NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
1. FINANCIAL STATEMENT POLICIES
Basis of Presentation.
The condensed consolidated financial statements include the accounts of Fossil Group, Inc., a Delaware corporation, and its wholly and majority-owned subsidiaries (the “Company”).
The condensed consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary to present a fair statement of the Company’s financial position as of
July 1, 2017
, and the results of operations for the thirteen-week periods ended
July 1, 2017
(“
Second
Quarter”) and
July 2, 2016
(“Prior Year Quarter”), respectively, and the twenty-six week periods ended
July 1, 2017
(“Year To Date Period”) and
July 2, 2016
(“Prior Year YTD Period”). All adjustments are of a normal, recurring nature.
These interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Annual Report on Form 10-K filed by the Company pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), for the fiscal year ended
December 31, 2016
(the “
2016
Form 10-K”). Operating results for the
Second
Quarter are not necessarily indicative of the results to be achieved for the full fiscal year.
The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), which require the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the periods reported. Actual results could differ from those estimates. The Company has not made any changes in its significant accounting policies from those disclosed in the
2016
Form 10-K.
Business.
The Company is
a global design, marketing and distribution company that specializes in consumer fashion accessories. Its principal offerings include an extensive line of men's and women's fashion watches and jewelry, handbags, small leather goods, belts and sunglasses. In the watch and jewelry product categories, the Company has a diverse portfolio of globally recognized owned and licensed brand names under which its products are marketed. The Company's products are distributed globally through various distribution channels, including wholesale in countries where it has a physical presence, direct to the consumer through its retail stores and commercial websites and through third-party distributors in countries where the Company does not maintain a physical presence. The Company's products are offered at varying price points to meet the needs of its customers, whether they are value-conscious or luxury oriented. Based on its extensive range of accessory products, brands, distribution channels and price points, the Company is able to target style-conscious consumers across a wide age spectrum on a global basis.
Hedging Instruments.
The Company is exposed to certain market risks relating to foreign exchange rates and interest rates. The Company actively monitors and attempts to mitigate but does not eliminate these exposures using derivative instruments including
foreign exchange forward contracts
("
forward contracts
") and interest rate swaps. The Company’s foreign subsidiaries periodically enter into
forward contracts
to hedge the future payment of intercompany inventory transactions denominated in U.S. dollars. Additionally, the Company enters into forward contracts to manage fluctuations in Japanese yen exchange rates that will be used to settle future third-party inventory component purchases by a U.S. dollar functional currency subsidiary. If the Company was to settle its euro, Canadian dollar, British pound, Japanese yen, Mexican peso, Australian dollar and U.S dollar
forward contracts
as of
July 1, 2017
, the result would have been a net loss of approximately
$5.8 million
, net of taxes. This unrealized loss is recognized in other comprehensive income (loss), net of taxes on the Company's consolidated statements of income (loss) and comprehensive income (loss). Additionally, to the extent that any of these contracts are not considered to be perfectly effective in offsetting the change in the value of the cash flows being hedged, any changes in fair value relating to the ineffective portion of these contracts would be recognized in other income (expense)-net on the Company's consolidated statements of income (loss) and comprehensive income (loss). Also, the Company has entered into an interest rate swap agreement to effectively convert portions of its variable rate debt obligations to a fixed rate. Changes in the fair value of the interest rate swap is recorded as a component of accumulated other comprehensive income (loss) within stockholders' equity, and is recognized in interest expense in the period in which the payment is settled. To reduce exposure to changes in currency exchange rates adversely affecting the Company’s investment in foreign currency-denominated subsidiaries, the Company periodically enters into forward contracts designated as net investment hedges. Both realized and unrealized gains and losses from net investment hedges are recognized in the cumulative translation adjustment component of other comprehensive income (loss), and will be reclassified into earnings in the event the Company's underlying investments are liquidated or disposed. The Company does not hold or issue derivative financial instruments for trading or speculative
purposes. See “Note 10—Derivatives and Risk Management” for additional disclosures about the Company’s use of derivatives.
Operating Expenses.
Operating expenses include selling, general and administrative expenses (“SG&A”), goodwill and trade name impairment and restructuring charges. SG&A expenses include selling and distribution expenses primarily consisting of sales and distribution labor costs, sales distribution center and warehouse facility costs, depreciation expense related to sales distribution and warehouse facilities, the four-wall operating costs of the Company’s retail stores, point-of-sale expenses, advertising expenses and art, design and product development labor costs. SG&A also includes general and administrative expenses primarily consisting of administrative support labor and “back office” or support costs such as treasury, legal, information services, accounting, internal audit, human resources, executive management costs and costs associated with stock-based compensation. Restructuring charges include costs to reorganize, refine and optimize the Company’s infrastructure as well as store closure expenses.
Earnings (Loss) Per Share (“EPS”).
Basic EPS is based on the weighted average number of common shares outstanding during each period. Diluted EPS adjusts basic EPS for the effects of dilutive common stock equivalents outstanding during each period using the treasury stock method.
The following table reconciles the numerators and denominators used in the computations of both basic and diluted EPS (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 13 Weeks Ended July 1, 2017
|
|
For the 13 Weeks Ended July 2, 2016
|
|
For the 26 Weeks Ended July 1, 2017
|
|
For the 26 Weeks Ended July 2, 2016
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Fossil Group, Inc.
|
$
|
(344,712
|
)
|
|
$
|
6,021
|
|
|
$
|
(392,898
|
)
|
|
$
|
11,814
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS computation:
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
48,484
|
|
|
48,119
|
|
|
48,399
|
|
|
48,125
|
|
|
Basic EPS
|
$
|
(7.11
|
)
|
|
$
|
0.13
|
|
|
$
|
(8.12
|
)
|
|
$
|
0.25
|
|
|
Diluted EPS computation:
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
48,484
|
|
|
48,119
|
|
|
48,399
|
|
|
48,125
|
|
|
Effect of stock options, stock appreciation rights, restricted stock units and performance restricted stock units
|
—
|
|
|
88
|
|
|
—
|
|
|
104
|
|
|
Diluted weighted average common shares outstanding
|
48,484
|
|
|
48,207
|
|
|
48,399
|
|
|
48,229
|
|
|
Diluted EPS
|
$
|
(7.11
|
)
|
|
$
|
0.12
|
|
|
$
|
(8.12
|
)
|
|
$
|
0.24
|
|
At the end of the
Second
Quarter and Year To Date Period, approximately
4.7
million and
4.1 million
weighted shares issuable under stock-based awards, respectively, were not included in the diluted EPS calculation because they were antidilutive. The total antidilutive weighted shares included approximately
1.2 million
and
1.1 million
weighted performance-based shares at the end of the
Second
Quarter and Year To Date Period, respectively.
At the end of the Prior Year Quarter and Prior Year YTD Period, approximately
1.9 million
and
1.7 million
weighted shares issuable under stock-based awards, respectively, were not included in the diluted EPS calculation because they were antidilutive. Approximately
1.1 million
weighted performance shares were not included in the diluted EPS calculation at the end of both the Prior Year Quarter and Prior Year YTD Period as the performance targets were not met.
Recently Issued Accounting Standards
In May 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2017-09,
Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting
("ASU 2017-09"). ASU 2017-09 clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award changes as a result of the modification. The guidance is effective for annual periods beginning after December 15, 2017,
including interim periods within those periods. Early adoption is permitted. The Company is still evaluating the effect of adopting ASU 2017-09.
In March 2017, the FASB issued ASU 2017-08,
Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities
("ASU 2017-08"). ASU 2017-08 shortens the amortization period for certain callable debt securities held at a premium. The amendment requires the premium to be amortized to the earliest call date. The guidance is effective for annual periods beginning after December 15, 2018, including interim periods within those periods. Early adoption is permitted. This standard will not have a material impact on the Company’s consolidated results of operations or financial position.
In March 2017, the FASB issued ASU 2017-07,
Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
("ASU 2017-07"). ASU 2017-07 requires the service cost component of pension expense to be included in operations in the same line item as other employee compensation costs and other components of pension expense to be presented separately outside of income from operations. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. This standard will not have a material impact on the Company’s consolidated results of operations or financial position.
In January 2017, the FASB issued ASU 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business
("ASU 2017-01"). ASU 2017-01 clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. This standard will not have a material impact on the Company’s consolidated results of operations or financial position.
In November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash
("ASU 2016-18"). ASU 2016-18 requires that a statement of cash flows explain the change during the period in total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for annual periods, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted. This standard will not have a material impact on the Company’s consolidated results of operations or financial position.
In October 2016, the FASB issued ASU 2016-16,
Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory
(“ASU 2016-16”). ASU 2016-16 requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. ASU 2016-16 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. This standard will not have a material impact on the Company’s consolidated results of operations or financial position.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows
(Topic 230): Classification of Certain Cash Receipts and Cash Payments
(“ASU 2016-15”). ASU 2016-15 provides guidance on how certain cash receipts and cash payments should be presented and classified in the statement of cash flows with the objective of reducing existing diversity in practice with respect to these items. ASU 2016-15 is effective for annual periods, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted. This standard will not have a material impact on the Company’s consolidated results of operations or financial position.
In March 2016, the FASB issued ASU 2016-04,
Liabilities—Extinguishments of Liabilities (Subtopic 405-20)- Recognition of Breakage for Certain Prepaid Stored-Value Products
(“ASU 2016-04”). ASU 2016-04 entitles a company to derecognize amounts related to expected breakage to the extent that it is probable a significant reversal of the recognized breakage amount will not subsequently occur. ASU 2016-04 is effective for annual periods, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted. This standard will not have a material impact on the Company’s consolidated results of operations or financial position.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842): Amendments to the FASB Accounting Standards Codification®
(“ASU 2016-02”), which supersedes the existing guidance for lease accounting,
Leases (Topic 840)
. ASU 2016-02 requires lessees to recognize leases on their balance sheets, and modifies accounting, presentation and disclosure for both lessors and lessees. ASU 2016-02 requires a modified retrospective approach for all leases existing at, or entered into after, the date of initial application, with an option to elect to use certain transition relief. ASU 2016-02 is effective for annual periods, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted. Many of the Company’s leases are considered operating leases and are not capitalized under ASC 840. Under ASC 842 the majority of these leases will qualify for capitalization and will result in the recognition of lease assets and lease liabilities once the new standard
is adopted. The Company is in the process of reviewing lease contracts to determine the impact of adopting ASU 2016-02 but expects the standard to have a material impact on the Company's financial position.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
(“ASU 2014-09”). ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets, unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The FASB later amended ASU-2014-09 with the following:
•
ASU 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date
|
|
|
|
•
|
ASU 2016-08
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
|
•
ASU 2016-10
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing
•
ASU 2016-12
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients
•
ASU 2016-20
Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers
The Company has performed a preliminary review of our core revenue streams including reviewing key contracts and comparing current accounting policies and practices to the new standard to identify potential differences that could arise from the application of ASU 2014-09. Based on these efforts, the Company currently anticipates that the performance obligations underlying its core revenue streams (i.e., its retail and standard wholesale businesses), and the timing of recognition thereof, will remain substantially unchanged. Revenues for these businesses are generated through the sale of finished products, and will continue to be generally recognized at the point in time when merchandise is transferred to the customer and in an amount that considers the impacts of estimated allowances. The Company is still evaluating the impact of adoption on ancillary transactions as well as finalizing our review of customer contracts. The standard will require additional disclosures about the nature of revenue as well as the judgment involved in the timing of revenue recognition. While early adoption is permitted, the Company will adopt ASU 2014-09 in the first quarter of fiscal 2018 and is still selecting a method of adoption.
Recently Adopted Accounting Standards
In January 2017, the FASB issued ASU 2017-04,
Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
("ASU 2017-04"). Under ASU 2017-04, goodwill impairment testing is done by comparing the fair value of the reporting unit to its carrying value. If the carrying amount exceeds the fair value, the Company would recognize an impairment charge for the amount that the reporting unit's carrying value exceeds the fair value, not to exceed the total amount of goodwill allocated to that reporting unit. The Company concluded that ASU 2017-04 is preferable to the current guidance due to efficiency, since ASU 2017-04 eliminates the requirement to determine the fair value of individual assets and liabilities of a reporting unit to measure goodwill impairment. The Company early adopted ASU 2017-04 effective June 15, 2017 in conjunction with the interim impairment test of goodwill for all reporting units and goodwill impairment was recorded according to the new standard. The Company believes the adoption of ASU 2017-04 did not change the amount of impairment charges recorded in the Second Quarter. See “Note 2—Goodwill and Intangibles Impairment Charges” for additional information on our interim goodwill impairment test performed.
In March 2016, the FASB issued ASU 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
(“ASU 2016-09”). ASU 2016-09 simplified several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. ASU 2016-09 was effective for the Company beginning fiscal year 2017 and did not have a material impact on the Company’s consolidated results of operations or financial position. As a result of adoption, the Company now recognizes excess tax benefits or deficiencies associated with share-based compensation activity as an income tax expense or benefit in the period the shares vest or are settled. In addition, the Company now presents excess tax benefits from share-based compensation activity with other income tax cash flows as an operating activity on the statement of cash flows, which differs from the Company’s historical classification of excess tax benefits as a financing activity. The Company has elected to apply this change in cash flow presentation on a prospective basis. The standard also permits the Company to make a policy election for how it accounts for forfeitures, and the Company has elected to continue estimating forfeitures.
In July 2015, the FASB issued ASU 2015-11,
Inventory (Topic 330): Simplifying the Measurement of Inventory
(“ASU 2015-11”). ASU 2015-11 requires that inventory be measured at the lower of cost and net realizable value. The standard was effective for the Company beginning fiscal year 2017 and did not have a material impact on the Company’s consolidated results of operations or financial position.
2. GOODWILL AND INTANGIBLES IMPAIRMENT CHARGES
The Company evaluates its goodwill and intangible assets for impairment on an annual basis, or as facts and circumstances warrant. At the end of the fiscal year 2016, the Company's market capitalization exceeded the carrying amount of its net assets by
23%
. At the end of the first quarter of fiscal 2017, the Company experienced a decline in market capitalization and, as a result of the decline, the Company's market capitalization was
14%
below the carrying amount of its net assets as of April 1, 2017. During the Second Quarter, the market capitalization continued to decline at which point the Company determined the decrease in stock price to be sustained and thus a strong indicator of impairment. Due to a change in key assumptions used in interim testing, including the decline in market capitalization and decline in sales projections, the Company believed that impairment of goodwill and trade names was probable as of June 15, 2017, and therefore performed interim tests for each reporting unit and trade name. Using a combination of discounted cash flow and guideline public company methodologies, the Company compared the fair value of each of its three reporting units with their fair value and concluded that goodwill was fully impaired. Accordingly, in the Second Quarter, the Company recognized a pre-tax impairment charge in operations of
$202.3 million
,
$114.3 million
and
$42.9 million
in the Americas, Europe and Asia segments, respectively.
The changes in the carrying amount of goodwill were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
Europe
|
|
Asia
|
|
Total
|
|
Balance at December 31, 2016
|
$
|
202,187
|
|
|
$
|
110,291
|
|
|
$
|
42,785
|
|
|
$
|
355,263
|
|
|
Foreign currency changes
|
162
|
|
|
3,983
|
|
|
85
|
|
|
4,230
|
|
|
Impairment charges
|
(202,349
|
)
|
|
(114,274
|
)
|
|
(42,870
|
)
|
|
$
|
(359,493
|
)
|
|
Balance at July 1, 2017
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
During the Second Quarter, the SKAGEN trade name with a carrying amount of
$55.6 million
was written down to its implied fair value of
$27.3 million
, resulting in a pre-tax impairment charge of
$28.3 million
, the MISFIT trade name with a carrying amount of
$11.8 million
was deemed not recoverable, resulting in a pre-tax impairment charge of
$11.8 million
and the MICHELE trade name with a carrying amount of
$18.5 million
was written down to its implied fair value of
$10.9 million
, resulting in a pre-tax impairment charge of
$7.6 million
. The fair values of the Company's indefinite-lived SKAGEN and MICHELE trade names were estimated using the relief from royalty method. The fair value of the Company's definite-lived MISFIT trade name was estimated using a discounted cash flow methodology. A reduction in expected future cash flows negatively affected the valuation compared to previous valuation assumptions.
3. INVENTORIES
Inventories consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
July 1, 2017
|
|
December 31, 2016
|
|
Components and parts
|
$
|
67,307
|
|
|
$
|
49,438
|
|
|
Work-in-process
|
16,719
|
|
|
12,345
|
|
|
Finished goods
|
534,044
|
|
|
480,704
|
|
|
Inventories
|
$
|
618,070
|
|
|
$
|
542,487
|
|
4. WARRANTY LIABILITIES
The Company’s warranty liability is recorded in accrued expenses-other in the Company’s condensed consolidated balance sheets. Warranty liability activity consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 26 Weeks Ended July 1, 2017
|
|
For the 26 Weeks Ended July 2, 2016
|
|
Beginning balance
|
$
|
15,421
|
|
|
$
|
13,669
|
|
|
Settlements in cash or kind
|
(3,838
|
)
|
|
(4,795
|
)
|
|
Warranties issued and adjustments to preexisting warranties (1)
|
4,674
|
|
|
4,861
|
|
|
Ending balance
|
$
|
16,257
|
|
|
$
|
13,735
|
|
_______________________________________________
(1) Changes in cost estimates related to preexisting warranties are aggregated with accruals for new standard warranties issued and foreign currency changes.
5. INCOME TAXES
The Company’s income tax (benefit) expense and related effective rates were as follows (in thousands, except percentage data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 13 Weeks Ended July 1, 2017
|
|
For the 13 Weeks Ended July 2, 2016
|
|
For the 26 Weeks Ended July 1, 2017
|
|
For the 26 Weeks Ended July 2, 2016
|
|
Income tax (benefit) expense
|
$
|
(96,296
|
)
|
|
$
|
3,499
|
|
|
$
|
(97,516
|
)
|
|
$
|
6,778
|
|
|
Effective tax rate
|
21.9
|
%
|
|
30.2
|
%
|
|
20.0
|
%
|
|
30.5
|
%
|
The lower effective tax rate in the Second Quarter and the Year to Date Period as compared to the Prior Year Quarter and Prior Year YTD Period is primarily attributable to a low projected annual effective tax rate for the year, which is the result of the forecasted loss from the Company's U.S. operations which is tax-benefited at a higher tax rate than the tax rates used to calculate the tax expense on the profits from the Company's foreign operations. This positive impact was partially offset by the increased tax expense resulting from all of the foreign and some of the U.S. goodwill impairment charge being permanently nondeductible for tax purposes. In addition, the Company recorded tax expense resulting from the adoption of ASU 2016-09. See "Note 1-Financial Statement Policies" for additional disclosures about ASU 2016-09.
As of
July 1, 2017
, the total amount of unrecognized tax benefits, excluding interest and penalties, was
$23.5 million
, of which
$20.5 million
would favorably impact the effective tax rate in future periods, if recognized. The Company is subject to examinations in various state and foreign jurisdictions for its 2010-2016 tax years, none of which the Company believes are significant, individually or in the aggregate. Tax audit outcomes and timing of tax audit settlements are subject to significant uncertainty.
The Company has classified uncertain tax positions as long-term income taxes payable, unless such amounts are expected to be paid within twelve months of the condensed consolidated balance sheet date. As of
July 1, 2017
, the Company had recorded
$3.4 million
of unrecognized tax benefits, excluding interest and penalties, for positions that are expected to be settled within the next twelve months. Consistent with its past practice, the Company recognizes interest and/or penalties related to income tax overpayments and income tax underpayments in income tax expense and income taxes receivable/payable. At
July 1, 2017
, the total amount of accrued income tax-related interest and penalties included in the condensed consolidated balance sheet was
$2.9 million
and
$1.4 million
, respectively. For the
Second
Quarter and Year To Date Period, the Company accrued income tax-related interest expense of
$0.3 million
and
$0.5 million
, respectively.
An increase in long-term deferred tax assets is mostly attributable to the future tax amortization of the tax basis in goodwill and trade names which were impaired for GAAP purposes, as well as an increased amount of net operating loss carry forwards.
6. STOCKHOLDERS’ EQUITY
Common Stock Repurchase Programs.
Purchases of the Company’s common stock have been made from time to time pursuant to its repurchase programs, subject to market conditions and at prevailing market prices, through the open market. Repurchased shares of common stock are recorded at cost and become authorized but unissued shares which may be issued in the future for general corporate or other purposes. In the event the repurchased shares are canceled, the Company accounts for retirements by allocating the repurchase price to common stock, additional paid-in capital and retained earnings. The repurchase price allocation is based upon the equity contribution associated with historical issuances. The repurchase programs have been conducted pursuant to Rule 10b-18 of the Exchange Act.
At
December 31, 2016
and
July 1, 2017
, all treasury stock had been effectively retired. As of
July 1, 2017
, the Company had
$824.2 million
of repurchase authorizations remaining under its combined repurchase programs. However, under the Company's credit agreement, the Company is restricted from making open market repurchases of its common stock.
The following tables reflect the Company’s common stock repurchase activity for the periods indicated (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 13 Weeks Ended July 1, 2017
|
|
For the 13 Weeks Ended July 2, 2016
|
|
Fiscal Year
Authorized
|
Dollar Value
Authorized
|
|
Termination Date
|
|
Number of
Shares
Repurchased
|
|
Dollar Value
Repurchased
|
|
Number of
Shares
Repurchased
|
|
Dollar Value
Repurchased
|
|
2014
|
$
|
1,000.0
|
|
|
December 2018
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
0.8
|
|
|
2010
|
$
|
30.0
|
|
|
None
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 26 Weeks Ended July 1, 2017
|
|
For the 26 Weeks Ended July 2, 2016
|
|
Fiscal Year
Authorized
|
Dollar Value
Authorized
|
|
Termination Date
|
|
Number of
Shares
Repurchased
|
|
Dollar Value
Repurchased
|
|
Number of
Shares
Repurchased
|
|
Dollar Value
Repurchased
|
|
2014
|
$
|
1,000.0
|
|
|
December 2018
|
|
—
|
|
|
$
|
—
|
|
|
0.1
|
|
|
$
|
5.2
|
|
|
2010
|
$
|
30.0
|
|
|
None
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
Controlling and Noncontrolling Interest.
The following tables summarize the changes in equity attributable to controlling and noncontrolling interest (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fossil Group, Inc.
Stockholders’
Equity
|
|
Noncontrolling
Interest
|
|
Total
Stockholders’
Equity
|
|
Balance at December 31, 2016
|
$
|
1,006,236
|
|
|
$
|
9,202
|
|
|
$
|
1,015,438
|
|
|
Net income (loss)
|
(392,898
|
)
|
|
3,010
|
|
|
(389,888
|
)
|
|
Currency translation adjustment
|
26,856
|
|
|
—
|
|
|
26,856
|
|
|
Cash flow hedges - net change
|
(11,593
|
)
|
|
—
|
|
|
(11,593
|
)
|
|
Distribution of noncontrolling interest earnings
|
—
|
|
|
(427
|
)
|
|
(427
|
)
|
|
Acquisition of common stock
|
(907
|
)
|
|
—
|
|
|
(907
|
)
|
|
Stock-based compensation expense
|
15,335
|
|
|
—
|
|
|
15,335
|
|
|
Balance at July 1, 2017
|
$
|
643,029
|
|
|
$
|
11,785
|
|
|
$
|
654,814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fossil Group, Inc.
Stockholders’
Equity
|
|
Noncontrolling
Interest
|
|
Total
Stockholders’
Equity
|
|
Balance at January 2, 2016
|
$
|
921,388
|
|
|
$
|
11,155
|
|
|
$
|
932,543
|
|
|
Net income
|
11,814
|
|
|
3,654
|
|
|
15,468
|
|
|
Currency translation adjustment
|
7,721
|
|
|
—
|
|
|
7,721
|
|
|
Cash flow hedges - net change
|
(6,101
|
)
|
|
—
|
|
|
(6,101
|
)
|
|
Pension plan activity
|
1,714
|
|
|
—
|
|
|
1,714
|
|
|
Common stock issued upon exercise of stock options
|
57
|
|
|
—
|
|
|
57
|
|
|
Tax expense derived from stock-based compensation
|
(1,389
|
)
|
|
—
|
|
|
(1,389
|
)
|
|
Distribution of noncontrolling interest earnings
|
—
|
|
|
(4,544
|
)
|
|
(4,544
|
)
|
|
Acquisition of common stock
|
(6,418
|
)
|
|
—
|
|
|
(6,418
|
)
|
|
Stock-based compensation expense
|
16,463
|
|
|
—
|
|
|
16,463
|
|
|
Balance at July 2, 2016
|
$
|
945,249
|
|
|
$
|
10,265
|
|
|
$
|
955,514
|
|
7. EMPLOYEE BENEFIT PLANS
Stock-Based Compensation Plans.
The following table summarizes stock options and stock appreciation rights activity during the
Second
Quarter:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options and Stock Appreciation Rights
|
|
Shares
|
|
Weighted-
Average
Exercise Price
|
|
Weighted-
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
|
|
|
(in Thousands)
|
|
|
|
(in Years)
|
|
(in Thousands)
|
|
Outstanding at April 1, 2017
|
|
2,273
|
|
|
$
|
50.77
|
|
|
6.0
|
|
$
|
117
|
|
|
Granted
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
Exercised
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
Forfeited or expired
|
|
(37
|
)
|
|
79.66
|
|
|
|
|
|
|
|
Outstanding at July 1, 2017
|
|
2,236
|
|
|
50.29
|
|
|
5.8
|
|
—
|
|
|
Exercisable at July 1, 2017
|
|
871
|
|
|
$
|
69.03
|
|
|
4.5
|
|
$
|
—
|
|
The aggregate intrinsic value shown in the table above is before income taxes and is based on (i) the exercise price for outstanding and exercisable options/rights at
July 1, 2017
and (ii) the fair market value of the Company’s common stock on the exercise date for options/rights that were exercised during the
Second
Quarter.
Stock Options and Stock Appreciation Rights Outstanding and Exercisable.
The following tables summarize information with respect to stock options and stock appreciation rights outstanding and exercisable at
July 1, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Stock Appreciation Rights Outstanding
|
|
Cash Stock Appreciation Rights Exercisable
|
|
Range of
Exercise Prices
|
|
Number of
Shares
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Remaining
Contractual
Term
|
|
Number of
Shares
|
|
Weighted- Average Exercise Price
|
|
|
|
(in Thousands)
|
|
|
|
(in Years)
|
|
(in Thousands)
|
|
|
|
$29.78 - $47.99
|
|
61
|
|
|
$
|
36.73
|
|
|
6.5
|
|
11
|
|
|
$
|
36.73
|
|
|
Total
|
|
61
|
|
|
$
|
36.73
|
|
|
6.5
|
|
11
|
|
|
$
|
36.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options Outstanding
|
|
Stock Options Exercisable
|
|
Range of
Exercise Prices
|
|
Number of
Shares
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Remaining
Contractual
Term
|
|
Number of
Shares
|
|
Weighted-
Average
Exercise
Price
|
|
|
|
(in Thousands)
|
|
|
|
(in Years)
|
|
(in Thousands)
|
|
|
|
$13.65 - $29.49
|
|
40
|
|
|
$
|
14.40
|
|
|
1.5
|
|
40
|
|
|
$
|
14.40
|
|
|
$29.78 - $47.99
|
|
81
|
|
|
36.92
|
|
|
1.7
|
|
81
|
|
|
36.92
|
|
|
$55.04 - $83.83
|
|
91
|
|
|
80.80
|
|
|
3.5
|
|
91
|
|
|
80.80
|
|
|
$95.91 - $131.46
|
|
130
|
|
|
127.97
|
|
|
4.4
|
|
130
|
|
|
127.97
|
|
|
Total
|
|
342
|
|
|
$
|
80.35
|
|
|
3.2
|
|
342
|
|
|
$
|
80.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Appreciation Rights Outstanding
|
|
Stock Appreciation Rights Exercisable
|
|
Range of
Exercise Prices
|
|
Number of
Shares
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Remaining
Contractual
Term
|
|
Number of
Shares
|
|
Weighted-
Average
Exercise
Price
|
|
|
|
(in Thousands)
|
|
|
|
(in Years)
|
|
(in Thousands)
|
|
|
|
$13.65 - $29.49
|
|
101
|
|
|
$
|
29.49
|
|
|
7.0
|
|
—
|
|
|
$
|
—
|
|
|
$29.78 - $47.99
|
|
1,489
|
|
|
38.11
|
|
|
6.5
|
|
314
|
|
|
39.05
|
|
|
$55.04 - $83.83
|
|
134
|
|
|
78.96
|
|
|
4.8
|
|
97
|
|
|
79.73
|
|
|
$95.91 - $131.46
|
|
109
|
|
|
114.42
|
|
|
3.8
|
|
107
|
|
|
114.63
|
|
|
Total
|
|
1,833
|
|
|
$
|
45.14
|
|
|
6.2
|
|
518
|
|
|
$
|
62.26
|
|
Restricted Stock, Restricted Stock Units and Performance Restricted Stock Units.
The following table summarizes restricted stock, restricted stock unit and performance restricted stock unit activity during the
Second
Quarter:
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock, Restricted Stock Units
and Performance Restricted Stock Units
|
|
Number of Shares
|
|
Weighted-Average
Grant Date Fair
Value Per Share
|
|
|
|
(in Thousands)
|
|
|
|
Nonvested at April 1, 2017
|
|
1,101
|
|
|
$
|
37.16
|
|
|
Granted
|
|
1,816
|
|
|
16.50
|
|
|
Vested
|
|
(53
|
)
|
|
30.82
|
|
|
Forfeited
|
|
(79
|
)
|
|
24.30
|
|
|
Nonvested at July 1, 2017
|
|
2,785
|
|
|
$
|
24.21
|
|
The total fair value of restricted stock and restricted stock units vested during the
Second
Quarter was approximately
$0.7 million
. Vesting of performance restricted stock units is based on achievement of sales growth and operating margin targets in relation to the performance of a certain identified peer group, particular sales growth in relation to a defined sales plan and achievement of succession plans for key talent.
8. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following tables illustrate changes in the balances of each component of accumulated other comprehensive income (loss), net of taxes (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 13 Weeks Ended July 1, 2017
|
|
|
Currency
Translation
Adjustments
|
|
Cash Flow Hedges
|
|
|
|
|
|
|
|
Forward
Contracts
|
|
Interest
Rate Swaps
|
|
Pension
Plan
|
|
Total
|
|
Beginning balance
|
$
|
(91,472
|
)
|
|
$
|
8,390
|
|
|
$
|
(41
|
)
|
|
$
|
(3,907
|
)
|
|
$
|
(87,030
|
)
|
|
Other comprehensive income (loss) before reclassifications
|
16,461
|
|
|
(15,306
|
)
|
|
(2
|
)
|
|
—
|
|
|
1,153
|
|
|
Tax (expense) benefit
|
—
|
|
|
6,371
|
|
|
1
|
|
|
—
|
|
|
6,372
|
|
|
Amounts reclassed from accumulated other comprehensive income (loss)
|
—
|
|
|
1,367
|
|
|
(131
|
)
|
|
—
|
|
|
1,236
|
|
|
Tax (expense) benefit
|
—
|
|
|
(628
|
)
|
|
48
|
|
|
—
|
|
|
(580
|
)
|
|
Total other comprehensive income (loss)
|
16,461
|
|
|
(9,674
|
)
|
|
82
|
|
|
—
|
|
|
6,869
|
|
|
Ending balance
|
$
|
(75,011
|
)
|
|
$
|
(1,284
|
)
|
|
$
|
41
|
|
|
$
|
(3,907
|
)
|
|
$
|
(80,161
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 13 Weeks Ended July 2, 2016
|
|
|
Currency
Translation
Adjustments
|
|
Cash Flow Hedges
|
|
|
|
|
|
|
|
Forward
Contracts
|
|
Interest
Rate Swaps
|
|
Pension
Plan
|
|
Total
|
|
Beginning balance
|
$
|
(64,486
|
)
|
|
$
|
(1,554
|
)
|
|
$
|
(1,457
|
)
|
|
$
|
(4,506
|
)
|
|
$
|
(72,003
|
)
|
|
Other comprehensive income (loss) before reclassifications
|
(9,396
|
)
|
|
8,738
|
|
|
(711
|
)
|
|
—
|
|
|
(1,369
|
)
|
|
Tax (expense) benefit
|
—
|
|
|
(3,576
|
)
|
|
259
|
|
|
—
|
|
|
(3,317
|
)
|
|
Amounts reclassed from accumulated other comprehensive income (loss)
|
104
|
|
|
928
|
|
|
(450
|
)
|
|
—
|
|
|
582
|
|
|
Tax (expense) benefit
|
—
|
|
|
(263
|
)
|
|
164
|
|
|
—
|
|
|
(99
|
)
|
|
Total other comprehensive income (loss)
|
(9,500
|
)
|
|
4,497
|
|
|
(166
|
)
|
|
—
|
|
|
(5,169
|
)
|
|
Ending balance
|
$
|
(73,986
|
)
|
|
$
|
2,943
|
|
|
$
|
(1,623
|
)
|
|
$
|
(4,506
|
)
|
|
$
|
(77,172
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 26 Weeks Ended July 1, 2017
|
|
|
Currency
Translation
Adjustments
|
|
Cash Flow Hedges
|
|
|
|
|
|
|
|
Forward
Contracts
|
|
Interest
Rate Swaps
|
|
Pension
Plan
|
|
Total
|
|
Beginning balance
|
$
|
(101,867
|
)
|
|
$
|
10,693
|
|
|
$
|
(343
|
)
|
|
$
|
(3,907
|
)
|
|
$
|
(95,424
|
)
|
|
Other comprehensive income (loss) before reclassifications
|
26,856
|
|
|
(16,468
|
)
|
|
225
|
|
|
—
|
|
|
10,613
|
|
|
Tax (expense) benefit
|
—
|
|
|
8,660
|
|
|
(82
|
)
|
|
—
|
|
|
8,578
|
|
|
Amounts reclassed from accumulated other comprehensive income (loss)
|
—
|
|
|
6,920
|
|
|
(379
|
)
|
|
—
|
|
|
6,541
|
|
|
Tax (expense) benefit
|
—
|
|
|
(2,751
|
)
|
|
138
|
|
|
—
|
|
|
(2,613
|
)
|
|
Total other comprehensive income (loss)
|
26,856
|
|
|
(11,977
|
)
|
|
384
|
|
—
|
|
—
|
|
|
15,263
|
|
|
Ending balance
|
$
|
(75,011
|
)
|
|
$
|
(1,284
|
)
|
|
$
|
41
|
|
|
$
|
(3,907
|
)
|
|
$
|
(80,161
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 26 Weeks Ended July 2, 2016
|
|
|
Currency
Translation
Adjustments
|
|
Cash Flow Hedges
|
|
|
|
|
|
|
|
Forward
Contracts
|
|
Interest
Rate Swaps
|
|
Pension
Plan
|
|
Total
|
|
Beginning balance
|
$
|
(81,707
|
)
|
|
$
|
8,114
|
|
|
$
|
(693
|
)
|
|
$
|
(6,220
|
)
|
|
$
|
(80,506
|
)
|
|
Other comprehensive income (loss) before reclassifications
|
7,825
|
|
|
(1,259
|
)
|
|
(2,381
|
)
|
|
2,010
|
|
|
6,195
|
|
|
Tax (expense) benefit
|
—
|
|
|
1,039
|
|
|
868
|
|
|
(296
|
)
|
|
1,611
|
|
|
Amounts reclassed from accumulated other comprehensive income (loss)
|
104
|
|
|
7,267
|
|
|
(918
|
)
|
|
—
|
|
|
6,453
|
|
|
Tax (expense) benefit
|
—
|
|
|
(2,316
|
)
|
|
335
|
|
|
—
|
|
|
(1,981
|
)
|
|
Total other comprehensive income (loss)
|
7,721
|
|
|
(5,171
|
)
|
|
(930
|
)
|
|
1,714
|
|
|
3,334
|
|
|
Ending balance
|
$
|
(73,986
|
)
|
|
$
|
2,943
|
|
|
$
|
(1,623
|
)
|
|
$
|
(4,506
|
)
|
|
$
|
(77,172
|
)
|
See “Note 10—Derivatives and Risk Management” for additional disclosures about the Company’s use of derivatives.
9. SEGMENT INFORMATION
The Company reports segment information based on the “management approach”. The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of the Company’s reportable segments.
The Company manages its business primarily on a geographic basis. The Company’s reportable operating segments are comprised of (i) Americas, (ii) Europe and (iii) Asia. Each reportable operating segment includes sales to wholesale and distributor customers, and sales through Company-owned retail stores and e-commerce activities based on the location of the selling entity. The Americas segment primarily includes sales to customers based in Canada, Latin America and the United States. The Europe segment primarily includes sales to customers based in European countries, the Middle East and Africa. The Asia segment primarily includes sales to customers based in Australia, China, India, Indonesia, Japan, Malaysia, New Zealand, Singapore, South Korea, Taiwan and Thailand. Each reportable operating segment provides similar products and services.
The Company evaluates the performance of its reportable segments based on net sales and operating income (loss). Net sales for geographic segments are based on the location of the selling entity. Operating income (loss) for each segment includes net sales to third parties, related cost of sales and operating expenses directly attributable to the segment. Global strategic initiatives such as brand building and omni channel activities and general corporate expenses, including certain administrative, legal, accounting, technology support costs, equity compensation costs, payroll costs attributable to executive management, brand management, product development, art, creative/product design, marketing, strategy, compliance and back office supply chain expenses are not allocated to the various segments because they are managed at the corporate level internally. The Company does not include intercompany transfers between segments for management reporting purposes.
Summary information by operating segment was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 13 Weeks Ended July 1, 2017
|
|
For the 13 Weeks Ended July 2, 2016
|
|
|
Net Sales
|
|
Operating Income (Loss)
|
|
Net Sales
|
|
Operating Income (Loss)
|
|
Americas
|
$
|
288,804
|
|
|
$
|
(166,500
|
)
|
|
$
|
345,187
|
|
|
$
|
52,300
|
|
|
Europe
|
194,702
|
|
|
(86,805
|
)
|
|
215,936
|
|
|
31,669
|
|
|
Asia
|
113,340
|
|
|
(35,658
|
)
|
|
124,245
|
|
|
18,936
|
|
|
Corporate
|
—
|
|
|
(140,793
|
)
|
|
—
|
|
|
(87,455
|
)
|
|
Consolidated
|
$
|
596,846
|
|
|
$
|
(429,756
|
)
|
|
$
|
685,368
|
|
|
$
|
15,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 26 Weeks Ended July 1, 2017
|
|
For the 26 Weeks Ended July 2, 2016
|
|
|
Net Sales
|
|
Operating Income (Loss)
|
|
Net Sales
|
|
Operating Income (Loss)
|
|
Americas
|
$
|
566,347
|
|
|
$
|
(140,819
|
)
|
|
$
|
680,997
|
|
|
$
|
111,896
|
|
|
Europe
|
390,382
|
|
|
(73,191
|
)
|
|
425,937
|
|
|
60,180
|
|
|
Asia
|
221,907
|
|
|
(24,701
|
)
|
|
238,282
|
|
|
36,865
|
|
|
Corporate
|
|
|
|
(236,308
|
)
|
|
|
|
|
(179,087
|
)
|
|
Consolidated
|
$
|
1,178,636
|
|
|
$
|
(475,019
|
)
|
|
$
|
1,345,216
|
|
|
$
|
29,854
|
|
The following tables reflect net sales for each class of similar products in the periods presented (in thousands, except percentage data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 13 Weeks Ended July 1, 2017
|
|
For the 13 Weeks Ended July 2, 2016
|
|
|
Net Sales
|
|
Percentage of Total
|
|
Net Sales
|
|
Percentage of Total
|
|
Watches
|
$
|
469,461
|
|
|
78.6
|
%
|
|
$
|
517,602
|
|
|
75.5
|
%
|
|
Leathers
|
69,597
|
|
|
11.7
|
|
|
93,152
|
|
|
13.6
|
|
|
Jewelry
|
44,285
|
|
|
7.4
|
|
|
56,752
|
|
|
8.3
|
|
|
Other
|
13,503
|
|
|
2.3
|
|
|
17,862
|
|
|
2.6
|
|
|
Total
|
$
|
596,846
|
|
|
100.0
|
%
|
|
$
|
685,368
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 26 Weeks Ended July 1, 2017
|
|
For the 26 Weeks Ended July 2, 2016
|
|
|
Net Sales
|
|
Percentage of Total
|
|
Net Sales
|
|
Percentage of Total
|
|
Watches
|
$
|
919,231
|
|
|
78.0
|
%
|
|
$
|
1,014,085
|
|
|
75.4
|
%
|
|
Leathers
|
142,286
|
|
|
12.1
|
|
|
185,657
|
|
|
13.8
|
|
|
Jewelry
|
92,171
|
|
|
7.8
|
|
|
111,472
|
|
|
8.3
|
|
|
Other
|
24,948
|
|
|
2.1
|
|
|
34,002
|
|
|
2.5
|
|
|
Total
|
$
|
1,178,636
|
|
|
100.0
|
%
|
|
$
|
1,345,216
|
|
|
100.0
|
%
|
10. DERIVATIVES AND RISK MANAGEMENT
Cash Flow Hedges.
The primary risks managed by using derivative instruments are the fluctuations in global currencies that will ultimately be used by non-U.S. dollar functional currency subsidiaries to settle future payments of intercompany inventory transactions denominated in U.S. dollars. Specifically, the Company projects future intercompany purchases by its non-U.S. dollar functional currency subsidiaries generally over a period of up to
24 months
. The Company enters into
forward contracts
, generally for up to
85%
of the forecasted purchases, to manage fluctuations in global currencies that will ultimately be used to settle such U.S. dollar denominated inventory purchases. Additionally, the Company enters into forward contracts to manage fluctuations in Japanese yen exchange rates that will be used to settle future third-party inventory component purchases by a U.S. dollar functional currency subsidiary.
Forward contracts
represent agreements to exchange the currency of one country for the currency of another country at an agreed-upon settlement date and exchange rate. These
forward contracts
are designated as single cash flow hedges. Fluctuations in exchange rates will either increase or decrease the Company’s U.S. dollar equivalent cash flows from these inventory transactions, which will affect the Company’s U.S. dollar earnings. Gains or losses on the
forward contracts
are expected to offset these fluctuations to the extent the cash flows are hedged by the
forward contracts
.
These
forward contracts
meet the criteria for hedge accounting, which requires that they represent foreign currency-denominated forecasted transactions in which (i) the operating unit that has the foreign currency exposure is a party to the hedging instrument and (ii) the hedged transaction is denominated in a currency other than the hedging unit’s functional currency.
At the inception of each forward contract designated as a cash flow hedge, the hedging relationship is expected to be highly effective in achieving offsetting cash flows attributable to the hedged risk. The Company assesses hedge effectiveness under the critical terms matched method at inception and at least quarterly throughout the life of the hedging relationship. If the critical terms (i.e., amounts, currencies and settlement dates) of the forward contract match the terms of the forecasted transaction, the Company concludes that the hedge is effective.
For a derivative instrument that is designated and qualifies as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income (loss), net of taxes and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. Due to the high degree of effectiveness between the hedging instruments and the underlying exposures being hedged, the Company’s hedges resulted in no ineffectiveness in the condensed consolidated statements of income (loss) and comprehensive income (loss), and there were no components excluded from the assessment of hedge effectiveness for the
Second
Quarter, Prior Year Quarter, Year To Date Period or Prior Year YTD Period.
All derivative instruments are recognized as either assets or liabilities at fair value in the condensed consolidated balance sheets. Derivatives designated as cash flow hedges are recorded at fair value at each balance sheet date and the change in fair value is recorded to accumulated other comprehensive income (loss) within the equity section of the Company’s condensed consolidated balance sheet until such derivative’s gains or losses become realized or the cash flow hedge relationship is terminated. If the cash flow hedge relationship is terminated, the derivative’s gains or losses that are recorded in accumulated other comprehensive income (loss) will be recognized in earnings when the hedged cash flows occur. However, for cash flow hedges that are terminated because the forecasted transaction is not expected to occur in the original specified time period, the derivative’s gains or losses are immediately recognized in earnings. There were no gains or losses reclassified into earnings as a result of the discontinuance of cash flow hedges in the
Second
Quarter, Prior Year Quarter, Year To Date Period or Prior Year YTD Period. Hedge accounting is discontinued if it is determined that the derivative is not highly effective. The Company records all forward contract hedge assets and liabilities on a gross basis as they do not meet the balance sheet netting criteria because the Company does not have master netting agreements established with the derivative counterparties that would allow for net settlement.
As of
July 1, 2017
, the Company had the following outstanding
forward contracts
designated as cash flow hedges that were entered into to hedge the future payments of inventory transactions (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Functional Currency
|
|
Contract Currency
|
|
Type
|
|
Amount
|
|
Type
|
|
Amount
|
|
Euro
|
|
258.2
|
|
|
U.S. dollar
|
|
291.4
|
|
|
Canadian dollar
|
|
95.0
|
|
|
U.S. dollar
|
|
72.3
|
|
|
British pound
|
|
44.8
|
|
|
U.S. dollar
|
|
60.8
|
|
|
Japanese yen
|
|
4,622.3
|
|
|
U.S. dollar
|
|
42.4
|
|
|
Mexican peso
|
|
366.6
|
|
|
U.S. dollar
|
|
19.2
|
|
|
Australian dollar
|
|
22.3
|
|
|
U.S. dollar
|
|
17.0
|
|
|
U.S. dollar
|
|
45.8
|
|
|
Japanese yen
|
|
4,930.0
|
|
The Company is also exposed to interest rate risk related to its outstanding debt. To manage the interest rate risk related to its U.S.-based term loan (as amended and restated, the "Term Loan") which had an outstanding balance of
$173.3 million
net of debt issuance costs as of July 1, 2017, the Company entered into an interest rate swap agreement on July 26, 2013 with a term of approximately
five years
. The objective of this hedge is to offset the variability of future payments associated with interest rates on the Term Loan. The interest rate swap agreement hedges the
1-month London Interbank Offer Rate ("LIBOR") based variable rate
debt obligations under the Term Loan. Under the terms of the swap, the Company pays a fixed interest rate of
1.288%
per annum to the swap counterparty plus the LIBOR rate applicable margin of
3.50%
. See “Note 14—Debt Activity” for additional disclosures about the Company’s Term Loan. The notional amount amortizes through May 17, 2018 and coincides with repayments on the underlying loan. The Company receives interest from the swap counterparty at a variable rate based on 1-month LIBOR. This hedge is designated as a cash flow hedge.
Non-designated Hedges.
The Company also periodically enters into
forward contracts
to manage exchange rate risks associated with certain intercompany transactions and for which the Company does not elect hedge accounting treatment. As of
July 1, 2017
, the Company had non-designated
forward contracts
of approximately
$2.4 million
on
31.7 million
rand associated with a South African rand-denominated foreign subsidiary. Changes in the fair value of derivatives not designated as hedging instruments are recognized in earnings when they occur.
The effective portion of gains and losses on cash flow hedges that were recognized in other comprehensive income (loss), net of taxes during the
Second
Quarter, Prior Year Quarter, Year To Date Period and Prior Year YTD Period are set forth below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 13 Weeks Ended July 1, 2017
|
|
For the 13 Weeks Ended July 2, 2016
|
|
Cash flow hedges:
|
|
|
|
|
|
|
Forward contracts
|
$
|
(8,935
|
)
|
|
$
|
5,162
|
|
|
Interest rate swaps
|
(1
|
)
|
|
(452
|
)
|
|
Total gain (loss) recognized in other comprehensive income (loss), net of taxes
|
$
|
(8,936
|
)
|
|
$
|
4,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 26 Weeks Ended July 1, 2017
|
|
For the 26 Weeks Ended July 2, 2016
|
|
Cash flow hedges:
|
|
|
|
|
|
|
Forward contracts
|
$
|
(7,808
|
)
|
|
$
|
(220
|
)
|
|
Interest rate swaps
|
143
|
|
|
(1,513
|
)
|
|
Total gain (loss) recognized in other comprehensive income (loss), net of taxes
|
$
|
(7,665
|
)
|
|
$
|
(1,733
|
)
|
The following table illustrates the effective portion of gains and losses on derivative instruments recorded in other comprehensive income (loss), net of taxes during the term of the hedging relationship and reclassified into earnings, and gains and losses on derivatives not designated as hedging instruments recorded directly to earnings during the
Second
Quarter, Prior Year Quarter, Year To Date Period and Prior Year YTD Period (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Instruments
|
|
Condensed Consolidated
Statements of Income (Loss)
and Comprehensive
Income (Loss) Location
|
|
Effect of Derivative
Instruments
|
|
For the 13 Weeks Ended July 1, 2017
|
|
For the 13 Weeks Ended July 2, 2016
|
|
Forward contracts designated as cash flow hedging instruments
|
|
Other income (expense)-net
|
|
Total gain (loss) reclassified from other comprehensive income (loss)
|
|
$
|
739
|
|
|
$
|
665
|
|
|
Forward contracts not designated as hedging instruments
|
|
Other income (expense)-net
|
|
Total gain (loss) recognized in income
|
|
$
|
50
|
|
|
$
|
74
|
|
|
Interest rate swap designated as a cash flow hedging instrument
|
|
Interest expense
|
|
Total gain (loss) reclassified from other comprehensive income (loss)
|
|
$
|
(83
|
)
|
|
$
|
(286
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Instruments
|
|
Condensed Consolidated
Statements of Income (Loss)
and Comprehensive
Income (Loss) Location
|
|
Effect of Derivative
Instruments
|
|
For the 26 Weeks Ended July 1, 2017
|
|
For the 26 Weeks Ended July 2, 2016
|
|
Forward contracts designated as cash flow hedging instruments
|
|
Other income (expense)-net
|
|
Total gain (loss) reclassified from other comprehensive income (loss)
|
|
$
|
4,169
|
|
|
$
|
4,951
|
|
|
Forward contracts not designated as hedging instruments
|
|
Other income (expense)-net
|
|
Total gain (loss) recognized in income
|
|
$
|
77
|
|
|
$
|
(157
|
)
|
|
Interest rate swap designated as a cash flow hedging instrument
|
|
Interest expense
|
|
Total gain (loss) reclassified from other comprehensive income (loss)
|
|
$
|
(241
|
)
|
|
$
|
(583
|
)
|
The following table discloses the fair value amounts for the Company’s derivative instruments as separate asset and liability values, presents the fair value of derivative instruments on a gross basis, and identifies the line items in the condensed consolidated balance sheets in which the fair value amounts for these categories of derivative instruments are included (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
|
|
July 1, 2017
|
|
December 31, 2016
|
|
July 1, 2017
|
|
December 31, 2016
|
|
Derivative Instruments
|
|
Condensed
Consolidated
Balance Sheets
Location
|
|
Fair
Value
|
|
Condensed
Consolidated
Balance Sheets
Location
|
|
Fair
Value
|
|
Condensed
Consolidated
Balance Sheets
Location
|
|
Fair
Value
|
|
Condensed
Consolidated
Balance Sheets
Location
|
|
Fair
Value
|
|
Forward contracts designated as cash flow hedging instruments
|
|
Prepaid expenses and other current assets
|
|
$
|
4,143
|
|
|
Prepaid expenses and other current assets
|
|
$
|
23,288
|
|
|
Accrued expenses- other
|
|
$
|
9,199
|
|
|
Accrued expenses- other
|
|
$
|
4,696
|
|
|
Forward contracts not designated as cash flow hedging instruments
|
|
Prepaid expenses and other current assets
|
|
—
|
|
|
Prepaid expenses and other current assets
|
|
—
|
|
|
Accrued expenses- other
|
|
2
|
|
|
Accrued expenses- other
|
|
2
|
|
|
Interest rate swap designated as a cash flow hedging instrument
|
|
Prepaid expenses and other current assets
|
|
123
|
|
|
Prepaid expenses and other current assets
|
|
—
|
|
|
Accrued expenses- other
|
|
59
|
|
|
Accrued expenses- other
|
|
613
|
|
|
Forward contracts designated as cash flow hedging instruments
|
|
Intangible and other assets-net
|
|
268
|
|
|
Intangible and other assets-net
|
|
5,648
|
|
|
Other long-term liabilities
|
|
3,464
|
|
|
Other long-term liabilities
|
|
268
|
|
|
Interest rate swap designated as a cash flow hedging instrument
|
|
Intangible and other assets-net
|
|
—
|
|
|
Intangible and other assets-net
|
|
73
|
|
|
Other long-term liabilities
|
|
—
|
|
|
Other long-term liabilities
|
|
—
|
|
|
Total
|
|
|
|
$
|
4,534
|
|
|
|
|
$
|
29,009
|
|
|
|
|
$
|
12,724
|
|
|
|
|
$
|
5,579
|
|
At the end of the
Second
Quarter, the Company had
forward contracts
designated as cash flow hedges with maturities extending through June 2019. As of
July 1, 2017
, an estimated net loss of
$3.7 million
is expected to be reclassified into earnings within the next twelve months at prevailing foreign currency exchange rates. See “Note 1—Financial Statement Policies” for additional disclosures on foreign currency hedging instruments.
11. FAIR VALUE MEASUREMENTS
The Company defines fair value as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date.
Accounting Standards Codification ("ASC") 820,
Fair Value Measurement and Disclosures
(“ASC 820”), establishes a fair value hierarchy, which prioritizes the inputs used in measuring fair value into three broad levels as follows:
•
Level 1 — Quoted prices in active markets for identical assets or liabilities.
•
Level 2 — Inputs, other than quoted prices in active markets, that are observable either directly or indirectly.
•
Level 3 — Unobservable inputs based on the Company’s assumptions.
ASC 820 requires the use of observable market data if such data is available without undue cost and effort.
The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of
July 1, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at July 1, 2017
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward contracts
|
$
|
—
|
|
|
$
|
4,411
|
|
|
$
|
—
|
|
|
$
|
4,411
|
|
|
Deferred compensation plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in publicly traded mutual funds
|
2,560
|
|
|
—
|
|
|
—
|
|
|
2,560
|
|
|
Interest rate swap
|
—
|
|
|
123
|
|
|
—
|
|
|
123
|
|
|
Total
|
$
|
2,560
|
|
|
$
|
4,534
|
|
|
$
|
—
|
|
|
$
|
7,094
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward contracts
|
$
|
—
|
|
|
$
|
12,665
|
|
|
—
|
|
|
$
|
12,665
|
|
|
Interest rate swap
|
—
|
|
|
59
|
|
|
—
|
|
|
59
|
|
|
Total
|
$
|
—
|
|
|
$
|
12,724
|
|
|
$
|
—
|
|
|
$
|
12,724
|
|
The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of
December 31, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at December 31, 2016
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward contracts
|
$
|
—
|
|
|
$
|
28,936
|
|
|
$
|
—
|
|
|
$
|
28,936
|
|
|
Deferred compensation plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in publicly traded mutual funds
|
2,385
|
|
|
—
|
|
|
—
|
|
|
2,385
|
|
|
Interest rate swap
|
—
|
|
|
73
|
|
|
—
|
|
|
73
|
|
|
Total
|
$
|
2,385
|
|
|
$
|
29,009
|
|
|
$
|
—
|
|
|
$
|
31,394
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward contracts
|
—
|
|
|
4,966
|
|
|
—
|
|
|
4,966
|
|
|
Interest rate swap
|
—
|
|
|
613
|
|
|
—
|
|
|
613
|
|
|
Total
|
$
|
—
|
|
|
$
|
5,579
|
|
|
$
|
—
|
|
|
$
|
5,579
|
|
The fair values of the Company’s deferred compensation plan assets are based on quoted prices. The deferred compensation plan assets are recorded in intangible and other assets-net in the Company’s condensed consolidated balance sheets. The fair values of the Company’s
forward contracts
are based on published quotations of spot currency rates and forward points, which are converted into implied forward currency rates. The fair values of the interest rate swap assets and liabilities are determined using valuation models based on market observable inputs, including forward curves, mid-market price and volatility levels. See “Note 10—Derivatives and Risk Management” for additional disclosures about the interest rate swaps and
forward contracts
.
As of
July 1, 2017
, debt, excluding unamortized debt issuance costs and capital leases, was recorded at cost and had a carrying value of
$649.0 million
and a fair value of approximately
$636.0 million
. The fair value of debt was obtained from a third-party based on observable market inputs.
The fair value of goodwill and trade names are measured on a non-recurring basis using Level 3 inputs, including forecasted cash flows, discounts rates and implied royalty rates.
During the Second Quarter, the Company fully impaired its goodwill balance and recorded pre-tax impairment charges of
$202.3 million
,
$114.3 million
and
$42.9 million
in the Americas, Europe and Asia segments, respectively.
During the Second Quarter, the SKAGEN trade name with a carrying amount of
$55.6 million
was written down to its implied fair value of
$27.3 million
, resulting in a pre-tax impairment charge of
$28.3 million
, the MISFIT trade name with a carrying amount of
$11.8 million
was deemed not recoverable, resulting in a pre-tax impairment charge of
$11.8 million
and the MICHELE trade name with a carrying amount of
$18.5 million
was written down to its implied fair value of
$10.9 million
, resulting in a pre-tax impairment charge of
$7.6 million
. Trade name impairment charges were recorded in the Corporate cost
area. See “Note 2—Goodwill and Intangibles Impairment Charges” for additional disclosures about goodwill and trade name impairment.
In accordance with the provisions of ASC 360,
Property, Plant and Equipment
, property, plant and equipment-net with a carrying amount of
$3.7 million
related to retail store leasehold improvements and fixturing and related key money in the amount of
$0.6 million
were deemed not recoverable, resulting in an impairment charge of
$4.3 million
during the Year To Date Period.
The fair values of assets related to Company-owned retail stores were determined using Level 3 inputs. Of the
$4.3 million
impairment expense,
$1.4 million
,
$1.3 million
, and
$0.4 million
were recorded in restructuring charges in the Europe, Americas and Asia segments, respectively, and
$0.8 million
and
$0.4 million
were recorded in SG&A in the Europe and Asia segments, respectively.
During the Second Quarter, the Company recorded a pre-tax impairment charge of
$1.6 million
related to the write off of a cost method investment.
12. INTANGIBLE AND OTHER ASSETS
The following table summarizes intangible and other assets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 1, 2017
|
|
December 31, 2016
|
|
|
|
Useful
|
|
Gross
|
|
Accumulated
|
|
Gross
|
|
Accumulated
|
|
|
|
Lives
|
|
Amount
|
|
Amortization
|
|
Amount
|
|
Amortization
|
|
Intangibles-subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
10 yrs.
|
|
$
|
4,310
|
|
|
$
|
3,562
|
|
|
$
|
4,310
|
|
|
$
|
3,443
|
|
|
Customer lists
|
|
5-10 yrs.
|
|
54,694
|
|
|
30,761
|
|
|
53,625
|
|
|
26,986
|
|
|
Patents
|
|
3-20 yrs.
|
|
2,325
|
|
|
2,116
|
|
|
2,325
|
|
|
2,099
|
|
|
Noncompete agreement
|
|
3-6 yrs.
|
|
2,535
|
|
|
1,956
|
|
|
2,505
|
|
|
1,662
|
|
|
Developed technology
|
|
7 yrs.
|
|
36,100
|
|
|
7,736
|
|
|
36,100
|
|
|
5,157
|
|
|
Trade name
|
|
6 yrs.
|
|
—
|
|
|
—
|
|
|
15,700
|
|
|
2,617
|
|
|
Other
|
|
7-20 yrs.
|
|
261
|
|
|
229
|
|
|
253
|
|
|
215
|
|
|
Total intangibles-subject to amortization
|
|
|
|
100,225
|
|
|
46,360
|
|
|
114,818
|
|
|
42,179
|
|
|
Intangibles-not subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names
|
|
|
|
38,651
|
|
|
|
|
|
74,485
|
|
|
|
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key money deposits
|
|
|
|
27,325
|
|
|
23,472
|
|
|
26,948
|
|
|
22,038
|
|
|
Other deposits
|
|
|
|
19,322
|
|
|
|
|
|
19,344
|
|
|
|
|
|
Deferred compensation plan assets
|
|
|
|
2,560
|
|
|
|
|
|
2,385
|
|
|
|
|
|
Deferred tax asset-net
|
|
|
|
83,844
|
|
|
|
|
|
23,061
|
|
|
|
|
|
Restricted cash
|
|
|
|
362
|
|
|
|
|
|
500
|
|
|
|
|
|
Shop-in-shop
|
|
|
|
9,907
|
|
|
9,437
|
|
|
8,807
|
|
|
8,019
|
|
|
Interest rate swap
|
|
|
|
—
|
|
|
|
|
73
|
|
|
|
|
Long term tax receivable
|
|
|
|
6,929
|
|
|
|
|
—
|
|
|
|
|
Forward contracts
|
|
|
|
268
|
|
|
|
|
|
5,648
|
|
|
|
|
|
Investments
|
|
|
|
500
|
|
|
|
|
2,078
|
|
|
|
|
Other
|
|
|
|
4,787
|
|
|
|
|
|
4,582
|
|
|
|
|
|
Total other assets
|
|
|
|
155,804
|
|
|
32,909
|
|
|
93,426
|
|
|
30,057
|
|
|
Total intangible and other assets
|
|
|
|
$
|
294,680
|
|
|
$
|
79,269
|
|
|
$
|
282,729
|
|
|
$
|
72,236
|
|
|
Total intangible and other assets-net
|
|
|
|
|
|
|
$
|
215,411
|
|
|
|
|
|
$
|
210,493
|
|
Key money is the amount of funds paid to a landlord or tenant to acquire the rights of tenancy under a commercial property lease for a certain property. Key money represents the “right to lease” with an automatic right of renewal. This right
can be subsequently sold by the Company or can be recovered should the landlord refuse to allow the automatic right of renewal to be exercised. Key money is amortized over the initial lease term, which ranges from approximately
four
to
18 years
.
Amortization expense for intangible assets was approximately
$3.7 million
and
$3.8 million
for the
Second
Quarter and Prior Year Quarter, respectively, and
$7.4 million
and
$7.5 million
for the Year To Date Period and Prior Year YTD Period, respectively. Estimated aggregate future amortization expense by fiscal year for intangible assets is as follows (in thousands):
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
Amortization
Expense
|
|
2017 (remaining)
|
|
$
|
6,049
|
|
|
2018
|
|
$
|
11,828
|
|
|
2019
|
|
$
|
11,499
|
|
|
2020
|
|
$
|
10,975
|
|
|
2021
|
|
$
|
7,146
|
|
|
2022
|
|
$
|
6,251
|
|
13. COMMITMENTS AND CONTINGENCIES
Litigation.
The Company is occasionally subject to litigation or other legal proceedings in the normal course of its business. The Company does not believe that the outcome of any currently pending legal matters, individually or collectively, will have a material effect on the business or financial condition of the Company.
14. DEBT ACTIVITY
On March 10, 2017, the Company entered into the Second Amendment to the Amended and Restated Credit Agreement (the “Second Amendment”). The Second Amendment reduced the revolving credit facility (the "Revolving Credit Facility") available under the Company’s existing credit amendment from
$1.05 billion
to
$850.0 million
. The Second Amendment also removed the incremental term loan that was available under the credit agreement, extended the maturity date of the credit agreement to May 17, 2019 and removed the Company’s ability to make offers to the lenders to extend the maturity date of the Term Loan or the Revolving Credit Facility. The Second Amendment also amended the repayment schedule for the Term Loan and requires the Company to make monthly payments on the last business day of each month beginning April 30, 2018. On and after April 1, 2018, interest on the Term Loan that is based upon the base rate will be due and payable in arrears on the last business day of each calendar month, and interest on the Term Loan that is based upon the LIBOR rate will be due and payable on the last day of the applicable interest period; provided, that if such interest period extends for over one month, then interest will be due and payable at the end of each one month interval during such interest period. The Second Amendment also amended the mandatory prepayment provisions under the credit agreement and provides that to the extent there are excess proceeds remaining from the issuance of debt by the Company following the repayment in full of the Term Loan, the Company will be required to repay the Revolving Credit Facility in the amount of such excess proceeds, with a corresponding permanent reduction in the Revolving Credit Facility in the amount of up to
$50.0 million
. In accordance with the Second Amendment, dividends paid from foreign subsidiaries to U.S. subsidiaries or Fossil Group, Inc., must first be used to repay the Term Loan and then up to
$50.0 million
of the Revolver.
The Second Amendment amended the applicable margin used to calculate the interest rate that is applicable to base rate loans and LIBOR rate loans under the Company’s credit agreement and provides that the interest rate margin for base rate loans is
2.50%
per annum and the interest rate margin for LIBOR rate loans is
3.50%
per annum. If the Term Loan has not been repaid in full on or prior to October 1, 2017, then on such date, the applicable margin will automatically increase to
2.75%
per annum for base rate loans and
3.75%
per annum for LIBOR rate loans; if the Term Loan has not been repaid in full on or prior to March 31, 2018, then on such date, the applicable margin will automatically increase to
3.25%
per annum for base rate loans and
4.25%
per annum for LIBOR rate loans. The Second Amendment also changed the commitment fee payable by the Company with respect to the Revolving Credit Facility to
0.50%
per annum. The Company will incur an additional fee of
0.25%
times the outstanding principal amount of the total credit exposure under the credit agreement if the Term Loan has not been repaid in full on or prior to March 31, 2018. Furthermore, the Second Amendment changed the consolidated total leverage ratio that the Company must comply with from
3.25
to 1.00 to the ratios as set forth below:
|
|
|
|
|
|
|
Period
|
|
Maximum Ratio
|
|
Second Amendment Effective Date through and including July 1, 2017
|
|
3.25 to 1.00
|
|
July 2, 2017 through and including September 30, 2017
|
|
3.50 to 1.00
|
|
October 1, 2017 through and including March 31, 2018
|
|
3.25 to 1.00
|
|
April 1, 2018 through and including September 29, 2018
|
|
3.50 to 1.00
|
|
September 30, 2018 and thereafter
|
|
3.25 to 1.00
|
The Company made principal payments of
$6.3 million
and
$12.5 million
under the Term Loan during the
Second
Quarter and Year To Date Period, respectively. The Company also made net borrowings of
$35.7 million
and
$26.7 million
under the Revolving Credit Facility during the
Second
Quarter and Year To Date Period, respectively. Borrowings were primarily used to fund normal operating expenses and capital expenditures. Amounts available under the Revolving Credit Facility are reduced by any amounts outstanding under standby letters of credit. As of
July 1, 2017
, the Company had available borrowing capacity of
$79.1 million
under the Revolving Credit Facility. The Company receives short-term loans from certain of its foreign subsidiaries at the end of each fiscal quarter which are used to reduce its external borrowings. These intercompany loans are repaid at the beginning of the following fiscal quarter. At the end of the Second Quarter, these intercompany loans totaled
$254.8 million
. The Company incurred approximately
$2.3 million
and
$4.1 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
$7.5 million
and
$12.4 million
of interest expense related to the Revolving Credit Facility during the
Second
Quarter and Year To Date Period, respectively. The Company incurred approximately
$1.1 million
and
$1.8 million
of interest expense related to the amortization of debt issuance costs during the
Second
Quarter and Year To Date Period, respectively.
15. RESTRUCTURING
The Company implemented a multi-year restructuring program that began in fiscal year 2016 called New World Fossil ("NWF"). As part of NWF, the Company targets to improve operating profit and support sales growth through a leaner infrastructure and an enhanced business model. The Company is working to achieve greater efficiencies from production to distribution through activities such as organizational changes, reducing its overall product assortment, optimizing its base cost structure and consolidating facilities. The Company also intends to build a quicker and more responsive operating platform. The Company is reducing its retail footprint to reflect the evolving shopping habits of today's consumer, which includes restructuring costs, such as store impairment, recorded lease obligations and termination fees and accelerated depreciation. Of the total estimated
$150 million
restructuring charges, approximately
$27.8 million
and
$36.0 million
were recorded during fiscal year 2016 and the Year To Date period, respectively. The Company estimates total fiscal year 2017 NWF restructuring charges of
$45 million
.
The following table shows a rollforward of the accrued liability related to the Company’s restructuring plan (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 13 Weeks Ended July 1, 2017
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Liabilities
|
|
|
April 1, 2017
|
|
Charges
|
|
Cash Payments
|
|
Non-cash Items
|
|
July 1, 2017
|
|
Store closures
|
$
|
5,501
|
|
|
$
|
3,017
|
|
|
$
|
1,060
|
|
|
$
|
2,565
|
|
|
$
|
4,893
|
|
|
Professional services
|
92
|
|
|
856
|
|
|
832
|
|
|
—
|
|
|
116
|
|
|
Severance and employee-related benefits
|
2,103
|
|
|
5,892
|
|
|
5,256
|
|
|
1,204
|
|
|
1,535
|
|
|
Total
|
$
|
7,696
|
|
|
$
|
9,765
|
|
|
$
|
7,148
|
|
|
$
|
3,769
|
|
|
$
|
6,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 26 Weeks Ended July 1, 2017
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Liabilities
|
|
|
December 31, 2016
|
|
Charges
|
|
Cash Payments
|
|
Non-cash Items
|
|
July 1, 2017
|
|
Store closures
|
$
|
4,546
|
|
|
$
|
5,741
|
|
|
$
|
2,178
|
|
|
$
|
3,216
|
|
|
$
|
4,893
|
|
|
Professional services
|
794
|
|
|
1,430
|
|
|
2,108
|
|
|
—
|
|
|
116
|
|
|
Severance and employee-related benefits
|
—
|
|
|
28,878
|
|
|
26,139
|
|
|
1,204
|
|
|
1,535
|
|
|
Total
|
$
|
5,340
|
|
|
$
|
36,049
|
|
|
$
|
30,425
|
|
|
$
|
4,420
|
|
|
$
|
6,544
|
|
Restructuring charges by operating segment were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 13 Weeks Ended July 1, 2017
|
|
For the 26 Weeks Ended July 1, 2017
|
|
Americas
|
$
|
2,179
|
|
|
$
|
7,796
|
|
|
Europe
|
2,160
|
|
|
7,682
|
|
|
Asia
|
3,353
|
|
|
8,139
|
|
|
Corporate
|
2,073
|
|
|
12,432
|
|
|
Consolidated
|
$
|
9,765
|
|
|
$
|
36,049
|
|