growth in watches and leathers, partially offset by a decrease in jewelry products as compared to the Prior Year Quarter. SKAGEN brand sales delivered double-digit growth across each region led by watches on a constant currency basis, and we also saw positive responses to the leathers and jewelry lines. During the Second Quarter, our multi-brand global watch portfolio sales in constant currency were flat to the Prior Year Quarter as increases in the Americas were offset by decreases in Europe and Asia. We believe Europe and Asia represent a significant opportunity to gain market share given we are underpenetrated in many markets around the world. Global comparable store sales increased 2.4% in our owned retail stores. Positive comparable store sales results in the Americas and Europe were partially offset by a decline in Asia. From a product category perspective, comparable store sales gains in watches and leathers were partially offset by a decline in jewelry.
During the Second Quarter, gross profit decreased and the gross margin rate contracted as compared to the Prior Year Quarter primarily driven by changes in foreign currencies. Excluding the impacts of currency, the gross margin rate expanded mainly due to the favorable impacts of our pricing initiatives which more than offset the impact of continued outlet promotions. Our operating margin contracted during the Second Quarter primarily as a result of the unfavorable impact of currencies.
During the Second Quarter, we invested $103 million to repurchase 1.3 million shares of our common stock. Our financial performance, including the unfavorable impacts of currencies combined with our repurchase activity, resulted in earnings of $1.12 per diluted share.
Quarterly Periods Ended July 4, 2015 and July 5, 2014
Consolidated Net Sales. Net sales decreased $33.8 million or 4.4% (increased 2% in constant currency), for the Second Quarter as compared to the Prior Year Quarter. Global watch sales decreased $35.4 million or 5.8% (flat in constant currency), while our leathers product category contributed favorably to the Second Quarter net sales, increasing $2.1 million or 2.4% (9% in constant currency). Our jewelry category declined $0.4 million or 0.7% (increased 11% in constant currency), during the Second Quarter as compared to the Prior Year Quarter as a result of a strong performance in licensed jewelry, offset by a decrease in FOSSIL branded products.
25
Net sales information by product category is summarized as follows (dollars in millions):
Growth (Decline)
Percentage
of Total
Dollars
575.8
611.2
(35.4
(5.8
)%
89.4
87.3
2.1
55.8
56.2
(0.4
(0.7
19.1
(0.1
(0.5
740.0
773.8
(33.8
(4.4
As a multinational enterprise, we are exposed to changes in foreign currency exchange rates. The translation of the operations of our foreign-based entities from their local currencies into U.S. dollars is sensitive to changes in foreign currency exchange rates. In general, our overall financial results are affected positively by a weaker U.S. dollar and are affected negatively by a stronger U.S. dollar as compared to the foreign currencies in which we conduct our business. In the Second Quarter, the translation of foreign-based net sales into U.S. dollars decreased reported net sales by approximately $50.9 million, including unfavorable impacts of $35.1 million, $9.9 million and $5.9 million in our Europe, Asia and Americas segments, respectively.
The following table sets forth consolidated net sales by segment (dollars in millions):
386.1
52.2
380.7
49.2
5.4
1.4
227.9
30.8
259.0
33.5
(31.1
(12.0
126.0
17.0
134.1
17.3
(8.1
(6.0
Americas Net Sales. Americas net sales increased $5.4 million or 1.4% (3% in constant currency), during the Second Quarter in comparison to the Prior Year Quarter. The sales increase in the region was primarily driven by our retail channel. Comparable store sales increased modestly in our owned retail stores, driven by improved conversion resulting from compelling promotions in the outlet channel as traffic continued to decline. Wholesale sales were flat on a constant currency basis, as international increases offset declines in the U.S. where the department store channel continues to be challenging. During the Second Quarter, our leathers category increased $3.3 million or 5.8% (7% in constant currency) and our jewelry business increased $2.6 million or 14.5% (17% in constant currency), while our multi-brand watch portfolio decreased $0.1 million and was flat on a percentage basis (increased 1% in constant currency). Additionally, during the Second Quarter, the Americas region continued to benefit from the addition of newer licensed brands to our portfolio.
Europe Net Sales. Europe net sales decreased $31.1 million or 12.0% (increased 2% in constant currency), with France driving the slight increase in constant currency. In the Second Quarter, sales in Germany were roughly flat to the Prior Year Quarter, and the United Kingdom declined partially attributable to a strong performance in the Prior Year Quarter when orders were shipped early, ahead of a warehouse transition. Sales in Italy also declined during the Second Quarter. From a product category perspective, sales performance was led by (i) a $26.3 million or 13.4% decrease (1% in constant currency), in our multi-brand watch portfolio, (ii) a $3.0 million or 8.2% decrease (8% increase in constant currency), in jewelry and (iii) a $2.1 million or 11.4% decrease (5% increase in constant currency), in leather products, during the Second Quarter as compared to the Prior Year Quarter. In the Europe segment, the constant currency increase was driven by our retail channel, where comparable store sales increased slightly in our owned retail stores with the strongest performance in the outlet channel.
Asia Net Sales. Net sales in Asia decreased $8.1 million or 6.0% (increased 1% in constant currency). In constant currency, India, Japan and Australia were the strongest performing markets and were partially offset by continued weakness in South Korea. Our watch and jewelry categories decreased $9.0 million or 7.7% (1% in constant currency) and $0.1 million or 3.8% (increased 6% in constant currency), respectively, while our leathers business increased $0.9 million or 7.1% (19% in constant currency) during the Second Quarter as compared to the Prior Year Quarter. Comparable store sales in the region decreased modestly in our owned retail stores with the strongest performance in the outlet channel. Comparable concession sales also decreased in the region during the Second Quarter.
26
The following table sets forth the number of stores by concept on the dates indicated below:
Full price accessory
138
126
63
327
148
114
313
Outlets
145
66
42
129
49
35
213
Full priced multi-brand
1
28
32
Total stores
284
127
608
283
169
106
558
During the Second Quarter, we opened eight new stores and closed fourteen stores. For the remainder of fiscal year 2015, we anticipate opening approximately 34 additional retail stores and closing approximately 19 retail stores globally.
A store is included in comparable store sales in the thirteenth month of operation. Stores that experience a gross square footage increase of 10% or more due to an expansion and/or relocation are removed from the comparable store sales base, but are included in total sales. These stores are returned to the comparable store sales base in the thirteenth month following the expansion and/or relocation.
Gross Profit. Gross profit of $409.5 million in the Second Quarter decreased 7.9% in comparison to $444.6 million in the Prior Year Quarter as a result of decreased sales and gross profit margin contraction. Gross profit margin decreased 220 basis points to 55.3% in the Second Quarter compared to 57.5% in the Prior Year Quarter primarily driven by changes in foreign currencies. Excluding the impacts of currency, gross profit margin expansion was driven primarily by our pricing initiatives, which more than offset the impact of continued outlet promotions.
Operating Expenses. Total operating expenses in the Second Quarter decreased by $20.8 million and, as a percentage of net sales, decreased to 45.8% as compared to 46.5% in the Prior Year Quarter. The translation of foreign-denominated expenses in the Second Quarter decreased operating expenses by approximately $25.4 million as a result of the stronger U.S. dollar. Restructuring costs of $6.5 million and the impact of fiscal 2014 store investments that had yet to anniversary were offset by the favorable impact of changes in foreign currencies, lower infrastructure spending and reduced marketing and customer engagement costs mainly due to a timing shift, including an earlier Baselworld in fiscal 2015.
Consolidated Operating Income. Operating income decreased by $14.3 million, or 17.0%, in the Second Quarter compared to the Prior Year Quarter as the impact of the comparable sales increase on a constant currency basis was more than offset by the unfavorable impact of currencies. As a percentage of net sales, operating margin decreased to 9.5% in the Second Quarter compared to 11.0% of net sales in the Prior Year Quarter, driven primarily by an approximate 290 basis point unfavorable impact from changes in foreign currencies.
Sales and gross margins were negatively impacted by currencies in all regional segments. On a constant currency basis, sales grew modestly across all geographies and gross profit margin in Europe expanded, while gross profit margin in the Americas and Asia contracted. Gross profit margin in all regions was negatively impacted by continued outlet promotions, offset by a favorable impact from our pricing initiatives. The gross profit margin in the Americas was also negatively impacted by an increased mix of sales in the off-price channel, while Asia and Europe were unfavorably impacted by an increased mix of outlet store sales. Operating expenses decreased in all regions largely due to the favorable impact of foreign currency changes partially offset by store and concession investments made in fiscal 2014 that had yet to anniversary and restructuring charges. Additionally, Europe and Asia expenses were favorably impacted by lower marketing and customer engagement costs largely due to a timing shift. Corporate operating expenses in the Second Quarter were flat in comparison to the Prior Year Quarter as restructuring charges were offset by decreased compensation costs.
During the Second Quarter, translation of foreign-based sales and expenses into U.S. dollars decreased operating income by approximately $27.6 million. Operating income by segment is summarized as follows (dollars in millions):
Operating Margin %
86.0
88.8
(2.8
(3.2
22.3
23.3
41.8
46.8
(5.0
(10.7
18.3
18.1
20.6
27.2
(6.6
(24.3
16.3
20.3
(78.0
—
Total operating income
70.4
84.8
(14.4
(17.0
9.5
11.0
Interest Expense. Interest expense increased by $1.1 million during the Second Quarter as a result of increased debt levels in comparison to the Prior Year Quarter.
27
Other Income (Expense)-Net. During the Second Quarter, other income (expense)-net increased by $15.4 million to $14.3 million in comparison to the Prior Year Quarter. This increase was primarily driven by net foreign currency gains resulting from mark-to-market hedging and other transactional activities as compared to net losses in the Prior Year Quarter and a $5.2 million gain related to an interest rate hedge settlement.
Provision for Income Taxes. Income tax expense for the Second Quarter was $22.9 million, resulting in an effective income tax rate of 28.7%. For the Prior Year Quarter, income tax expense was $24.9 million, resulting in an effective income tax rate of 31.2%. The lower effective tax rate in the Second Quarter as compared to the Prior Year Quarter was primarily attributable to the recognition of income tax benefits due to the settlement of audits.
Net Income Attributable to Fossil Group, Inc. Second Quarter net income attributable to Fossil Group, Inc. increased by 4.1% to $54.6 million, or $1.12 per diluted share, in comparison to $52.5 million, or $0.98 per diluted share, in the Prior Year Quarter. Diluted earnings per share in the Second Quarter included a $0.30 per diluted share decrease related to foreign currency changes. Excluding currency impacts, diluted earnings per share included a $0.10 per diluted share decrease related to restructuring charges, offset by constant currency sales growth, a reduction in average shares outstanding and a $0.09 per diluted share increase resulting from non-operating gains. The non-operating gains increase consisted of a $0.04 per diluted share increase associated with lower taxes driven by favorable results from prior year tax audits completed during the Second Quarter and a net $0.05 per diluted share increase related to financing activities.
Fiscal Year To Date Periods Ended July 4, 2015 and July 5, 2014
Consolidated Net Sales. Net sales decreased $85.3 million or 5.5% (increased 4% in constant currency and comparable calendar), for the Year To Date Period as compared to the Prior Year YTD Period, which included an extra week as fiscal 2014 was a 53-week year compared to a 52-week year for fiscal 2015. Global watch sales decreased $84.9 million or 7.0% (increased 2% in constant currency and comparable calendar). Our jewelry product category contributed favorably to the Year To Date Period net sales, increasing $6.1 million or 5.4% (20% in constant currency and comparable calendar), as a result of a strong performance in licensed jewelry, partially offset by a decrease in FOSSIL branded products. Our leathers category declined $4.8 million or 2.6% (increased 6% in constant currency and comparable calendar), during the Year To Date Period as compared to the Prior Year YTD Period. Global comparable store sales increased 2.1% in our owned retail stores normalized for the 53-week calendar. Positive comparable store sales results in the Americas and Europe were partially offset by a decline in Asia. From a product category perspective, comparable sales gains in watches and leathers were partially offset by a decline in jewelry.
1,127.7
1,212.6
(84.9
(7.0
182.3
187.1
(4.8
(2.6
118.8
112.7
36.3
38.0
(1.7
(4.5
1,465.1
1,550.4
(85.3
(5.5
In the Year To Date Period, the translation of foreign-based net sales into U.S. dollars decreased reported net sales by approximately $96.1 million, including unfavorable impacts of $68.9 million, $17.1 million and $10.1 million in our Europe, Asia and Americas segments, respectively.
752.7
51.4
763.4
(1.4
462.2
31.5
519.3
(57.1
(11.0
17.1
267.7
(17.5
(6.5
Americas Net Sales. For the Year To Date Period, Americas net sales decreased $10.7 million or 1.4% (increased 3% in constant currency and comparable calendar), compared to the Prior Year YTD Period. Sales performance in the Year To Date Period was principally driven by sales declines in watches of $21.1 million or 3.6% (increased 1% in constant currency and comparable calendar). This sales decrease was partially offset by increases in jewelry and leathers of $10.8 million or 30.9% (37% in constant currency and comparable calendar) and $0.4 million or 0.4% (4% in constant currency and comparable calendar), respectively. Comparable store sales increased modestly in our owned retail stores during the Year To Date Period.
Europe Net Sales. Europe net sales decreased $57.1 million or 11.0% (increased 5% in constant currency and comparable calendar), for the Year To Date Period as compared to the Prior Year YTD Period. The sales performance was led by a $45.7 million or 11.7% decrease in watch sales (4% increase in constant currency and comparable calendar). Our leathers and jewelry categories also declined $6.3 million or 15.4% (increased 4% in constant currency and comparable calendar) and $4.5 million or 6.1% (increased 13% in constant currency and comparable calendar), respectively. Comparable store sales increased slightly in our owned retail stores during the Year To Date Period.
Asia Net Sales. For the Year To Date Period as compared to the Prior Year YTD Period, Asia net sales decreased $17.5 million or 6.5% (increased 3% in constant currency and comparable calendar), principally as a result of an $18.1 million or 7.8% decrease (1% increase in constant currency and comparable calendar), in watches, partially offset by a $1.1 million or 4.2% increase (18% in constant currency and comparable calendar), in leathers products. Comparable store sales in the region decreased modestly in our owned retail stores with the strongest performance in the outlet channel. Comparable concession sales also decreased in the region during the Year To Date Period.
Constant Currency and Comparable Calendar Financial Information. The following table presents our business segment and product net sales on a constant currency and comparable calendar basis. To calculate net sales on a constant currency basis, net sales for the Year To Date Period for entities reporting in currencies other than the U.S. dollar are translated into U.S. dollars at the average rates during the Prior Year YTD Period. To calculate net sales on a comparable calendar basis, we have estimated the impact on net sales of the extra week in the Prior Year YTD Period.
29
Our presentations of net sales on a constant currency and comparable calendar basis are non-GAAP financial measures. We present net sales on a constant currency and comparable calendar basis because we believe that such information is useful to certain investors as a measure of our results of operations year-over-year without the effects of foreign currency fluctuations and the extra week in the Prior Year YTD Period.
Impact of
Estimated
As
Foreign Currency
Constant
Comparable
(in millions)
Reported
Exchange Rates
Extra Week
Calendar
(70.5
1,198.2
34.5
1,178.1
(10.3
192.6
181.3
(12.6
131.4
3.2
109.5
(2.7
39.0
1.1
36.9
Total net sales
(96.1
1,561.2
44.6
1,505.8
(10.1
762.8
21.8
741.6
(68.9
531.1
15.1
504.2
(17.1
267.3
7.7
260.0
Gross Profit. For the Year To Date Period, gross profit margin decreased 200 basis points to 55.3% compared to 57.3% in the Prior Year YTD Period. The decreased gross profit margin was primarily driven by the same factors impacting the Second Quarter.
Operating Expenses. For the Year To Date Period, operating expenses as a percentage of net sales increased to 46.7% compared to 45.0% in the Prior Year YTD Period and included a $49.4 million favorable impact from the translation of foreign-based expenses into U.S. dollars. On a constant currency basis, operating expenses for the Year To Date Period increased by $34.6 million primarily as a result of the impact of fiscal 2014 store investments that had yet to anniversary, restructuring charges and increased marketing and brand building expenses, partially offset by the additional week of operations included in the Prior Year YTD Period.
Consolidated Operating Income. Operating income decreased by $62.9 million, or 33.2%, in the Year To Date Period as compared to the Prior Year YTD Period as the impact of the comparable sales increase on a constant currency and comparable calendar basis was more than offset by the unfavorable impact of currencies, restructuring charges and the impact of the fiscal 2014 store investments that had yet to anniversary. As a percentage of net sales, operating income decreased to 8.6% in the Year To Date Period as compared to 12.2% in the Prior Year YTD Period and included a 230 basis point unfavorable impact from changes in foreign currencies.
Sales and gross margins were negatively impacted by currencies in all regional segments. On a constant currency and comparable calendar basis, sales grew in each regional segment and gross margins expanded modestly in Europe while contracting in the Americas and Asia, primarily as a result of the same factors impacting the Second Quarter. Operating expenses deleveraged in all regions largely due to store and concession investments made in fiscal 2014 that had yet to anniversary and restructuring costs. Additionally, Europe expenses included increased compensation and back office expenses and the Americas included increased marketing and customer engagement costs. Corporate operating expenses in the Year To Date Period increased slightly compared to the Prior Year YTD Period, as restructuring costs were offset by decreased compensation and back office expenses.
30
During the Year To Date Period, the translation of foreign-based sales and expenses into U.S. dollars decreased operating income by approximately $43.7 million. Operating income by segment is summarized as follows (dollars in millions):
162.5
187.9
(25.4
(13.5
21.6
24.6
79.1
99.3
(20.2
(20.3
41.1
58.1
(29.3
16.4
21.7
(156.1
(155.8
(0.3
(0.2
126.6
189.5
(62.9
(33.2
8.6
12.2
Interest Expense. Interest expense increased by $1.6 million during the Year To Date Period as a result of increased debt levels in comparison to the Prior Year YTD Period.
Other Income (Expense)-Net. During the Year To Date Period, other income (expense)-net increased by $22.9 million to $21.5 million in comparison to the Prior Year YTD Period. This increase was primarily driven by net foreign currency gains resulting from mark-to-market hedging and other transactional activities as compared to net losses in the Prior Year YTD Period and a $5.2 million gain related to an interest rate hedge settlement.
Provision for Income Taxes. Income tax expense for the Year To Date Period was $41.4 million, resulting in an effective income tax rate of 29.8%. For the Prior Year YTD Period, income tax expense was $56.4 million, resulting in an effective income tax rate of 31.2%. The lower effective tax rate in the Year To Date Period as compared to the Prior Year YTD Period was primarily attributable to the recognition of income tax benefits due to the settlement of audits.
Net Income Attributable to Fossil Group, Inc. Year To Date Period net income attributable to Fossil Group, Inc. decreased by 22.0% to $92.7 million, or $1.87 per diluted share, in comparison to $118.9 million, or $2.20 per diluted share, in the Prior Year YTD Period. Diluted earnings per share in the Year To Date Period included a $0.43 per diluted share decrease related to foreign currency changes. Excluding currency impacts, diluted earnings per share included a $0.27 per diluted share decrease related to restructuring charges, offset by constant currency sales growth, a reduction in average shares outstanding and a $0.09 per diluted share increase resulting from non-operating gains. The non-operating gains consisted of a $0.05 per diluted share increase associated with lower taxes driven by favorable results from prior year tax audits completed during the Second Quarter and a net $0.04 per diluted share increase related to financing activities.
Liquidity and Capital Resources
Historically, our business operations have not required substantial cash during the first several months of our fiscal year. Generally, starting in the third quarter, our cash needs begin to increase, typically reaching a peak in the September-November time frame as we increase inventory levels in advance of the holiday season. Our quarterly cash requirements are also impacted by the number of new stores we open, other capital expenditures and strategic investments such as acquisitions and stock repurchases. Our cash and cash equivalents balance at the end of the Second Quarter was $249.9 million, including $245.0 million held in banks outside the U.S., in comparison to cash and cash equivalents of $272.6 million at the end of the Prior Year Quarter and $276.3 million at the end of fiscal year 2014. We believe cash from operating activities as well as amounts available under our U.S. credit facilities are sufficient to meet our cash needs in the U.S. for the next 12 months.
For the Year To Date Period, we generated operating cash flow of $162.5 million. This operating cash flow combined with cash on hand and $63.0 million in net borrowings on our credit facilities was utilized to fund $218.7 million of common stock repurchases and $32.5 million of capital expenditures. Cash flows provided by operations were largely attributable to $97.5 million in net income, in addition to $58.2 million of net non-cash items and a $6.8 million net increase in working capital items including a $184.0 million reduction in accounts receivable.
Accounts receivable, net of allowances, decreased by 16.4% to $254.5 million at the end of the Second Quarter compared to $304.6 million at the end of the Prior Year Quarter, primarily as a result of increased collection efforts. Days sales outstanding for our wholesale businesses for the Second Quarter decreased to 41 days, compared to 46 days in the Prior Year Quarter.
Inventory at the end of the Second Quarter was $669.3 million, representing an increase of 0.8% from the Prior Year Quarter inventory balance of $664.2 million.
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The following tables reflect our common stock repurchase activity under our repurchase programs for the periods indicated (in millions):
(1) In the first quarter of fiscal year 2015, we completed this repurchase plan.
We effectively retired 2.5 million shares of common stock repurchased under our repurchase plans during the Year To Date Period. We account for the retirements by allocating the repurchase price, which is based upon the equity contribution associated with historical issuances, to common stock, additional paid-in capital and retained earnings. The effective retirement of common stock repurchased during the Year To Date Period decreased common stock by approximately $25,500, additional paid-in capital by $0.6 million, retained earnings by $216.4 million and treasury stock by $217.0 million. We effectively retired 1.6 million shares of our common stock during the Prior Year YTD Period that was repurchased under our repurchase programs. The effective retirement of common stock repurchased during the Prior Year YTD Period decreased common stock by approximately $16,300, additional paid-in capital by $1.5 million, retained earnings by $183.1 million and treasury stock by $184.6 million. At January 3, 2015 and July 4, 2015, all treasury stock had been effectively retired. As of July 4, 2015, we had a total of $841.7 million of repurchase authorizations remaining under our combined repurchase programs.
At the end of the Second Quarter, we had working capital of $984.4 million compared to working capital of $976.3 million at the end of the Prior Year Quarter. Additionally, at the end of the Second Quarter, we had approximately $20.3 million of short-term borrowings and $674.4 million in long-term debt.
On March 9, 2015, we entered into an Amended and Restated Credit Agreement (the “Credit Agreement”). The Credit Agreement provides for (i) revolving credit loans in the amount of $1.05 billion (the “Revolving Credit Facility”), with an up to $20.0 million subfacility for swingline loans (the “Swingline Loan”), and an up to $10.0 million subfacility for letters of credit, and (ii) a term loan in the amount of $231.3 million (the “Term Loan”). The Credit Agreement expires and is due and payable on May 17, 2018. The Credit Agreement amended and restated that certain credit agreement, dated as of May 17, 2013, as amended (the “Prior Agreement”).
Our obligations under the Credit Agreement are unsecured, and none of our subsidiaries are guarantors of our obligations under the Credit Agreement. Upon the occurrence of both (a) the Moody’s Investor Service, Inc. rating of us falling below Ba1 and (b) the Standard & Poor’s Financial Services LLC rating of us falling below BB+, our obligations under the Credit Agreement will be required to be guaranteed by all of our direct and indirect material domestic subsidiaries, as provided in a subsidiary guaranty agreement, and secured by 65% of the total outstanding voting capital stock and 100% of the non-voting capital stock of our material first-tier foreign subsidiaries, pursuant to a pledge agreement. The Credit Agreement refinanced the indebtedness under the Prior Agreement and may be used (a) to finance the acquisition of capital assets, (b) for ongoing working capital and other general corporate purposes and (c) to repurchase our capital stock to the extent permitted under the Credit Agreement.
Amounts outstanding under the Revolving Credit Facility and the Term Loan under the Credit Agreement bear interest, at our option, at (i) the base rate (defined as the highest of (a) the prime rate publicly announced by Wells Fargo, (b) the federal funds rate plus 0.5% and (c) LIBOR for an interest period of one month plus 1.0%) plus the base rate applicable margin (which varies, based upon our consolidated total leverage ratio, from 0.25%, if the consolidated total leverage ratio is less than 1.00 to 1.00, to 1.00%, if the consolidated total leverage ratio is greater than or equal to 2.00 to 1.00) or (ii) the LIBOR rate (defined as the quotient obtained by dividing (a) LIBOR by (b) 1.00 minus the Eurodollar reserve percentage) plus the LIBOR rate applicable margin (which varies, based upon the consolidated total leverage ratio, from 1.25%, if the consolidated total leverage ratio is less than 1.00 to 1.00, to 2.00%, if the consolidated total leverage ratio is greater than or equal to 2.00 to 1.00). Amounts outstanding under the Swingline Loan under the Credit Agreement or upon any drawing under a letter of credit bear interest at the base rate plus the applicable margin. Interest based upon the base rate is payable quarterly in arrears. Interest based upon the LIBOR rate is payable on the last day of the applicable interest period.
Financial covenants in the Credit Agreement require us to maintain (i) a consolidated total leverage ratio no greater than 2.50 to 1.00, and (ii) a consolidated interest coverage ratio no less than 3.50 to 1.00.
During the Year To Date Period, we made net principal payments of $6.3 million under the Term Loan and term loan under the Prior Agreement. Additionally, we had net borrowings of $69.7 million under the Revolving Credit Facility and revolving credit loans under the Prior Agreement at an average annual interest rate of 1.43%. As of July 4, 2015, we had $225.0 million and $458.7 million outstanding under the Term Loan and the Revolving Credit Facility, respectively. In addition, we had $0.9 million of outstanding standby letters of credit at July 4, 2015. Amounts available under the Revolving Credit Facility are reduced by any amounts outstanding under standby letters of credit. As of July 4, 2015, we had $590.4 million available for borrowing under the Revolving Credit Facility, which was favorably impacted by a $400.0 million international cash balance. Borrowings under the Revolving Credit Facility were mainly used to fund common stock repurchases, capital expenditures and normal operating expenses.
At July 4, 2015, we were in compliance with all debt covenants related to all of our credit facilities.
For fiscal year 2015, we expect total capital expenditures to be approximately $100 million to $110 million. These capital expenditures will be primarily related to global retail store expansion and renovation and investment in technological infrastructure. We believe that cash flows from operations combined with existing cash on hand and amounts available under the Revolving Credit Facility will be sufficient to fund our working capital needs, common stock repurchases and planned capital expenditures for the next twelve months.
Contractual Obligations
As of July 4, 2015, there were no material changes to our contractual obligations set forth in our Annual Report on Form 10-K for the fiscal year ended January 3, 2015.
Off Balance Sheet Arrangements
As of July 4, 2015, there were no material changes to our off balance sheet arrangements as set forth in commitments and contingencies in our Annual Report on Form 10-K for the fiscal year ended January 3, 2015.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the periods reported. On an on-going basis, we evaluate our estimates and judgments, including those related to product returns, bad debt, inventories, long-lived asset impairment, impairment of goodwill and trade names, income taxes, warranty costs, hedge accounting, litigation reserves and stock-based compensation. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances. Our estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. There have been no changes to the critical accounting policies disclosed in “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the fiscal year ended January 3, 2015.
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Forward-Looking Statements
The statements contained and incorporated by reference in this Quarterly Report on Form 10-Q that are not historical facts, including, but not limited to, statements regarding our expected financial position, results of operations, business and financing plans found in this “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 3. Quantitative and Qualitative Disclosures About Market Risk,” constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and involve a number of risks and uncertainties. The words “may,” “believes,” “expects,” “plans,” “intends,” “estimates,” “anticipates” and similar expressions identify forward-looking statements. The actual results of the future events described in such forward-looking statements could differ materially from those stated in such forward-looking statements. Among the factors that could cause actual results to differ materially are: the effect of worldwide economic conditions; significant changes in consumer spending patterns or preferences; interruptions or delays in the supply of key components; acts of war or acts of terrorism; changes in foreign currency valuations in relation to the U.S. dollar; lower levels of consumer spending resulting from a general economic downturn or generally reduced shopping activity caused by public safety or consumer confidence concerns; the performance of our products within the prevailing retail environment; customer acceptance of both new designs and newly-introduced product lines; financial difficulties encountered by customers; the effects of vigorous competition in the markets in which we operate; the integration of the organizations and operations of any acquired businesses into our existing organization and operations; the termination or non-renewal of material licenses, foreign operations and manufacturing; changes in the costs of materials, labor and advertising; government regulation; our ability to secure and protect trademarks and other intellectual property rights; and the outcome of current and possible future litigation.
In addition to the factors listed above, our actual results may differ materially due to the other risks and uncertainties discussed in this Quarterly Report on Form 10-Q and the risks and uncertainties set forth in our Annual Report on Form 10-K for the fiscal year ended January 3, 2015. Accordingly, readers of this Quarterly Report on Form 10-Q should consider these facts in evaluating the information and are cautioned not to place undue reliance on the forward-looking statements contained herein. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Exchange Rate Risk
As a multinational enterprise, we are exposed to changes in foreign currency exchange rates. Our most significant foreign currency risk relates to the euro, and to a lesser extent, the British pound, Canadian dollar, Japanese yen, Mexican peso and Australian dollar as compared to the U.S. dollar. Due to our vertical nature whereby a significant portion of goods are sourced from our owned facilities, the foreign currency risks relate primarily to the necessary current settlement of intercompany inventory transactions. We employ a variety of operating practices to manage these market risks relative to foreign currency exchange rate changes and, where deemed appropriate, utilize foreign exchange forward contracts. These operating practices include, among others, our ability to convert foreign currency into U.S. dollars at spot rates and to maintain U.S. dollar pricing relative to sales of our products to certain distributors located outside the U.S. The use of foreign exchange forward contracts allows us to offset exposure to rate fluctuations because the gains or losses incurred on the derivative instruments will offset, in whole or in part, losses or gains on the underlying foreign currency exposure. We use derivative instruments only for risk management purposes and do not use them for speculation or for trading. There were no significant changes in how we managed foreign currency transactional exposure in the Second Quarter, and management does not anticipate any significant changes in such exposures or in the strategies we employ to manage such exposure in the near future.
The following table shows our outstanding forward contracts designated as cash flow hedges at July 4, 2015 and their expiration dates (in millions):
Expiration Date
May 2017
June 2017
March 2016
If we were to settle our euro, British pound, Canadian dollar, Japanese yen, Mexican peso and Australian dollar based forward contracts as of July 4, 2015, the net result would have been a net gain of approximately $14.6 million, net of taxes. As of July 4, 2015, a 10% unfavorable change in the U.S. dollar strengthening against foreign currencies to which we have balance sheet transactional exposures, would have decreased net pre-tax income by $13.3 million. The translation of the balance sheets of our foreign-based operations from their local currencies into U.S. dollars is also sensitive to changes in foreign currency exchange rates. As of July 4, 2015, a 10% unfavorable change in the exchange rate of the U.S. dollar strengthening against the foreign currencies to which we have exposure would have reduced consolidated stockholders’ equity by approximately $89.4 million. In our view, these hypothetical changes resulting from these assumed changes in foreign currency exchange rates are not material to our consolidated financial position, results of operations or cash flows.
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Interest Rate Risk
We are subject to interest rate volatility with regard to existing and future debt borrowings. Effective July 26, 2013, we entered into an interest rate swap agreement with a term of approximately five years to manage our exposure to interest rate fluctuations on our Term Loan. We will continue to evaluate our interest rate exposure and the use of interest rate swaps in future periods to mitigate our risk associated with adverse fluctuations in interest rates.
Based on our variable-rate debt outstanding as of July 4, 2015, excluding our $225.0 million Term Loan debt hedged with an interest rate swap agreement, a 100 basis point increase in interest rates would increase annual interest expense by approximately $4.7 million.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We conducted an evaluation of the effectiveness of our “disclosure controls and procedures” (“Disclosure Controls”), as defined by Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this Quarterly Report on Form 10-Q. The Disclosure Controls evaluation was done under the supervision and with the participation of management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”). There are inherent limitations to the effectiveness of any system of disclosure controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
Based upon this evaluation, our CEO and CFO have concluded that our Disclosure Controls were effective as of July 4, 2015.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the Second Quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION
Item 1. Legal Proceedings
There are no legal proceedings to which we are a party or to which our properties are subject, other than routine litigation incidental to our business, which is not material to our consolidated financial condition, results of operations or cash flows.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table shows our common stock repurchases based on settlement date for the Fiscal Quarter:
ISSUER PURCHASES OF EQUITY SECURITIES
Total Number of Shares
Approximate Dollar
Number
Purchased as Part
Value of Shares that
of Shares
Paid per
of Publically
May Yet Be Purchased
Period
Purchased (1)
Share
Announced Programs
Under the Programs (2)
April 5, 2015 - May 2, 2015
776,653
83.40
776,330
879,503,408
May 3, 2015 - May 30, 2015
339,594
82.25
851,570,692
May 31, 2015 - July 4, 2015
136,782
71.88
841,738,631
1,253,029
1,252,706
(1) During the Second Quarter, 323 shares of common stock were acquired from grantees in connection with income tax withholding obligations arising from vesting of restricted stock grants. These shares were not part of our publicly announced program to repurchase shares of common stock.
(2) On August 10, 2010, we announced a common stock repurchase program pursuant to which up to $30 million could be used to repurchase outstanding shares of our common stock. The $30 million repurchase program has no termination date. In December 2012, we announced a common stock repurchase program pursuant to which up to $1.0 billion could be used to repurchase outstanding shares of our common stock. The $1.0 billion repurchase program was completed during the first quarter of fiscal year 2015. In November 2014, we announced an additional common stock repurchase program pursuant to which up an additional $1.0 billion could be used to repurchase outstanding shares of our common stock. The second $1.0 billion repurchase program has a termination date of December 2018. During the Second Quarter, approximately 1.3 million shares of our common stock were repurchased pursuant to the second $1.0 billion repurchase plan at a cost of $102.5 million. As of July 4, 2015, we had $841.7 million of repurchase authorizations remaining under our combined repurchase programs.
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Item 6. Exhibits
(a) Exhibits
Exhibit Number
Document Description
3.1
Third Amended and Restated Certificate of Incorporation of Fossil, Inc. (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed on May 25, 2010).
Certificate of Amendment of the Third Amended and Restated Certificate of Incorporation of Fossil, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on May 28, 2013).
3.3
Fourth Amended and Restated Bylaws of Fossil Group, Inc. (incorporated by reference to Exhibit 3.2 of the Company’s Current Report on Form 8-K filed on May 28, 2013).
3.4
Amendment No. 1 to Fourth Amended and Restated Bylaws of Fossil Group, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on March 20, 2014).
31.1(1)
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
31.2(1)
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
32.1(2)
Certification of Chief Executive Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2(2)
Certification of Chief Financial Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS(1)
XBRL Instance Document.
101.SCH(1)
XBRL Taxonomy Extension Schema Document.
101.DEF(1)
XBRL Taxonomy Extension Definition Linkbase Document.
101.CAL(1)
XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB(1)
XBRL Taxonomy Extension Label Linkbase Document.
101.PRE(1)
XBRL Taxonomy Extension Presentation Linkbase Document.
(1) Filed herewith.
(2) Furnished herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
August 13, 2015
/S/ DENNIS R. SECOR
Dennis R. Secor
Executive Vice President, Chief Financial Officer and Treasurer (Principal financial and accounting officer duly authorized to sign on behalf of the Registrant)
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EXHIBIT INDEX
Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
Certification of Chief Executive Officer Pursuant to Section 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer Pursuant to Section 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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