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TABLE OF CONTENTS
PART IV
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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(Mark One) |
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ý |
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended January 3, 2015 |
OR |
o |
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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 0-19848
FOSSIL GROUP, INC.
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of
incorporation or organization) |
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75-2018505
(I.R.S. Employer
Identification No.) |
901 S. Central Expressway
Richardson, Texas
(Address of principal executive offices) |
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75080
(Zip Code) |
Registrant's
telephone number, including area code: (972) 234-2525
Securities
registered pursuant to Section 12(b) of the Act:
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Title of each class |
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Name of each exchange on which registered |
Common Stock, $0.01 par value |
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NASDAQ Global Select Market |
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes ý No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No ý
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 ý 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 ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. 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.
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Large accelerated filer ý |
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Accelerated filer o |
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Non-accelerated filer o (Do not check if a
smaller reporting company) |
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Smaller reporting company o |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes o No ý
The aggregate market value of Common Stock, $0.01 par value per share (the "Common Stock"), held by non-affiliates of the registrant, based on the last sale price
of the Common Stock as reported by the NASDAQ Global Select Market on July 5, 2014 was $5,007,626,160. For purposes of this computation, all officers, directors and 10% beneficial owners of the
registrant are deemed to be affiliates. Such determination should not be deemed an admission that such officers, directors or 10% beneficial owners are, in fact, affiliates of the registrant.
As
of February 16, 2015, 50,379,206 shares of Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement to be furnished to shareholders in connection with its 2015 Annual Meeting of Stockholders are incorporated by
reference in Part III, Items 10-14 of this Annual Report on Form 10-K.
Table of Contents
FOSSIL GROUP, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED JANUARY 3, 2015
INDEX
Table of Contents
In this Form 10-K, references to "we," "our," and the "Company" refer to Fossil Group, Inc. and its subsidiaries on a
consolidated basis.
PART I
Item 1. Business
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 ("U.S."), our network of Company-owned stores included 153 retail stores located in premier retail sites and 143 outlet
stores located in major outlet malls as of January 3, 2015. In addition, we offer an extensive collection of our FOSSIL brand products through our website at 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 25
Company-owned foreign sales subsidiaries and through a network of over 60 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 197 retail stores and 100 outlet stores as of January 3, 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.
We
are a Delaware corporation formed in 1991 and are the successor to a Texas corporation formed in 1984. In 1993, we completed an initial public offering of 13,972,500 shares of our
common stock. Domestically, we conduct a majority of our operations through Fossil Partners, L.P., a Texas limited partnership formed in 1994 of which we are the sole general partner. We also
conduct operations domestically and in certain international markets through various owned subsidiaries. Our principal executive offices are located at 901 S. Central Expressway, Richardson, Texas
75080, and our telephone number at that address is (972) 234-2525. Our European headquarters is located in Basel, Switzerland, and our Asia headquarters is located in Hong Kong. Our common
stock is traded on the NASDAQ Global Select Market under the trading symbol FOSL. We make available free of charge through our website at www.fossilgroup.com our annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to
these reports filed or furnished pursuant to
Section 13(a) or 15(a) of the Securities Exchange Act of 1934 as soon as reasonably practicable after such materials are electronically filed with, or furnished to, the U.S. Securities and
Exchange
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Commission
("SEC"). You may also obtain any materials we file with, or furnish to, the SEC on its website at www.sec.gov.
Business segments
Our operations and financial reporting are primarily divided into four distinct segments: (i) the North America wholesale
segment; (ii) the Europe wholesale segment; (iii) the Asia Pacific wholesale segment; and (iv) the Direct to consumer segment, which includes our Company-owned retail stores, our
catalog costs and e-commerce activities. Within the wholesale segments of our business, we generally sell to retailers in those countries in which we have a physical presence as well as to third-party
distributors in countries where we do not have a physical presence. Except to the extent that differences between operating segments are material to an understanding of our business taken as a whole,
the description of our business in this report is presented on a consolidated basis. Corporate expenses include certain administrative, legal, accounting, technology support costs, equity compensation
costs, payroll costs attributable to executive management and amounts related to intercompany eliminations that are not allocated to the various segments. For financial information about our operating
segments and geographic areas, refer to Management's Discussion and Analysis of Financial Condition and Results of Operations set forth in Part II, Item 7 and Note 18 Major
Customer, Segment and Geographic Information to our consolidated financial statements set forth in Part II, Item 8 of this Annual Report on Form 10-K.
Business strengths
We believe that we have several business strengths which allow us to differentiate ourselves and achieve our key operating and
financial goals. These business strengths include:
Brand strength. We believe a brand's image, individuality, consistency and connection with its customers is paramount in building and
sustaining the
brand. We believe that our FOSSIL brand name is recognized on a global basis as a vintage-inspired aspirational lifestyle brand with a focus on fashion accessories. The FOSSIL brand has developed from
its origin as a watch brand to encompass other accessory categories, including handbags, belts, small leather goods, jewelry, soft accessories, sunglasses and clothing. We believe the FOSSIL brand is
one of our most valuable assets, serves as a foundational piece of our business and remains very marketable across product lines, geographic areas and distribution channels. Since our inception in
1984, we have continued to develop, acquire or license other nationally or internationally recognized brand names, such as ADIDAS®, ARMANI EXCHANGE®, BURBERRY®,
DIESEL®, DKNY®, EMPORIO ARMANI®, KARL LAGERFELD®, MARC BY MARC JACOBS, MICHAEL KORS®, MICHELE®, RELIC®,
SKAGEN®, TORY BURCH® and ZODIAC®, in order to appeal to a wide range of consumers. Our industry is highly competitive and subject to changing preferences in style,
taste and price points. The success of our business model depends upon offering a wide range of branded products that appeal to the various tastes and fashion preferences of our customers. We must
also maintain the relevance of these products by continually anticipating customer needs and desires as they relate to both the brands and categories of products we offer. We have teams of designers
and brand specialists assigned to each of our brands. The objectives of these designers and brand specialists are to immerse themselves in their assigned brand and product area, identify their
customers' preferences, interpret global fashion trends and develop style-right offerings to generate volume purchasing. By owning the vast majority of our global distribution, we are also able to
create and execute consistent pricing strategies and brand image presentations that protect and enhance our proprietary brands and those of our licensors.
Licensing strength. Since 1997, we have attracted highly recognized and respected brand names to license within our watch and jewelry
portfolios. We
believe we attract such quality brands due to our ability to provide them with access to our global design, production, distribution and marketing infrastructure. As a result of our vertical
integration, we, unlike many of our competitors, can offer an
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integrated
solution to launch or increase an accessory category presence on a worldwide basis in a consistent, timely and focused manner. All of our major licensing relationships are exclusive to us
and the licensors, which substantially minimizes risks to the licensor associated with dealing with multiple licensees in different geographic regions. Additionally, in order to develop a broader
relationship and maintain brand consistency across the accessory categories, we have broadened our infrastructure, allowing us to expand our licensing activities to products beyond the watch category,
including our DIESEL, DKNY, EMPORIO ARMANI and MICHAEL KORS jewelry product lines.
Breadth of brands and retail price points. Through the multiple brands we distribute, we have developed a broad spectrum of retail
price points.
Within our watch collections, core retail price points vary from approximately $7 in the mass market channel up to retail price points of $4,990 in the luxury distribution channel, although the
majority of our collections focus on price points ranging from $85 to $600. The breadth of our brands allows us to anchor a brand to a given price point range and distribution channel, thereby
maintaining a consistent brand image while focusing on the quality/value relationship important to the customer and not diluting the brand through overlapping distribution channels. The breadth of
price points allows us to cater to various age and income groups while continuing to participate in sales consistently, regardless of a shift in income or the price/value preferences of our customers.
International penetration. Since our initial public offering in 1993, we have continued to extend our reach beyond the U.S. by forming
and acquiring
internationally-based subsidiaries, licensing and developing internationally recognized brands and investing in the growth of our business within many major countries of the world. For fiscal years
2014, 2013 and 2012, 54.7%, 53.2% and 52.6% of our consolidated net sales were generated outside of the U.S., respectively.
Breadth of distribution channels. Our products are sold through multiple distribution channels including department stores, specialty
retail stores,
specialty watch and jewelry stores, mass market stores, cruise ships, airlines, Company-owned retail stores, licensed and franchised FOSSIL stores, retail concessions operated by us and e-commerce
sites. As we expand our presence in existing distribution channels and add new distribution channels, as well as develop new product lines and expand our geographic reach, our revenues have become
less dependent on any one distribution channel or geographic region. Our Company-owned retail stores, websites and catalog venues allow us to enhance the related brand image by offering a targeted
message to the customer, showcasing the array of product availability, influencing the merchandising and presentation of the products and testing new product introductions.
In-house creative team. Since our inception, we have developed a talented pool of creative individuals who design our retail stores,
websites,
products, packaging, graphics, presentation displays and marketing materials, allowing us to deliver a unique and cohesive style and image for each of our brands. We believe our emphasis on constant
innovation and distinctive design has made us a leader in the branded accessory category. The breadth of talent and vertical integration of our design teams allows us to minimize the need for, and
associated expense of, outside creative talent and advertising agencies.
International sourcing. The vast majority of our products are sourced internationally. Most watch product sourcing from Asia is
coordinated through
our Hong Kong subsidiary, Fossil (East) Limited ("Fossil East"). During fiscal 2014, approximately 57% of our non-Swiss made watch production was assembled through wholly or majority owned factories.
This vertical integration of our business allows for better flow of communication, consistent quality, product design protection and improved supply chain speed, while still allowing us to utilize
non-owned production facilities for their unique capabilities and to cover production needs over internal capacities. Establishing our watch assembly facilities near the component manufacturers also
allows us to operate a more efficient supply chain. We have also been successful in leveraging our jewelry production needs through our watch assembly
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factory
infrastructure. Our other accessory and apparel products are purchased from many third-party manufacturers with whom we have long-standing relationships and, in the case of our leathers
business, we typically represent a meaningful portion of their businesses.
Operating cash flow. Our business model has historically generated strong operating cash flows, including $387.9 million in fiscal
year 2014,
and $1.3 billion and $1.7 billion over the past three fiscal years and five fiscal years, respectively. This strong cash flow has allowed us to fund capital expenditures, Company-owned
retail store growth, product line expansions, common stock repurchase programs and acquisitions.
Information systems. Operating and managing a global company requires sophisticated and reliable management information systems to
assist in the
planning, order processing, production and distribution functions and accounting of each relevant business. We mainly operate an SAP Enterprise Resource Planning system ("ERP") in the U.S. and most of
Europe. For our subsidiaries in Asia, we operate Microsoft's Dynamics Navision Enterprise Resource Planning System ("Navision"). Our e-commerce platform is based on IBM's WebSphere Commerce platform
and we continued to invest in other parts our e-commerce infrastructure, which will allow us to leverage the success of our U.S.-based web business across many of the countries where we currently
distribute products. We have also implemented SAP's IS Retail platform combined with the WINCOR point-of-sale and the SAP point-of-sale systems to improve our ability to manage our growing
Company-owned retail stores globally. Our products are principally distributed from three primary warehouses, one located in Texas near our headquarters, one located in southern Germany and the other
located in Hong Kong. Our facilities in Texas and Germany utilize sophisticated automated material handling equipment and software designed to improve accuracy, speed and quality in our warehousing
operations.
During
fiscal year 2014, we implemented the following financial software solutions from Oracle Corporation: Hyperion Financial Management, Essbase and Hyperion Planning. This software
was implemented to increase the overall efficiency of our consolidation and financial reporting process, provide an analytical application to view and interpret data, and to improve predictability in
the budgeting and forecasting process.
Growth strategy
In order to expand our global market share in a profitable manner, we continually establish and implement business initiatives that we
believe will build brand equity, increase revenues and improve profitability across three distinct areas of the businessFOSSIL, SKAGEN and our multi-brand watch portfolio. Our strategy
for growing the business includes the following:
FOSSIL. Realizing the full potential of this vintage American lifestyle brand is a key element of our long-term growth strategy. Our
goal is to
continue to grow the brand through innovation and increasing global awareness.
SKAGEN. Growing SKAGEN into a multi-category lifestyle brand by leveraging the Fossil Group infrastructure, proving a unique brand
experience and
delivering great Danish-inspired product is an important element of our long-term growth strategy.
Portfolio. Our multi-brand watch portfolio is a powerful tool enabling us to gain share in the growing global watch market. Our
innovation, design,
supply chain and global distribution network provide us the opportunity to work with lifestyle brands around the world and position them across a broad spectrum of market segments. Our goal is to
employ all of our strategic advantages to realize the full potential of our brands.
Global Diversification. International expansion and gaining market share are key elements in expanding the distribution of our brands.
We have
continued to increase our penetration of the
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international
market by building brand name recognition, broadening the selection of merchandise through existing distribution channels by introducing new products or brands, extending product
categories under our existing portfolio of brands, purchasing former distributors to gain increased control over international businesses, establishing owned, franchised or licensed retail stores,
expanding into retail concessions operated by us and entering new geographic markets through owned subsidiary or third-party distributor relationships. For example, on December 31, 2012, we
acquired substantially all the assets of our largest third-party distributor, Bentrani Watches, LLC. Bentrani was a distributor of watch products in 16 Latin American countries and was based in
Miami, Florida. Additionally, effective January 1, 2013, we assumed control over the board of directors and day-to-day management of Fossil, S.L. ("Fossil Spain"). The results of Fossil Spain
have been included in our consolidated financial statements since January 1, 2013.
Leverage existing infrastructure. We have built our design, marketing, assembly and distribution infrastructure to allow us to manage
and grow our
businesses. As we continue to develop additional products, acquire or license additional brands and seek additional businesses to complement our existing offering, we believe we will be able to
leverage our infrastructure and continue to increase the efficiency of our operations over the long-term.
Extend product categories of existing brands. We frequently introduce new accessory product categories within our existing proprietary
and licensed
brands to further leverage our branded portfolio. For example, we introduced jewelry collections under the DIESEL, DKNY, EMPORIO ARMANI, FOSSIL and MICHAEL KORS brands after first establishing a
market for the brands in watches. Wearable technology is an opportunity to extend the reach of our brands and offer customers new functionality with accessories, including jewelry and smart watches.
While this is an emerging / new category, we anticipate developing capabilities in conjunction with our partnerships with Google and Intel ahead of releasing new products in 2015.
Introduce new brands. We have introduced new brands through the development or acquisition of proprietary brands and licensing
agreements related to
recognizable global fashion lifestyle brands to attract a wide range of consumers with differing tastes and lifestyles. Our current portfolio of proprietary and licensed watch brands allows us to
compete for market share from the luxury branded market to the mass market level. In 2011, we entered into an exclusive global licensing agreement with Karl Lagerfeld for watches, which launched
globally in the first quarter of 2013. In April 2012, we completed the acquisition of Skagen Designs, Ltd. ("Skagen Designs") and certain of its international subsidiaries. Skagen Designs is an
international company offering contemporary Danish design
accessories including watches, jewelry, sunglasses and clocks. In February 2013, we announced an exclusive global licensing agreement with Tory Burch for watches, which we launched globally in the
third quarter of 2014.
Expand retail locations. Historically, we have expanded our Company-owned retail and outlet locations each year. Distribution through
our
Company-owned retail stores has allowed us to raise awareness of the FOSSIL brand and showcase a broad assortment of FOSSIL branded products in a warm and inviting atmosphere. Our FOSSIL retail
stores, combined with our FOSSIL branded catalogs and website, have continued to build brand equity, present a consistent brand image, influence the merchandising and presentation of our products at
other retailers and have allowed us to test new product categories and designs. With the level of awareness we have achieved for the FOSSIL brand worldwide and the expansion of product categories
offered under the brand, we have been able to accelerate our FOSSIL retail store growth. Of the 593 Company-owned retail stores open as of January 3, 2015, 469 of these stores are FOSSIL
branded stores. We also sell certain of our proprietary and licensed watch products, as well as upscale watch brands of other companies, such as Citizen and Swiss Army, at our Company-owned Watch
Station International full-price retail and outlet stores. As of January 3, 2015, we operated 99 Watch Station International stores. We plan to open approximately
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44
to 55 additional stores in fiscal 2015, depending upon available retail locations and lease terms that meet our requirements, the majority of which will be our FOSSIL full-price accessory and
outlet concepts. During fiscal 2015, we also expect to close approximately 40 stores.
Operating strategy
Fashion orientation and design innovation. We are able to market our products to consumers with differing tastes and lifestyles by
offering a wide
range of brands and product categories at varying price points. We attempt to stay abreast of emerging fashion and lifestyle trends affecting accessories and clothing, and we respond to these trends
by making adjustments in our product lines several times each year. We differentiate our products from those of our competitors principally through innovations in
fashion details, including variations in both the materials and treatments used for dials, crystals, cases, straps and bracelets for our watches, and innovative treatments and details in our other
accessories.
Coordinated product promotion. We internally coordinate product design, packaging, advertising, websites, catalogs and in-store
presentations to
effectively communicate to our target markets the themes and images associated with our brands. For example, many of our watch products and certain of our accessory products are packaged in metal tins
decorated with designs consistent with our marketing strategy and product image. In certain parts of the world, we market our non-watch fashion accessory lines through the same distribution channels
as our watch lines, using similar in-store presentations, graphics and packaging.
Captive suppliers. The three entities that assemble the majority of our Asia watch production volume are majority owned by us. In
addition, although
we do not have long-term contracts with our unrelated accessory manufacturers, we maintain long-term relationships with several manufacturers. These relationships developed due to the significant
length of time we have conducted business with the same manufacturers. We believe that we are able to exert significant operational control with regard to our principal watch assemblers because of our
level of ownership and long standing relationships. In addition, we believe that the relative size of our business with non-owned watch manufacturers gives us priority within their production
schedules. Furthermore, the manufacturers understand our quality standards, which allow us to produce quality products and reduce the delivery time to market, improving overall operating margins.
Actively manage retail sales. We manage the retail sales process with some of our wholesale customers by monitoring consumer purchases
and retail
inventory levels by product category and style, primarily through electronic data interchange, and by assisting some of our wholesale customers in the conception, development and implementation of
their marketing programs. Through our merchandising unit, we work with some retailers to ensure that our products are properly stocked and displayed in accordance with our visual standards. As a
result, we believe we enjoy close relationships with some of our principal wholesale customers, often allowing us to influence the mix, quantity and timing of their purchasing decisions.
Centralized distribution. We distribute substantially all of our products sold in North America from our warehouse and distribution
centers located
in Texas. In Europe, we distribute our products primarily through our warehouse and distribution center located in Germany. In Asia, we primarily distribute our products through our distribution
warehouse located in Hong Kong and through smaller distribution warehouses in those countries where we maintain a physical presence. We believe our centralized distribution capabilities in the U.S.
and Europe enable us to reduce inventory risk, increase flexibility in
achieving delivery requirements of our customers and maintain cost advantages as compared to our competitors.
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Industry overview
Watch products
We believe that the current market for watches generally can be divided into four segments. One segment of the market consists of fine
watches characterized by internationally known brand names such as Audemars Piguet, Cartier, Omega, Patek Philippe, Piaget and Rolex. Watches offered in this segment are usually made of precious
metals or stainless steel and may be set with precious gems. These watches are almost exclusively manufactured in Switzerland and are sold by trade jewelers and in the fine jewelry departments of
better department stores and other purveyors of luxury goods at retail prices ranging from $4,000 to in excess of $20,000. Selected limited editions of our BURBERRY and MICHELE lines compete in this
market. A second segment of the market consists of fine premium branded and designer watches produced in Switzerland and the Far East such as Gucci, Movado, Raymond Weil, Seiko, TAG Heuer and Tissot.
These watches are sold at retail prices generally ranging from $495 to $4,000. Our BURBERRY, EMPORIO ARMANI, EMPORIO ARMANI Swiss, FOSSIL Swiss, MICHELE, TORY BURCH and ZODIAC lines generally compete
in this market segment. A third segment of the market consists of watches sold by mass marketers, which typically consist of digital and analog watches manufactured in the Far East. Well-known brands
in this segment include Armitron, Casio and Timex. Retail prices in this segment range from $7 to $60. We compete in this segment through the design and production of private label watch products for
Target and Wal-Mart.
The
fourth segment of the market consists of moderately priced watches characterized by contemporary fashion and well known fashion brand names. Moderately priced watches are typically
produced in China or Hong Kong and are sold by department stores and specialty stores at retail prices ranging from $60 to $1,000. This market segment is targeted by us with our FOSSIL, RELIC and
SKAGEN lines and by our principal competitors, including the companies that market watches under the Anne
Klein II, Guess?, Kenneth Cole and Swatch brand names, whose products attempt to reflect emerging fashion trends in accessories and clothing. Our ARMANI EXCHANGE, DIESEL, DKNY, KARL LAGERFELD, MARC BY
MARC JACOBS, and MICHAEL KORS lines generally compete in this segment as well. We compete in the sports specialty area of this segment with our ADIDAS line of women's and men's sport timepieces. We
believe that a number of consumers regard branded fashion watches not only as timepieces, but also as fashion accessories, and that has historically resulted in consumers owning multiple watches that
may differ significantly in terms of style, features and cost.
Watches
typically utilize either a mechanical or quartz-analog movement to maintain their time keeping function. Mechanical watches utilize intricate arrangements of wheels, jewels and
winding and regulating mechanisms to keep time, while quartz-analog watches are precisely calibrated to the regular frequency of the vibration of a quartz crystal powered by a battery. Although
quartz-analog movements typically maintain their time keeping functions more precisely than mechanical movements, mechanical movements are prized for their craftsmanship and are generally associated
with high-end luxury timepieces.
Fashion accessories
In addition to watches, the fashion accessories market also includes an array of products such as small leather goods, handbags, belts,
sunglasses, neckwear, jewelry and gloves. We believe that a number of consumers view accessories as fashion statements, and as a result, purchase brand name, quality items that complement other
fashion items. These fashion accessory products are generally marketed through department stores, specialty retailers and mass merchandisers, depending upon price and quality. Higher price point items
include products offered by fashion names such as Louis Vuitton and Prada.
Moderately
priced fashion accessories are typically marketed in department stores and are characterized by contemporary fashion and well-known brand names at reasonable price points,
such as
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our
FOSSIL and RELIC brands. We currently offer small leather goods, handbags, belts, sunglasses and soft accessories for both men and women through department stores and specialty retailers in the
moderate to upper-moderate price ranges. Our competitors in this market include companies such as Coach, Guess?, Kenneth Cole, Liz Claiborne and Nine West. In addition, we currently offer fashion
jewelry sold under the DIESEL, DKNY, EMPORIO ARMANI, FOSSIL, MICHAEL KORS and SKAGEN brands.
Our products
We design, develop, market and distribute fashion accessories, including limited apparel, belts, handbags, jewelry, small leather
goods, sunglasses, soft accessories and watches under proprietary and licensed brand names. Additionally, we manufacture or distribute private label brands as well as branded products we purchase for
resale in certain of our non-FOSSIL retail stores. The following table sets forth certain information with respect to the breakdown of our net sales and percentage of growth between proprietary,
licensed and other brands within our wholesale and Direct to consumer distribution channels for the fiscal years indicated (in millions, except for percentage data).
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Fiscal Year |
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2014 |
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2013 |
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2012 |
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Dollars |
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% Growth |
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Dollars |
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% Growth |
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Dollars |
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Net sales |
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Wholesale: |
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Proprietary |
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$ |
827.7 |
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(5.6 |
)% |
$ |
876.6 |
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4.8 |
% |
$ |
836.7 |
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Licensed |
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1,651.3 |
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12.7 |
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1,465.4 |
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20.1 |
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1,220.2 |
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Other |
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106.0 |
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6.6 |
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99.4 |
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16.8 |
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85.1 |
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2,585.0 |
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5.9 |
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2,441.4 |
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14.0 |
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2,142.0 |
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Direct to consumer: |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proprietary |
|
|
689.0 |
|
|
10.0 |
|
|
626.6 |
|
|
9.9 |
|
|
570.3 |
|
Licensed |
|
|
225.4 |
|
|
24.7 |
|
|
180.8 |
|
|
33.6 |
|
|
135.3 |
|
Other |
|
|
10.3 |
|
|
(8.0 |
) |
|
11.2 |
|
|
13.1 |
|
|
9.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
924.7 |
|
|
13.0 |
|
|
818.6 |
|
|
14.4 |
|
|
715.5 |
|
Total: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proprietary |
|
|
1,516.7 |
|
|
0.9 |
|
|
1,503.2 |
|
|
6.8 |
|
|
1,407.0 |
|
Licensed |
|
|
1,876.7 |
|
|
14.0 |
|
|
1,646.2 |
|
|
21.4 |
|
|
1,355.5 |
|
Other |
|
|
116.3 |
|
|
5.2 |
|
|
110.6 |
|
|
16.4 |
|
|
95.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,509.7 |
|
|
7.7 |
% |
$ |
3,260.0 |
|
|
14.1 |
% |
$ |
2,857.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Watch products
We offer an extensive line of branded lifestyle watches under our proprietary brands and, pursuant to license agreements, under some of
the most prestigious brands in the world. Sales of watches for fiscal years 2014, 2013 and 2012 accounted for approximately 78.0%, 77.1% and 74.9%, respectively, of our consolidated net sales.
8
Table of Contents
Proprietary brands. The following table sets forth information about our primary proprietary brand watches:
|
|
|
|
|
Brand
|
|
Suggested
Retail Price
Point Range |
|
Primary Distribution Channels |
FOSSIL |
|
$75 - 995 |
|
U.S. department stores (Belk, Dillard's, Macy's and Nordstrom), U.S. specialty retailers (The Buckle), better European department stores (Debenhams, El Corte Ingles, Galeries Lafayette, Harrod's, House of
Fraser, Karstadt, Kaufhof and Printemps), better European specialty stores (Christ, Ernest Jones, Goldsmith, H. Samuel, Histoire d'Or as, and Louis Pion), Canadian department stores (Hudson Bay), Australian department stores (Myers),
Chinese department stores (Sogo), independently-owned watch and jewelry stores worldwide, www.amazon.com, www.fossil.com, www.watchstation.com, our catalog and Fossil stores worldwide |
MICHELE |
|
$295 - 4,990 |
|
U.S. department stores (Bloomingdales, Neiman Marcus, Nordstrom and Saks Fifth Avenue), watch specialty stores, jewelry
stores, www.michele.com and www.watchstation.com |
RELIC |
|
$60 - 150 |
|
U.S. department stores (JCPenney, Kohl's, Sears and Stage Stores) and www.relicbrand.com |
SKAGEN |
|
$95 - 275 |
|
U.S. department stores (Belk, Bloomingdales, Bon Ton, Dillard's, Lord and Taylor, Macy's, Nordstrom and Von Maur), U.S.
specialty and independent retailers, U.S. military, better European department stores (Galeries Lafayette, House of Fraser, Karstadt and Kaufhof), European specialty stores (Christ) and independent retailers, Asian specialty stores (City Chain, On
Time and Tic Tac) and independent retailers, Company-owned stores (Skagen, Watch Station International retail stores and outlets), www.watchstation.com and www.skagen.com |
ZODIAC |
|
$795 - 1,395 |
|
Watch specialty jewelry stores worldwide, www.nordstrom.com, www.amazon.com
and www.watchstation.com |
Licensed brands. We have entered into multi-year, worldwide exclusive license agreements for the manufacture, distribution and sale of
watches
bearing the brand names of certain globally recognized
9
Table of Contents
fashion
companies. The following table sets forth information with respect to our primary licensed watch products:
|
|
|
|
|
|
|
Brand
|
|
Suggested
Retail Price
Point Range |
|
Expiration
Date |
|
Primary Distribution Channels |
ADIDAS |
|
$50 - 195 |
|
12/31/2017 |
|
Department stores, major sports stores, specialty retailers, adidas outlets, adidas boutiques worldwide and www.watchstation.com |
ARMANI EXCHANGE |
|
$100 - 260 |
|
12/31/2023 |
|
Department stores, specialty retailers, duty free stores worldwide, Armani Exchange boutiques worldwide, www.armaniexchange.com and www.watchstation.com |
BURBERRY |
|
$395 - 3,995 |
|
12/31/2017 |
|
Department stores, specialty retailers, duty free stores worldwide and Burberry boutiques worldwide |
DIESEL |
|
$100 - 495 |
|
12/31/2015 |
|
Department stores, specialty retailers, Diesel boutiques worldwide, www.diesel.com and
www.watchstation.com |
DKNY |
|
$75 - 275 |
|
12/31/2019 |
|
Department stores, jewelry stores, specialty retailers, DKNY boutiques worldwide and www.watchstation.com |
EMPORIO ARMANI |
|
$145 - 545 |
|
12/31/2023 |
|
Department stores, specialty retailers, major jewelry and watch stores, Emporio Armani boutiques worldwide, duty free stores worldwide,
www.emporioarmaniwatches.com and www.watchstation.com |
KARL LAGERFELD |
|
$150 - 595 |
|
12/31/2017 |
|
Department stores, Karl Lagerfeld boutiques, watch and jewelry specialty stores, and www.watchstation.com |
MARC BY MARC JACOBS |
|
$150 - 600 |
|
12/31/2020 |
|
Department stores, specialty retailers, Marc by Marc Jacobs boutiques worldwide and www.watchstation.com |
MICHAEL KORS |
|
$195 - 550 |
|
12/31/2024 |
|
Department stores, specialty retailers, jewelry stores, duty free stores, retail websites, Michael Kors boutiques worldwide and www.watchstation.com |
TORY BURCH |
|
$350 - 995 |
|
12/31/2018 |
|
Department stores, specialty retailers, jewelry stores, duty free stores, retail websites, Tory Burch boutiques worldwide and www.watchstation.com |
Sales
of our licensed watch products accounted for 49.2% of our consolidated net sales for fiscal year 2014. Our MICHAEL KORS product sales, including jewelry, accounted for 26.3% of our
10
Table of Contents
consolidated
net sales for fiscal year 2014. In fiscal year 2011, we entered into an exclusive global licensing agreement with Karl Lagerfeld for watches, which launched worldwide in the first quarter
of 2013. In February 2013, we announced an exclusive global licensing agreement with Tory Burch for watches, which launched globally in late 2014. We launched EMPORIO ARMANI Swiss made watches in the
first quarter of 2014.
Private label and other. We design, market and source manufacturing of certain retailers' private label and owned brand watches or as
premium and
incentive items for use in various corporate events. Under these arrangements, we perform design and product development functions, as well as act as a sourcing agent for our customers by contracting
for and managing the manufacturing process, purchasing and inspecting the finished product and arranging for shipment. Participation in the private label and premium businesses provides us with
certain advantages, including increased assembly volume, which may reduce the costs of assembling our other products, and the strengthening of business relationships with our manufacturing sources.
Fashion accessories
In order to leverage our design and marketing expertise and our close relationships with our principal retail customers, primarily in
the U.S. and Europe, we have developed a line of fashion accessories for both men and women, including belts, handbags, jewelry, small leather goods and sunglasses. Our handbags are made of a variety
of fine leathers and other materials that emphasize classic styles and incorporate a variety of creative designs. Our small leather goods are typically made of fine leathers or other man-made
materials and include items such as coin purses,
cosmetic bags, mini-bags and wallets. Our jewelry lines include bracelets, cufflinks, earrings, necklaces and rings marketed under the DIESEL, DKNY, EMPORIO ARMANI, FOSSIL, MICHAEL KORS and SKAGEN
brands and typically include materials such as base metals, stainless steel, semi-precious stones and sterling silver. We offer 100% UV protected fashion sunglasses in the FOSSIL brand. We currently
sell our fashion accessories through a number of our existing major department store and specialty retail store customers, as well as our Company-owned retail stores, www.fossil.com and other
internationally-owned e-commerce sites. In the U.S. and certain international markets, we generally market our fashion
accessory lines through the same distribution channels as our watches using similar in-store presentations, graphics and packaging. These fashion accessories are typically sold in locations adjacent
to watch departments, which may lead to purchases by persons who are familiar with our watch brands. Sales of our accessory lines for fiscal years 2014, 2013 and 2012 accounted for approximately
20.2%, 21.1% and 22.9%, respectively, of our consolidated net sales.
11
Table of Contents
The following table sets forth information about our fashion accessories:
|
|
|
|
|
|
|
Brand
|
|
Accessory Category |
|
Suggested
Retail Price
Point Range |
|
Primary Distribution Channel |
DIESEL |
|
Jewelry |
|
$75 - 150 |
|
Department stores, domestic and international specialty retailers and Diesel retail stores worldwide |
DKNY |
|
Jewelry |
|
$40 - 200 |
|
International department stores, specialty retailers, jewelry stores and DKNY boutiques |
EMPORIO ARMANI |
|
Jewelry |
|
$75 - 295 |
|
Department stores, specialty retailers, major jewelry stores, Emporio Armani boutiques worldwide, duty free stores worldwide and
www.emporioarmani.com |
FOSSIL |
|
Handbags Small Leather Goods Belts Gifts Eyewear Jewelry |
|
$78 - 398 $25 - 118 $24 - 48 $24 - 158 $55 - 135 $18 -
128 |
|
U.S. department stores (Belk, Dillard's, Macy's and Nordstrom), specialty retailers (The Buckle), better European specialty and department
stores (Christ, Debenhams, Galeries Lafayette, House of Fraser, Karstadt and Kaufhof), www.amazon.com, Company-owned stores, our catalogs and www.fossil.com |
MICHAEL KORS |
|
Jewelry |
|
$65 - 595 |
|
Department stores, specialty retailers, jewelry stores, duty free stores worldwide and Michael Kors boutiques nationwide |
RELIC |
|
Handbags Small Leather Goods Belts |
|
$40 - 78 $22 - 40 $18 - 30 |
|
U.S. department stores (JCPenney, Kohl's, Sears and Stage Stores) and www.relicbrand.com |
SKAGEN |
|
Jewelry Leather bags and Accessories |
|
$30 - 100 $25 - 445 |
|
U.S. department stores (Macy's, Nordstrom, Dillards, Hudson Bay), U.S. specialty and independent retailers, better European department
stores (Galeries Lafayette, House of Fraser, Karstadt and Kaufhof), European specialty stores (Christ) and independent retailers, Asian independent retailers, Company-owned stores (Skagen, Watch Station International retail stores and outlets), and
www.skagen.com |
Apparel
Our limited assortment of Fossil apparel is designed for both men and women. The products' unique vintage-inspired style, packaging and
graphics capture the energy and spirit of the FOSSIL brand. As of January 3, 2015, FOSSIL apparel was offered through select distribution in 30 Company-owned retail stores in the U.S and
internationally and at www.fossil.com. Sales for FOSSIL apparel for fiscal years 2014, 2013 and 2012 accounted for approximately 0.3%, 0.5% and 0.7%,
respectively, of our consolidated net sales.
12
Table of Contents
Licensed eyewear
In fiscal year 2013, our FOSSIL and RELIC brands were licensed to the Safilo Group, who manufactured, marketed, and sold optical frames
under the FOSSIL and RELIC brands in the U.S. and Canada. Effective January 1, 2014, we expanded our license agreement with the Safilo Group to include both FOSSIL branded sunglasses and
optical frames worldwide. The license agreement provides for royalties to be paid to us based on a percentage of net sales and includes certain guaranteed minimum royalties. Sales of licensed eyewear
for fiscal years 2014 and 2013 accounted for approximately 0.4% and 0.7%, respectively, of our consolidated net sales.
Design and development
We believe one of our key strengths is our internal creative team. Our watch, accessory and select apparel products are created and
developed by our in-house design staff primarily located in the U.S., Germany, Hong Kong and Switzerland. When developing products under our various licensed brands, we often coordinate our efforts
with our licensors' design teams to provide for a more fluid design approval process and to fully incorporate the image of the respective brand into the product. Product design ideas are drawn from
various sources and are reviewed and modified by our design staff to ensure consistency with our existing product offerings and the themes and images associated with our brands. Senior management is
actively involved in the design process.
In
order to respond effectively to changing consumer preferences, we attempt to stay abreast of emerging lifestyle and fashion trends impacting our product categories. In addition, we
attempt to take advantage of the constant flow of information from our customers and our retail stores and e-commerce sites regarding the retail performance of our products. We review weekly sales
reports provided by a substantial number of our customers, as well as daily sales reports generated from our Company-owned retail stores and e-commerce sites, containing information with respect to
sales and inventories by product category and style. Once a trend in the retail performance of a product category or style has been identified, our design and marketing staffs review their product
design decisions to ensure that key features of successful products are incorporated into future designs. Other factors having an influence on the design process include the availability of
components, the capabilities of the factories that will manufacture the products for us and the anticipated retail prices and profit margins for the products. Our creative teams have access to our
product design archives and are regularly updated on all the various new components, hardware and materials that become available. Over the last few years, our focus has been on transforming our
approach in design and development from an assortment-rich offering to an iconic platform presentation. This has enhanced our ability to develop and share compelling stories within the platforms
through a narrower range of product offerings, thereby reducing inventory risk and improving lead times. We initially developed this approach in our watch business, and we are now in the early stages
of applying a similar approach to our leather and jewelry businesses.
We
differentiate our products from those of our competitors principally by incorporating into our product designs innovations in fashion details, including variations in the materials
and treatments used for dials, crystals, cases, straps and bracelets for our watches, and innovative details and treatments in our other accessories. We also incorporate certain proprietary technology
or integrate our suppliers' technologies in certain of our watch products. In some instances, we believe that such innovations have allowed us to achieve significant improvements in consumer
acceptance of our product offerings. We believe that the substantial experience of our design staff will assist us in maintaining our current leadership position in the watch category, continuing to
enhance our handbag offering and expanding the scope of our product offerings.
13
Table of Contents
Marketing and promotion
Our marketing strategy for each of our proprietary brands is to deliver a coordinated and consistent brand image to the consumer
regardless of where the consumer comes into contact with the brand. This includes point of sale merchandise displays, print and media advertising, our websites, our catalogs, retail stores, and the
product packaging to the product itself. We identify our advertising themes and coordinate our packaging, advertising and point of sale material around these themes. These themes are carefully
coordinated in order to convey American vintage styling and the aspirational viewpoint that we associate with our products. Our vintage-inspired tin packaging concept for many of our watch products
and certain of our accessories is an example of these marketing themes. While our marketing themes typically change each year, the core image of the brand is designed to endure, only changing slightly
to keep it fresh and relevant to our targeted consumer. For our licensed brands, we incorporate many of the same concepts but derive the themes generally from the licensors.
We
participate in cooperative advertising programs with our major retail customers, whereby we share the cost of certain of their advertising and promotional expenses. An important
aspect of the marketing process involves the use of in-store visual support and other merchandising materials, including packages, signs, posters and fixtures. Through the use of these materials, we
attempt to differentiate the space used to sell our products from other areas of our customers' stores. We also promote the use of our shop-in-shop concept for watches, jewelry, handbags and small
leather goods and, primarily in Asia and Europe, watch and jewelry concessions. Our shop-in-shop concept involves the use of dedicated space within a customer's store to create a brand "shop"
featuring our products and visual displays. The concessions we run allow us to essentially operate all or a portion of the watch and jewelry department within our customers' stores, thereby permitting
us to control merchandising, inventory levels, build-out and branding decisions and, more importantly, the interaction with the end
consumer. We also provide our customers with a large number of preprinted customized advertising inserts and from time to time stage promotional events designed to focus public attention on our
products.
Our
in-house art department designs, develops and implements all of the packaging, advertising, marketing and other promotional aspects of our products. The art staff uses computer-aided
design techniques to generate the images presented on product packaging and other advertising materials. Senior management is involved in monitoring our advertising and promotional activities to
ensure that themes and ideas are communicated in a cohesive manner to our target audience.
Sales and customers
General. Domestically, we sell our products in retail locations in the U.S. through a diversified distribution network that includes
department
stores, specialty retail locations, specialty watch and jewelry stores and mass market stores. For our FOSSIL, MICHELE and licensed branded products, our primary department store customers include
Bloomingdales, Dillard's, Neiman Marcus, Nordstrom, Macy's and Saks Fifth Avenue. For our RELIC brand, our primary customers include JCPenney and Kohl's. For our SKAGEN brand, our primary customers
include Dillard's, Macy's and Nordstrom. Many of our licensed branded products are also sold through each respective licensor's boutique stores and websites. We maintain sales offices in several major
cities across the U.S. staffed with sales associates to assist in managing our department and specialty store accounts and employ a nationwide staff of merchandise coordinators who work with the
stores to ensure that our products are displayed appropriately. We also sell certain of our FOSSIL branded products at Company-owned FOSSIL retail stores and outlet stores located throughout the U.S.,
and through our website at www.fossil.com. In addition, we sell certain of our proprietary and licensed watch products, as well as upscale watch brands
of other companies, such as Citizen and Swiss Army, at our Company-owned Watch Station International retail stores in the U.S. and through our website at www.watchstation.com.
14
Table of Contents
We
maintain subsidiary offices in Australia, Austria, Belgium, Canada, China, Denmark, France, Germany, Hong Kong, India, Italy, Japan, Macau, Malaysia, Mexico, the Netherlands, Norway,
Singapore, South Korea, Spain, Sweden, Switzerland, Taiwan and the United Kingdom. Our European headquarters is located in Basel, Switzerland, and our Asia headquarters is located in Hong Kong.
Internationally,
our products are sold to department stores and specialty retail stores in approximately 150 countries worldwide through 25 Company-owned foreign subsidiaries, a network
of over 60 independent distributors, Company-owned retail stores and websites and licensed or franchised FOSSIL retail stores, retail concessions operated by us and kiosks. Foreign distributors
generally purchase products from us at uniform prices established by us for all international sales and resell them to department stores and specialty retail stores. We generally receive payment from
our foreign distributors in U.S. dollars. We generally do not have long-term contracts with any of our retail customers. All transactions between us and our retail customers are conducted on the basis
of purchase orders, which generally require payment of amounts due to us on a net 30 day basis for most of our U.S.-based customers and up to 120 days for certain international
customers. No customer accounted for 10% or more of our consolidated net sales in fiscal years 2014, 2013 or 2012. Net sales for geographic segments are based on the location of the selling entity.
For more information on our geographic segments, see Note 18Major Customer, Segment and Geographic Information to our consolidated financial statements set forth in Part II,
Item 8 of this Annual Report on Form 10-K.
United States sales. For fiscal years 2014, 2013 and 2012, U.S. sales accounted for 45.3%, 46.8% and 47.4% of our consolidated net
sales,
respectively, and the aggregate sales to our 10 largest customers in the U.S. wholesale channel represented approximately 18.9%, 20.5% and 20.8% of consolidated net sales, respectively.
International sales. For fiscal years 2014, 2013 and 2012, Europe sales accounted for 34.1%, 32.3% and 30.8% of consolidated net sales,
respectively,
Asia Pacific sales accounted for 16.1%, 15.4% and 15.7% of consolidated net sales, respectively, and other international sales accounted for 4.5%, 5.5% and 6.1% of consolidated net sales,
respectively.
Company-owned stores
Our various retail store formats focus on creating emotional connections with our customers through an intense branding experience and
personalized customer service. We strive to provide an inviting and welcoming environment for our customers that enhance our brand image and seek brand loyalty by continually delivering innovative
vintage-inspired products that meet our customers' tastes.
The
following table sets forth the number of stores by concept as of January 3, 2015 and December 28, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 3, 2015 |
|
December 28, 2013 |
|
|
|
North
America |
|
Other
International |
|
Total |
|
North
America |
|
Other
International |
|
Total |
|
Full price accessory |
|
|
119 |
|
|
170 |
|
|
289 |
|
|
112 |
|
|
164 |
|
|
276 |
|
Outlets |
|
|
143 |
|
|
100 |
|
|
243 |
|
|
125 |
|
|
81 |
|
|
206 |
|
Apparel |
|
|
28 |
|
|
2 |
|
|
30 |
|
|
30 |
|
|
2 |
|
|
32 |
|
Full priced multi-brand |
|
|
6 |
|
|
25 |
|
|
31 |
|
|
6 |
|
|
23 |
|
|
29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stores |
|
|
296 |
|
|
297 |
|
|
593 |
|
|
273 |
|
|
270 |
|
|
543 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accessory stores
We operate full-price FOSSIL and SKAGEN accessory retail stores ("Accessory Stores") in order to broaden the recognition of our brand
names. Accessory Stores carry a full assortment of FOSSIL or
15
Table of Contents
SKAGEN
watches and other accessories that are generally sold at the suggested retail price. We believe our Accessory Stores present a key growth strategy for us on a worldwide basis. At the end of
fiscal 2014, the average size of our Accessory Stores was 1,496 square feet, but each store can vary in size based on its geographic location. For example, our international-based stores are generally
smaller in square footage than our U.S.-based stores due to smaller retail store configurations generally available in international markets. The table below sets forth information about our Accessory
Stores for the last five fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
Open At
Beginning
of Period |
|
Opened
During
Period |
|
Closed
During
Period |
|
Open
at End
of Period |
|
Total Gross
Square Footage
(in thousands) |
|
Percentage
Increase in
Square Footage |
|
Average Gross
Square
Footage Per
Retail Store |
|
2010 |
|
|
218 |
|
|
20 |
|
|
8 |
|
|
230 |
|
|
311.4 |
|
|
5.1 |
% |
|
1,354 |
|
2011 |
|
|
230 |
|
|
22 |
|
|
7 |
|
|
245 |
|
|
337.7 |
|
|
8.4 |
% |
|
1,378 |
|
2012 |
|
|
245 |
|
|
25 |
|
|
10 |
|
|
260 |
|
|
363.4 |
|
|
7.6 |
% |
|
1,398 |
|
2013 |
|
|
260 |
|
|
30 |
|
|
14 |
|
|
276 |
|
|
402.3 |
|
|
10.7 |
% |
|
1,458 |
|
2014 |
|
|
276 |
|
|
29 |
|
|
16 |
|
|
289 |
|
|
432.2 |
|
|
7.4 |
% |
|
1,496 |
|
Outlet stores
The majority of our outlet stores are FOSSIL branded and operate at selected major outlet malls throughout the U.S. and certain
international locations. We also operate outlets under the SKAGEN and Watch Station International names. Our outlets operating under the FOSSIL and SKAGEN names not only increase our brand awareness,
but also enable us to liquidate excess inventory generally at significantly better prices than we would obtain through third-party liquidators. We generally discount products in our outlet stores from
25% to 75% off our suggested retail price. The table below sets forth information about our outlet stores during the last five fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
Open At
Beginning
of Period |
|
Opened
During
Period |
|
Closed
During
Period |
|
Open
at End
of Period |
|
Total Gross
Square Footage
(in thousands) |
|
Percentage
Increase in
Square Footage |
|
Average Gross
Square
Footage Per
Retail Store |
|
2010 |
|
|
90 |
|
|
9 |
|
|
6 |
|
|
93 |
|
|
221.1 |
|
|
4.0 |
% |
|
2,377 |
|
2011 |
|
|
93 |
|
|
15 |
|
|
4 |
|
|
104 |
|
|
238.3 |
|
|
7.8 |
% |
|
2,291 |
|
2012 |
|
|
104 |
|
|
59 |
|
|
1 |
|
|
162 |
|
|
356.3 |
|
|
49.5 |
% |
|
2,199 |
|
2013 |
|
|
162 |
|
|
46 |
|
|
2 |
|
|
206 |
|
|
427.9 |
|
|
20.1 |
% |
|
2,077 |
|
2014 |
|
|
206 |
|
|
41 |
|
|
4 |
|
|
243 |
|
|
497.4 |
|
|
16.2 |
% |
|
2,047 |
|
Other Direct to consumer
We offer FOSSIL brand select apparel through specially designed Company-owned apparel stores. Our apparel stores carry our full apparel
line along with an assortment of certain FOSSIL watch and accessory products. We sell certain of our proprietary and licensed brand watches, as well as watches manufactured by other companies in our
Watch Station International stores.
We
have an agreement with the House of Fraser ("HOF"), a U.K.-based department store, which allows us to operate the watch department in certain HOF stores. Under this agreement, we own
the inventory within the HOF store, provide the labor to operate the department and pay HOF a commission on the retail watch sales generated in the stores. As of January 3, 2015, we operated
the watch department in 46 HOF stores. Although we include the net sales derived from the HOF stores in our Direct to consumer segment, we do not include the number of locations associated with this
arrangement in our retail store count.
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Internet sales. Our U.S. e-commerce website for FOSSIL branded products is www.fossil.com. We also
operate e-commerce websites in Australia, China, France, Germany, Japan, South Korea and the United Kingdom. In October 2012, we began shipping to Canada and Mexico through our U.S. e-commerce
website. Each website features a full selection of geographically specific FOSSIL branded products. Certain of our websites also provide customer service, company news and shareholder information. Our
websites are continually updated to provide a fresh look and an easy-to-navigate interface that enhances our brand image, while allowing consumers a pleasing shopping experience or a preview of what
they may find at their local store carrying the brand. Since its launch, the www.fossil.com website has been promoted consistently in support of online
brand and direct sales goals. Our online marketing efforts include the following: search/keyword marketing programs through major search partners including Google, Bing and Yahoo!; regular e-mail
communications sent using our email service provider to over one million registered consumers; product and promotional banners presented on affiliate networks and display banner networks; and online
brand initiatives through social networks such as Facebook, Twitter, Instagram, Pinterest and YouTube in support of viral and traditional brand initiatives. We have leveraged our e-commerce
infrastructure by opening websites to support our licensed and owned brands, including www.michele.com, www.skagen.com, and www.watchstation.com, as
well as our international FOSSIL brand website located at www.fossilglobal.com.
Catalogs. In fiscal year 2014, we distributed approximately 3.1 million FOSSIL catalogs in the U.S., a decrease from
5.0 million in
fiscal year 2013, and we distributed 0.2 million FOSSIL catalogs internationally, a decrease from 0.7 million in fiscal year 2013. These distribution decreases were the result of a
change in our communication and advertising strategy to optimize circulation by distributing more smaller promotional pieces, such as self-mailers and postcards, and distributing fewer large catalogs.
We continue to distribute several versions of our catalog each year with approximately half the catalogs being distributed during our fourth quarter. We continue to utilize our customer relationship
management database to optimize and reduce our global circulation strategy, resulting in reduced costs. We continue to view our catalogs as a key communication and advertising tool for the FOSSIL
brand, further enhancing and focusing the brand image, as well as promoting sales across all of our distribution channels.
During
fiscal years 2014, 2013 and 2012, our Direct to consumer segment, which includes sales from Company-owned stores and e-commerce businesses, accounted for approximately 26.3%,
25.1% and 25.0% of consolidated net sales, respectively.
Facilitating our wholesale distribution
We utilize an in-house sales staff and, to a lesser extent, independent sales representatives to promote the sale of our products to
retail accounts. Our in-house sales personnel receive a salary and, in some cases, a commission based on a percentage of sales attributable to specified accounts. Independent sales representatives
generally do not sell competing product lines and are under contracts with us that are generally terminable by either party upon notice ranging from 15 days to six months. These independent
contractors are primarily compensated on a commission basis.
We
have developed an approach to managing the retail sales process that involves monitoring our customers' sales and inventories by product category and style, primarily through
electronic data interchange. We review weekly selling and inventory information to ensure our products are properly stocked and replenished on a timely basis. We also assist many of our customers in
the conception, development and implementation of their marketing programs. We also participate in cooperative advertising programs with our major retail customers. We believe that management of the
retail sales process has resulted in close relationships with our principal wholesale customers, often allowing us to influence the mix, quantity and timing of their purchasing decisions.
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We believe that our sales approach has historically accounted for high retail turnover in our products, which can result in attractive profit margins for our
wholesale customers. We believe that the resulting profit margins for our wholesale customers encourage them to devote greater selling space to our products within their stores. We are also able to
work closely with buyers for our wholesale customers in determining the mix of products a store should carry. In addition, we believe that the buyers' familiarity with our sales approach has
facilitated, and should continue to facilitate, the introduction of new products through our existing distribution network.
We
permit the return of damaged or defective products. In addition, although we have no obligation to do so, we accept limited amounts of product returns from our wholesale customers in
other instances. Accordingly, we provide allowances for the estimated amount of product returns. The allowances for product returns as of the end of fiscal years 2014, 2013 and 2012 were
$68.2 million, $63.1 million and $65.3 million, respectively. We have not historically experienced returns in excess of our aggregate allowances.
Backlog
It is the practice of a substantial number of our customers not to confirm orders by delivering a formal purchase order until a
relatively short time prior to the shipment of goods. As a result, the amount of unfilled customer orders includes confirmed orders and orders that we believe will be confirmed by delivery of a formal
purchase order. A majority of such amounts represent orders that have been confirmed. The remainder of such amounts represents orders that we believe, based on industry practice and prior experience,
will be confirmed in the ordinary course of business. Our backlog at a particular time is affected by a number of factors, including seasonality and the scheduling of the manufacture and shipment of
our products. Accordingly, a comparison of backlog from period to period is not necessarily meaningful and may not be indicative of eventual actual shipments. At the end of fiscal year 2014, we had
unfilled customer orders of approximately $185.1 million, compared to $194.5 million and $203.0 million at the end of fiscal years 2013 and 2012, respectively.
Manufacturing
During fiscal 2014, approximately 57% of the watches we procured from Asia were assembled through our two majority-owned entities. The
remaining watches we procured from Asia were assembled by approximately 44 unrelated factories located primarily in China and Hong Kong, which includes almost all the production and assembly of our
digital and mass market watches. During fiscal year 2014, our Swiss-made watches were assembled primarily by one of our majority-owned entities and three third-party factories in Switzerland. During
fiscal year 2014, approximately 58% of our jewelry products were manufactured by one of our majority-owned entities. The remaining 42% of our jewelry products were manufactured by approximately 20
factories located primarily in China. Although we have no ownership interest in these unrelated watch and jewelry factories, Fossil East maintains oversight and control of the supply chain from design
through final delivery of the finished product as it does with our related factories. We believe substantial ownership of the assembly factories that produce a majority of our fashion watches and
jewelry is critical to our operating model, as we believe this allows us to keep our designs proprietary, control the size of our production runs and vertically manage our supply chain.
The
principal components used in the assembly of our watches are cases, crystals, dials, movements, hands, bracelets and straps. These components are obtained from a large number of
suppliers located principally in China, Hong Kong, India, Italy, Japan, South Korea, Switzerland and Thailand. The majority of the movements, cases, dials, bracelets and hands used in the assembly of
our watches are supplied by eight principal vendors. During fiscal years 2014, 2013 and 2012, one vendor was responsible for supplying approximately 41%, 36% and 28% of our case and bracelet
components, respectively. Additionally, two vendors were responsible for supplying approximately 87%, 86% and
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88%
of our movements in fiscal years 2014, 2013 and 2012, respectively. The principal materials used in the manufacture of our jewelry products are base metals, stainless steel, semi-precious stones
or silver jewelry with 18K gold plating on top. These components are primarily obtained from the same factories that we use for our watches. Except for the one case and bracelet vendor and the two
movement vendors noted above, we do not believe that our business is materially dependent on any single component supplier.
We
believe that we have established and maintain close relationships with a number of component manufacturers and assembly factories primarily located in China, Hong Kong and
Switzerland. The loss of any one of these manufacturers could temporarily disrupt shipments of certain of our watch and jewelry products. In addition, we believe that losing one or more of the
component vendors, watch assembly factories or jewelry manufacturers could have a material impact on our ability to source these products and meet our sales plans. Our future success will generally
depend upon our ability to maintain close relationships with, or ownership of, our current watch assembly and jewelry manufacturing factories and to develop long-term relationships with other vendors
and manufacturers that satisfy our requirements for price, quality and production flexibility.
During
fiscal year 2014, all of the manufacturing of our handbags, small leather goods, belts, sunglasses and apparel was outsourced. We believe that our policy of outsourcing the
production of these product categories allows us flexibility in selecting our suppliers while avoiding significant capital expenditures, build-ups of work-in-process inventory and the costs of
managing a substantial production work force. We have a Code of Conduct for Manufacturers ("Manufacturer Code") that sets forth the corporate responsibility requirements for our suppliers, including
compliance with international labor and human rights standards and environmental laws and regulations. Before supplying products to us, our manufacturers sign an agreement that includes a commitment
to abide by our Manufacturer Code. For more information on our Manufacturer Code, see "Code of Conduct for Manufacturers."
Our
products are assembled or manufactured according to plans that reflect management's estimates of product performance based on recent sales results, current economic conditions and
prior experience with manufacturing sources. The average lead time from the commitment to purchase products through the production and shipment thereof ranges from two to four months for our watches,
leather goods, jewelry, sunglasses and apparel. We believe that the close relationships, including ownership interests in some cases, we have established and maintain with our principal assembly or
manufacturing sources constitute a significant competitive advantage and allow us to quickly and efficiently introduce innovative product designs and alter production in response to the retail
performance of our products.
Code of Conduct for Manufacturers
We are committed to ethical and responsible conduct in all of our operations and respect for the rights of all individuals. We strive
to ensure that human rights are upheld for all workers involved in our supply chain, and that individuals experience safe, fair and non-discriminatory working conditions. In addition, we are committed
to compliance with applicable environmental requirements and are committed to seeing that all of our products are manufactured and distributed in compliance with applicable environmental laws and
regulations. We expect that our business partners will share these commitments, which we enforce through our Manufacturer Code.
Our
Manufacturer Code specifically requires our manufacturers to not use child, forced or involuntary labor and to comply with applicable environmental laws and regulations. We provide
training to our factories related to our Manufacturer Code and the applicable laws in the country in which the factory is located. The training provides the factories with a more in-depth explanation
of our Manufacturer Code.
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In
addition to the contractual obligation, we evaluate our suppliers' compliance with our Manufacturer Code through audits conducted both by our employees and third-party compliance
auditing firms. In most cases, the audits are announced. If we believe that a supplier is failing to live up to the standards of our Manufacturer Code, we may terminate the supplier or provide the
supplier with an opportunity to remedy the non-compliance through the implementation of a corrective action plan. For those suppliers on a corrective action plan, we will work with the supplier as
necessary to help them understand the non-compliance and provide advice on how to remedy the non-compliance. We usually conduct a follow-up audit to confirm compliance after the implementation of the
corrective action plan. Should the supplier continue to fail to meet our standards, we may seek to eliminate such supplier from our supply chain.
Quality control
Our quality control program attempts to ensure that our products meet the standards established by our product development staff.
Samples of products are inspected by us
prior to placing orders with factories to ensure compliance with our technical design specifications. We also typically inspect "top of production" prototypes of each product before commencing
production. The operations of our Hong Kong and Chinese factories are monitored on a periodic basis by Fossil East, and the operations of our Swiss factories are monitored on a periodic basis by
Montres Antima SA, one of our foreign operating subsidiaries. Substantially all of our watches, jewelry and certain of our other accessories are inspected by personnel of Fossil East or by the
assembly/manufacturing facility prior to shipment to our distribution centers. Final inspections, on a sampling basis, occur when the products are received in our distribution centers. We believe that
our policy of inspecting our products at the assembly/manufacturing facility, upon receipt at our distribution facilities and prior to shipment to our customers is important to maintain the quality,
consistency and reputation of our products.
Distribution
Upon completion of assembly/manufacturing, the majority of our products are shipped to one of our warehousing and distribution centers
in Texas, Germany or Hong Kong, from which they are shipped to subsidiary warehouses or directly to customers in selected markets. Our centralized warehouse and distribution facilities allow us to
maximize our inventory management and distribution capabilities and more readily meet the varying distribution requirements placed on us by our customers at a lower cost. Our facilities in Texas and
Germany are equipped with automated material handling equipment operated by world-class software from SAP and Manhattan Associates. The automated equipment and operating systems, in conjunction with
the continual sampling of our outgoing orders prior to shipment, are important in maintaining the quality, accuracy, speed and reputation of our products and distribution service.
Our
warehouse and distribution facilities in Texas operate in a special purpose sub-zone established by the U.S. Department of Commerce Foreign Trade Zone Board. This sub-zone provides
the following economic and operational advantages to us: (i) we do not have to pay duty on imported merchandise until it leaves the sub-zone and enters the U.S. market, (ii) we do not
have to pay any U.S. duty on merchandise if the imported merchandise is subsequently shipped to locations outside the U.S. and (iii) we do not have to pay local property tax on inventory
located within the sub-zone.
Information technology systems
General. We believe that automation, reliable and scalable systems, accurate reporting and rapid flow of communication is essential to
maintain our
competitive position and support our key operating and financial goals. Therefore, we continue to invest in computer hardware, system applications and telecommunication networks. Our information
technology systems consist of a wide spectrum of financial, distribution, human resources, merchandising, planning, point of sale, supply chain and other
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solutions.
Where possible and cost effective, we leverage our various systems on a global basis, which enhances the accuracy, timeliness and accessibility of the relevant data.
Inventory control. We maintain inventory control systems at our facilities that enable us to track each product from the time it is
shipped from our
factory through shipment to our customers, or consumer in the case of our retail stores, concessions and websites. To facilitate this tracking, a significant number of products sold by us are
pre-ticketed and bar coded. Our inventory control systems report shipping, sales and individual stock keeping unit level inventory information. We manage the retail sales process by monitoring
customer sales and inventory levels of our products by product category and style, primarily through electronic data interchange. We believe that our distribution capabilities enable us to reduce
inventory risk and increase flexibility in responding to the delivery requirements of our customers. Our management believes that our electronic data interchange efforts will continue to grow in the
future as customers focus further on increasing operating efficiencies. In addition, we maintain systems that are designed to track inventory movement through our Company-owned stores. Detailed sales
transaction records are accumulated on each store's point-of-sale system and polled by us.
Enterprise resource planning. We have implemented SAP ERP in our U.S. operations and throughout most of Europe. This software is
installed on a
single site platform located in our U.S. headquarters facility. The software currently supports the human resources, sales and distribution, inventory planning, retail merchandising and operational
and financial reporting systems of our U.S. businesses and most subsidiary operations in Europe. It also supports manufacturing operations in India and Europe. Additionally, we have implemented other
non-SAP systems for the purpose of merchandise planning and product lifecycle management.
We
continue to monitor the growth of our subsidiary sales operations in Asia and will migrate these operations at the appropriate time to effectively benefit from our global SAP
platform. However, we do operate SAP human resource, financial planning and warehouse management modules in Hong Kong to provide efficiencies to further support our regional warehouse in Hong Kong and
the related supply chain associated with our local country operations, including our Company-owned retail stores throughout Asia. We have implemented Navision as our standard system throughout most of
our Asia
distribution and manufacturing subsidiary operations. The Navision system supports many of the same functions as our SAP system on a local country level.
Enterprise Performance Management Systems. We have implemented customized Hyperion financial reporting software from Oracle
Corporation. The software
increases the efficiency of our consolidation and reporting process, and provides a more dynamic way to view and analyze data. The Hyperion planning tool also improves budgeting and forecasting
processes, resulting in more predictability in our business.
Product Lifecycle Management. We have implemented Dassault Systemes Enovia in our product development function. This system enables our
global
product development process across our multiple brands and product categories. Besides aligning this process, the platform will enable a global solution for collaboration, sample management, design
tool integration, and calendar management.
Cyber/Data security. Our business involves the receipt and storage of personal information about customers and employees, the
protection of which is
critical to us. If we experience a significant breach of customer, employee, and/or company data it could attract a substantial amount of media attention, damage our customer relationships and
reputation and result in lost sales, fines, or lawsuits. Our Board of Directors and/or our Audit Committee reviews our data security risks and strategy on a quarterly basis, and we have obtained
insurance liability coverage for certain data security or privacy breaches.
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Warranty and repair
Our FOSSIL watch products sold in the U.S. are covered by a limited warranty against defects in materials or workmanship for a period
of 11 years from the date of purchase. Our RELIC watch products sold in the U.S. are covered by a comparable 12 year warranty, while other watches sold by us in the U.S. are covered by a
comparable two year limited warranty. SKAGEN branded watches are covered by a lifetime warranty against defects due to faulty material or
workmanship, subject to normal conditions of use. Generally, all of our watch products sold in Canada, Asia and Europe are covered by a comparable two year limited warranty. The majority of our
defective watch products returned by consumers in North America are processed at our repair facilities in Texas while defective watch products returned by consumers in Europe are processed at our
repair facilities in France. We also maintain repair facilities at a majority of our subsidiaries, as well as through our network of third-party distributors to handle repairs which are minor in
nature or are not convenient to one of our centralized repair facilities. In most cases, defective products under warranty are repaired by our personnel or third-party distributors. We attempt to
retain adequate levels of component parts to facilitate after-sales service of our watches, even after specific styles are discontinued. We have a component parts system that tracks the inventory of
our various component replacement parts that can be utilized by our repair facilities for identifying stock levels and availability for procurement. Watch and non-watch products under warranty that
cannot be repaired in a cost-effective manner are replaced by us at no cost to the customer. Our warranty liability at the end of fiscal years 2014, 2013 and 2012 was $13.5 million,
$15.7 million and $13.4 million, respectively. Repair services accounted for approximately 1.0% of our consolidated net sales in both fiscal years 2014 and 2013 and 0.9% in fiscal year
2012.
Governmental regulations
Imports and import restrictions. Most of our products are assembled or manufactured overseas. As a result, the U.S. and countries in
which our
products are sourced or sold may from time to time modify existing or impose new quotas, duties (including antidumping or countervailing duties), tariffs or other restrictions in a manner that
adversely affects us. For example, our products imported to the U.S. are subject to U.S. customs duties and, in the ordinary course of our business, we may from time to time be subject to claims by
the U.S. Customs Service for duties and other charges. Factors that may influence the modification or imposition of these restrictions include the determination by the U.S. Trade Representative that a
country has denied adequate intellectual property rights or fair and equitable market access to U.S. firms that rely on intellectual property, trade disputes between the U.S. and a country that leads
to withdrawal of "most favored nation" status for that country and economic and political changes within a country that are viewed unfavorably by the U.S. government. We cannot predict the effect
these events would have on our operations, if any, especially in light of the concentration of our assembly and manufacturing operations in Hong Kong and China.
General. We are subject to laws regarding customs, tax, employment, privacy, truth-in-advertising, consumer product safety, zoning and
occupancy and
other laws and regulations that regulate and/or govern the importation, promotion and sale of consumer products and our corporate, retail and distribution operations.
Intellectual property
Trademarks. We use our FOSSIL, MICHELE, RELIC, SKAGEN and ZODIAC trademarks, as well as other trademarks, on certain of our watches,
leather goods,
apparel and other fashion accessories in the U.S. and in a significant number of foreign countries. We also use FOSSIL, SKAGEN, WATCH STATION INTERNATIONAL®, and WSI as trademarks on
retail stores and online e-commerce sites. We have taken steps to establish or provide additional protection for our trademarks by registering or applying to register our trademarks for relevant
classes of products in each country where our products are sold in addition to certain foreign countries where it is our intent to
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market
our products in the future. Each registered trademark may be renewable indefinitely, so long as we continue to use the mark in the applicable jurisdiction and make the appropriate filings when
required. We aggressively protect our trademarks and trade dress and pursue infringement both domestically and internationally. We also pursue counterfeiters both domestically and internationally
through leads generated internally, as well as through our business partners worldwide. In certain cases, we track serial numbers of our products or we etch microscopic identification markings on
certain of our watches in order to identify potential customers who might be diverting product into a parallel market.
Patents. We continue to explore innovations in the design and assembly of our watch products. As a result, we have been granted, and
have pending,
various U.S. and international design and utility patents related to certain of our watch designs and features. We also have been granted, and have pending, various U.S. patents related to certain of
our other products and technologies. As of January 3, 2015, none of our patents were material to our business.
License agreements. A significant portion of our growth in sales and net income is, and is expected to continue to be, derived from the
sales of
products produced under licensing agreements with
third-parties. Under these license agreements, we generally have the right to produce, market and distribute certain products utilizing the brand names of other companies. Our significant license
agreements have various expiration dates between 2015 and 2024. In 2011, we entered into an exclusive global licensing agreement with Karl Lagerfeld for watches, which launched globally in the first
quarter of 2013. In February 2013, we announced an exclusive global licensing agreement with Tory Burch for watches, which launched globally in late 2014.
Seasonality
Although the majority of our products are not seasonal, our business is seasonal by nature. A significant portion of our net sales and
operating income is generated during the third and fourth quarters of our fiscal year, which includes the "back to school" and Christmas seasons. Additionally, as our Direct to consumer segment sales
continue to increase as a percentage of our sales mix, they will benefit our sales and profitability in our fiscal fourth quarter, generally at the expense of our fiscal first and second quarters when
it is more difficult to leverage our Direct to consumer segment expenses against our Direct to consumer segment sales. The amount of net sales and operating income generated during our fiscal fourth
quarter also depends upon the anticipated level of retail sales during the Christmas season, as well as general economic conditions and other factors beyond our control. In addition, the amount of net
sales and operating income generated during our fiscal first quarter depends in part upon the actual level of retail sales during the Christmas season. For example, lower levels of inventory held by
our wholesale customers at the end of the Christmas season may result in higher levels of restocking orders placed by them during our fiscal first quarter.
Competition
The businesses in which we compete are highly competitive and fragmented. We believe that the current market for watches can be divided
into four segments, ranging from lower price point watches that are typically distributed through mass market channels to luxury watches at higher price points that are typically distributed through
fine watch departments of upscale department stores or upscale specialty watch and fine jewelry stores. Our watch business generally competes in these segments with a number of established
manufacturers, importers and distributors, including Armitron, Citizen, Gucci, Guess?, Kenneth Cole, LVMH Group, Movado, Raymond Weil, Seiko, Swatch, Swiss Army, TAG Heuer and Timex. In addition, our
leather goods, sunglasses, jewelry and apparel businesses compete with a large number of established companies that have significant experience developing, marketing and distributing such products. In
all of our businesses, we compete with numerous manufacturers, importers and distributors who may have significantly greater financial, distribution, advertising and
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marketing
resources than us. Our competitors include distributors that import watches, accessories and clothing from abroad, U.S. companies that have established foreign manufacturing relationships
and companies that produce accessories and apparel domestically.
Although
the level and nature of competition varies among our product categories and geographic regions, we believe that we compete on the basis of style, price, value, quality, brand
name, advertising, marketing, distribution and customer service. We believe that our ability to identify and respond to changing fashion trends and consumer preferences, to maintain existing
relationships and develop new relationships with manufacturing sources, to deliver quality merchandise in a timely manner and to manage the retail sales process are important factors in our ability to
compete. We also believe that our distinctive business model of owning the distribution in many key markets and offering a globally recognized portfolio of proprietary and licensed products allows for
many competitive advantages over smaller, regional or local competitors. This "ownership of the market" allows us in certain countries to bypass the local distributor's cost structure resulting in
more competitively priced products while also generating higher product and operating margins.
We
believe the risk of significant new competitors is mitigated to some extent by barriers to entry such as high startup costs and the development of long-term relationships with
customers and manufacturing sources. During the past few years, it has been our experience that better department stores and other major retailers have been increasingly unwilling to purchase products
from suppliers who are not well capitalized or do not have a demonstrated ability to deliver quality merchandise in a timely manner. There can be no assurance, however, that significant new
competitors will not emerge in the future.
Employees
As of January 3, 2015, we employed approximately 15,200 persons, including approximately 7,500 persons employed by our foreign
operating subsidiaries.
None
of our domestic or foreign-based employees are represented by a trade union. However, certain European-based employees are represented by work councils, which include certain of our
current employees who negotiate with management on behalf of all the employees. We have never experienced a work stoppage and consider our working relationship with our employees and work councils to
be good.
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Item 1A. Risk Factors
The statements contained in this Annual Report on Form 10-K 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 Item 1. Business and Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations, 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", "anticipates" and similar expressions identify forward-looking statements. These forward-looking statements are based on our
current expectations and beliefs concerning future developments and their potential effect on us. While management believes that these forward-looking statements are reasonable as and when made, there
can be no assurance that future developments affecting us will be those that we anticipate. The actual results of the future events described in such forward-looking statements could differ materially
from those stated in such forward-looking statements.
Our
actual results may differ materially due to the risks and uncertainties discussed in this Annual Report on Form 10-K, including those discussed below. Accordingly, readers of
this Annual Report on Form 10-K should consider these factors in evaluating, 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.
Risk Factors Relating to Our Business
Any deterioration in the global economic environment, and any resulting declines in consumer
confidence and spending, could have an adverse effect on our operating results.
In recent years, the global economic environment has been challenging. Depressed real estate values, reduced lending by banks, solvency
concerns of major financial institutions and certain foreign countries and high levels of unemployment negatively impacted the level of consumer spending for discretionary items. This can affect our
business as it is dependent on consumer demand for our products. Global economic conditions remain fragile, and the possibility remains that domestic or global economies, or certain industry sectors
of those economies that are key to our sales, may slow or deteriorate, which could result in a corresponding decrease in demand for our products and negatively impact our results of operations and
financial condition.
The effects of economic cycles, terrorism, acts of war and retail industry conditions may adversely
affect our business.
Our business is subject to economic cycles and retail industry conditions. Purchases of discretionary fashion accessories, such as our
watches, handbags, sunglasses and other products, tend to decline during recessionary periods when disposable income is low and consumers are hesitant to use available credit. In addition, acts of
terrorism, acts of war and military action both in the U.S. and abroad can have a significant effect on economic conditions and may negatively affect our ability to procure our products from
manufacturers for sale to our customers. Any significant declines in general economic conditions, public safety concerns or uncertainties regarding future economic prospects that affect consumer
spending habits could have a material adverse effect on consumer purchases of our products.
Our success depends upon our ability to anticipate and respond to changing fashion trends.
Our success depends upon our ability to anticipate and respond to changing fashion trends and consumer preferences in a timely manner.
The purchasing decisions of consumers are highly subjective and can be influenced by many factors, such as brand image, marketing programs and product design. Our success depends, in part, on our
ability to anticipate, gauge and respond to these changing consumer preferences in a timely manner while preserving the authenticity and the quality of our
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brands.
Although we attempt to stay abreast of emerging lifestyle and fashion trends affecting accessories and clothing, any failure by us to identify and respond to such trends could adversely affect
consumer acceptance of our existing brand names and product lines, which in turn could adversely affect sales of our products. If we misjudge the market for our products, we may be faced with a
significant amount of unsold finished goods inventory, which could adversely affect our results of operations.
The loss of any of our license agreements, pursuant to which a number of our products are produced,
may result in the loss of significant revenues and may adversely affect our business.
A significant portion of our growth in sales and net income is, and is expected to continue to be, derived from the sales of products
produced under license agreements with third parties. Under these license agreements, we generally have the right to produce, market and distribute certain products utilizing the brand names of other
companies. We sell products under certain licensed brands, including, but not limited to, ADIDAS, ARMANI EXCHANGE, BURBERRY, DIESEL, DKNY, EMPORIO ARMANI, KARL LAGERFELD, MARC BY MARC JACOBS, MICHAEL
KORS, and TORY BURCH. Sales of our licensed products amounted to approximately 53.5% of our consolidated net sales for fiscal year 2014, including MICHAEL KORS product sales, which accounted for
approximately 26.3% of our consolidated net sales. Our significant license agreements have various expiration dates between 2015 and 2024. In addition, certain license agreements may require us to
make minimum royalty payments, subject us to restrictive covenants or require us to comply with certain other obligations and may be terminated by the licensor if these or other conditions are not met
or upon certain events. We may not be able to continue to meet our obligations or fulfill the conditions under these agreements in the future. In addition, we may be unable to renew our existing
license agreements beyond the current term or obtain new license agreements to replace any lost license agreements on similar economic terms or at all. The failure by us to maintain or renew one or
more of our existing license agreements could result in a significant decrease in our sales and have a material adverse effect on our results of operations.
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.
We and our contract manufacturers currently purchase a number of key components used to manufacture our products from limited sources
of supply for which alternative sources may not be readily available. Any interruption or delay in the supply of any of these 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 contractor manufacturers' control, such as natural disasters like the March 2011 earthquake and tsunami in Japan. In addition, the purchase of these components on a limited
source basis subjects us to risks of price increases and potential quality assurance problems. An increase in the cost of components could make our products less competitive and result in lower gross
margins. In the event that we can no longer obtain materials from these limited sources of supply, we might not be able to qualify or identify alternative suppliers in a timely fashion. Any extended
interruption in the supply of any of the key components currently obtained from a limited source or delay in transitioning to a replacement supplier could disrupt our operations and significantly harm
our business in any given period. If our supply of certain components is disrupted, our lead times are extended or the cost of our components increases, our business, operating results and financial
condition could be materially affected.
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The loss of key senior management personnel could negatively affect our business.
We depend on our senior management and other key personnel, particularly Kosta N. Kartsotis, our CEO and Chairman. We do not have "key
person" life insurance policies for any of our personnel. The loss of any of our executive officers or other key employees could harm our business.
A data security or privacy breach could damage our reputation, harm our customer relationships,
expose us to litigation or government actions, and result in a material adverse effect to our business, financial condition and results of operations.
We depend on information technology systems, the Internet and computer networks for a substantial portion of our Direct to consumer
business, including credit card transaction authorization and processing. We also receive and store personal information about our customers and employees, the protection of which is critical to us.
In the normal course of our business, we collect, retain, and transmit certain sensitive and confidential customer information, including credit card information, over public networks. Our customers
have a high expectation that we will adequately protect their personal information. In addition, personal information is highly regulated at the international, federal and state level.
Despite
the security measures we currently have in place, our facilities and systems and those of our third-party service providers may be vulnerable to theft of physical information,
security breaches, hacking attempts, computer viruses and malware, lost data and programming and/or human errors. Any electronic or physical security breach involving the misappropriation, loss, or
other unauthorized disclosure of confidential or personally identifiable information, including penetration of our network security or those of our third-party service providers, could disrupt our
business, severely damage our reputation and our customer relationships, expose us to litigation and liability, subject us to governmental investigations, fines and enforcement actions, result in
negative media coverage and distraction to management and result in a material adverse effect to our business, financial condition, and results of operations. In addition, as a result of recent
security breaches at a number of prominent retailers and other companies, the media and public scrutiny of information security and privacy has become more intense and the regulatory environment
related thereto has become more uncertain. As a result, we may incur significant costs in complying with new and existing state, federal, and foreign laws regarding protection of, and unauthorized
disclosure of, personal information.
Our success depends upon our ability to continue to develop innovative products, including wearable
technology.
Our success depends upon our ability to continue to develop innovative products in the respective markets in which we compete. Wearable
technology is an emerging category of fashion that offers customers new functionality with accessories, including jewelry and smart watches. Our ability to respond to consumer preferences for wearable
technology will depend in part on establishing successful partnerships with companies that are involved in developing wearable technology. If we are unable to establish such partnerships, this could
negatively impact our ability to meet customer demands for wearable technology. Additionally, we may be unable to enhance and develop our products to satisfy consumer demands for wearable technology
or we may fail to do so in a timely manner or at competitive prices. The process of developing new products is complex and uncertain, and involves time, substantial costs and risks, which are further
magnified when the development process involves a transition to a new technology platform. Our inability or the inability of our partners, for technological or other reasons, some of which may be
beyond our or our partners' control, to enhance, develop, introduce and monetize wearable technology products in a timely manner, or at all, in response to changing consumer preferences for wearable
technology, could have a material adverse effect on our business, results of operations and financial condition or could result in our products not achieving market acceptance or becoming obsolete. If
we are unable to successfully introduce new products, or if
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our
competitors introduce new or superior products, customers may purchase increasing amounts of products from our competitors, which could adversely affect our sales and results of operations.
We are subject to laws and regulations in the U.S. and the many countries in which we operate.
Violations of laws and regulations, or changes to existing laws or regulations, could have a material adverse effect on our financial condition or results of operations.
Our operations are subject to domestic and international laws and regulations in a number of areas, including, but not limited to,
labor, advertising, consumer protection, real estate, product safety, e-commerce, promotions, intellectual property, tax, import and export, anti-corruption, anti-bribery, foreign exchange controls
and cash repatriation, data privacy, anti-competition, environmental, health and safety. Compliance with these numerous laws and regulations is complicated, time consuming and expensive, and the laws
and regulations may be inconsistent from jurisdiction to jurisdiction, further increasing the difficulty and cost to comply with them. New laws and regulations, or changes to existing laws and
regulations, could individually or in the aggregate make our products more costly to produce, delay the introduction of new products in one or more regions, cause us to change or limit our business
practices, or affect our financial condition and results of operations. We have implemented policies and procedures designed to ensure compliance with the numerous laws and regulations affecting our
business, but there can be no assurance that our employees, contractors, or agents will not violate such laws, regulations or our policies related thereto. Any such violations could have a material
adverse effect on our financial condition or operating results.
Reduced lending by banks could have a negative impact on our customers, suppliers and business
partners, which in turn could materially and adversely affect our results of operations and liquidity.
The reduction in lending by banks has had, and may continue to have, a significant negative impact on businesses around the world.
Although we believe that our cash provided by operations and available borrowing capacity under our U.S. credit facility will provide us with sufficient liquidity for the foreseeable future, the
impact of reduced lending on our customers, business partners and suppliers cannot be predicted and may be quite severe. A disruption in the ability of our significant customers or distributors to
access liquidity could cause serious disruptions or an overall deterioration of their businesses, which could lead to a significant reduction in their future orders of our products and the inability
or failure on their part to meet their payment obligations to us, any of which could have a material adverse effect on our financial condition and results of operations and liquidity.
Seasonality of our business may adversely affect our net sales and operating income.
Our quarterly results of operations have fluctuated in the past and may continue to fluctuate as a result of a number of factors,
including seasonal cycles, timing of new product introductions, timing of orders by our customers and mix of product sales demand. Our
business is seasonal by nature. A significant portion of our net sales and operating income are generated during the third and fourth quarters of our fiscal year, which includes the "back to school"
and Christmas seasons. The amount of net sales and operating income generated during our fiscal fourth quarter depends upon the anticipated level of retail sales during the Christmas season, as well
as general economic conditions and other factors beyond our control. In addition, the amount of net sales and operating income generated during our fiscal first quarter depends in part upon the actual
level of retail sales during the Christmas season. The seasonality of our business may adversely affect our net sales and operating income during the first and fourth quarters of our fiscal year.
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Our plan to significantly increase our store base may not be successful, and implementation of this
plan may divert our operational, managerial and administrative resources, which could impact our competitive position.
Each year, we have historically expanded our store base. During fiscal year 2015, we intend to further expand our store base by opening
approximately 44 to 55 new stores globally and close approximately 40 stores. Thereafter, in the near term, we plan to continue to expand our store base annually. The success of our business depends,
in part, on our ability to open new stores and renew our existing store leases on terms that meet our financial targets. Our ability to open new stores on schedule or at all, to renew existing store
leases on favorable terms or to operate them on a profitable basis will depend on various factors, including our ability to:
-
- identify suitable markets for new stores and available store locations;
-
- negotiate acceptable lease terms for new locations or renewal terms for existing locations;
-
- manage and expand our infrastructure to accommodate growth;
-
- hire and train qualified sales associates;
-
- develop new merchandise and manage inventory effectively to meet the needs of new and existing stores on a timely basis;
-
- foster current relationships and develop new relationships with vendors that are capable of supplying a greater volume of merchandise;
and
-
- avoid construction delays and cost overruns in connection with the build-out of new stores.
Our
plans to expand our store base may not be successful and the implementation of these plans may not result in an increase in our net sales even though they increase our costs.
Additionally, implementing our plans to expand our store base will place increased demands on our operational, managerial and administrative resources. The increased demands of operating additional
stores could cause us to operate less effectively, which could cause the performance of our existing stores and our wholesale operations to suffer materially. Any of these outcomes of our attempted
expansion of our store base could have a material adverse effect on the amount of net sales we generate and on our financial condition and results of operations.
We have key facilities in the U.S. and overseas, the loss or shut down of any of which could harm
our business.
Our administrative, information technology and distribution operations in the U.S. are conducted primarily from two separate facilities
located in the Dallas, Texas area. Our operations internationally are conducted from various administrative, distribution and assembly facilities outside of the U.S., particularly in China, Germany,
Hong Kong and Switzerland. The complete or temporary loss of use of all or part of these facilities could have a material adverse effect on our business.
Our
warehouse and distribution facilities in the Dallas, Texas area are operated in a special purpose sub-zone established by the U.S. Department of Commerce Foreign Trade Zone Board.
Although the sub-zone allows us certain tax advantages, the sub-zone is highly regulated by the U.S. Customs Service. This level of regulation may cause disruptions or delays in the distribution of
our products out of these facilities. Under some circumstances, the U.S. Customs Service has the right to shut down the entire sub-zone and, therefore, our entire warehouse and distribution
facilities. During the time that the sub-zone is shut down, we may be unable to adequately meet the supply requests of our customers and our Company-owned retail stores, which could have an adverse
effect on our sales, relationships with our customers, and results of operations, especially if the shutdown were to occur during our third or fourth quarter.
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Our ability to grow our sales is dependent upon the implementation of our growth strategy, which we
may not be able to achieve.
Since our public offering in 1993, we have experienced substantial growth in net sales. Our ability to continue this growth is
dependent on the successful implementation of our business strategy. This includes diversification of our product offerings, expansion of our Company-owned store locations and strategic acquisitions.
If we are not successful in the expansion of our product offerings or our new products are not profitable or do not generate sales comparable to those of our existing businesses, our results of
operations could be negatively impacted. Another element of our business strategy is to place increased emphasis on growth in selected international markets. If our brand names and products do not
achieve a high degree of consumer acceptance in these markets, our net sales could be adversely affected.
We
also operate FOSSIL brand stores and other non-FOSSIL branded stores and have historically expanded our Company-owned accessory and outlet locations to further strengthen our brand
image. As of January 3, 2015, we operated 593 stores worldwide. The costs associated with leasehold improvements to current stores and the costs associated with opening new stores could
materially increase our costs of operation.
We have recently expanded and intend to further expand the scope of our product offerings, and new
products introduced by us may not achieve consumer acceptance comparable to that of our existing product lines.
We have recently expanded and intend to further expand the scope of our product offerings. As is typical with new products, market
acceptance of new designs and products 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. If trends shift away from our products, or if we misjudge the market for our product lines, we may be faced with significant amounts of unsold inventory or other conditions which could
have a material adverse effect on our financial condition and results of operations.
The
failure of new product designs or new product lines to gain market acceptance could also adversely affect our business and the image of our brands. Achieving market acceptance for
new products may also require substantial marketing efforts and expenditures to generate consumer demand. These requirements could strain our management, financial and operational resources. If we do
not continue to develop innovative products that provide better design and performance attributes than the products of our competitors and that are accepted by consumers, or if our future product
lines misjudge consumer demands, we may lose consumer loyalty, which could result in a decline in our sales and market share.
Our business could be harmed if we fail to maintain proper inventory levels.
We maintain an inventory of selected products that we anticipate will be in high demand. We may be unable to sell the products we have
ordered in advance from manufacturers or that we have in our inventory. Inventory levels in excess of customer demand may result in inventory write-downs or the sale of excess inventory at prices
below our standard levels. These events could significantly harm our operating results and impair the image of our brands. Conversely, if we underestimate consumer demand for our products or if our
manufacturers fail to supply quality products in a timely manner, we may experience inventory shortages, which might result in unfilled orders, negatively impact customer relationships, diminish brand
loyalty and result in lost revenues, any of which could harm our business.
Our license agreements may require minimum royalty commitments regardless of the level of product
sales under these agreements.
Under our license agreements, we have in the past experienced, and could again in the future experience, instances where our minimum
royalty commitments exceeded the royalties payable based upon our sales of the licensed products. Payments of minimum royalties in excess of the royalties based on our sales of the licensed products
reduces our margins and could adversely affect our results of operations.
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Fluctuations in the price, availability and quality of raw materials could cause delays and increase
costs.
Fluctuations in the price, availability and quality of the raw materials used in our products could have a material adverse effect on
our cost of sales or ability to meet our customers' demands. The price and availability of such raw materials may fluctuate significantly, depending on many factors, including natural resources,
increased freight costs, increased labor costs, especially in China, and weather conditions. In the future, we may not be able to pass on all, or a portion of, such higher raw materials prices to our
customers.
We rely on third-party assembly factories and manufacturers and problems with, or loss of, our
assembly factories or manufacturing sources could harm our business and results of operations.
The majority of our watch products are currently assembled, and a majority of our jewelry products are manufactured, to our
specifications by our majority- owned entities in China, with the remainder assembled or manufactured by independent entities. All of our apparel,
sunglasses, handbags, small leather goods, belts and soft accessories are produced by independent manufacturers. We have no long-term contracts with these independent assembly factories or
manufacturers and compete with other companies for production facilities. All transactions between us and our independent assembly factories or manufacturers are conducted on the basis of purchase
orders. We face the risk that these independent assembly factories or manufacturers may not produce and deliver our products on a timely basis, or at all. As a result, we cannot be certain that these
assembly factories or manufacturers will continue to assemble or manufacture products for us or that we will not experience operational difficulties with our manufacturers, such as reductions in the
availability of production capacity, errors in complying with product specifications, insufficient quality control, shortages of raw materials, failures to meet production deadlines or increases in
manufacturing costs. Our future success will depend upon our ability to maintain close relationships with, or ownership of, our current assembly factories and manufacturers and to develop long-term
relationships with other manufacturers that satisfy our requirements for price, quality and production flexibility. Our ability to establish new manufacturing relationships involves numerous
uncertainties, including those relating to payment terms, costs of manufacturing, adequacy of manufacturing capacity, quality control and timeliness of delivery. Any failure by us to maintain
long-term relationships with, or ownership of, our current assembly factories and manufacturers or to develop relationships with other manufacturers could have a material adverse effect on our ability
to manufacture and distribute our products.
If an independent manufacturer or license partner of ours fails to use acceptable labor practices or
otherwise comply with laws, our business could suffer.
We have no control over the ultimate actions or labor practices of our independent manufacturers. The violation of labor or other laws
by one of our independent manufacturers, or by one of our license partners, or the divergence of an independent manufacturer's or license partner's labor practices from those generally accepted as
ethical in the U.S. or other countries in which the violation or divergence occurred, could interrupt or otherwise disrupt the shipment of finished products to us or damage our reputation. Any of
these, in turn, could have a material adverse effect on our financial condition and results of operations. As a result, should one of our independent manufacturers or licensors be found in violation
of state or international laws, we could suffer financial or other unforeseen consequences.
We extend unsecured credit to our customers and are therefore vulnerable to any financial
difficulties they may face.
We sell our merchandise primarily to department stores, specialty retail stores and distributors worldwide. We extend credit based on
an evaluation of each customer's financial condition, usually without requiring collateral. Should any of our larger customers experience financial difficulties, we could curtail business with such
customers or assume more credit risk relating to such customers'
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receivables.
Our inability to collect on our trade accounts receivable relating to such customers could have a material adverse effect on our operating cash flows, financial condition and results of
operations.
We do not maintain long-term contracts with our customers and are unable to control their purchasing
decisions.
We do not maintain long-term purchasing contracts with our customers and therefore have no contractual leverage over their purchasing
decisions. A decision by a major department store or other significant customer to decrease the amount of merchandise purchased from us or to cease carrying our products could have a material adverse
effect on our net sales and operating strategy.
Our Direct to consumer business segment operates in the highly competitive specialty retail and
e-commerce industry and the size and resources of some of our competitors are substantially greater than ours, which may allow them to compete more effectively.
We face intense competition in the specialty retail and e-commerce industry. We compete primarily with specialty retailers, department
stores and internet businesses that engage in the retail sale of watches, accessories and apparel. We believe that the principal basis upon which we compete is the quality and design of merchandise
and the quality of customer service. We also believe that price is an important factor in our customers' decision-making processes. Many of our competitors are, and many of our potential competitors
may be, larger and have greater financial, marketing and other resources than we have and therefore may be able to adapt to changes in customer requirements more quickly, devote greater resources to
the marketing and sale of their products and generate greater national brand recognition than we can. This intense competition and greater size and resources of some of our competitors could have a
material adverse effect on the amount of net sales we generate and on our results of operations.
We could be negatively impacted if we fail to successfully integrate the businesses we acquire.
As part of our growth strategy, we have made certain acquisitions, domestically and internationally, including acquisitions of certain
watch brands and acquisitions of independent distributors of our products. The integration of any future acquisitions may not be successful or generate sales increases. When we have acquired
businesses, we have acquired businesses that we believe could enhance our business opportunities and our growth prospects. All acquisitions involve risks that could materially affect our business,
financial condition and operating results. These risks include:
-
- distraction of management from our business operations;
-
- loss of key personnel and other employees;
-
- costs, delays, and inefficiencies associated with integrating acquired operations and personnel;
-
- the impairment of acquired assets and goodwill; and
-
- acquiring the contingent and other liabilities of the businesses we acquire.
In
addition, acquired businesses may not provide us with increased business opportunities or result in the growth that we anticipate. Furthermore, integrating acquired operations is a
complex,
time-consuming and expensive process. Combining acquired operations with our current operations may result in lower overall operating margins, greater stock price volatility and quarterly earnings
fluctuations. Cultural incompatibilities, career uncertainties and other factors associated with such acquisitions may also result in the loss of employees. Failure to acquire and successfully
integrate complementary practices, or failure to achieve the business synergies or other anticipated benefits, could materially adversely affect our business, financial condition and results of
operations.
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We face competition from traditional competitors as well as new competitors in the wearable
technology category.
There is intense competition in each of the businesses in which we compete. In all of our businesses, we compete with numerous
manufacturers, importers and distributors who may have significantly greater financial, distribution, advertising and marketing resources than us. Our competitors include distributors that import
watches, accessories and clothing from abroad, U.S. companies that have established foreign manufacturing relationships and companies that produce accessories and clothing domestically. In addition,
we face new competition from technology companies that are launching smart watch products and other wearable technology. These new competitors have not historically competed with us, and many have
significantly greater financial, distribution, advertising and marketing resources than us. The impact of the introduction of smart watch products and other wearable technology on sales of our
traditional product lines, and watches in particular, is currently unknown, but could be materially adverse. Our results of operations and market position may be adversely affected by our competitors
and their competitive pressures in the watch, wearable technology, fashion accessory and clothing industries.
Any material disruption of our information systems could disrupt our business and reduce our sales.
We are increasingly dependent on information systems to operate our websites, process transactions, manage inventory, monitor sales and
purchase, sell and ship goods on a timely basis. We also utilize SAP ERP in our U.S. operations and throughout most of our European operations to support our human resources, sales and distribution,
inventory planning, retail merchandising and operational and financial reporting systems of our business, and Navision in our Asian operations to support many of the same functions on a local country
level. We may experience operational problems with our information systems as a result of system failures, viruses, computer "hackers" or other causes. Any material disruption or slowdown of our
systems could cause information, including data related to customer orders, to be lost or delayed which could result in delays in the delivery of merchandise to our stores and customers or lost sales,
which could reduce
demand for our merchandise and cause our sales to decline. Moreover, the failure to maintain, or a disruption in, financial and management control systems could have a material adverse effect on our
ability to respond to trends in our target markets, market our products and meet our customers' requirements.
In
addition, we have e-commerce and other websites in the U.S. and internationally. In addition to changing consumer preferences and buying trends relating to Internet usage, we are
vulnerable to certain additional risks and uncertainties associated with the Internet, including changes in required technology interfaces, website downtime and other technical failures, security
breaches, and consumer privacy concerns. Our failure to successfully respond to these risks and uncertainties could reduce Internet sales, increase costs and damage the reputation of our brands.
Changes in the mix of product sales demand could negatively impact our gross profit margins.
Our gross profit margins are impacted by our sales mix. Sales from our Direct to consumer segment and international and licensed watch
businesses generally provide gross margins in excess of our historical consolidated gross profit margin, while accessory products generally provide gross profit margins below our historical
consolidated gross profit margin. If future sales from our Direct to consumer segment and international and licensed watch businesses do not increase at a faster rate than our accessory business, our
gross profit margins may grow at a slower pace, cease to grow, or decrease relative to our historical consolidated gross profit margin. We also distribute private label products to the mass market
channel at gross profit margins significantly lower than our historical consolidated gross profit margin. Future growth in this channel at rates in excess of our consolidated net sales growth rate
could negatively impact our consolidated gross profit margins.
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Our industry is subject to pricing pressures that may adversely impact our financial performance.
We assemble or source many of our products offshore because they generally cost less to make overseas, due primarily to lower labor
costs. Many of our competitors also source their product requirements offshore to achieve lower costs, possibly in locations with lower costs than our offshore operations, and those competitors may
use these cost savings to reduce prices. To remain competitive, we must adjust our prices from time to time in response to these industry-wide pricing pressures. Our financial performance may be
negatively affected by these pricing pressures if we
are forced to reduce our prices and we cannot reduce our production costs or our production costs increase and we cannot increase our prices.
The loss of our intellectual property rights may harm our business.
Our trademarks, patents and other intellectual property rights are important to our success and competitive position. We are devoted to
the establishment and protection of our trademarks, patents and other intellectual property rights in those countries where we believe it is important to our ability to sell our products. However, we
cannot be certain that the actions we have taken will result in enforceable rights, will be adequate to protect our products in every country where we may want to sell our products, will be adequate
to prevent imitation of our products by others or will be adequate to prevent others from seeking to prevent sales of our products as a violation of the trademarks, patents or other intellectual
property rights of others. Additionally, we rely on the patent, trademark and other intellectual property laws of the U.S. and other countries to protect our proprietary rights. Even if we are
successful in obtaining appropriate trademark, patent and other intellectual property rights, we may be unable to prevent third parties from using our intellectual property without our authorization,
particularly in those countries where the laws do not protect our proprietary rights as fully as in the U.S. Because we sell our products internationally and are dependent on foreign manufacturing in
China, we are significantly dependent on foreign countries to protect our intellectual property rights. The use of our intellectual property or similar intellectual property by others could reduce or
eliminate any competitive advantage we have developed, causing us to lose sales or otherwise harm our business. Further, if it became necessary for us to resort to litigation to protect our
intellectual property rights, any proceedings could be burdensome and costly and we may not prevail. The failure to obtain or maintain trademark, patent or other intellectual property rights could
materially harm our business.
Our products may infringe the intellectual property rights of others, which may cause us to incur
unexpected costs or prevent us from selling certain of our products.
We cannot be certain that our products do not and will not infringe upon the intellectual property rights of others. We may be subject
to legal proceedings and claims in the ordinary course of our business, including claims of alleged infringement of the intellectual property rights of third parties by us or our customers in
connection with their use of our products. Any such claims, whether or not meritorious, could result in costly litigation and divert the efforts of our personnel. Moreover, should we be found liable
for infringement, we may be required to enter into licensing agreements (if available on acceptable terms or at all) or to pay damages and cease making or selling certain products. Moreover, we may
need to redesign or rename some of our products to avoid future infringement liability. Any of the foregoing could cause us to incur significant costs and prevent us from manufacturing or selling
certain of our products.
An increase in product returns could negatively impact our operating results.
We accept limited returns and will request that a customer return a product if we feel the customer has an excess of any style that we
have identified as being a poor performer for that customer or geographic location. We continually monitor returns and maintain a provision for estimated returns based upon historical experience and
any specific issues identified. While returns have historically been
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within
our expectations and the provisions established, future return rates may differ from those experienced in the past. In the event that our products are performing poorly in the retail market
and/or we experience product damages or defects at a rate significantly higher than our historical rate, the resulting credit returns could have an adverse impact on our operating results for the
period or periods in which such returns occur.
There are inherent limitations in all control systems, and misstatements due to error or fraud may
occur and not be detected.
We are subject to the ongoing internal control provisions of Section 404 of the Sarbanes-Oxley Act of 2002. These provisions
provide for the identification of material weaknesses in internal control over financial reporting, which is a process to provide reasonable assurance regarding the reliability of financial reporting
for external purposes in accordance with accounting principles generally accepted in the United States of America. Our management, including our Chief Executive Officer and Chief Financial Officer,
does not expect that our internal controls and disclosure controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. In addition, the design of a control system must reflect the fact that there are resource constraints and the benefit of controls
must be relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if
any, in our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple errors or
mistakes. Further, controls can be circumvented by individual acts of some persons, by collusion of two or more persons, or by management override of the controls. The design of any system of controls
is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential
future conditions. Over time, a control may be inadequate because of changes in conditions, such as growth of the Company or increased transaction volume, or the degree
of compliance with the policies or procedures may deteriorate. Because of inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
In
addition, discovery and disclosure of a material weakness, by definition, could have a material adverse impact on our financial statements. Such an occurrence could discourage certain
customers or suppliers from doing business with us, result in higher borrowing costs and affect how our stock trades. This could in turn negatively affect our ability to access public debt or equity
markets for capital.
Risk Factors Relating to Our International Operations
Factors affecting international commerce and our international operations may seriously harm our
financial condition.
During fiscal 2014, we generated 54.7% of our net sales from outside of the U.S., and we anticipate that revenue from our international
operations could account for an increasingly larger portion of our net sales in the future. Our international operations are directly related to, and dependent on, the volume of international trade
and foreign market conditions. International commerce and our international operations are subject to many risks, some of which are discussed in more detail below,
including:
-
- recessions in foreign economies;
-
- the adoption and expansion of trade restrictions;
-
- limitations on repatriation of earnings;
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-
- difficulties in protecting our intellectual property or enforcing our intellectual property rights under the laws of other countries;
-
- longer receivables collection periods and greater difficulty in collecting accounts receivable;
-
- difficulties in managing foreign operations;
-
- social, political and economic instability;
-
- unexpected changes in regulatory requirements;
-
- our ability to finance foreign operations;
-
- tariffs and other trade barriers; and
-
- U.S. government licensing requirements for exports.
The
occurrence or consequences of any of these risks may restrict our ability to operate in the affected regions and decrease the profitability of our international operations, which may
seriously harm our financial condition.
Foreign currency fluctuations could adversely impact our financial condition.
We generally purchase our products in U.S. dollars. However, we source a significant amount of our products overseas and, as such, the
cost of these products may be affected by changes in the value of the currencies of these countries, including the Australian dollar, British pound, Canadian dollar, Chilean peso, Chinese yuan, Danish
krone, euro, Hong Kong dollar, Indian rupee, Japanese yen, Korean won, Malaysian ringgit, Mexican peso, Norwegian kroner, Singapore dollar, Swedish krona, Swiss franc and Taiwanese dollar. Due to our
dependence on manufacturing operations in China, changes in the value of the Chinese yuan may have a material impact on our supply channels and manufacturing costs, including component and assembly
costs.
In
addition, changes in currency exchange rates also affect the prices at which we sell products in foreign markets. For fiscal years 2014, 2013 and 2012, 54.7%, 53.2% and 52.6% of our
consolidated net sales were generated outside of the U.S., 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. For example, due to a generally stronger U.S. dollar in fiscal year 2014, the translation of foreign based net sales into
U.S. dollars reduced our reported net sales by approximately $17.1 million. If the value of the U.S. dollar remains at its current levels or strengthens further against foreign currencies,
particularly against the euro, British pound, Canadian dollar, Japanese yen, Australian dollar and Mexican peso, our financial condition and results of operations could be materially and adversely
impacted. Although we utilize forward contracts to mitigate foreign currency risks (mostly relating to the euro, British pound, Japanese yen, Mexican peso, Canadian dollar and Australian dollar), if
we are unsuccessful in mitigating these risks, foreign currency fluctuations may have a material adverse impact on our financial condition and results of operations.
The ongoing European economic problems and debt crisis could adversely impact our financial
condition.
The European economic situation and debt crisis have contributed to instability in the global credit markets and have caused the value
of the euro to fall 17% against the U.S. dollar since July 1, 2014 and may cause the value of the euro to deteriorate further in the future. During fiscal 2014, we generated 26.5% of our
consolidated net sales from our Europe wholesale segment. If global economic and market conditions, or economic conditions in Europe become uncertain or deteriorate, the value of the euro could
decline. The general financial instability in the stressed European countries could have a contagion effect on the region and contribute to the general instability and uncertainty in the European
36
Table of Contents
Union.
If this were to occur or if the value of the euro were to weaken against the U.S. dollar, our financial condition and results of operations could be materially and adversely impacted.
We depend on independent distributors to sell our products in certain international markets.
Our products are sold in certain international markets through independent distributors. If a distributor fails to meet annual sales
goals, it may be difficult and costly to locate an acceptable substitute distributor. If a change in our distributors becomes necessary, we may experience increased costs, as well as a substantial
disruption in, and a resulting loss of, sales and profits.
Because we depend on foreign manufacturing, we are vulnerable to changes in economic and social
conditions in Asia, particularly China, and disruptions in international travel and shipping.
Because a substantial portion of our watches and jewelry and certain of our handbags, sunglasses and other products are assembled or
manufactured in China, our success will depend to a significant extent upon future economic and social conditions existing in China. If the factories in China were disrupted for any reason, we would
need to arrange for the manufacture and shipment of products by alternative sources. Because the establishment of new manufacturing
relationships involves numerous uncertainties, including those relating to payment terms, costs of manufacturing, adequacy of manufacturing capacity, quality control and timeliness of delivery, we are
unable to predict whether such new relationships would be on terms that we regard as satisfactory. Any significant disruption in our relationships with our manufacturing sources located in China would
have a material adverse effect on our ability to manufacture and distribute our products. In addition, restrictions on travel to and from this and other regions, similar to those imposed during the
outbreak of Severe Acute Respiratory Syndrome in 2003, commonly known as SARS, and any delays or cancellations of customer orders or the manufacture or shipment of our products could have a material
adverse effect on our ability to meet customer deadlines and timely distribute our products in order to match consumer tastes.
Risks associated with foreign government regulations and U.S. trade policy may affect our foreign
operations and sourcing.
Our businesses are subject to risks generally associated with doing business abroad, such as foreign governmental regulation in the
countries in which our manufacturing sources are located, primarily China. While we have not experienced any material issues with foreign governmental regulations that would impact our arrangements
with our foreign manufacturing sources, we believe that this issue is of particular concern with regard to China due to the less mature nature of the Chinese market economy and the historical
involvement of the Chinese government in industry. If regulations were to render the conduct of business in a particular country undesirable or impracticable, or if our current foreign manufacturing
sources were for any other reason to cease doing business with us, such a development could have a material adverse effect on our product sales and on our supply, manufacturing and distribution
channels.
Our
business is also subject to risks associated with U.S. and foreign legislation and regulations relating to imports, including quotas, duties, tariffs or taxes, and other charges or
restrictions on imports, which could adversely affect our operations and our ability to import products at current or increased levels. We cannot predict whether additional U.S. and foreign customs
quotas, duties (including antidumping or countervailing duties), tariffs, taxes or other charges or restrictions, requirements as to where raw materials must be purchased, additional workplace
regulations or other restrictions on our imports will be imposed upon the importation of our products in the future or adversely modified, or what effect such actions would have on our costs of
operations. For example, our products imported to the U.S. are subject to U.S. customs duties and, in the ordinary course of our business, we may from time to time be subject to claims by the U.S.
Customs Service for duties and other charges. Factors that may influence the modification or imposition of these restrictions include
37
Table of Contents
the
determination by the U.S. Trade Representative that a country has denied adequate intellectual property rights or fair and equitable market access to U.S. firms that rely on intellectual property,
trade disputes between the U.S. and a country that leads to withdrawal of "most favored nation" status for that country and economic and political changes within a country that are viewed unfavorably
by the U.S. government. Future quotas, duties or tariffs may have a material adverse effect on our business, financial condition and results of operations. Future trade agreements could also provide
our competitors with an advantage over us, or increase our costs, either of which could have a material adverse effect on our business, financial condition and results of operations and financial
condition. Substantially all of our import operations are subject to:
-
- quotas imposed by bilateral textile agreements between the countries where our clothing-producing facilities are located and foreign
countries; and
-
- customs duties imposed by the governments where our apparel-producing facilities are located on imported products, including raw
materials.
Our
apparel business is also subject to the effects of international trade agreements and regulations such as the North American Free Trade Agreement, and the activities and regulations
of the World Trade Organization, referred to as the WTO. Generally, such trade agreements benefit our apparel business by reducing or eliminating the duties and/or quotas assessed on products
manufactured in a particular country. However, trade agreements can also impose requirements that negatively impact our apparel business, such as limiting the countries from which we can purchase raw
materials and setting quotas on products that may be imported into the U.S. from a particular country. In addition, the WTO may commence a new round of trade negotiations that liberalize textile
trade. This increased competition could have a material adverse effect on our business, results of operations and financial condition.
Risk Factors Relating to Our Common Stock
Many factors may cause our net sales, operating results and cash flows to fluctuate and possibly
decline, which may result in declines in our stock price.
Our net sales, operating results and cash flows may fluctuate significantly because of a number of factors, many of which are outside
of our control. These factors may include, but may not be limited to, the following:
-
- fluctuations in market demand for our products;
-
- increased competition and pricing pressures;
-
- our ability to anticipate changing customer demands and preferences;
-
- our failure to efficiently manage our inventory levels;
-
- our inability to manage and maintain our debt obligations;
-
- seasonality in our business;
-
- changes in our, and our competitors', business strategy or pricing;
-
- the successful expansion of our Company-owned retail stores;
-
- the timing of certain selling, general and administrative expenses;
-
- completing acquisitions and the costs of integrating acquired operations;
-
- international currency fluctuations, operating challenges and trade regulations;
-
- acts of terrorism or acts of war; and
38
Table of Contents
One
or more of the foregoing factors, as well as any other risk factors discussed in this Annual Report on Form 10-K, may cause our operating expenses to be unexpectedly high or
result in a decrease in our net sales during any given period. If these or any other variables or unknowns were to cause a shortfall in revenues or earnings, an increase in our operating costs or
otherwise cause a failure to meet public market expectations, our stock price may decline and our business could be adversely affected.
Our CEO owns approximately 12% of our outstanding common stock.
Mr. Kosta Kartsotis owns approximately 12% of our common stock as of January 3, 2015. As a result, he is in a position to
influence the outcome of elections of our directors, the adoption, amendment or repeal of our bylaws and any other actions requiring the vote or consent of our stockholders, and to otherwise influence
our affairs.
Because
the interests of Mr. Kartsotis may not coincide with the interests of other stockholders, Mr. Kartsotis may influence the Company to enter into transactions or
agreements that other stockholders would not approve or make decisions with which other stockholders may disagree.
Our organizational documents contain anti-takeover provisions that could discourage a proposal for a
takeover.
Our certificate of incorporation and bylaws, as well as the General Corporation Law of the State of Delaware, contain provisions that
may have the effect of discouraging a proposal for a takeover. These include a provision in our certificate of incorporation authorizing the issuance of "blank check" preferred stock and provisions in
our bylaws establishing advance notice procedures with respect to certain stockholder proposals. Our bylaws may be amended by a vote of 80% of the Board of Directors, subject to repeal by a vote of
80% of the stockholders. In addition, Delaware law limits the ability of a Delaware corporation to engage in certain business combinations with interested stockholders. Finally, Mr. Kartsotis
has the ability, by virtue of his stock ownership, to influence a vote regarding a change in control.
Future sales of our common stock in the public market could adversely affect our stock price.
The shares of our common stock beneficially owned by Mr. Kartsotis may be sold in the open market in the future, subject to any
volume restrictions and other limitations under the Securities Act of 1933 and Rule 144 thereunder. We may also decide to file a registration statement enabling Mr. Kartsotis to
sell additional shares. Any sales by Mr. Kartsotis of substantial amounts of our common stock in the open market, or the availability of his shares for sale, could adversely affect the price of
our common stock. The market price of our common stock could decline as a result of sales of substantial amounts of our common stock in the public market, or the perception that those sales could
occur. These sales or the possibility that they may occur also could make it more difficult for us to raise funds in any equity offering in the future at a time and price that we deem appropriate.
Item 1B. Unresolved Staff Comments
None.
39
Table of Contents
Item 2. Properties
Company facilities. As of the end of fiscal year 2014, we owned or leased the following material facilities in connection with
our U.S. and
international operations:
|
|
|
|
|
|
|
|
Location
|
|
Use |
|
Approximate
Square
Footage |
|
Owned / Leased |
Dallas, Texas |
|
Office, warehouse and distribution |
|
|
518,000 |
|
Owned |
Eggstätt, Germany |
|
Office, warehouse and distribution |
|
|
260,000 |
|
Owned |
Grabenstätt, Germany |
|
Office |
|
|
92,000 |
|
Owned |
Basel, Switzerland |
|
European headquarters |
|
|
31,000 |
|
Owned |
Richardson, Texas |
|
Corporate headquarters |
|
|
536,000 |
|
Lease expiring in 2021 |
Hong Kong |
|
Far East headquarters, warehouse and distribution |
|
|
202,000 |
|
Lease expiring in 2016 |
Garland, Texas |
|
Warehouse |
|
|
269,000 |
|
Lease expiring in 2017 |
Shenzhen, China |
|
Manufacturing |
|
|
110,000 |
|
Lease expiring in 2018 |
New York, New York |
|
General office and showroom |
|
|
27,000 |
|
Lease expiring in 2016 |
We
also lease certain other manufacturing and/or office, warehouse and/or distribution facilities in Atlanta, Georgia; Chicago, Illinois; Los Angeles, California; Miami, Florida;
Australia; Austria; Canada; China; Denmark; France; Germany; Hong Kong; India; Italy; Japan; Malaysia; Mexico; the Netherlands; New Zealand; Portugal; Singapore; South Korea; Spain; Sweden;
Switzerland; Taiwan and the United Kingdom.
Retail store facilities. As of the end of fiscal year 2014, we had 602 lease agreements for retail space for the sale of our
products. The leases,
including renewal options, expire at various times from 2015 to 2026. The leases provide for minimum annual rentals and, in certain cases, for the payment of additional rent when sales exceed
specified net sales amounts. We are also generally required to pay our pro rata share of common area maintenance costs, real estate taxes, insurance, maintenance expenses and utilities.
In
fiscal year 2014, we signed a lease agreement for a new facility under construction for our European headquarters which we expect to move into during fiscal year 2016. We believe that
our material existing facilities are well maintained, in good operating condition, and are adequate for our needs.
Item 3. Legal Proceedings
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.
Item 4. Mine Safety Disclosures
Not applicable.
40
Table of Contents
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
General. Our common stock is listed on the NASDAQ Global Select Market under the symbol "FOSL." The following table sets forth
the range of quarterly
high and low sales prices per share of our common
stock on the NASDAQ Global Select Market for the fiscal years ended January 3, 2015 and December 28, 2013.
|
|
|
|
|
|
|
|
|
|
High |
|
Low |
|
Fiscal year ended January 3, 2015: |
|
|
|
|
|
|
|
First quarter |
|
$ |
125.00 |
|
$ |
106.91 |
|
Second quarter |
|
$ |
114.80 |
|
$ |
98.53 |
|
Third quarter |
|
$ |
107.86 |
|
$ |
91.84 |
|
Fourth quarter |
|
$ |
115.20 |
|
$ |
94.91 |
|
Fiscal year ended December 28, 2013: |
|
|
|
|
|
|
|
First quarter |
|
$ |
115.19 |
|
$ |
88.65 |
|
Second quarter |
|
$ |
110.44 |
|
$ |
89.50 |
|
Third quarter |
|
$ |
129.25 |
|
$ |
103.17 |
|
Fourth quarter |
|
$ |
134.99 |
|
$ |
113.14 |
|
As
of February 17, 2015, there were 246 holders of record of our shares of common stock (including nominee holders such as banks and brokerage firms who hold shares for beneficial
owners), although we believe that the number of beneficial owners is much higher.
Cash Dividend Policy. We did not pay any cash dividends in fiscal years 2014, 2013 or 2012. We expect that for the foreseeable
future, we will retain
all available earnings generated by our operations for the development and growth of our business and for the repurchase of shares of our common stock. Any future determination as to a cash dividend
policy will be made at the discretion of our Board of Directors and will depend on a number of factors, including our future earnings, capital requirements, stock repurchase plans, financial
condition, future prospects and such other factors as our Board of Directors may deem relevant.
Common Stock Performance Graph
The following performance graph compares the cumulative return of our shares of common stock over the preceding five year periods with
that of the broad market Standard & Poor's 500 Stock Index ("S&P 500 Index") and the NASDAQ Retail Trades Group. Each index assumes $100 invested at December 31, 2009 and is
calculated assuming quarterly reinvestment of dividends and quarterly weighting by market capitalization.
Effective
January 2014, NASDAQ replaced total return values prepared by the Center for Research in Security Prices ("CRSP") at the University of Chicago with comparable NASDAQ OMX Global
Indexes. As a result of the change, our performance graph for fiscal year 2014 uses a comparable index provided by NASDAQ OMX Global Indexes. In future stock performance graphs, we will discontinue
presenting the CRSP total return index for NASDAQ Retail Trades.
41
Table of Contents
2014 COMPARATIVE TOTAL RETURNS
Fossil Group, Inc.,
NASDAQ Retail Trades and S&P 500 Index
(Performance Results through 12/31/14)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/31/09 |
|
12/31/10 |
|
12/31/11 |
|
12/31/12 |
|
12/31/13 |
|
12/31/14 |
|
Fossil Group, Inc |
|
$ |
100.00 |
|
$ |
210.01 |
|
$ |
236.47 |
|
$ |
277.41 |
|
$ |
357.39 |
|
$ |
329.98 |
|
S&P 500 Index |
|
$ |
100.00 |
|
$ |
112.78 |
|
$ |
112.78 |
|
$ |
127.90 |
|
$ |
165.76 |
|
$ |
184.64 |
|
Nasdaq Retail Trades (OMX) |
|
$ |
100.00 |
|
$ |
118.04 |
|
$ |
125.81 |
|
$ |
153.19 |
|
$ |
211.08 |
|
$ |
243.53 |
|
Nasdaq Retail Trades (CRSP) |
|
$ |
100.00 |
|
$ |
125.25 |
|
$ |
141.05 |
|
$ |
166.77 |
|
$ |
216.58 |
|
$ |
240.94 |
|
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
In August 2010, our Board of Directors approved common stock repurchase programs pursuant to which up to $30 million and
$750 million could be used to repurchase outstanding shares of our common stock. The $30 million repurchase program has no termination date and, as of January 3, 2015, no shares
had been repurchased under it. We completed the $750 million repurchase program during the first quarter of fiscal 2013 and repurchased approximately 382,000 shares at a cost of
$38.6 million. During fiscal year 2012, we repurchased 3.0 million shares at a cost of $261.3 million under the $750 million repurchase plan. In December 2012, our Board of
Directors approved a common stock repurchase program pursuant to which up to $1.0 billion could be used to repurchase outstanding shares of our common stock. This repurchase program has a
termination date of December 31, 2016. We repurchased 4.9 million shares under the $1.0 billion repurchase program during fiscal year 2013 at a cost of $536.3 million and
4.1 million shares during fiscal year 2014 at a cost of $435.0 million. On November 10, 2014, the Company's Board of Directors authorized a new $1.0 billion share
repurchase program with an expiration date of December 31, 2018, and as of January 3, 2015, no shares had been repurchased. These repurchase programs are to be conducted pursuant to
Rule 10b-18 of the Securities Exchange Act of 1934.
Common
stock repurchases acquired from grantees in connection with income tax withholding obligations arising from vesting of restricted stock grants were 13,572 shares, 25,322 shares
and 23,702 shares for fiscal years 2014, 2013 and 2012, respectively.
42
Table of Contents
The
following table shows our common stock repurchases based on the settlement date for the quarter ended January 3, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
Total Number
of Shares
Purchased |
|
Average
Price Paid
per Share |
|
Total Number
of Shares
Purchased as
Part of Publicly
Announced Plan |
|
Approximate Dollar
Value of Shares
that May Yet Be
Purchased Under
the Plans |
|
October 5, 2014 - November 1, 2014 |
|
|
686,871 |
|
$ |
98.34 |
|
|
686,419 |
|
$ |
107,844,921 |
|
November 2, 2014 - November 29, 2014 |
|
|
233,936 |
|
$ |
102.92 |
|
|
233,936 |
|
$ |
1,083,768,334 |
|
November 30, 2014 - January 3, 2015 |
|
|
228,560 |
|
$ |
109.30 |
|
|
228,560 |
|
$ |
1,058,785,691 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,149,367 |
|
|
|
|
|
1,148,915 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item 6. Selected Financial Data
The following information should be read in conjunction with our consolidated financial statements and notes thereto contained in
Item 8. Consolidated Financial Statements and Supplementary Data of this Annual Report on Form 10-K (in thousands, except for per share data).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
2014 |
|
2013 |
|
2012 |
|
2011 |
|
2010 |
|
Net sales |
|
$ |
3,509,691 |
|
$ |
3,259,971 |
|
$ |
2,857,508 |
|
$ |
2,567,302 |
|
$ |
2,030,690 |
|
Gross profit |
|
|
2,001,172 |
|
|
1,861,686 |
|
|
1,606,543 |
|
|
1,439,186 |
|
|
1,155,164 |
|
Operating income |
|
|
566,536 |
|
|
561,596 |
|
|
488,840 |
|
|
471,991 |
|
|
376,414 |
|
Net income |
|
|
386,611 |
|
|
388,048 |
|
|
354,259 |
|
|
307,402 |
|
|
264,890 |
|
Net income attributable to Fossil Group, Inc |
|
|
376,707 |
|
|
378,152 |
|
|
343,401 |
|
|
294,702 |
|
|
255,205 |
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
7.12 |
|
|
6.59 |
|
|
5.63 |
|
|
4.66 |
|
|
3.83 |
|
Diluted |
|
|
7.10 |
|
|
6.56 |
|
|
5.59 |
|
|
4.61 |
|
|
3.77 |
|
Weighted average common shares and common equivalent shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
52,882 |
|
|
57,401 |
|
|
60,959 |
|
|
63,298 |
|
|
66,701 |
|
Diluted |
|
|
53,080 |
|
|
57,676 |
|
|
61,400 |
|
|
63,965 |
|
|
67,687 |
|
Working capital |
|
$ |
1,043,025 |
|
$ |
987,556 |
|
$ |
737,334 |
|
$ |
844,124 |
|
$ |
801,329 |
|
Total assets |
|
|
2,207,552 |
|
|
2,230,414 |
|
|
1,841,989 |
|
|
1,642,922 |
|
|
1,467,573 |
|
Total long-term liabilities |
|
|
776,922 |
|
|
663,141 |
|
|
194,747 |
|
|
134,798 |
|
|
76,377 |
|
Stockholders' equity attributable to Fossil Group, Inc |
|
|
977,860 |
|
|
1,068,677 |
|
|
1,233,535 |
|
|
1,105,929 |
|
|
1,044,118 |
|
Return on average stockholders' equity attributable to Fossil Group, Inc.(1) |
|
|
37.5 |
% |
|
33.1 |
% |
|
29.9 |
% |
|
28.0 |
% |
|
25.0 |
% |
- (1)
- Calculated
by dividing net income attributable to Fossil Group, Inc. by five quarter average stockholders' equity attributable to Fossil
Group, Inc.
43
Table of Contents
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Summary
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 153 retail stores located in premier retail sites and 143 outlet stores located in
major outlet malls as of January 3, 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 affiliated websites.
Internationally,
our products are sold to department stores, specialty retail stores and specialty watch and jewelry stores in approximately 150 countries worldwide through 25
Company-owned foreign sales subsidiaries and through a network of over 60 independent distributors. Internationally, our network of Company-owned stores included 197 retail stores and 100 outlet
stores as of January 3, 2015. Our products are also sold through licensed and franchised FOSSIL retail stores, retail concessions operated by us and kiosks in certain international markets. In
addition, we offer an extensive collection of our FOSSIL brand products on our websites in certain countries.
Our
consolidated gross profit margin is impacted by our diversified business model that includes but is not limited to: (i) a significant number of product categories we
distribute, (ii) the multiple brands we offer within several product categories, (iii) the geographical presence of our businesses and (iv) the different distribution channels we
sell to or through. The components of this diversified business model produce varying ranges of gross profit margin. Generally, on a historical basis, our fashion branded watch, jewelry and sunglass
offerings produce higher gross profit margins than our leather goods offerings. In addition, in most product categories that we offer, brands with higher retail price points generally produce higher
gross profit margins compared to those of lower retail priced brands. From a segment standpoint, our Direct to consumer business generally produces the highest gross profit margin as a result of these
sales being direct to the ultimate consumer. Gross profit margins related to sales in our international wholesale segments are historically lower than our Direct to consumer segment, but historically
higher than our North America wholesale segment primarily due to the following factors: (i) premiums charged in comparison to retail prices on products sold in the U.S.; (ii) the product
sales mix in our international wholesale segments, in comparison to our North America wholesale segment, are comprised more predominantly of watches and jewelry that generally produce higher gross
profit margins than leather goods; (iii) the watch sales mix in our international wholesale segments, in comparison to our North America wholesale segment, are comprised more predominantly of
higher priced licensed brands; and (iv) concessions sales in our Asia Pacific wholesale segment where we capture the full retail price.
44
Table of Contents
Our
business is subject to the risks inherent in global sourcing 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 contractor manufacturers' control.
This
discussion should be read in conjunction with our consolidated financial statements and the related notes included therewith.
Critical Accounting Policies and Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United
States of America 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
consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing 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. We believe the following critical accounting policies require the most significant estimates and judgments.
Product Returns. We accept limited returns and may request that a customer return a product if we feel the customer has an excess of
any style that
we have identified as being a poor performer for that customer or geographic location. We monitor returns and maintain a provision for estimated returns based upon historical experience and any
specific issues identified. While returns have historically been within our expectations and the provisions established, future return rates may differ from those experienced in the past. In the event
that our products are performing poorly in the retail market and/or we experience product damages or defects at a rate significantly higher than our historical rate,
the resulting returns could have an adverse impact on the operating results for the period or periods in which such returns occur. If our allowance for product returns were to change by 10%, the
result would have been a $2.7 million change to net income, net of taxes.
Inventories. Inventories are stated at the lower of average cost, including any applicable duty and freight charges, or market. We
account for
estimated obsolescence or unmarketable inventory equal to the difference between the average cost of inventory and the estimated market value based upon assumptions about future demand, market
conditions and available liquidation channels. If actual future demand or market conditions are less favorable than those projected by management, or if liquidation channels are not readily available,
additional inventory valuation reductions may be required. We assess our off-price sales on an ongoing basis and update our estimates accordingly. Revenue from sales of our products that are subject
to inventory consignment agreements is recognized when title and risk of loss transfers, delivery has occurred, the price to the buyer is determinable and collectability is reasonably assured.
Inventory held at consignment locations is included in our finished goods inventory.
Long-lived Asset Impairment. We test for asset impairment of property, plant and equipment and other long-lived assets whenever events
or conditions
indicate that the carrying value of an asset might not be recoverable based on expected undiscounted cash flows related to the asset. In evaluating long-lived assets for recoverability, we calculate
fair value using our best estimate of future cash flows expected to result from the use of the asset and its eventual disposition. When undiscounted cash flows
45
Table of Contents
estimated
to be generated through the operations of our Company-owned retail stores are less than the carrying value of the underlying assets, the assets are impaired. If it is determined that assets
are impaired, an impairment loss is recognized for the amount the asset's book value exceeds its fair value. Impairment losses are recorded in selling, general and administrative expenses. Should
actual results or market conditions differ from those anticipated, additional losses may be recorded. We recorded impairment losses on long-lived assets of approximately $9.3 million,
$5.8 million and $1.2 million in fiscal years 2014, 2013 and 2012, respectively. An increase of 100 basis points to the discount rate used in our impairment testing would have
increased impairment expense by $0.3 million. A 10% decrease in future expected cash flows would have increased impairment expense by $0.2 million.
Impairment of Goodwill and Trade Names. We evaluate goodwill for impairment annually as of the end of the fiscal year by comparing the
fair value of
the reporting unit to its recorded value. Additionally, if events or conditions were to indicate the carrying value of a reporting unit may not be recoverable, we
would evaluate goodwill for impairment at that time. We have three reporting units for which we evaluate goodwill for impairment, North America wholesale, Europe wholesale and Asia Pacific wholesale.
The fair value of each reporting unit is estimated using market comparable information and discounted cash flows. If the estimated fair value of a reporting unit exceeds its carrying value, no
impairment charge is recorded. As of January 3, 2015, the fair value of each of these reporting units exceeded their carrying value by over 200%.
We
evaluate trade names by comparing the fair value of the asset to its recorded value annually as of the end of the fiscal year and whenever events or conditions indicate that the
carrying value of the trade name may not be recoverable. The fair value of the asset is estimated using discounted cash flow methodologies. The MICHELE trade name represented approximately 22% of our
total trade name balances at the end of fiscal years 2014, 2013 and 2012. The SKAGEN trade name represented approximately 77% of our total trade name balance at the end of fiscal years 2014, 2013 and
2012. We performed the required annual impairment test and recorded no impairment charges in fiscal years 2014, 2013 and 2012. As of January 3, 2015, the fair values of the MICHELE and SKAGEN
trade names exceeded their carrying values by approximately 86% and 47%, respectively. If we were to increase our discount rate 100 basis points, or if we were to decrease forecasted cash flows by
10%, no additional impairment charges would have resulted from our impairment test. Due to the inherent uncertainties involved in making the estimates and assumptions used in the fair value analysis,
actual results may differ which could alter the fair value of the trade names and possibly cause impairment charges to occur in future periods.
Judgments
and assumptions are inherent in our estimate of future cash flows used to determine the estimate of the reporting unit's fair value. The most significant assumptions associated
with the fair value calculations include net sales growth rates and discount rates. If the actual future sales results do not meet the assumed growth rates, future impairments of goodwill and trade
names may be incurred.
Income Taxes. We record valuation allowances against our deferred tax assets, when necessary, in accordance with ASC 740, Income Taxes ("ASC 740"). Realization of deferred tax assets is dependent on future taxable earnings and is therefore uncertain. At least quarterly, we
assess the likelihood that our deferred tax asset balance will be recovered from future taxable income. To the extent we believe that recovery is not likely, we establish a valuation allowance against
our deferred tax asset, increasing our income tax expense in the period such determination is made. In addition, we have not recorded U.S. income tax expense for foreign earnings that we have
determined to be indefinitely reinvested outside the U.S.
Our
continuing practice is to recognize interest and penalties related to income tax matters in income tax expense. We accrue an amount for our estimate of additional income tax
liability which we believe we are more likely than not to incur as a result of the ultimate resolution of tax audits ("uncertain tax positions"). We review and update the estimates used in the accrual
for uncertain tax
46
Table of Contents
positions
as more definitive information becomes available from taxing authorities, upon completion of tax audits, upon expiration of statutes of limitation, or upon occurrence of other events. The
results of operations and financial position for future periods could be impacted by changes in assumptions or resolutions of tax audits.
Warranty Costs. Our FOSSIL watch products sold in the U.S. are covered by a limited warranty against defects in materials or workmanship
for a period
of 11 years from the date of purchase. RELIC watch products sold in the U.S. are covered by a comparable 12 year limited warranty, while all other watch brands sold in the U.S. are
covered by a comparable two year limited warranty. SKAGEN branded watches are covered by a lifetime warranty against defects due to faulty material or workmanship, subject to normal conditions of use.
Generally, all of our watch products sold in Canada, Asia and Europe are covered by a comparable two year limited warranty. We determine our warranty liability using historical warranty repair
experience. As changes occur in sales volumes and warranty experience, the warranty accrual is adjusted as necessary. The year-end warranty liability for fiscal years 2014, 2013 and 2012 was
$13.5 million, $15.7 million and $13.4 million, respectively.
Hedge Accounting. We operate in foreign countries, which exposes us to market risk associated with foreign currency exchange rate
fluctuations. We
have entered into certain foreign exchange forward contracts ("forward contracts") to hedge the risk of foreign currency rate fluctuations. Our main objective is to hedge the variability in forecasted
cash flows due to the foreign currency risks primarily associated with certain anticipated inventory purchases. Changes in the fair value of forward contracts designated as cash flow hedges are
recorded as a component of accumulated other comprehensive income (cumulative translation adjustment) within stockholders' equity, and are recognized in other income-net in the period which the
intercompany cash payment for inventory is made. To reduce exposure to changes in currency exchange rates adversely affecting our investment in a euro-denominated subsidiary, in fiscal year 2014, we
entered into a forward contract designated as a net investment hedge. Changes in the fair value of the net investment hedge were recorded as a component of accumulated other comprehensive income and
will be recognized in other income-net when the subsidiary is sold or dissolved. Also, the Company has entered into an interest rate swap agreement to effectively convert a portion of variable rate
debt obligations from a floating rate to a fixed rate. Changes in the fair value of the interest rate swap are recorded as a component of accumulated other comprehensive income within stockholders'
equity, and are recognized in interest expense in the period in which the payment is settled. We have elected to apply the hedge accounting rules as required by ASC 815, Derivatives and Hedging, for
these hedges.
Stock-Based Compensation. We utilize the Black-Scholes model to determine the fair value of stock options and stock appreciation rights
on the date
of grant. The model requires us to make assumptions
concerning (i) the length of time employees will retain their vested stock options and stock appreciation rights before exercising them ("expected term"), (ii) the volatility of our
common stock price over the expected term and (iii) the number of stock options and stock appreciation rights that will be forfeited. Changes in these assumptions can materially affect the
estimate of fair value of stock-based compensation and, consequently, the related expense amounts recognized on our consolidated statements of income and comprehensive income. If the fair value of our
stock-based compensation were to change by 10%, the result would have been a $1.3 million change to net income, net of taxes.
Results of Operations
Executive Summary
During fiscal year 2014, net sales rose 8% as compared to the prior fiscal year, representing growth across each of our geographic
regions with particular strength in Europe and Asia. In addition, fiscal 2014 included an extra week of operations, resulting in a 53-week year as compared to a 52-week year for fiscal 2013. Both of
our proprietary lifestyle brands, FOSSIL and SKAGEN, as well as our
47
Table of Contents
multi-brand
global watch portfolio experienced growth across each region in which we operate. FOSSIL grew 2% during fiscal 2014, led by the continued strength of watches, partially offset by decreases
in the jewelry and leather categories. We continue to believe FOSSIL jewelry is an opportunity for growth and after spending this past year repositioning distribution in the U.S., we believe we are
well positioned to capitalize on the synergies that FOSSIL jewelry shares with watches. During fiscal 2014 we repositioned our FOSSIL leathers business and saw improved performance in the category,
particularly women's handbags, where we concentrated efforts to add to our design team and bolstered our products to gain broader customer appeal. Our elevated assortment is resonating with customers,
particularly in our retail stores where we have the best opportunity to clearly communicate the brand story to the customer and in improved presentations through shop-in-shops within U.S. department
stores. SKAGEN grew 13% during fiscal year 2014, with watches and jewelry each posting double-digit gains. Our two new high profile store locations in Frankfurt and New York along with our remodeled
stores in London allow us to showcase the full array of SKAGEN's products in an environment that
reflects the differentiated and unique positioning of the brand. Our multi-brand global watch portfolio grew 9% during fiscal year 2014, which included growth across multiple brands, with the
strongest gains occurring internationally. Additionally, we advanced our Swiss initiative with the spring launch of EMPORIO ARMANI Swiss Made and with the launch of the TORY BURCH assortment in the
last six months of fiscal 2014. Our Direct to consumer business grew during fiscal year 2014 primarily as a result of store expansion and a modest increase in our global comparable store sales in our
owned retail stores. Positive comparable store sales results in Europe and Asia were partially offset by a very slight decline in North America, primarily as a result of traffic declines in the U.S.
that were only partially offset by higher conversion rates.
Gross
profit increased during fiscal year 2014, while the gross margin rate was relatively consistent with the prior fiscal year. During fiscal 2014, our gross margin rate was favorably
impacted by our regional distribution mix given the growth in international markets. However, this benefit was offset by increased promotional activity in our retail channel, primarily in our U.S.
outlet stores. Our operating margin contracted during fiscal year 2014 primarily due to planned operating expense deleveraging in the first half of the year as we invested in retail and concession
expansion and infrastructure to support growth and global initiatives. These reductions in operating expense leverage were partially offset by increased operating expense leverage in the back half of
the year as we managed infrastructure spending tightly and drove leverage in more mature areas of our business, redeploying some of the capacity to invest in growth initiatives and customer facing
activities.
During
fiscal year 2014, we invested $435 million to repurchase 4.1 million shares of our common stock. Our financial performance combined with our repurchase activity
resulted in earnings of $7.10 per diluted share.
Fiscal Year 2014 Compared to Fiscal Year 2013
Consolidated Net Sales. Net sales increased 7.7%, representing sales growth in our Europe and Asia Pacific wholesale and Direct
to consumer
businesses, partially offset by a slight decrease in our North America wholesale business. Global watch sales made the most significant contribution, increasing $223.4 million or 8.9%, in
fiscal year 2014. We believe that we continue to gain market share in the watch category given our powerful portfolio of global lifestyle brands, design innovation and our global production and
distribution advantages. Our jewelry product category also contributed favorably to the current fiscal year net sales growth, increasing $47.7 million, or 20.8%, as a result of a strong
performance in licensed jewelry, partially offset by a decrease in FOSSIL branded products. Our leathers category declined $16.9 million or 3.9% during the year as we anniversaried high
clearance volumes in fiscal year 2013.
We
believe our diverse global distribution network, our design and marketing capabilities and continued investments in our owned brands to increase brand awareness, drive demand and
accelerate
48
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growth,
will allow us to continue to take market share from local and regional brands. We also believe that investments we have made in certain emerging markets will facilitate higher levels of growth
in international wholesale segments in comparison to the larger and more mature North American wholesale segment. Net sales information by product category is summarized as follows (dollars in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
|
|
|
|
|
2014 |
|
2013 |
|
|
|
|
|
|
|
Growth (Decline) |
|
|
|
|
|
Percentage
of Total |
|
|
|
Percentage
of Total |
|
|
|
Amounts |
|
Amounts |
|
Dollars |
|
Percentage |
|
Watches |
|
$ |
2,736.5 |
|
|
78.0 |
% |
$ |
2,513.1 |
|
|
77.1 |
% |
$ |
223.4 |
|
|
8.9 |
% |
Leathers |
|
|
419.4 |
|
|
11.9 |
|
|
436.3 |
|
|
13.4 |
|
|
(16.9 |
) |
|
(3.9 |
) |
Jewelry |
|
|
276.5 |
|
|
7.9 |
|
|
228.8 |
|
|
7.0 |
|
|
47.7 |
|
|
20.8 |
|
Other |
|
|
77.3 |
|
|
2.2 |
|
|
81.8 |
|
|
2.5 |
|
|
(4.5 |
) |
|
(5.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
$ |
3,509.7 |
|
|
100.0 |
% |
$ |
3,260.0 |
|
|
100.0 |
% |
$ |
249.7 |
|
|
7.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 fiscal year 2014, the translation of foreign-based net sales into U.S. dollars reduced reported net
sales by approximately $17.1 million, including unfavorable impacts of $7.4 million, $7.1 million and $5.3 million in our Asia Pacific wholesale, Direct to consumer and
North America wholesale businesses, respectively, partially offset by a favorable impact of $2.7 million in our Europe wholesale segment.
The
following table sets forth consolidated net sales by segment (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
|
|
|
|
|
2014 |
|
2013 |
|
|
|
|
|
|
|
Growth (Decline) |
|
|
|
|
|
Percentage
of Total |
|
|
|
Percentage
of Total |
|
|
|
Amounts |
|
Amounts |
|
Dollars |
|
Percentage |
|
Wholesale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
1,213.1 |
|
|
34.6 |
% |
$ |
1,216.6 |
|
|
37.3 |
% |
$ |
(3.5 |
) |
|
(0.3 |
)% |
Europe |
|
|
931.2 |
|
|
26.5 |
|
|
828.1 |
|
|
25.4 |
|
|
103.1 |
|
|
12.5 |
|
Asia Pacific |
|
|
440.7 |
|
|
12.6 |
|
|
396.7 |
|
|
12.2 |
|
|
44.0 |
|
|
11.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total wholesale |
|
|
2,585.0 |
|
|
73.7 |
|
|
2,441.4 |
|
|
74.9 |
|
|
143.6 |
|
|
5.9 |
|
Direct to consumer |
|
|
924.7 |
|
|
26.3 |
|
|
818.6 |
|
|
25.1 |
|
|
106.1 |
|
|
13.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
$ |
3,509.7 |
|
|
100.0 |
% |
$ |
3,260.0 |
|
|
100.0 |
% |
$ |
249.7 |
|
|
7.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America Wholesale Net Sales. North America wholesale net sales decreased $3.5 million or 0.3% but increased
$1.8 million or 0.1%
in constant currency during fiscal year 2014, representing growth in the U.S., offset by declines in Canada and Latin America. The department store channel has been challenging due to the continuing
promotional retail environment and due to retail partners managing to lower inventory levels. In constant currency, both the jewelry and watch categories contributed favorably to fiscal year 2014, as
jewelry sales increased $16.5 million or 33.2% and watches increased $16.4 million or 1.7%. These sales gains were partially offset by sales declines in our leathers products of
$29.4 million or 17.2%, as the leather category has proven to be highly competitive and promotional in this wholesale channel.
49
Table of Contents
Europe Wholesale Net Sales. During fiscal 2014, Europe wholesale net sales rose $103.1 million or 12.5% ($100.5 million
or 12.1% in
constant currency), representing sales gains across nearly all markets in which we operate. In Europe, we continue to benefit from our scale, as we leverage our extensive European infrastructure and
distribution to drive growth. Key markets performed well as we have seen positive results from partnering with customers to focus on door productivity and to influence assortments and replenishment.
Sales growth was particularly strong in the United Kingdom, France and Germany, while Italy experienced a sales decline during fiscal year 2014 as a result of the challenging market conditions. From a
product category perspective, on a constant currency basis, sales growth was led by a $90.3 million or 13.9% increase in our watch category and a $19.2 million or 16.3% increase in
jewelry, partially offset by a $10.1 million or 27.0% decrease in leather products.
Asia Pacific Wholesale Net Sales. In fiscal year 2014, Asia Pacific wholesale net sales increased $44.0 million or 11.1%
($51.4 million
or 13.0% in constant currency). We experienced sales growth across the majority of the markets in the Asia Pacific region led by Japan, India and China, while sales in South Korea decreased as market
conditions there remain weak. Our watch category made the greatest contribution, increasing $51.7 million or 14.2% in constant currency. At the end of fiscal year 2014, we operated 334
concession locations in the Asia Pacific region with a net 25 new concessions opened during the last twelve months. For the 2014 fiscal year, Asia Pacific concession sales increased as a
result of new door growth as comparable year-over-year concession sales declined. We believe these concessions represent a large opportunity for us because they allow us to control the brand
presentation and customer experience at the point of sale and capture the full retail price.
Direct to Consumer Net Sales. Direct to consumer net sales increased $106.1 million or 13.0% ($113.2 million or 13.8%
in constant
currency), during fiscal year 2014, primarily as a result of an increase in the average number of Company-owned stores open during the fiscal year and a 2.0% comparable store sales increase normalized
for the 53-week calendar. Positive comparable store sales results in Europe and Asia were partially offset by a slight decline in North America, primarily driven by the U.S. stores, where conversion
rates improved but not enough to offset the impact of significant mall traffic declines and promotional activity in our outlet stores. Compared to fiscal year 2013, comparable store sales in watches
and leathers increased slightly, while comparable jewelry sales increased double-digits.
The
following table sets forth the number of stores by concept for the fiscal years ended below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 3, 2015 |
|
December 28, 2013 |
|
|
|
North
America |
|
Other
International |
|
Total |
|
North
America |
|
Other
International |
|
Total |
|
Full price accessory |
|
|
119 |
|
|
170 |
|
|
289 |
|
|
112 |
|
|
164 |
|
|
276 |
|
Outlets |
|
|
143 |
|
|
100 |
|
|
243 |
|
|
125 |
|
|
81 |
|
|
206 |
|
Clothing |
|
|
28 |
|
|
2 |
|
|
30 |
|
|
30 |
|
|
2 |
|
|
32 |
|
Full price multi-brand |
|
|
6 |
|
|
25 |
|
|
31 |
|
|
6 |
|
|
23 |
|
|
29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stores |
|
|
296 |
|
|
297 |
|
|
593 |
|
|
273 |
|
|
270 |
|
|
543 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During
fiscal year 2014, we opened 76 new stores and closed 26 stores. During fiscal year 2015, we anticipate opening approximately 44 to 55 additional retail stores and closing
approximately 40 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.
50
Table of Contents
Gross Profit. Gross profit of $2.0 billion in fiscal year 2014 increased 7.5% in comparison to $1.9 billion in fiscal
year 2013 as a
result of increased sales, partially offset by a slight decrease in gross profit margin. Gross profit margin decreased 10 basis points to 57.0% in fiscal year 2014 compared to 57.1% in the prior
fiscal year. The gross margin rate reduction was primarily driven by the impact of increased promotional activity, primarily in our U.S. outlet stores, as compared to the prior fiscal year. Partially
offsetting this decrease was the impact of a favorable regional distribution mix from the growth in international markets.
Selling, General and Administrative Expenses ("SG&A"). Total SG&A expenses increased by $134.5 million, and as a
percentage of net sales,
increased to 40.9% in fiscal year 2014 compared to 39.9% in fiscal year 2013. The translation of foreign-based expenses in fiscal year 2014 increased SG&A expenses by approximately $0.6 million
as a result of the weaker U.S. dollar. SG&A expense increases were primarily attributable to continued investments in our retail store and concession base, infrastructure investments to support growth
and global initiatives, marketing expenses, including advertising royalties, and investments in brand building and customer engagement activities, partially offset by the reversal of incentive
compensation accruals. In addition, fiscal year 2014 included a $9.3 million non-cash asset impairment charge to write down certain long-lived assets associated with our retail stores as
compared to a $5.8 million charge incurred in fiscal year 2013.
Consolidated Operating Income. During fiscal year 2014, operating income increased by $4.9 million, or 0.9%, as compared to
the prior fiscal
year. As a percentage of net sales, operating income decreased to 16.1% in fiscal year 2014 as compared to 17.2% in fiscal year 2013, primarily as a result of decreased SG&A expense leverage.
Operating income for the 2014 fiscal year included approximately $12.1 million of net currency losses related to the translation of foreign-based sales and expenses into U.S. dollars. Operating
income by operating segment is summarized as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
Growth (Decline) |
|
|
|
2014 |
|
2013 |
|
Dollars |
|
Percentage |
|
Wholesale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
251.0 |
|
$ |
305.8 |
|
$ |
(54.8 |
) |
|
(17.9 |
)% |
Europe |
|
|
261.2 |
|
|
219.0 |
|
|
42.2 |
|
|
19.3 |
|
Asia Pacific |
|
|
122.8 |
|
|
130.0 |
|
|
(7.2 |
) |
|
(5.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total wholesale |
|
|
635.0 |
|
|
654.8 |
|
|
(19.8 |
) |
|
(3.0 |
) |
Direct to consumer |
|
|
115.0 |
|
|
88.1 |
|
|
26.9 |
|
|
30.5 |
|
Corporate |
|
|
(183.5 |
) |
|
(181.3 |
) |
|
(2.2 |
) |
|
1.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income |
|
$ |
566.5 |
|
$ |
561.6 |
|
$ |
4.9 |
|
|
0.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany
profit attributable to our factory operations is included in the Asia Pacific wholesale and Europe wholesale segments in accordance with the geographic location of the
factories. These intercompany factory profits are eliminated in consolidation.
Wholesale Operating Income. Operating income in our wholesale segments decreased $19.8 million, or 3.0%, in fiscal year 2014
compared to
fiscal year 2013. As a percentage of net sales, wholesale operating income decreased to 24.6% in fiscal year 2014, compared to 26.8% of net sales in the prior fiscal year, primarily as a result of
decreased SG&A expense leverage in our wholesale segments. The decreased leverage in SG&A expenses was largely driven by brand building activities, marketing and advertising royalties in our North
America wholesale segment. Gross profit margin expansion in the Europe wholesale business was largely offset by decreased gross profit margin in the Asia Pacific and North America wholesale segments.
The Europe wholesale business benefited from the currency impact of a stronger euro in the purchase of inventory. The Asia Pacific wholesale segment was negatively
51
Table of Contents
impacted
by the currency impact of a weaker Japanese Yen and Australian dollar as well as an increased sales mix of lower margin products within the watch category, while an increase in sales to
off-price partners contributed to the gross profit margin contraction in the North America wholesale business.
Direct to Consumer Operating Income. Direct to consumer operating income increased $26.9 million, or 30.5%, in fiscal year
2014 compared to
the prior fiscal year and, as a percentage of net sales, increased to 12.4% in fiscal year 2014 compared to 10.8% in fiscal year 2013, as a result of increased SG&A expense leverage, partially offset
by gross profit margin contraction. Favorable SG&A expense leverage in the Direct to consumer segment was primarily related to employee compensation, partially offset by decreased leverage in rent and
facility-related expenses, while gross profit margin was negatively impacted by lower margins primarily in our U.S. outlet stores due to effective promotions that drove increased gross profit dollars
but put pressure on the gross margin rate.
Interest Expense. Interest expense increased by $6.4 million in fiscal year 2014 as a result of increased debt levels in
comparison to the
prior fiscal year.
Other IncomeNet. During fiscal year 2014, other incomenet decreased by approximately $2.0 million, largely
driven by
decreased net foreign currency gains resulting from mark-to-market hedging and other transactional activities as compared to fiscal year 2013. Additionally, fiscal year 2014 other income-net included
an arbitration judgment gain of $6.0 million related to the purchase price for Skagen Designs, while the fiscal year 2013 other income-net amount included a $6.5 million non-cash,
mark-to-market valuation gain related to our assumption of control of Fossil Spain, our Spanish joint venture.
Provision for Income Taxes. Income tax expense for fiscal year 2014 was $171.5 million, resulting in an effective tax rate
of 30.7%, compared
to 30.9% in fiscal year 2013.
Net Income Attributable to Fossil Group, Inc. Fiscal year 2014 net income attributable to Fossil Group, Inc. was $7.10
per diluted
share in comparison to $6.56 per diluted share in the prior fiscal year and included a $0.57 per diluted share benefit as a result of a lower outstanding share count due to common stock repurchases
under our ongoing stock repurchase program and net foreign currency losses of $0.17 per diluted share. Net income attributable to Fossil Group, Inc. was relatively flat at $376.7 million
for fiscal year 2014 in comparison to $378.2 million in the prior year. Fiscal year 2014 results included a $6.0 million arbitration judgment gain related to the purchase price for
Skagen Designs, which benefitted earnings by $0.08 per diluted share, while fiscal year 2013 results included a $6.5 million non-cash, non-operating gain, which benefitted earnings by $0.11 per
diluted share, related to our assumption of control of Fossil Spain in connection with our right to acquire in 2015 the remaining 50% of Fossil Spain.
Fiscal Year 2013 Compared to Fiscal Year 2012
Consolidated Net Sales. Net sales increased 14.1%, representing sales growth across each of our global wholesale and Direct to
consumer businesses.
Global watch sales made the most significant contribution, increasing $371.6 million or 17.4%, in fiscal year 2013. Our jewelry product category also contributed favorably to fiscal year 2013
net sales growth, increasing $47.2 million, or 26.0%, as our new global assortment resonated well with consumers. Our leather business decreased slightly during the year.
52
Table of Contents
Net sales information by product category is summarized as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
|
|
|
|
|
2013 |
|
2012 |
|
|
|
|
|
|
|
Growth (Decline) |
|
|
|
|
|
Percentage
of Total |
|
|
|
Percentage
of Total |
|
|
|
Amounts |
|
Amounts |
|
Dollars |
|
Percentage |
|
Watches |
|
$ |
2,513.1 |
|
|
77.1 |
% |
$ |
2,141.5 |
|
|
74.9 |
% |
$ |
371.6 |
|
|
17.4 |
% |
Leathers |
|
|
436.3 |
|
|
13.4 |
|
|
440.1 |
|
|
15.4 |
|
|
(3.8 |
) |
|
(0.9 |
) |
Jewelry |
|
|
228.8 |
|
|
7.0 |
|
|
181.6 |
|
|
6.4 |
|
|
47.2 |
|
|
26.0 |
|
Other |
|
|
81.8 |
|
|
2.5 |
|
|
94.3 |
|
|
3.3 |
|
|
(12.5 |
) |
|
(13.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
$ |
3,260.0 |
|
|
100.0 |
% |
$ |
2,857.5 |
|
|
100.0 |
% |
$ |
402.5 |
|
|
14.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
fiscal year 2013, the translation of foreign-based net sales into U.S. dollars reduced reported net sales by approximately $0.6 million including a favorable impact of
$18.3 million in our Europe wholesale segment offset by unfavorable impacts of $17.1 million and $1.8 million in our Asia Pacific wholesale and Direct to consumer businesses,
respectively.
The
following table sets forth consolidated net sales by segment (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
|
|
|
|
|
2013 |
|
2012 |
|
|
|
|
|
|
|
Growth |
|
|
|
|
|
Percentage
of Total |
|
|
|
Percentage
of Total |
|
|
|
Amounts |
|
Amounts |
|
Dollars |
|
Percentage |
|
Wholesale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
1,216.6 |
|
|
37.3 |
% |
$ |
1,083.5 |
|
|
37.9 |
% |
$ |
133.1 |
|
|
12.3 |
% |
Europe |
|
|
828.1 |
|
|
25.4 |
|
|
697.0 |
|
|
24.4 |
|
|
131.1 |
|
|
18.8 |
|
Asia Pacific |
|
|
396.7 |
|
|
12.2 |
|
|
361.5 |
|
|
12.7 |
|
|
35.2 |
|
|
9.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total wholesale |
|
|
2,441.4 |
|
|
74.9 |
|
|
2,142.0 |
|
|
75.0 |
|
|
299.4 |
|
|
14.0 |
|
Direct to consumer |
|
|
818.6 |
|
|
25.1 |
|
|
715.5 |
|
|
25.0 |
|
|
103.1 |
|
|
14.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
$ |
3,260.0 |
|
|
100.0 |
% |
$ |
2,857.5 |
|
|
100.0 |
% |
$ |
402.5 |
|
|
14.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America Wholesale Net Sales. Net sales in the North America wholesale segment increased $133.1 million or 12.3%
during fiscal year 2013,
representing growth across the U.S., Canada and Latin America. Watch sales led the growth, increasing $142.3 million or 16.9%, while jewelry sales also contributed favorably, increasing
$11.5 million or 30.2%. These sales gains were partially offset by sales volume declines in our leathers products of $12.0 million or 6.6% as a result of decreased sell-through rates at
retail. The discontinuation of our footwear line and, as we transitioned to a licensing model, eyewear line also negatively impacted fiscal year 2013 net sales by $5.3 million and
$5.0 million, respectively. Additionally, fiscal year 2013 was negatively impacted by approximately $10 million as a result of the misalignment of our fiscal calendar with the National
Retail Federation ("NRF") calendar, on which many of our customers operate. The NRF calendar included an extra week in January 2013 as compared to our fiscal calendar. The extra week on our fiscal
calendar took place in January 2014 at which time our fiscal calendar re-aligned with the NRF calendar.
Europe Wholesale Net Sales. Europe wholesale net sales rose $131.1 million or 18.8% ($112.8 million or 16.2% in
constant currency)
representing sales gains across multiple geographies within the European region. The United Kingdom, Germany, Spain, the Middle East and France delivered the strongest growth, while Italy experienced
a sales decline during fiscal 2013 and continues to be our most challenging European market. From a product category perspective, on a constant currency basis, sales growth was led by a
$97.0 million or 18.0% increase in our watch category and a $19.2 million or 20.2% increase in jewelry, partially offset by a $3.9 million or 9.7% decrease in leather products.
53
Table of Contents
Asia Pacific Wholesale Net Sales. In fiscal year 2013, Asia Pacific wholesale net sales increased $35.2 million or 9.7%
($52.2 million
or 14.4% in constant currency). We experienced sales growth across most markets in the Asia Pacific region led by China, Japan and India. Our watch category made the most significant impact,
increasing $52.8 million or 16.2% in constant currency. At the end of fiscal year 2013, we operated 309 concession locations in the Asia Pacific region with a net 39 new concessions opened
during the last twelve months. For the 2013 fiscal year, Asia Pacific concession sales increased primarily as a result of new door growth and a modestly positive comp.
Direct to Consumer Net Sales. Direct to consumer net sales increased $103.1 million or 14.4%, during fiscal year 2013,
primarily as a result
of an increase in the average number of Company-owned stores open during the fiscal year and a 0.2% comparable store sales increase. Positive comparable store sales results in the international
markets were almost entirely offset by weak traffic and a highly promotional environment in the U.S.
Gross Profit. Gross profit of $1.9 billion in fiscal year 2013 increased 15.9% in comparison to $1.6 billion in fiscal
year 2012 as a
result of increased sales and gross profit margin expansion. Gross profit margin increased 90 basis points to 57.1% in fiscal year 2013 compared to 56.2% in the prior fiscal year. Gross margins
benefitted from a greater sales mix of higher margin watch and jewelry products, growth in our international markets, and direct distribution in Latin America, Spain and Portugal as a result of
acquisitions during fiscal year 2013. Partially offsetting these increases were the unfavorable impacts of promotional activities to drive traffic and clear prior seasons' products, especially in U.S.
outlet stores.
SG&A. SG&A expenses increased by $182.4 million, and as a percentage of net sales, increased to 39.9% in fiscal year
2013 compared to 39.1% in
fiscal year 2012. The translation of foreign-based expenses in fiscal year 2013 decreased SG&A expenses by approximately $0.4 million as a result of the stronger U.S. dollar. SG&A expense
increases were primarily attributable to continued investments in our retail store and concession expansion, performance based compensation, infrastructure investments to support growth and global
initiatives, enhancements to our marketing programs and the impact of newly acquired businesses. In addition, fiscal year 2013 included a $5.8 million non-cash asset impairment charge to write
down certain long-lived assets associated with our retail stores.
Consolidated Operating Income. During fiscal year 2013, operating income increased by $72.8 million, or 14.9%, in
comparison to fiscal year
2012. As a percentage of net sales, operating income increased to 17.2% as compared to 17.1% in the prior fiscal year. Operating income for the 2013 fiscal year included approximately
$2.3 million of net currency losses related to the translation of
54
Table of Contents
foreign-based
sales and expenses into U.S. dollars. Operating income by operating segment is summarized as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
Growth (Decline) |
|
|
|
2013 |
|
2012 |
|
Dollars |
|
Percentage |
|
Wholesale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
305.8 |
|
$ |
246.6 |
|
$ |
59.2 |
|
|
24.0 |
% |
Europe |
|
|
219.0 |
|
|
174.5 |
|
|
44.5 |
|
|
25.5 |
|
Asia Pacific |
|
|
130.0 |
|
|
127.3 |
|
|
2.7 |
|
|
2.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total wholesale |
|
|
654.8 |
|
|
548.4 |
|
|
106.4 |
|
|
19.4 |
|
Direct to consumer |
|
|
88.1 |
|
|
98.7 |
|
|
(10.6 |
) |
|
(10.7 |
) |
Corporate |
|
|
(181.3 |
) |
|
(158.3 |
) |
|
(23.0 |
) |
|
14.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income |
|
$ |
561.6 |
|
$ |
488.8 |
|
$ |
72.8 |
|
|
14.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany
profit attributable to our factory operations is included in the Asia Pacific wholesale and Europe wholesale segments in accordance with the geographic
location of the factories. These intercompany factory profits are eliminated in consolidation.
Wholesale Operating Income. Operating income in our wholesale segments increased $106.4 million or 19.4%, in fiscal year
2013 compared to
fiscal year 2012. As a percentage of net sales, wholesale operating income increased to 26.8% in fiscal year 2013 compared to 25.6% of net sales in the prior fiscal year primarily as a result of gross
profit margin expansion partially offset by decreased SG&A expense leverage. Gross margin rate expansion in our wholesale businesses was primarily a result of a favorable shift in sales to higher
margin geographic regions and an increase in sales mix to sales of higher margin watch and jewelry products. Wholesale operating margin was negatively impacted by decreased SG&A expense leverage in
our Asia Pacific wholesale segment as we continued to invest in the region.
Direct to Consumer Operating Income. Direct to consumer operating income decreased $10.6 million, or 10.7%, in fiscal year
2013 compared to
the prior fiscal year and, as a percentage of net sales, decreased to 10.8% in fiscal year 2013 compared to 13.8% in fiscal year 2012, as a result of gross profit margin contraction and decreased SG&A
expense leverage. Decreased gross margins in our Direct to consumer business were largely driven by liquidation of prior seasons' leather products and outlet promotional activity. Operating margin was
negatively impacted by a $5.8 million non-cash asset impairment charge to write down certain long-lived assets associated with our retail stores.
Interest Expense. Interest expense increased by $4.4 million in fiscal year 2013 primarily as a result of increased debt
levels.
Other IncomeNet. During fiscal year 2013, other incomenet changed favorably by approximately $0.9 million. This
increase was primarily driven by a $6.5 million non-cash, mark-to-market valuation gain related to our assumption of control of Fossil Spain, our Spanish joint venture that is 50% owned by
General De Relojeria, S.A., partially offset by decreased net foreign currency gains resulting from mark-to-market hedging and other transactional activities as compared to fiscal year 2012.
Provision for Income Taxes. Income tax expense for fiscal year 2013 was $173.4 million, resulting in an effective tax rate
of 30.9%, compared
to 28.0% in fiscal year 2012. Fiscal year 2012 income tax expense was favorably impacted by management's determination in fiscal 2012 to reinvest undistributed earnings and profits of certain foreign
subsidiaries and the recognition of previously unrecognized income tax benefits in connection with the completion of prior year income tax audits during the fiscal year.
55
Table of Contents
Net Income Attributable to Fossil Group, Inc. Fiscal year 2013 net income attributable to Fossil Group, Inc. increased
10.1% to
$378.2 million, or $6.56 per diluted share, in comparison to $343.4 million, or $5.59 per diluted share, in the prior fiscal year. Fiscal year 2013 results included a $6.5 million
non-cash, non-operating gain, which benefitted earnings by $0.11 per diluted share, related to our assumption of control of Fossil Spain in connection with our right to acquire in 2015 the remaining
50% of Fossil Spain. Additionally, net income attributable to Fossil Group, Inc. for fiscal year 2013 included a $0.40 per diluted share benefit as a result of a 6.1% lower outstanding share
count due to common stock
repurchases under our ongoing stock repurchase program and net foreign currency losses of $0.08 per diluted share.
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 the amount of any discretionary stock repurchases we make. Our cash and cash
equivalents balance at the end of fiscal year 2014 was $276.3 million, including $262.4 million held by foreign subsidiaries outside the U.S., in comparison to $320.5 million at
the end of fiscal year 2013.
Net
cash provided by operating activities of $387.9 million in fiscal year 2014 was more than offset by the aggregate amount of cash used in investing and financing activities of
$103.2 million and $325.2 million, respectively, resulting in a $44.2 million decrease in cash and cash equivalents since the end of fiscal year 2013. During fiscal year 2014, net
cash provided by operating activities consisted primarily of net income of $386.6 million, non-cash activities of $131.1 million and an unfavorable increase in net operating assets and
liabilities of $129.9 million. During fiscal year 2014, net cash used in investing activities was primarily driven by $94.8 million related to capital expenditures. During fiscal year
2014, net cash used in financing activities was principally comprised of $437.9 million of common stock acquisitions, partially offset by $122.3 million of net borrowings on notes
payable. Net borrowings primarily consisted of draws and repayments made under our $1.1 billion revolving line of credit and term loan.
Accounts
receivable decreased by 5.3% to $430.5 million during fiscal year 2014 compared to $454.8 million at the end of the prior fiscal year, due to the timing of sales
and shipments as well as the translation of foreign-based balances as a result of the stronger U.S. dollar. Average days sales outstanding for our wholesale segments for fiscal year 2014 was
52 days compared to 49 days in the prior fiscal year.
Inventory
at the end of fiscal year 2014 was $597.3 million, representing an increase of 4.7% from the prior fiscal year inventory balance of $570.7 million. Due to our
effort to manage inventory levels and the impact of foreign currency fluctuations, our inventory growth was slightly below our sales growth.
On
November 10, 2014, the Company's board of directors authorized a new $1.0 billion share repurchase program with an expiration date of December 2018.
56
Table of Contents
The
following table reflects our common stock repurchase activity for the periods indicated (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 2014 Fiscal Year |
|
For the 2013 Fiscal Year |
|
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 |
|
|
0.0 |
|
$ |
0.0 |
|
|
0.0 |
|
$ |
0.0 |
|
2012 |
|
$ |
1,000.0 |
|
December 2016 |
|
|
4.1 |
|
$ |
435.0 |
|
|
4.9 |
|
$ |
536.3 |
|
2010 |
|
$ |
30.0 |
|
None |
|
|
0.0 |
|
$ |
0.0 |
|
|
0.0 |
|
$ |
0.0 |
|
2010 |
|
$ |
750.0 |
|
December 2013(1) |
|
|
0.0 |
|
$ |
0.0 |
|
|
0.4 |
|
$ |
38.6 |
|
- (1)
- In
the first quarter of fiscal year 2013, the Company completed this repurchase plan.
We
effectively retired 4.1 million shares of repurchased common stock under our repurchase programs during fiscal 2014. 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 fiscal year 2014 decreased common stock by $41,000, additional paid-in capital by $3.2 million, retained earnings by $431.7 million and treasury stock by
$435.0 million. The effective retirement of common stock repurchased during the 2013 fiscal year decreased common stock by $53,000, additional paid-in capital by $7.6 million, retained
earnings by $567.2 million and treasury stock by $574.8 million. At December 28, 2013 and January 3, 2015, all treasury stock had been effectively retired. As of
January 3, 2015, we had $1.1 billion of repurchase authorizations remaining under our repurchase programs.
At
the end of the fiscal year 2014, we had working capital of $1.0 billion compared to working capital of $987.6 million at the end of the prior fiscal year. Additionally,
we had approximately $16.6 million of outstanding short-term borrowings and $613.7 million in long-term debt.
On
May 17, 2013, we entered into a five year Credit Agreement (the "Credit Agreement") which provided for revolving credit loans in the amount of $750 million (the
"Revolver"), a swingline subfacility up to $20 million, an up to $10 million subfacility for letters of credit and a term loan in the amount of $250 million (the "Term Loan"). On
May 23, 2014, we entered into a First Amendment (the "Amendment") to the Credit Agreement. The Amendment increased the credit limit on the Revolver by $300 million to
$1,050 million. Amounts outstanding under the Revolver and Term Loan bear interest at our option of (i) the base rate (defined as the higher of (a) the prime rate publicly
announced by
Wells Fargo (3.25% at fiscal year-end 2014), (b) the federal funds rate plus 0.5% and (c) the London Interbank Offer Rate ("LIBOR") (0.16% at fiscal year-end 2014) for an interest period
of one month plus 1.00%) plus the base rate applicable margin (which varies based upon our consolidated leverage ratio (the "Ratio") from 0.25% if the Ratio is less than 1.00 to 1.00, to 1.00% if the
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 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). Amounts
outstanding under the swingline subfacility under the Credit Agreement or upon any drawing under a letter of credit bear interest at the base rate plus the base rate applicable margin. Interest based
upon the base rate is payable quarterly in arrears. Interest based upon the LIBOR rate is payable either monthly or quarterly in arrears, depending on the interest period selected by us. The Revolver
also contains a commitment fee, determined based upon the Ratio, which varies from 0.20%, if the Ratio is less than 1.00 to 1.00, to 0.35%, if the Ratio is greater than or equal to 2.00 to 1.00.
The
Credit Agreement is guaranteed by all of our direct and indirect material domestic subsidiaries and secured by 65% of the total outstanding voting capital stock and 100% of the
57
Table of Contents
non-voting
capital stock of Fossil Europe B.V., Fossil (East) Limited and Swiss Technology Holding GmbH, certain of our foreign subsidiaries, pursuant to a pledge agreement.
Financial
covenants in the Credit Agreement require us to maintain (i) a consolidated total leverage ratio no greater than 2.50 to 1.00, (ii) a consolidated interest
coverage ratio no less than 3.50 to 1.00 and (iii) maximum capital expenditures not in excess of (x) $200.0 million during each of fiscal years 2014 and 2015 and
(y) $250.0 million during each fiscal year thereafter, subject to certain adjustments.
During
fiscal year 2014, we repaid $15.6 million on the Term Loan and had no additional borrowings. The average interest rate during fiscal year 2014 for borrowings under the Term
Loan including the impact of the interest rate swap was 2.5%. During fiscal year 2014, we borrowed $961.0 million under the Revolver at an average rate of 1.4% and repaid $822.0 million.
As of January 3, 2015, we had $231.3 million and $389.0 million outstanding under the Term Loan and the Revolver, respectively. In addition, we had $0.9 million of
outstanding standby letters of credit at January 3, 2015. Amounts available under the Revolver are reduced by any amounts outstanding under standby letters of credit. As of January 3,
2015, we had $660.1 million available for borrowing under the Revolver. Borrowings under the Revolver were mainly used to fund common stock repurchases and normal operating expenses.
At
January 3, 2015, we were in compliance with debt covenants related to all of our credit facilities.
As
of January 3, 2015, we do not consider $484.0 million of undistributed earnings of our foreign subsidiaries to be indefinitely reinvested. As such, we have accrued taxes
on these amounts net of applicable foreign tax credits. We have not provided for U.S. federal and state income taxes on the remaining $800.6 million of undistributed earnings of our foreign
subsidiaries because we consider such earnings to be indefinitely reinvested outside the U.S. The determination of the amount of incremental tax that would be due in the event these earnings are
repatriated in the future is not practicable. However, our intent is to keep these funds indefinitely reinvested outside of the U.S., and our current plans do not indicate a need to repatriate them to
fund our U.S. operations.
For
the fiscal year ending January 2, 2016, we expect total capital expenditures to be in a range of $110 million to $120 million. These capital expenditures will be
primarily related to global concession and retail store expansion and renovation as well as investment in technological infrastructure and strategic investments. We believe that cash flows from
operations combined with existing cash on hand and amounts available under the Revolver will be sufficient to fund our working capital needs, common stock repurchases and planned capital expenditures
for the next twelve months.
58
Table of Contents
Contractual Obligations
The following table identifies our contractual obligations as of January 3, 2015 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
Less than
1 Year |
|
1 - 3 Years |
|
3 - 5 Years |
|
More than
5 Years |
|
Debt obligations(1) |
|
$ |
623,556 |
|
$ |
15,725 |
|
$ |
40,825 |
|
$ |
564,200 |
|
$ |
2,806 |
|
Interest payments on debt(2) |
|
|
36,692 |
|
|
11,443 |
|
|
21,350 |
|
|
3,786 |
|
|
113 |
|
Minimum royalty payments(3) |
|
|
509,252 |
|
|
226,363 |
|
|
197,515 |
|
|
85,374 |
|
|
|
|
Capital lease obligations |
|
|
7,218 |
|
|
1,039 |
|
|
2,024 |
|
|
1,967 |
|
|
2,188 |
|
Operating lease obligations |
|
|
919,913 |
|
|
158,692 |
|
|
256,278 |
|
|
188,834 |
|
|
316,109 |
|
Purchase obligations(4) |
|
|
310,360 |
|
|
297,203 |
|
|
13,157 |
|
|
|
|
|
|
|
Uncertain tax positions(5) |
|
|
5,288 |
|
|
5,288 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations(6) |
|
$ |
2,412,279 |
|
$ |
715,753 |
|
$ |
531,149 |
|
$ |
844,161 |
|
$ |
321,216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- (1)
- Consists
of borrowings in the U.S. and Switzerland, excluding contractual interest payments.
- (2)
- Consists
of interest payments related to debt and capital lease obligations.
- (3)
- Consists
primarily of minimum royalty commitments under exclusive licenses to manufacture watches and jewelry under trademarks not owned by us. However
these minimum royalty commitments do not include amounts owed pursuant to various license and design service agreements under which we are obligated to pay the licensors a percentage of our net sales
of these licensed products.
- (4)
- Consists
primarily of outstanding letters of credit, which represent inventory purchase commitments that typically mature in one to eight months and open
non-cancelable purchase orders.
- (5)
- Management
has only included its current ASC 740 liability in the table above. Long-term amounts of $14.8 million have been excluded because the
payment timing cannot be reasonably estimated.
- (6)
- Pension
obligations of $14.0 million have been excluded because the payment timing cannot be reasonably estimated.
Off Balance Sheet Arrangements
There are no off balance sheet arrangements other than those disclosed in commitments and contingencies.
59
Table of Contents
Selected Quarterly Consolidated Financial Data
The table below sets forth selected quarterly consolidated financial information. The information is derived from our unaudited
consolidated financial statements and includes, in the opinion of management, all normal and recurring adjustments that management considers necessary for a fair statement of results for such periods.
The operating results for any quarter are not necessarily indicative of results for any future period. Certain line items presented in the tables below, when aggregated, may not agree with the
corresponding line items on our consolidated statements of income and comprehensive income for fiscal years 2014 and 2013 due to rounding (in thousands, except percentage and per share data).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2014
|
|
1st Qtr |
|
2nd Qtr |
|
3rd Qtr |
|
4th Qtr |
|
Net sales |
|
$ |
776,544 |
|
$ |
773,820 |
|
$ |
894,482 |
|
$ |
1,064,845 |
|
Gross profit |
|
|
443,220 |
|
|
444,602 |
|
|
509,038 |
|
|
604,312 |
|
Net income |
|
|
69,161 |
|
|
54,899 |
|
|
106,404 |
|
|
156,146 |
|
Net income attributable to noncontrolling interest |
|
|
2,818 |
|
|
2,382 |
|
|
2,683 |
|
|
2,021 |
|
Net income attributable to Fossil Group, Inc |
|
$ |
66,343 |
|
$ |
52,517 |
|
$ |
103,721 |
|
$ |
154,125 |
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.23 |
|
$ |
0.98 |
|
$ |
1.97 |
|
$ |
3.01 |
|
Diluted |
|
$ |
1.22 |
|
$ |
0.98 |
|
$ |
1.96 |
|
$ |
3.00 |
|
Gross profit as a percentage of net sales |
|
|
57.1 |
% |
|
57.5 |
% |
|
56.9 |
% |
|
56.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2013
|
|
1st Qtr |
|
2nd Qtr |
|
3rd Qtr |
|
4th Qtr |
|
Net sales |
|
$ |
680,899 |
|
$ |
706,249 |
|
$ |
810,396 |
|
$ |
1,062,427 |
|
Gross profit |
|
|
378,471 |
|
|
408,901 |
|
|
464,969 |
|
|
609,345 |
|
Net income |
|
|
73,980 |
|
|
70,409 |
|
|
92,374 |
|
|
151,284 |
|
Net income attributable to noncontrolling interest |
|
|
1,794 |
|
|
2,696 |
|
|
2,640 |
|
|
2,766 |
|
Net income attributable to Fossil Group, Inc |
|
$ |
72,186 |
|
$ |
67,713 |
|
$ |
89,734 |
|
$ |
148,518 |
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.22 |
|
$ |
1.16 |
|
$ |
1.59 |
|
$ |
2.69 |
|
Diluted |
|
$ |
1.21 |
|
$ |
1.15 |
|
$ |
1.58 |
|
$ |
2.68 |
|
Gross profit as a percentage of net sales |
|
|
55.6 |
% |
|
57.9 |
% |
|
57.4 |
% |
|
57.4 |
% |
While
the majority of our products are not seasonal in nature, a significant portion of our net sales and operating income is generally derived in the second half of the fiscal year. Our
third and fourth quarters, which include the "back to school" and Christmas seasons, have historically generated a significant portion of our annual operating income. The amount of net sales and
operating income generated during the first quarter is affected by the levels of inventory held by retailers at the end of the Christmas season, as well as general economic conditions and other
factors beyond our control. In general, lower levels of inventory held by retailers at the end of the Christmas season may have a positive impact on our net sales and operating income in the first
quarter of the following fiscal year as a result of higher levels of restocking orders placed by retailers.
As
we expand our retail store base and e-commerce businesses, sales from our Direct to consumer segment may increase as a percentage of the total sales mix. Based upon the historical
seasonality of sales in our Direct to consumer segment, we believe this expansion could result in higher levels of
60
Table of Contents
profitability
in the fourth quarter and lower levels of profitability in the first and second quarters when, due to seasonality, it is more difficult to leverage four wall operating costs and back
office expenses against a lower level of sales productivity. In addition, new product launches would generally augment the sales and operating expense levels in the quarter the product launch takes
place. The results of operations for a particular quarter may also vary due to a number of factors, including retail, economic and monetary conditions, timing of orders or holidays and the mix of
products sold by us.
Item 7A. Quantitative and Qualitative Disclosures about Market 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, Australian dollar and Mexican peso 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 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 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 fiscal year 2014 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 at January 3, 2015 and their expiration dates (in millions).
|
|
|
|
|
|
|
|
|
|
|
Functional Currency |
|
Contract Currency |
|
|
Type
|
|
Amount |
|
Type
|
|
Amount |
|
Expiration Date |
Euro |
|
|
160.4 |
|
U.S. dollar |
|
|
211.6 |
|
May 2016 |
British pound |
|
|
26.0 |
|
U.S. dollar |
|
|
42.2 |
|
June 2016 |
Canadian dollar |
|
|
34.4 |
|
U.S. dollar |
|
|
30.9 |
|
June 2016 |
Japanese yen |
|
|
2,865.0 |
|
U.S. dollar |
|
|
26.8 |
|
June 2016 |
Australian dollar |
|
|
15.0 |
|
U.S. dollar |
|
|
13.1 |
|
September 2015 |
Mexican peso |
|
|
164.3 |
|
U.S. dollar |
|
|
12.0 |
|
September 2015 |
If
we were to settle our euro, British pound, Canadian dollar, Japanese yen, Australian dollar and Mexican peso based forward contracts at January 3, 2015, the net result would
have been a net gain of approximately $18.1 million, net of taxes. At fiscal year-end 2014, a 10% 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 $5.6 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. At fiscal year-end 2014, a 10% 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 $77.9 million. In our view, these hypothetical losses resulting from these assumed changes in
foreign currency exchange rates are not material to our consolidated financial position, results of operations or cash flows.
61
Table of Contents
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 January 3, 2015, excluding our $231.3 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 $3.9 million.
62
Table of Contents
Item 8. Consolidated Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Stockholders of
Fossil Group, Inc.
Richardson, Texas
We
have audited the accompanying consolidated balance sheets of Fossil Group, Inc. and subsidiaries (the "Company") as of January 3, 2015 and December 28, 2013, and
the related consolidated statements of income and comprehensive income, stockholders' equity, and cash flows for each of the three years in the period ended January 3, 2015. Our audits also
included the consolidated financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on the consolidated financial statements and consolidated financial statement schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinions.
In
our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Fossil Group, Inc. and subsidiaries as of
January 3, 2015 and December 28, 2013, and the results of their operations and their cash flows for each of the three years in the period ended January 3, 2015, in conformity with
accounting principles generally accepted in the United States of America. Also, in our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We
have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of
January 3, 2015, based on the criteria established in Internal ControlIntegrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report dated February 20, 2015 expressed an unqualified opinion on the Company's internal control over financial reporting.
/s/
Deloitte & Touche LLP
Dallas,
Texas
February 20, 2015
63
Table of Contents
FOSSIL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
IN THOUSANDS
|
|
|
|
|
|
|
|
|
|
January 3,
2015 |
|
December 28,
2013 |
|
Assets |
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
276,261 |
|
$ |
320,479 |
|
Accounts receivable-net |
|
|
430,498 |
|
|
454,762 |
|
Inventories |
|
|
597,281 |
|
|
570,719 |
|
Deferred income tax assets-net |
|
|
34,084 |
|
|
46,986 |
|
Prepaid expenses and other current assets |
|
|
151,730 |
|
|
86,516 |
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
1,489,854 |
|
|
1,479,462 |
|
Property, plant and equipment-net |
|
|
345,606 |
|
|
355,666 |
|
Goodwill |
|
|
197,728 |
|
|
206,954 |
|
Intangible and other assets-net |
|
|
174,364 |
|
|
188,332 |
|
|
|
|
|
|
|
|
|
Total long-term assets |
|
|
717,698 |
|
|
750,952 |
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,207,552 |
|
$ |
2,230,414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Equity |
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
Accounts payable |
|
$ |
159,267 |
|
$ |
165,433 |
|
Short-term and current portion of long-term debt |
|
|
16,646 |
|
|
13,443 |
|
Accrued expenses: |
|
|
|
|
|
|
|
Compensation |
|
|
50,776 |
|
|
80,573 |
|
Royalties |
|
|
54,013 |
|
|
65,117 |
|
Co-op advertising |
|
|
28,591 |
|
|
25,599 |
|
Transaction taxes |
|
|
35,301 |
|
|
35,134 |
|
Other |
|
|
75,609 |
|
|
79,860 |
|
Income taxes payable |
|
|
26,626 |
|
|
26,747 |
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
446,829 |
|
|
491,906 |
|
Long-term income taxes payable |
|
|
16,610 |
|
|
15,720 |
|
Deferred income tax liabilities |
|
|
87,860 |
|
|
98,168 |
|
Long-term debt |
|
|
613,659 |
|
|
494,711 |
|
Other long-term liabilities |
|
|
58,793 |
|
|
54,542 |
|
|
|
|
|
|
|
|
|
Total long-term liabilities |
|
|
776,922 |
|
|
663,141 |
|
Commitments and contingencies (Note 13) |
|
|
|
|
|
|
|
Stockholders' equity: |
|
|
|
|
|
|
|
Common stock, 50,771 and 54,708 shares issued and outstanding at January 3, 2015 and December 28, 2013, respectively |
|
|
508 |
|
|
547 |
|
Additional paid-in capital |
|
|
171,669 |
|
|
154,376 |
|
Retained earnings |
|
|
822,093 |
|
|
877,063 |
|
Accumulated other comprehensive (loss) income |
|
|
(16,410 |
) |
|
36,691 |
|
|
|
|
|
|
|
|
|
Total Fossil Group, Inc. stockholders' equity |
|
|
977,860 |
|
|
1,068,677 |
|
Noncontrolling interest |
|
|
5,941 |
|
|
6,690 |
|
|
|
|
|
|
|
|
|
Total stockholders' equity |
|
|
983,801 |
|
|
1,075,367 |
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity |
|
$ |
2,207,552 |
|
$ |
2,230,414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to the consolidated financial statements.
64
Table of Contents
FOSSIL GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
IN THOUSANDS, EXCEPT PER SHARE DATA
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
2014 |
|
2013 |
|
2012 |
|
Net sales |
|
$ |
3,509,691 |
|
$ |
3,259,971 |
|
$ |
2,857,508 |
|
Cost of sales |
|
|
1,508,519 |
|
|
1,398,285 |
|
|
1,250,965 |
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
2,001,172 |
|
|
1,861,686 |
|
|
1,606,543 |
|
Selling, general and administrative expenses |
|
|
1,434,636 |
|
|
1,300,090 |
|
|
1,117,703 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
566,536 |
|
|
561,596 |
|
|
488,840 |
|
Interest expense |
|
|
15,898 |
|
|
9,548 |
|
|
5,160 |
|
Other income-net |
|
|
7,440 |
|
|
9,419 |
|
|
8,542 |
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
558,078 |
|
|
561,467 |
|
|
492,222 |
|
Provision for income taxes |
|
|
171,467 |
|
|
173,419 |
|
|
137,963 |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
386,611 |
|
|
388,048 |
|
|
354,259 |
|
Less: Net income attributable to noncontrolling interest |
|
|
9,904 |
|
|
9,896 |
|
|
10,858 |
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Fossil Group, Inc. |
|
$ |
376,707 |
|
$ |
378,152 |
|
$ |
343,401 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), net of taxes: |
|
|
|
|
|
|
|
|
|
|
Currency translation adjustment |
|
$ |
(65,393 |
) |
$ |
7,971 |
|
$ |
11,228 |
|
Securities available for sale-net change |
|
|
0 |
|
|
475 |
|
|
(29 |
) |
Cash flow hedges-net change |
|
|
16,675 |
|
|
(1,251 |
) |
|
(4,619 |
) |
Pension plan activity |
|
|
(4,383 |
) |
|
736 |
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss) |
|
|
(53,101 |
) |
|
7,931 |
|
|
6,580 |
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
333,510 |
|
|
395,979 |
|
|
360,839 |
|
Less: Comprehensive income attributable to noncontrolling interest |
|
|
9,904 |
|
|
9,896 |
|
|
10,858 |
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to Fossil Group, Inc. |
|
$ |
323,606 |
|
$ |
386,083 |
|
$ |
349,981 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
7.12 |
|
$ |
6.59 |
|
$ |
5.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
7.10 |
|
$ |
6.56 |
|
$ |
5.59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
52,882 |
|
|
57,401 |
|
|
60,959 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
53,080 |
|
|
57,676 |
|
|
61,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to the consolidated financial statements.
65
Table of Contents
FOSSIL GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AMOUNTS IN THOUSANDS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
|
|
|
|
|
Accumulated
other
comprehensive
income
(loss) |
|
Stockholders'
equity
attributable
to Fossil
Group, Inc. |
|
|
|
|
|
|
|
Shares |
|
Par
value |
|
Additional
paid-in
capital |
|
Treasury
stock |
|
Retained
earnings |
|
Noncontrolling
interest |
|
Total
stockholders'
equity |
|
Balance, December 31, 2011 |
|
|
68,370 |
|
$ |
684 |
|
$ |
149,243 |
|
$ |
(450,700 |
) |
$ |
1,384,522 |
|
$ |
22,180 |
|
$ |
1,105,929 |
|
$ |
10,917 |
|
$ |
1,116,846 |
|
Common stock issued upon exercise of stock options and stock appreciation rights |
|
|
336 |
|
|
3 |
|
|
6,087 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
6,090 |
|
|
0 |
|
|
6,090 |
|
Tax benefit derived from stock-based compensation |
|
|
0 |
|
|
0 |
|
|
11,693 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
11,693 |
|
|
0 |
|
|
11,693 |
|
Acquisition of common stock |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
(271,293 |
) |
|
0 |
|
|
0 |
|
|
(271,293 |
) |
|
0 |
|
|
(271,293 |
) |
Retirement of common stock |
|
|
(9,341 |
) |
|
(93 |
) |
|
(60,476 |
) |
|
722,410 |
|
|
(661,841 |
) |
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
Restricted stock issued in connection with stock-based compensation plan |
|
|
116 |
|
|
1 |
|
|
(1 |
) |
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
Common stock forfeitures put to treasury |
|
|
0 |
|
|
0 |
|
|
417 |
|
|
(417 |
) |
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
Stock-based compensation |
|
|
0 |
|
|
0 |
|
|
18,568 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
18,568 |
|
|
0 |
|
|
18,568 |
|
Net income |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
343,401 |
|
|
0 |
|
|
343,401 |
|
|
10,858 |
|
|
354,259 |
|
Other comprehensive income (loss) |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
6,580 |
|
|
6,580 |
|
|
0 |
|
|
6,580 |
|
Purchase of noncontrolling interest shares |
|
|
0 |
|
|
0 |
|
|
(7,332 |
) |
|
0 |
|
|
0 |
|
|
0 |
|
|
(7,332 |
) |
|
(6,729 |
) |
|
(14,061 |
) |
Distribution of noncontrolling interest earnings and other |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
(8,198 |
) |
|
(8,198 |
) |
Acquisitions |
|
|
150 |
|
|
1 |
|
|
19,898 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
19,899 |
|
|
81 |
|
|
19,980 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 29, 2012 |
|
|
59,631 |
|
$ |
596 |
|
$ |
138,097 |
|
$ |
0 |
|
$ |
1,066,082 |
|
$ |
28,760 |
|
$ |
1,233,535 |
|
$ |
6,929 |
|
$ |
1,240,464 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued upon exercise of stock options and stock appreciation rights |
|
|
293 |
|
|
3 |
|
|
7,593 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
7,596 |
|
|
0 |
|
|
7,596 |
|
Tax benefit derived from stock-based compensation |
|
|
0 |
|
|
0 |
|
|
8,379 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
8,379 |
|
|
0 |
|
|
8,379 |
|
Acquisition of common stock |
|
|
0 |
|
|
0 |
|
|
1,064 |
|
|
(583,318 |
) |
|
0 |
|
|
0 |
|
|
(582,254 |
) |
|
0 |
|
|
(582,254 |
) |
Retirement of common stock |
|
|
(5,340 |
) |
|
(53 |
) |
|
(16,094 |
) |
|
583,318 |
|
|
(567,171 |
) |
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
Restricted stock issued in connection with stock-based compensation plan |
|
|
124 |
|
|
1 |
|
|
(1 |
) |
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
Stock-based compensation |
|
|
0 |
|
|
0 |
|
|
15,338 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
15,338 |
|
|
0 |
|
|
15,338 |
|
Net income |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
378,152 |
|
|
0 |
|
|
378,152 |
|
|
9,896 |
|
|
388,048 |
|
Other comprehensive income (loss) |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
7,931 |
|
|
7,931 |
|
|
0 |
|
|
7,931 |
|
Distribution of noncontrolling interest earnings and other |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
(10,135 |
) |
|
(10,135 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 28, 2013 |
|
|
54,708 |
|
$ |
547 |
|
$ |
154,376 |
|
$ |
0 |
|
$ |
877,063 |
|
$ |
36,691 |
|
$ |
1,068,677 |
|
$ |
6,690 |
|
$ |
1,075,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued upon exercise of stock options and stock appreciation rights |
|
|
88 |
|
|
1 |
|
|
3,234 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
3,235 |
|
|
0 |
|
|
3,235 |
|
Tax benefit derived from stock-based compensation |
|
|
0 |
|
|
0 |
|
|
1,430 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
1,430 |
|
|
0 |
|
|
1,430 |
|
Acquisition of common stock |
|
|
0 |
|
|
0 |
|
|
800 |
|
|
(438,711 |
) |
|
0 |
|
|
0 |
|
|
(437,911 |
) |
|
0 |
|
|
(437,911 |
) |
Retirement of common stock |
|
|
(4,144 |
) |
|
(41 |
) |
|
(6,993 |
) |
|
438,711 |
|
|
(431,677 |
) |
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
Restricted stock issued in connection with stock-based compensation plan |
|
|
119 |
|
|
1 |
|
|
(1 |
) |
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
Stock-based compensation |
|
|
0 |
|
|
0 |
|
|
18,823 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
18,823 |
|
|
0 |
|
|
18,823 |
|
Net income |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
376,707 |
|
|
0 |
|
|
376,707 |
|
|
9,904 |
|
|
386,611 |
|
Other comprehensive income (loss) |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
(53,101 |
) |
|
(53,101 |
) |
|
0 |
|
|
(53,101 |
) |
Distribution of noncontrolling interest earnings and other |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
(10,317 |
) |
|
(10,317 |
) |
Purchase of noncontrolling interest shares |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
(336 |
) |
|
(336 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 3, 2015 |
|
|
50,771 |
|
$ |
508 |
|
$ |
171,669 |
|
$ |
0 |
|
$ |
822,093 |
|
$ |
(16,410 |
) |
$ |
977,860 |
|
$ |
5,941 |
|
$ |
983,801 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
notes to consolidated financial statements.
66
Table of Contents
FOSSIL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
AMOUNTS IN THOUSANDS
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
2014 |
|
2013 |
|
2012 |
|
Operating Activities: |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
386,611 |
|
$ |
388,048 |
|
$ |
354,259 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
Depreciation, amortization and accretion |
|
|
95,931 |
|
|
81,936 |
|
|
65,536 |
|
Stock-based compensation |
|
|
18,823 |
|
|
15,338 |
|
|
18,568 |
|
Increase (decrease) in allowance for returns-net of inventory in transit |
|
|
3,701 |
|
|
(307 |
) |
|
3,395 |
|
Loss on disposal of assets |
|
|
465 |
|
|
731 |
|
|
2,290 |
|
Impairment losses |
|
|
9,266 |
|
|
5,750 |
|
|
1,231 |
|
Equity in income of joint venture |
|
|
0 |
|
|
0 |
|
|
(1,382 |
) |
Distribution from joint venture |
|
|
0 |
|
|
0 |
|
|
1,870 |
|
Gain on equity method investment |
|
|
0 |
|
|
(6,510 |
) |
|
0 |
|
Increase (decrease) in allowance for doubtful accounts |
|
|
550 |
|
|
(5,422 |
) |
|
(1,221 |
) |
Excess tax benefits from stock-based compensation |
|
|
(1,430 |
) |
|
(8,379 |
) |
|
(11,693 |
) |
Deferred income taxes and other |
|
|
2,708 |
|
|
12,400 |
|
|
10,591 |
|
Contingent consideration remeasurement |
|
|
1,112 |
|
|
0 |
|
|
(9,949 |
) |
Changes in operating assets and liabilities, net of effect of acquisitions: |
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(8,495 |
) |
|
(77,452 |
) |
|
(42,849 |
) |
Inventories |
|
|
(60,746 |
) |
|
(52,923 |
) |
|
10,677 |
|
Prepaid expenses and other current assets |
|
|
(52,726 |
) |
|
(21,141 |
) |
|
38,236 |
|
Accounts payable |
|
|
2,477 |
|
|
15,347 |
|
|
(7,017 |
) |
Accrued expenses |
|
|
(13,315 |
) |
|
52,904 |
|
|
2,847 |
|
Income taxes payable |
|
|
2,951 |
|
|
11,362 |
|
|
16,211 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
387,883 |
|
|
411,682 |
|
|
451,600 |
|
Investing Activities: |
|
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment |
|
|
(94,763 |
) |
|
(95,234 |
) |
|
(112,385 |
) |
Increase in intangible and other assets |
|
|
(9,419 |
) |
|
(14,818 |
) |
|
(10,419 |
) |
Proceeds from the sale of property, plant, equipment and other |
|
|
571 |
|
|
2,029 |
|
|
68 |
|
Net change in restricted cash |
|
|
41 |
|
|
376 |
|
|
6,734 |
|
Business acquisitions-net of cash acquired |
|
|
0 |
|
|
(15,521 |
) |
|
(229,151 |
) |
Net investment hedge settlement |
|
|
410 |
|
|
0 |
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(103,160 |
) |
|
(123,168 |
) |
|
(345,153 |
) |
Financing Activities: |
|
|
|
|
|
|
|
|
|
|
Acquisition of common stock |
|
|
(437,911 |
) |
|
(582,254 |
) |
|
(271,293 |
) |
Distribution of noncontrolling interest earnings and other |
|
|
(10,317 |
) |
|
(10,135 |
) |
|
(8,198 |
) |
Purchase of noncontrolling interest shares |
|
|
(336 |
) |
|
0 |
|
|
(14,061 |
) |
Excess tax benefits from stock-based compensation |
|
|
1,430 |
|
|
8,379 |
|
|
11,693 |
|
Debt borrowings |
|
|
961,000 |
|
|
1,222,116 |
|
|
554,568 |
|
Debt payments |
|
|
(838,684 |
) |
|
(791,495 |
) |
|
(498,391 |
) |
Proceeds from exercise of stock options |
|
|
3,235 |
|
|
7,596 |
|
|
6,090 |
|
Other financing activities |
|
|
(3,598 |
) |
|
(2,456 |
) |
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(325,181 |
) |
|
(148,249 |
) |
|
(219,592 |
) |
Effect of exchange rate changes on cash and cash equivalents |
|
|
(3,760 |
) |
|
2,978 |
|
|
2,883 |
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents |
|
|
(44,218 |
) |
|
143,243 |
|
|
(110,262 |
) |
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
|
|
Beginning of year |
|
|
320,479 |
|
|
177,236 |
|
|
287,498 |
|
|
|
|
|
|
|
|
|
|
|
|
End of year |
|
$ |
276,261 |
|
$ |
320,479 |
|
$ |
177,236 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to the consolidated financial statements.
67
Table of Contents
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies
Consolidated Financial Statements include the accounts of Fossil Group, Inc., a Delaware corporation, and its subsidiaries (the
"Company"). The Company reports on a fiscal year reflecting the retail-based calendar (containing 4-4-5 week calendar quarters). References to fiscal years 2014, 2013 and 2012 are for the
fiscal years ended January 3, 2015, December 28, 2013 and December 29, 2012, respectively. The Company's fiscal year periodically results in a 53-week year instead of a normal
52-week year. The current fiscal year ended January 3, 2015 is a 53-week year, with the additional week included in the first quarter of the fiscal year. Accordingly, the information presented
herein includes fifty-three weeks
of operations for fiscal year 2014 as compared to fifty-two weeks in fiscal years 2013 and 2012. All intercompany balances and transactions are eliminated in consolidation. Certain prior period
amounts have been reclassified to conform to the current period presentation. The Company is a leader in the design, development, marketing and distribution of contemporary, high quality fashion
accessories on a global basis. The Company's products are sold primarily through department stores, specialty retailers and Company-owned retail stores worldwide.
Use of Estimates is required in the preparation of the consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America. Management makes estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates
and judgments, including those related to product returns, inventories, long-lived assets, goodwill and trade names, income taxes, warranty costs, hedge accounting and stock-based compensation.
Management bases its estimates and judgments on historical experience and on various other factors that it believes are reasonable under the circumstances. Management estimates form the basis for
making judgments about the carrying value of the assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates under different assumptions
or conditions.
Concentration of Risk involves financial instruments that potentially expose the Company to concentration of credit risk and consist
primarily of cash investments and accounts receivable. The Company places its cash investments with high-credit quality financial institutions and currently invests primarily in corporate debt
securities and money market funds with major banks and financial institutions. Accounts receivable are generally diversified due to the number of entities comprising the Company's customer base and
their dispersion across many geographic regions. The Company believes no significant concentration of credit risk exists with respect to these cash investments and accounts receivable.
A
significant portion of sales of the Company's products are supplied by manufacturers located outside of the U.S., primarily in Asia. While the Company is not dependent on any single
manufacturer outside the U.S., the Company could be adversely affected by political or economic disruptions affecting the business or operations of third-party manufacturers located outside of the
U.S. In fiscal year 2014, two of the Company's majority-owned assembly factories accounted for approximately 57% of the Company's total watch assembly and jewelry production.
The
Company has entered into multi-year, worldwide exclusive license agreements for the manufacture, distribution and sale of products bearing the brand names of certain globally
recognized fashion companies. Sales of the Company's licensed products amounted to 53.5% of the consolidated net sales for fiscal year 2014, of which MICHAEL KORS® product sales accounted
for 26.3%.
68
Table of Contents
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Significant Accounting Policies (Continued)
Cash Equivalents are considered all highly liquid investments with original maturities of three months or less from the date of purchase.
Accounts Receivable are stated net of allowances of approximately $68.2 million and $63.1 million for estimated customer
returns at the end of fiscal years 2014 and 2013, respectively, and net of doubtful accounts of approximately $11.8 million at the end of both fiscal years 2014 and 2013. The Company's policy
is to maintain allowances for bankruptcies until the bankruptcies are actually settled. The total amount charged to cost and expenses during fiscal year 2014 relating to the Company's doubtful
accounts receivable was $3.3 million.
Inventories are stated at the lower of market or average cost, including any applicable duty and freight charges. Inventory held at
consignment locations is included in the Company's finished goods inventory, and at the end of fiscal years 2014 and 2013, was $40.7 million and $29.9 million, respectively.
Investments in which the Company has significant influence over the investee are accounted for utilizing the equity method. If the Company
does not have significant influence over the investee, the cost method is utilized.
Property, Plant and Equipment is stated at cost less accumulated depreciation and amortization. Depreciation is calculated using the
straight-line method over the estimated useful lives of the assets of thirty years for buildings, generally five years for machinery and equipment and furniture and fixtures and three to seven years
for computer equipment and software. Leasehold improvements are amortized over the shorter of the lease term or the asset's estimated useful life.
Property,
plant and equipment and other long-lived assets are evaluated for impairment whenever events or conditions indicate that the carrying value of an asset may not be recoverable
based on expected undiscounted cash flows related to the asset. Property, plant and equipment and key money impairment losses related to underperforming Company-owned retail stores of approximately
$9.3 million, $5.8 million and $1.2 million were recorded in fiscal years 2014, 2013 and 2012, respectively, and are included in selling, general and administrative expenses in
the Company's consolidated statements of income and comprehensive income.
Goodwill and Other Intangible Assets include the cost in excess of net tangible assets acquired (goodwill), trademarks, trade names,
customer lists and patents. Trademarks, customer lists and patents
are amortized using the straight-line method over their estimated useful lives, which are generally three to 20 years. Goodwill and other indefinite-lived intangible assets, such as trade names
acquired in business combinations, are evaluated for impairment annually as of the end of the fiscal year. Additionally, if events or conditions were to indicate the carrying value of a reporting unit
or an indefinite-lived intangible asset may not be recoverable, the Company would evaluate the asset for impairment at that time. Impairment testing compares the carrying amount of the reporting unit
or other intangible assets with its fair value. When the carrying amount of the reporting unit or other intangible assets exceeds its fair value, an impairment charge is recorded.
The
Company has three reporting units for which it evaluates goodwill for impairment. These reporting units are North America wholesale, Europe wholesale and Asia Pacific wholesale. The
fair value of each reporting unit is estimated using market comparable information and an income approach. If the estimated fair value of a reporting unit exceeds its carrying value, no impairment
69
Table of Contents
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Significant Accounting Policies (Continued)
charge
is recorded. As of January 3, 2015, the fair value of each of these reporting units substantially exceeded its carrying value.
Judgments
and assumptions are inherent in the Company's estimate of future cash flows used to determine the estimate of the reporting unit's fair value. The most significant assumptions
associated with the fair value calculations include estimated future cash flows. The Company's estimated future cash flows are dependent on estimated future growth rates, discount rates and operating
margins. If actual results differ, the estimated future cash flows may not be realized, and future impairments of goodwill may be incurred.
The
Company estimates the fair value of its trade names using discounted cash flow methodologies. Due to the inherent uncertainties involved in making the estimates and assumptions used
in the fair value analysis, actual results may differ, which could alter the fair value of the trade names and possibly result in impairment charges in future periods. The Company has completed the
required annual impairment testing for trade names for fiscal years 2014, 2013 and 2012. No impairment charges were recorded in fiscal years 2014, 2013 or 2012.
Accrued Expenses Other includes liabilities relating to warranties, duty, deferred compensation, gift cards, foreign exchange forward
contracts ("forward contracts"), deferred rent, and other liabilities which are current in nature.
Other Long-Term Liabilities includes obligations relating to asset retirements, deferred rent, forward contracts and defined benefits
relating to certain international employees that are not current in nature.
Cumulative Translation Adjustment is included as a component of accumulated other comprehensive income and reflects the adjustments
resulting from translating the financial statements of foreign subsidiaries into U.S. dollars. The functional currency of the Company's foreign subsidiaries is the currency of the primary economic
environment in which the entity operates, which is generally the local currency of the country. Accordingly, assets and liabilities of the foreign subsidiaries are translated to U.S. dollars at fiscal
year-end exchange rates. Income and expense items are translated at daily or average monthly exchange rates. Those changes in exchange rates that affect cash flows and the related receivables or
payables are recognized as transaction gains and losses in determining net income. The Company incurred net foreign currency transaction gains, including gains and losses associated with the
settlement of forward contracts, of approximately $20,000, $1.0 million and $5.6 million fiscal years 2014, 2013 and 2012, respectively. These net gains have been included in other
incomenet in the Company's consolidated statements of income and comprehensive income.
Hedging Instruments consist of forward contracts and an interest rate swap. Forward contracts are entered into by the Company principally
to hedge the future payment of intercompany inventory transactions by its non-U.S. subsidiaries. These cash flow hedges are stated at estimated fair value and changes in fair value are reported as a
component of other comprehensive income (loss), net of taxes on the Company's consolidated statements of income and comprehensive income. If the Company was to settle its euro, British pound, Canadian
dollar, Japanese yen, Australian dollar and Mexican peso based forward contracts at fiscal year-end 2014, the result would have been a net gain of approximately $18.1 million, net of taxes.
This unrealized gain is recognized in other comprehensive income (loss), net of taxes on the Company's consolidated statements of income and comprehensive income. Additionally, to the extent that any
of these contracts are not considered to be perfectly effective in offsetting the
70
Table of Contents
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Significant Accounting Policies (Continued)
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-net on the Company's
consolidated statements of income and comprehensive income. Also, the Company has entered into an interest rate swap agreement to effectively convert a portion of its variable rate debt obligations
from a floating rate to a fixed rate. Changes in the fair value of the interest rate swap are recorded as a component of accumulated other comprehensive income within stockholders' equity, and are
recognized in interest expense in the period in which the payment is settled. To reduce exposure to changes in currency exchange rates adversely affecting the Company's investment in a
euro-denominated subsidiary, the Company entered into a forward contract designated as a net investment hedge that was settled during the second quarter of fiscal year 2014. The Company does not hold
or issue derivative financial instruments for trading or speculative purposes. See Note 8Derivatives and Risk Management for more information regarding the Company's use of
derivatives.
Litigation Liabilities are estimated amounts for claims that are probable and can be reasonably estimated and are recorded as liabilities
in the Company's consolidated balance sheets. The likelihood of a material change in these estimated liabilities would be dependent on new claims that may arise, changes in the circumstances used to
estimate amounts for prior period claims and favorable or unfavorable final settlements of prior period claims. As additional information becomes available, the Company assesses the potential
liability related to new claims and existing claims and revises estimates as appropriate. As new claims arise or circumstances change relative to prior claim assessments, revisions in estimates of the
potential liability could materially impact the Company's consolidated results of operations and financial position.
Stock-Based Compensation is recognized as expense related to the fair value of employee stock based awards. The Company utilizes the
Black-Scholes model to determine the fair value of stock options and stock appreciation rights on the date of grant. The model requires the Company to make assumptions concerning (i) the length
of time employees will retain their vested stock options and stock appreciation rights before exercising them ("expected term"), (ii) the volatility of the Company's common stock price over the
expected term and (iii) the number of stock options and stock appreciation rights that will be forfeited. Changes in these assumptions can materially affect the estimate of fair value of
stock-based compensation and, consequently, the related expense amounts recognized on the Company's consolidated statements of income and comprehensive income.
Revenues are recognized at the point title and the risks and rewards of ownership have passed to the customer, based on the terms of sale.
Revenue from sales of the Company's products including those that are subject to inventory consignment agreements is recognized when title and risk of loss transfers, delivery has occurred, the price
to the buyer is determinable and collectability is reasonably assured. The Company accepts limited returns and may request that a customer return a product if the customer has an excess of any style
that the Company has identified as being a poor performer for that customer or geographic location. The Company continually monitors returns and maintains a provision for estimated returns based upon
historical experience and any specific issues identified. Product returns are accounted for as reductions to revenue, cost of sales, accounts receivable and an increase in inventory to the extent the
returned product is resalable. While returns have historically been within management's expectations and the provisions established, future return rates may differ from those experienced in the past.
In the event that the Company's products are performing poorly in the retail market and/or it experiences product damages or defects at a rate significantly higher than the historical rate, the
resulting returns could have an adverse impact on the operating results for the
71
Table of Contents
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Significant Accounting Policies (Continued)
period
or periods in which such returns occur. Taxes imposed by governmental authorities on the Company's revenue-producing activities with customers, such as sales taxes and value added taxes, are
excluded from net sales.
Cost of Sales includes raw material costs, assembly labor, assembly overhead including depreciation expense, assembly warehousing costs
and shipping and handling costs related to the movement of finished goods from assembly locations to sales distribution centers and from sales distribution centers to customer locations. Additionally,
cost of sales includes customs duties, product packaging cost, royalty cost associated with sales of licensed products, the cost of molding and tooling and inventory shrinkage and damages.
Selling, General and Administrative Expenses ("SG&A") 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.
Advertising Costs for in-store and media advertising as well as co-op advertising, catalog costs, product displays, show/exhibit costs,
advertising royalties related to the sales of licensed brands, internet costs associated with affiliation fees, printing, sample costs and promotional allowances are expensed as incurred. Advertising
costs were approximately $232.7 million, $205.6 million and $185.1 million for fiscal years 2014, 2013 and 2012, respectively.
Warranty Costs are included in SG&A. The Company records an estimate for future warranty costs based on historical repair costs and
adjusts the liability as required. Warranty costs have historically been within the Company's expectations and the provisions established. If such costs were to substantially exceed estimates, this
could have an adverse effect on the Company's operating results. See Note 4Warranty Liabilities, for more information regarding warranties.
Noncontrolling Interest is recognized as equity in the Company's consolidated balance sheets, is reflected in net income attributable to
noncontrolling interest in the consolidated statements of income and comprehensive income and is captured within the summary of changes in equity attributable to controlling and noncontrolling
interests. Noncontrolling interests represent ownership interests in the Company's subsidiaries held by third parties.
Other Comprehensive Income (Loss) which is reported in the consolidated statements of income and comprehensive income and consolidated
statements of equity, consists of net income and other gains and losses affecting equity that are excluded from net income. The components of other comprehensive income (loss) primarily consist of
foreign currency translation gains and losses and net realized and unrealized gains and losses on the following: (i) securities available for sale; (ii) derivatives designated as cash
flow hedges; and (iii) the Company's defined benefit plans.
Earnings Per Share ("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.
72
Table of Contents
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Significant Accounting Policies (Continued)
The
following table reconciles the numerators and denominators used in the computations of both basic and diluted EPS (in thousands except per share data):
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
2014 |
|
2013 |
|
2012 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
Net income attributable to Fossil Group, Inc |
|
$ |
376,707 |
|
$ |
378,152 |
|
$ |
343,401 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
Basic EPS computation: |
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding |
|
|
52,882 |
|
|
57,401 |
|
|
60,959 |
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS |
|
$ |
7.12 |
|
$ |
6.59 |
|
$ |
5.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS computation: |
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding |
|
|
52,882 |
|
|
57,401 |
|
|
60,959 |
|
Stock options, stock appreciation rights and restricted stock units |
|
|
198 |
|
|
275 |
|
|
441 |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average common shares outstanding |
|
|
53,080 |
|
|
57,676 |
|
|
61,400 |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS |
|
$ |
7.10 |
|
$ |
6.56 |
|
$ |
5.59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximately
318,448, 274,944 and 316,638 weighted shares issuable under stock-based awards were not included in the diluted EPS calculation in fiscal years 2014, 2013 and 2012,
respectively, because they were antidilutive.
Income Taxes are provided for under the asset and liability method for temporary differences in the recognition of assets and liabilities
recognized for income tax and financial reporting purposes. Deferred tax assets are periodically assessed for the likelihood of whether they more likely than not will be realized. Tax benefits
associated with uncertain tax positions are recognized in the period in which one of the following conditions is satisfied: (i) the more likely than not recognition threshold is satisfied;
(ii) the position is ultimately settled through negotiation or litigation; or (iii) the statute of limitations for the taxing authority to examine and challenge the position has expired.
Tax benefits associated with an uncertain tax position are derecognized in the period in which the more likely than not recognition threshold is no longer satisfied.
Recently Issued Accounting Standards
In January 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-01, Income StatementExtraordinary 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.
73
Table of Contents
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Significant Accounting Policies (Continued)
In
August 2014, FASB issued ASU 2014-15, Presentation of Financial StatementsGoing 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, CompensationStock 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 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. ASU 2014-09 provides alternative methods of retrospective
adoption and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. Early adoption is not permitted. The Company is evaluating the effect of
adopting ASU 2014-09, but does not expect adoption will have a material impact on the Company's consolidated results of operations or financial position.
In
April 2014, FASB issued ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity ("ASU
2014-08"). Under ASU 2014-08, only disposals of a component of an entity, or a group of components of an entity, that represent a strategic shift that has (or will have) a major effect on the entity's
results and operations would qualify as discontinued operations. ASU 2014-08 also provides guidance on the financial statement presentations and disclosures of discontinued operations. ASU 2014-08 is
effective prospectively for all disposals, or components classified as held for sale, for fiscal years, and interim periods within those years, beginning on or after December 15, 2014. Early
adoption is permitted but only for disposals that have not been previously reported. The Company is evaluating the effect of adopting ASU 2014-08, but does not expect adoption will have a material
impact on the Company's consolidated results of operations or financial position.
74
Table of Contents
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Significant Accounting Policies (Continued)
Recently Adopted Accounting Standards
In accordance with U.S. GAAP, the following provisions, which had no material impact on the Company's financial position,
results of operations or cash flows, were adopted effective fiscal year 2014:
-
- ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss
Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists;
-
- ASU 2013-05, Foreign Currency Matters (Topic 830): Parent's Accounting for the Cumulative Translation
Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity; and
-
- ASU 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and
Liabilities.
2. Acquisitions, Divestiture and Goodwill
Skagen Designs, Ltd. Acquisition. On April 2, 2012, the Company acquired Skagen Designs, Ltd. and certain of its
international
affiliates ("Skagen Designs"). The purchase price was $231.7 million in cash and 150,000 shares of the Company's common stock valued at $19.9 million. In addition, subject to the
purchase agreement, the sellers could receive up to 100,000 additional shares of the Company's common stock if the Company's net sales of SKAGEN® branded products exceed certain thresholds
over a defined period of time (the "Earnout").
The
Company recorded the Earnout as a $9.9 million contingent consideration liability in accrued expensesother in the Company's consolidated balance sheets as of the
acquisition date. As of December 29, 2012, the contingent consideration liability was remeasured at zero, which resulted in a decrease in operating expenses of $9.9 million during fiscal
year 2012. The contingent consideration liability remained valued at zero as the Earnout criteria was not met. The results of Skagen Designs' operations have been included in the Company's
consolidated financial statements since April 2, 2012.
Prior
to closing the Skagen Designs acquisition, the Company incurred approximately $600,000 of acquisition-related expenses for legal, accounting and valuation services during fiscal
year 2011 and the first quarter of fiscal year 2012. The Company incurred additional acquisition and integration related costs of approximately $8.2 million in fiscal year 2012, subsequent to
the closing date. Acquisition and integration costs were reflected in SG&A on the Company's consolidated statements of income and comprehensive income. Assets acquired and liabilities assumed in the
transaction were recorded at their
acquisition date fair values, while transaction costs associated with the acquisition were expensed as incurred.
Because
the total purchase price for Skagen Designs exceeded the fair values of the tangible and intangible assets acquired, $140.4 million of goodwill was recorded equal to the
difference. The element of goodwill that is not separable into identifiable intangible assets represents expected synergies.
The
goodwill and trade name assets recognized from the acquisition have indefinite useful lives, were tested for impairment beginning fiscal year-end 2012 and will continue to be tested
for impairment annually or on an interim basis if indicators are present. The amortization periods for the acquired customer lists, patents and noncompete agreements range from three years to nine
years. Approximately $133.8 million of the goodwill recognized in the acquisition is deductible for tax purposes.
75
Table of Contents
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Acquisitions, Divestiture and Goodwill (Continued)
During the fourth quarter of fiscal year 2014, the Company participated in arbitration proceedings regarding the original purchase price for Skagen Designs, which concluded that the
original purchase amount for Skagen Designs was overstated and awarded the Company approximately $6.0 million. The Company recognized the amount in other income-net in the Company's
consolidated statements of income and comprehensive income for the fiscal year 2014.
Fossil Spain Acquisition. On August 10, 2012, the Company's joint venture company, Fossil, S.L. ("Fossil Spain"), entered into a
Framework
Agreement (the "Framework Agreement") with several related and unrelated parties, including General De Relojeria, S.A. ("General De Relojeria"), the Company's joint venture partner. Pursuant to
the Framework Agreement, Fossil Spain was granted the right to acquire the outstanding 50% of its shares owned by General De Relojeria upon the expiration of the joint venture agreement on
December 31, 2015. Upon the acquisition of these shares, Fossil Spain will become a wholly-owned subsidiary of the Company.
Effective
January 1, 2013, pursuant to the Framework Agreement, the Company assumed control over the board of directors and the day-to-day management of Fossil Spain. As a result
of this change, the Company now controls Fossil Spain and began consolidating it, instead of treating it as an equity method investment.
The
Company remeasured its preexisting investment in Fossil Spain to fair value as of January 1, 2013, resulting in a gain of $6.5 million, which was recorded in other
income-net on the Company's consolidated statements of income and comprehensive income. The results of Fossil Spain's operations have been included in the Company's consolidated financial statements
since January 1, 2013. The Company recorded approximately $10.6 million of goodwill related to the acquisition.
The
purchase price for the shares has a fixed and variable component. The fixed portion is based on 50% of the net book value of Fossil Spain as of December 31, 2012. The fixed
portion was measured at 5.2 million euros (approximately $6.8 million at the purchase date). The Company recorded a contingent consideration liability of 5.9 million euros
(approximately $7.8 million at the purchase date) related to the variable portion of the purchase price as of January 1, 2013. The variable portion is determined based on Fossil Spain's
aggregated results of operations with a minimum annual variable price of 2.0 million euros (approximately $2.6 million at the purchase date) and a maximum annual variable price of
3.5 million euros (approximately $4.6 million at the purchase date) for each of the calendar years 2013, 2014 and 2015. See Note 9Fair Value Measurements for
additional information about the contingent consideration liability for Fossil Spain.
Of
the total consideration for Fossil Spain, 3.2 million euros (approximately $3.9 million) relating to the contingent consideration for 2014 was recorded in accrued
expensesother, and 6.6 million euros (approximately $7.9 million) of the total consideration was recorded in other long-term liabilities in the consolidated balance sheets
at January 3, 2015.
Bentrani Watches, LLC Acquisition. On December 31, 2012, the Company purchased substantially all of the assets of Bentrani
Watches, LLC ("Bentrani"). Bentrani was a distributor of watch products in 16 Latin American countries and was based in Miami, Florida. Bentrani was the Company's largest third-party
distributor and had partnered with the Company for ten years. The purchase price was
$26.6 million, comprised of $19.3 million in cash and $7.3 million in forgiveness of a payable to the Company. The Company recorded approximately $8.9 million of goodwill
related to the acquisition. The results of Bentrani's operations have been included in the Company's consolidated
76
Table of Contents
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Acquisitions, Divestiture and Goodwill (Continued)
financial
statements since the acquisition date. On June 28, 2013, the Company also obtained control of Bentrani Chile SpA ("Bentrani Chile"), and the results of Bentrani Chile's operations
have been included in the Company's consolidated financial statements since that date. The terms of the Bentrani Chile acquisition were not significant.
Swiss Technology Components AG Divestiture. On April 24, 2013, Swiss Technology Holding GmbH ("STH"), a wholly-owned
subsidiary of the
Company, sold 80% of STH's share in Swiss Technology Components AG ("STC"). STC was deconsolidated as a result of the Company's termination of control and has subsequently been accounted for under the
cost method.
Goodwill. The changes in the carrying amount of goodwill were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
Wholesale |
|
Europe
Wholesale |
|
Asia Pacific
Wholesale |
|
Total |
|
Balance at December 29, 2012 |
|
$ |
109,270 |
|
$ |
63,884 |
|
$ |
11,639 |
|
$ |
184,793 |
|
Acquisitions |
|
|
8,890 |
|
|
10,641 |
|
|
0 |
|
|
19,531 |
|
Foreign currency changes |
|
|
(13 |
) |
|
2,692 |
|
|
(49 |
) |
|
2,630 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 28, 2013 |
|
$ |
118,147 |
|
$ |
77,217 |
|
$ |
11,590 |
|
$ |
206,954 |
|
Foreign currency changes |
|
|
(217 |
) |
|
(8,934 |
) |
|
(75 |
) |
|
(9,226 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 3, 2015 |
|
$ |
117,930 |
|
$ |
68,283 |
|
$ |
11,515 |
|
$ |
197,728 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3. Inventories
Inventories consisted of the following (in thousands):
|
|
|
|
|
|
|
|
At Fiscal Year End
|
|
2014 |
|
2013 |
|
Components and parts |
|
$ |
48,797 |
|
$ |
56,275 |
|
Work-in-process |
|
|
13,719 |
|
|
14,017 |
|
Finished goods |
|
|
534,765 |
|
|
500,427 |
|
|
|
|
|
|
|
|
|
Inventories |
|
$ |
597,281 |
|
$ |
570,719 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4. Warranty Liabilities
The Company's warranty liabilities are primarily related to watch products and are included in accrued expensesother in the consolidated balance sheets. The Company's
FOSSIL® watch products sold in the U.S. are covered by a limited warranty against defects in materials or workmanship for a period of 11 years from the date of purchase.
RELIC® watch products sold in the U.S. are covered by a comparable 12 year warranty, while certain other watches sold by the Company are covered by a comparable two year limited
warranty. SKAGEN branded watches are covered by a lifetime warranty against defects due to faulty material or workmanship subject to normal conditions of use. The Company's warranty liability is
recorded using historical warranty repair expense. As changes in
77
Table of Contents
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Warranty Liabilities (Continued)
warranty
costs are experienced, the warranty accrual is adjusted as necessary. Warranty liability activity consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
2014 |
|
2013 |
|
2012 |
|
Beginning balance |
|
$ |
15,658 |
|
$ |
13,383 |
|
$ |
10,996 |
|
Settlements in cash or kind |
|
|
(12,313 |
) |
|
(10,672 |
) |
|
(6,945 |
) |
Warranties issued and adjustments to preexisting warranties(1) |
|
|
10,155 |
|
|
12,607 |
|
|
8,737 |
|
Liabilities assumed in acquisition |
|
|
0 |
|
|
340 |
|
|
595 |
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
13,500 |
|
$ |
15,658 |
|
$ |
13,383 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- (1)
- Changes
in cost estimates related to preexisting warranties are aggregated with accruals for new standard warranties issued and foreign currency changes.
5. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
At Fiscal Year End
|
|
2014 |
|
2013 |
|
Prepaid royalties |
|
$ |
42,698 |
|
$ |
12,322 |
|
Prepaid taxes |
|
|
34,094 |
|
|
29,645 |
|
Other receivables |
|
|
14,840 |
|
|
7,378 |
|
Forward contracts |
|
|
25,867 |
|
|
3,289 |
|
Prepaid rent |
|
|
13,543 |
|
|
10,599 |
|
Restricted cash |
|
|
125 |
|
|
39 |
|
Other prepaid expenses |
|
|
20,359 |
|
|
23,048 |
|
Other |
|
|
204 |
|
|
196 |
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets |
|
$ |
151,730 |
|
$ |
86,516 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6. Property, Plant and Equipment
Property, plant and equipmentnet consisted of the following (in thousands):
|
|
|
|
|
|
|
|
At Fiscal Year End
|
|
2014 |
|
2013 |
|
Land |
|
$ |
14,508 |
|
$ |
15,184 |
|
Buildings |
|
|
71,580 |
|
|
78,013 |
|
Machinery and equipment |
|
|
36,992 |
|
|
39,154 |
|
Furniture and fixtures |
|
|
108,137 |
|
|
98,494 |
|
Computer equipment and software |
|
|
205,831 |
|
|
186,123 |
|
Leasehold improvements |
|
|
246,882 |
|
|
237,671 |
|
Construction in progress |
|
|
21,867 |
|
|
15,814 |
|
|
|
|
|
|
|
|
|
|
|
|
705,797 |
|
|
670,453 |
|
Less accumulated depreciation and amortization |
|
|
360,191 |
|
|
314,787 |
|
|
|
|
|
|
|
|
|
Property, plant and equipment-net |
|
$ |
345,606 |
|
$ |
355,666 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78
Table of Contents
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Intangible and Other Assets
Intangible and other assets-net consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
2013 |
|
At Fiscal Year End
|
|
Useful
Lives |
|
Gross
Amount |
|
Accumulated
Amortization |
|
Gross
Amount |
|
Accumulated
Amortization |
|
Intangibles-subject to amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks |
|
|
10 yrs. |
|
$ |
4,174 |
|
$ |
2,950 |
|
$ |
4,175 |
|
$ |
2,695 |
|
Customer lists |
|
|
5 - 10 yrs. |
|
|
41,703 |
|
|
17,457 |
|
|
43,367 |
|
|
14,065 |
|
Patents |
|
|
3 - 20 yrs. |
|
|
2,273 |
|
|
1,902 |
|
|
2,273 |
|
|
1,360 |
|
Noncompete agreement |
|
|
6 yrs. |
|
|
1,855 |
|
|
851 |
|
|
1,913 |
|
|
558 |
|
Other |
|
|
7 - 20 yrs. |
|
|
353 |
|
|
341 |
|
|
263 |
|
|
207 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangibles-subject to amortization |
|
|
|
|
|
50,358 |
|
|
23,501 |
|
|
51,991 |
|
|
18,885 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles-not subject to amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names |
|
|
|
|
|
83,610 |
|
|
|
|
|
83,659 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key money deposits |
|
|
|
|
|
31,892 |
|
|
18,661 |
|
|
35,535 |
|
|
17,038 |
|
Other deposits |
|
|
|
|
|
21,854 |
|
|
|
|
|
22,574 |
|
|
|
|
Deferred compensation plan assets |
|
|
|
|
|
2,477 |
|
|
|
|
|
2,360 |
|
|
|
|
Deferred tax asset-net |
|
|
|
|
|
8,583 |
|
|
|
|
|
10,044 |
|
|
|
|
Restricted cash |
|
|
|
|
|
575 |
|
|
|
|
|
752 |
|
|
|
|
Shop-in-shop |
|
|
|
|
|
16,333 |
|
|
9,660 |
|
|
16,334 |
|
|
7,767 |
|
Interest rate swap |
|
|
|
|
|
1,724 |
|
|
|
|
|
4,307 |
|
|
|
|
Forward contracts |
|
|
|
|
|
1,802 |
|
|
|
|
|
219 |
|
|
|
|
Other |
|
|
|
|
|
6,978 |
|
|
|
|
|
4,247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other assets |
|
|
|
|
|
92,218 |
|
|
28,321 |
|
|
96,372 |
|
|
24,805 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible and other assets |
|
|
|
|
$ |
226,186 |
|
$ |
51,822 |
|
$ |
232,022 |
|
$ |
43,690 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible and other assets-net |
|
|
|
|
|
|
|
$ |
174,364 |
|
|
|
|
$ |
188,332 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $5.1 million, $5.2 million and $3.5 million for fiscal years 2014, 2013 and 2012, respectively.
Estimated aggregate future amortization expense by fiscal year for intangible assets is as follows (in thousands):
|
|
|
|
|
Fiscal Year
|
|
Amortization
Expense |
|
2015 |
|
$ |
4,633 |
|
2016 |
|
$ |
4,494 |
|
2017 |
|
$ |
4,236 |
|
2018 |
|
$ |
3,877 |
|
2019 |
|
$ |
3,780 |
|
79
Table of Contents
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. 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 18 months. The Company enters into forward contracts
generally for up to 65% of the forecasted purchases to manage fluctuations in global currencies that will ultimately be used to settle such U.S. dollar denominated inventory purchases. Forward
contracts represent agreements to exchange the currency of one country for the currency of another country at an agreed-upon settlement date 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 eligibility, which requires that they represent foreign-currency-denominated forecasted intra-entity transactions in which
(i) the operating unit that has the foreign currency exposure is a party to the hedging instrument and (ii) the hedged transaction is denominated in a currency other than the hedging
unit's functional currency.
At
the inception of each forward contract 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 its consolidated statements of income and comprehensive income, and there were no
components excluded from the assessment of hedge effectiveness for fiscal years 2014, 2013 and 2012.
All
derivative instruments are recognized as either assets or liabilities at fair value in the 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 within the equity section of the Company's 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 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 for fiscal years 2014, 2013 and 2012. Hedge accounting is discontinued if it is determined that
80
Table of Contents
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Derivatives and Risk Management (Continued)
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 January 3, 2015, the Company had the following outstanding forward contracts that were entered into to hedge the future payments of intercompany inventory transactions (in
millions):
|
|
|
|
|
|
|
|
|
|
Functional Currency |
|
Contract Currency |
|
Type
|
|
Amount |
|
Type
|
|
Amount |
|
Euro |
|
|
160.4 |
|
U.S. dollar |
|
|
211.6 |
|
British pound |
|
|
26.0 |
|
U.S. dollar |
|
|
42.2 |
|
Canadian dollar |
|
|
34.4 |
|
U.S. dollar |
|
|
30.9 |
|
Japanese yen |
|
|
2,865.0 |
|
U.S. dollar |
|
|
26.8 |
|
Australian dollar |
|
|
15.0 |
|
U.S. dollar |
|
|
13.1 |
|
Mexican peso |
|
|
164.3 |
|
U.S. dollar |
|
|
12.0 |
|
The
Company is also exposed to interest rate risk related to its $250 million U.S.-based term loan ("Term Loan"). To manage the interest rate risk related to this loan, the
Company entered into an interest rate swap agreement on July 26, 2013 with a term of approximately five years. The objective of this hedge is to offset the variability of future payments
associated with interest rates on the Term Loan. The interest rate swap agreement hedges 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. 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.
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 second quarter of fiscal
year 2014. The effective portion of derivatives designated as net investment hedges are recorded at fair value at each balance sheet date and the change in fair value is recorded in cumulative
translation adjustment as a component of other comprehensive income (loss) in the Company's 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 consolidated statements of income and comprehensive income. Gains and losses reported in accumulated other comprehensive income 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. All of the Company's outstanding forward contracts were
81
Table of Contents
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Derivatives and Risk Management (Continued)
designated
as hedging instruments as of January 3, 2015 and December 28, 2013. 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 was recognized in other comprehensive income (loss), net of taxes during fiscal years 2014 and 2013 was (in thousands):
|
|
|
|
|
|
|
|
|
|
For the Fiscal
Year Ended
January 3, 2015 |
|
For the Fiscal
Year Ended
December 28, 2013 |
|
Cash flow hedges: |
|
|
|
|
|
|
|
Forward contracts |
|
$ |
22,927 |
|
$ |
(1,391 |
) |
Interest rate swap |
|
|
(2,159 |
) |
|
(1,031 |
) |
|
|
|
|
|
|
|
|
Total gain (loss) recognized in other comprehensive income (loss), net of taxes |
|
$ |
20,768 |
|
$ |
(2,422 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 fiscal years 2014 and 2013 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Income
and Comprehensive
Income Location |
|
|
|
For the Fiscal
Year Ended
January 3,
2015 |
|
For the Fiscal
Year Ended
December 28,
2013 |
|
Forward contracts designated as cash flow hedging instruments |
|
Other income-net |
|
Total gain (loss) reclassified from other comprehensive income (loss) |
|
$ |
5,856 |
|
$ |
(246 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward contracts not designated as hedging instruments |
|
Other income-net |
|
Total gain (loss) recognized in income |
|
$ |
(148 |
) |
$ |
567 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap designated as a cash flow hedging instrument |
|
Interest expense |
|
Total gain loss reclassified from other comprehensive income (loss) |
|
$ |
(1,763 |
) |
$ |
(925 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82
Table of Contents
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Derivatives and Risk Management (Continued)
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 consolidated balance sheets in which the fair value amounts for these categories of derivative instruments are included (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives |
|
Liability Derivatives |
|
|
|
January 3, 2015 |
|
December 28, 2013 |
|
January 3, 2015 |
|
December 28, 2013 |
|
|
|
Consolidated
Balance Sheets
Location |
|
Fair Value |
|
Consolidated
Balance Sheets
Location |
|
Fair Value |
|
Consolidated
Balance Sheets
Location |
|
Fair Value |
|
Consolidated
Balance Sheets
Location |
|
Fair Value |
|
Forward contracts designated as cash flow hedging instruments |
|
Prepaid expenses and and other current assets |
|
$ |
25,867 |
|
Prepaid expenses and other current assets |
|
$ |
3,289 |
|
Accrued expenses-other |
|
$ |
0 |
|
Accrued expenses-other |
|
$ |
7,651 |
|
Interest rate swap designated as a cash flow hedging instrument |
|
Prepaid expenses and and other current assets |
|
$ |
0 |
|
Prepaid expenses and other current assets |
|
|
0 |
|
Accrued expenses-other |
|
|
2,157 |
|
Accrued expenses-other |
|
|
2,783 |
|
Forward contracts designated as cash flow hedging instruments |
|
Intangible and other assets-net |
|
$ |
1,802 |
|
Intangible and other assets-net |
|
|
219 |
|
Other long-term liabilities |
|
|
0 |
|
Other long-term liabilities |
|
|
563 |
|
Interest rate swap designated as a cash flow hedging instrument |
|
Intangible and other assets-net |
|
$ |
1,724 |
|
Intangible and other assets-net |
|
|
4,307 |
|
Other long-term liabilities |
|
|
357 |
|
Other long-term liabilities |
|
|
1,693 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
$ |
29,393 |
|
|
|
$ |
7,815 |
|
|
|
$ |
2,514 |
|
|
|
$ |
12,690 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
the end of fiscal year 2014, the Company had forward contracts with maturities extending through June 2016. The estimated net amount of the existing gains and losses at
January 3, 2015 that is expected to be reclassified into earnings within the next twelve months is a gain of $16.9 million. See Note 1Significant Accounting Policies
for additional disclosures on foreign currency hedging instruments.
9. Fair Value Measurements
The Company defines fair value as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or
liability in an orderly transaction between market participants at the measurement date.
ASC
820, Fair Value Measurement and Disclosures ("ASC 820"), establishes a fair value hierarchy, which prioritizes the inputs used in
measuring fair value into three broad levels as follows:
-
- Level 1Quoted prices in active markets for identical assets or liabilities.
-
- Level 2Inputs, other than quoted prices in active markets, that are observable either directly or indirectly.
-
- Level 3Unobservable 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.
83
Table of Contents
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Fair Value Measurements (Continued)
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 |
|
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward contracts |
|
$ |
0 |
|
$ |
27,669 |
|
$ |
0 |
|
$ |
27,669 |
|
Deferred compensation plan assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in publicly traded mutual funds |
|
|
2,477 |
|
|
0 |
|
|
0 |
|
|
2,477 |
|
Interest rate swap |
|
|
0 |
|
|
1,724 |
|
|
0 |
|
|
1,724 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,477 |
|
$ |
29,393 |
|
$ |
0 |
|
$ |
31,870 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration |
|
$ |
0 |
|
$ |
0 |
|
$ |
7,114 |
|
$ |
7,114 |
|
Interest rate swap |
|
|
0 |
|
|
2,514 |
|
|
0 |
|
|
2,514 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
0 |
|
$ |
2,514 |
|
$ |
7,114 |
|
$ |
9,628 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of December 28, 2013 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at December 28, 2013 |
|
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward contracts |
|
$ |
0 |
|
$ |
3,508 |
|
$ |
0 |
|
$ |
3,508 |
|
Deferred compensation plan assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in publicly traded mutual funds |
|
|
2,360 |
|
|
0 |
|
|
0 |
|
|
2,360 |
|
Interest rate swap |
|
|
0 |
|
|
4,307 |
|
|
0 |
|
|
4,307 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,360 |
|
$ |
7,815 |
|
$ |
0 |
|
$ |
10,175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration |
|
$ |
0 |
|
$ |
0 |
|
$ |
8,084 |
|
$ |
8,084 |
|
Forward contracts |
|
|
0 |
|
|
8,214 |
|
|
0 |
|
|
8,214 |
|
Interest rate swap |
|
|
0 |
|
|
4,476 |
|
|
0 |
|
|
4,476 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
0 |
|
$ |
12,690 |
|
$ |
8,084 |
|
$ |
20,774 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
assetsnet in the Company's 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
Company estimates the fair value of its debt using Level 2 inputs, such as interest rates, related terms and maturities. The fair value of the Company's debt approximated its
carrying amount
84
Table of Contents
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Fair Value Measurements (Continued)
as
of January 3, 2015 and December 28, 2013. As of January 3, 2015 and December 28, 2013, the carrying values of cash and cash equivalents, accounts receivable, accounts
payable and accrued liabilities approximated their values due to the short-term maturities of these accounts.
The
fair value of the contingent consideration liability related to Fossil Spain was determined using Level 3 inputs. See Note 2Acquisitions, Divestiture and
Goodwill for additional disclosures about the acquisition. The contingent consideration recorded as of January 3, 2015 is based on Fossil Spain's forecasted earnings during the two year period
from January 1, 2014 to December 31, 2015. During the fiscal year 2014, the Company paid 2.8 million euros (approximately $3.4 million) for
the 2013 contingent consideration. The contingent consideration for calendar year 2014 will be paid during 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. Due to an increase in Fossil Spain's estimated future revenue for calendar years 2014 and 2015, the Company recorded an unfavorable $1.1 million remeasurement
adjustment to the contingent consideration liability in SG&A during the fiscal year 2014. Future revenue growth based on management's projections for the 2015 calendar year is approximately 10%.
Operating expenses are projected to be approximately 28% 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 years 2014 and 2015 is valued at the maximum annual variable price of 3.5 million euros (approximately $4.2 million) for each year. A
decrease in future cash flows may result in a lower estimated fair value of the contingent consideration liability. Future changes in the estimated fair value of the contingent consideration
liability, if any, will be reflected in earnings.
The
fair values of the interest rate swap asset and liability are determined using valuation models based on market observable inputs, including forward curves, mid-market price, foreign
exchange spot or forward rates and volatility levels. See Note 8Derivatives and Risk Management for additional disclosures about the interest rate swap.
The
following tables present the fair value hierarchy for those assets and liabilities measured at fair value on a nonrecurring basis as of January 3, 2015 and December 28,
2013 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
Using |
|
|
|
|
|
For the Fiscal
Year Ended
January 3, 2015 |
|
Total
Impairment
Charge |
|
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specific Company-owned stores |
|
$ |
284 |
|
$ |
0 |
|
$ |
0 |
|
$ |
284 |
|
$ |
(9,266 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
Using: |
|
|
|
|
|
For the Fiscal
Year Ended
December 28, 2013 |
|
Total
Impairment
Charge |
|
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specific Company-owned stores |
|
$ |
668 |
|
$ |
0 |
|
$ |
0 |
|
$ |
668 |
|
$ |
(5,750 |
) |
In
accordance with the provisions of ASC 360, Property, Plant and Equipment, property, plant and equipmentnet with a carrying
amount of $9.1 million related to Company-owned retail store leasehold improvements and fixturing was written down to a fair value of $0.3 million, and related key money in the amount of
$0.5 million was deemed not recoverable, resulting in total impairment charges of $9.3 million for fiscal year 2014.
85
Table of Contents
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Fair Value Measurements (Continued)
In fiscal year 2013, property, plant and equipmentnet with a carrying amount of $6.4 million related to Company-owned retail store leasehold improvements, fixturing,
computer software and computer hardware was written down to a fair value of $0.7 million, resulting in an impairment charge of $5.8 million for fiscal year 2013.
The
fair values of assets related to the Company-owned retail stores were determined using Level 3 inputs. Impairment expenses related to Company-owned retail stores are recorded
in SG&A within the Direct to consumer segment.
10. Debt
The Company's debt consisted of the following, excluding capital lease obligations, (in millions):
|
|
|
|
|
|
|
|
|
|
January 3,
2015 |
|
December 28,
2013 |
|
U.S. revolving line of credit |
|
$ |
389.0 |
|
$ |
250.0 |
|
U.S. term loan |
|
|
231.3 |
|
|
246.9 |
|
Other international |
|
|
3.3 |
|
|
3.8 |
|
|
|
|
|
|
|
|
|
Total debt |
|
|
623.6 |
|
|
500.7 |
|
|
|
|
|
|
|
|
|
Less current portion |
|
|
15.7 |
|
|
12.6 |
|
|
|
|
|
|
|
|
|
Long-term debt |
|
$ |
607.9 |
|
$ |
488.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.-Based. On May 17, 2013, the Company and certain of its subsidiaries entered into a five year Credit Agreement (the
"Credit Agreement")
which provided for revolving credit loans in the amount of $750 million (the "Revolver"), a swingline subfacility up to $20 million, an up to $10 million subfacility for letters
of credit, and a term loan in the amount of $250 million (the "Term Loan"). On May 23, 2014, the Company, entered into a First Amendment (the "Amendment") to the Credit Agreement. The
Amendment increased the credit limit on the Revolver by $300 million to $1,050 million. The Credit Agreement expires and is due and payable on May 17, 2018. The Credit Agreement
is guaranteed by all direct and indirect material domestic subsidiaries of the Company and is secured by 65% of the outstanding voting capital stock and 100% of the non-voting capital stock of the
following foreign subsidiaries of the Company: Fossil Europe B.V., Swiss Technology Holding GmbH and Fossil (East) Limited. In connection with entering into the Credit Agreement, the
Company paid upfront fees of approximately $4.8 million, which are being amortized over the life of the Credit Agreement.
Amounts
outstanding under the Revolver and Term Loan bear interest at the Company's option of (i) the base rate (defined as the higher of (a) the prime rate publicly
announced by Wells Fargo (3.25% at fiscal year-end 2014), (b) the federal funds rate plus 0.50% and (c) the London Interbank Offer Rate ("LIBOR") (0.16% at fiscal year-end 2014) for an
interest period of one month plus 1.00%) plus the base rate applicable margin (which varies based upon the Company's consolidated leverage ratio (the "Ratio") from 0.25% if the Ratio is less than 1.00
to 1.00, to 1.00% if the 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 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). Amounts outstanding under the swingline loan under the Credit
86
Table of Contents
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Debt (Continued)
Agreement
or upon any drawing under a letter of credit bear interest at the base rate plus the base rate applicable margin. Interest based upon the base rate is payable quarterly in arrears. Interest
based upon the LIBOR rate is payable either monthly or quarterly in arrears, depending on the interest period selected by the Company. The Revolver also includes a commitment fee ranging from 0.20% to
0.35% for any amounts not drawn under the Revolver.
During
fiscal 2014, the Company made principal payments of $15.6 million under the Term Loan. The Company had net borrowings of $139.0 million under the Revolver during
fiscal 2014. Borrowings were primarily used to fund common stock repurchases and normal operating expenses. Amounts available under the Revolver are reduced by any amounts outstanding under standby
letters of credit. As of January 3, 2015, the Company had available borrowings of approximately $660.1 million under the Revolver. The Company incurred approximately $6.3 million
and $6.1 million of interest expense related to the Term Loan and Revolver, respectively, including the interest rate swap impact during fiscal year 2014.
Financial
covenants in the Credit Agreement require the Company to maintain (i) a consolidated leverage ratio no greater than 2.50 to 1.00, (ii) a consolidated interest
coverage ratio no less than 3.50 to 1.00 and (iii) maximum capital expenditures not in excess of (x) $200.0 million during each of fiscal years 2014 and 2015 and
(y) $250.0 million during each fiscal year thereafter, subject to certain adjustments. The Credit Agreement contains representations, warranties, covenants, events of default and
indemnities that are customary for agreements of this type. The Company was in compliance with all covenants in the Credit Agreement as of January 3, 2015.
The
Company's debt as of January 3, 2015, excluding capital lease obligations, matures as follows (in millions):
|
|
|
|
|
Less than 1 Year |
|
$ |
15.7 |
|
Year 2 |
|
|
22.0 |
|
Year 3 |
|
|
18.9 |
|
Year 4 |
|
|
564.1 |
|
Year 5 |
|
|
0.1 |
|
Thereafter |
|
|
2.8 |
|
|
|
|
|
|
Total |
|
$ |
623.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Letters of Credit. On May 11, 2012, the Company, Fossil Partners, L.P., Fossil Europe GmbH and Fossil Asia
Pacific Ltd.
renewed their Letter of Credit Facility (the "LC Facility") to allow for $80 million of commercial letters of credit. At the end of fiscal years 2014 and 2013, the Company had outstanding
letters of credit under the LC Facility of approximately $50.3 million and $49.7 million, respectively. Letters of credit issued under the LC Facility are primarily used for the purchase
of inventory.
Capital Lease Obligations. At the end of fiscal years 2014 and 2013, the Company had current capital lease obligations of
$0.9 million and
$0.8 million, respectively, and long-term capital lease obligations of $5.8 million and $6.6 million, respectively.
87
Table of Contents
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Other IncomeNet
Other incomenet consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
2014 |
|
2013 |
|
2012 |
|
Interest income |
|
$ |
799 |
|
$ |
809 |
|
$ |
889 |
|
Remeasurement of investment in Fossil Spain to fair value |
|
|
0 |
|
|
6,510 |
|
|
0 |
|
Gain on Skagen Designs arbitration settlement |
|
|
5,968 |
|
|
0 |
|
|
0 |
|
Equity in the earnings of joint venture, net of tax |
|
|
0 |
|
|
0 |
|
|
972 |
|
Currency gains |
|
|
20 |
|
|
951 |
|
|
5,565 |
|
Other gains |
|
|
653 |
|
|
1,149 |
|
|
1,116 |
|
|
|
|
|
|
|
|
|
|
|
|
Other incomenet |
|
$ |
7,440 |
|
$ |
9,419 |
|
$ |
8,542 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12. Taxes
Income Taxes. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and
liabilities for
financial reporting purposes and the amounts used for
88
Table of Contents
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Taxes (Continued)
income
tax purposes. Significant components of the consolidated deferred tax assets and liabilities were (in thousands):
|
|
|
|
|
|
|
|
Fiscal Year
|
|
2014 |
|
2013 |
|
Current deferred income tax assets (liabilities): |
|
|
|
|
|
|
|
Bad debt allowance |
|
$ |
4,387 |
|
$ |
4,467 |
|
Returns allowance |
|
|
8,724 |
|
|
8,641 |
|
Inventory |
|
|
11,882 |
|
|
12,169 |
|
Warranty reserve |
|
|
2,590 |
|
|
3,040 |
|
Compensation |
|
|
6,459 |
|
|
9,189 |
|
Accrued liabilities |
|
|
6,658 |
|
|
0 |
|
Deferred rent |
|
|
1,128 |
|
|
1,810 |
|
Loss carryforwards |
|
|
1,910 |
|
|
3,392 |
|
Other |
|
|
(5,007 |
) |
|
12,070 |
|
|
|
|
|
|
|
|
|
Total current deferred tax assets |
|
|
38,731 |
|
|
54,778 |
|
Valuation allowance |
|
|
(5,168 |
) |
|
(7,946 |
) |
|
|
|
|
|
|
|
|
Net current deferred income tax assets |
|
$ |
33,563 |
|
$ |
46,832 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term deferred income tax assets |
|
$ |
34,084 |
|
$ |
46,986 |
|
Total short-term deferred income tax liabilities |
|
|
(521 |
) |
|
(154 |
) |
|
|
|
|
|
|
|
|
Net short-term deferred income tax assets |
|
$ |
33,563 |
|
$ |
46,832 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term deferred income tax (liabilities) assets: |
|
|
|
|
|
|
|
Unrealized exchange losses |
|
$ |
8,325 |
|
$ |
(1,939 |
) |
State income tax and interest on tax contingencies |
|
|
2,880 |
|
|
160 |
|
Fixed assets |
|
|
(51,719 |
) |
|
(50,194 |
) |
Trade names and customer lists |
|
|
(6,782 |
) |
|
(6,803 |
) |
Compensation |
|
|
3,481 |
|
|
4,803 |
|
Deferred rent |
|
|
9,425 |
|
|
7,456 |
|
Loss carryforwards |
|
|
1,409 |
|
|
2,429 |
|
Undistributed earnings of certain foreign subsidiaries |
|
|
(52,122 |
) |
|
(52,546 |
) |
Tax deductible foreign reserves |
|
|
3,248 |
|
|
0 |
|
Other |
|
|
4,231 |
|
|
11,111 |
|
|
|
|
|
|
|
|
|
Total deferred income tax liabilities |
|
|
(77,624 |
) |
|
(85,523 |
) |
Valuation allowance |
|
|
(1,653 |
) |
|
(2,601 |
) |
|
|
|
|
|
|
|
|
Net long-term deferred income tax liabilities |
|
$ |
(79,277 |
) |
$ |
(88,124 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term deferred income tax assets |
|
$ |
8,583 |
|
$ |
10,044 |
|
Total long-term deferred income tax liabilities |
|
|
(87,860 |
) |
|
(98,168 |
) |
|
|
|
|
|
|
|
|
Net long-term deferred income tax liabilities |
|
$ |
(79,277 |
) |
$ |
(88,124 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Loss Carryforwards. The deferred income tax asset for loss carryforwards includes $3.3 million of net operating losses
of foreign
subsidiaries. Valuation allowances have been recorded to
89
Table of Contents
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Taxes (Continued)
reflect
the estimated amount of deferred tax assets that may not be realized on these losses. The amounts and the fiscal year of expiration of the loss carryforwards are (in thousands):
|
|
|
|
|
Expires 2015 through 2019 |
|
$ |
6,100 |
|
Expires 2020 through 2024 |
|
|
2,855 |
|
Expires 2025 through 2028 |
|
|
2,696 |
|
Indefinite |
|
|
3,263 |
|
|
|
|
|
|
Total loss carryforwards |
|
$ |
14,914 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table identifies income before income taxes for the Company's U.S. and non-U.S. based operations for the fiscal years indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
2014 |
|
2013 |
|
2012 |
|
U.S |
|
$ |
169,079 |
|
$ |
194,956 |
|
$ |
193,985 |
|
Non-U.S |
|
|
388,999 |
|
|
366,511 |
|
|
298,237 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
558,078 |
|
$ |
561,467 |
|
$ |
492,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company's provision for income taxes consisted of the following for the fiscal years indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
2014 |
|
2013 |
|
2012 |
|
Current provision: |
|
|
|
|
|
|
|
|
|
|
U.S. federal |
|
$ |
84,669 |
|
$ |
97,860 |
|
$ |
64,552 |
|
Non-U.S |
|
|
74,190 |
|
|
69,901 |
|
|
60,239 |
|
State and local |
|
|
10,582 |
|
|
8,297 |
|
|
6,314 |
|
|
|
|
|
|
|
|
|
|
|
|
Total current |
|
|
169,441 |
|
|
176,058 |
|
|
131,105 |
|
Deferred provision (benefit) |
|
|
|
|
|
|
|
|
|
|
U.S. federal |
|
|
5,124 |
|
|
(2,346 |
) |
|
9,485 |
|
Non-U.S |
|
|
(3,622 |
) |
|
(166 |
) |
|
(2,426 |
) |
State and local |
|
|
524 |
|
|
(127 |
) |
|
(201 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total deferred |
|
|
2,026 |
|
|
(2,639 |
) |
|
6,858 |
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
$ |
171,467 |
|
$ |
173,419 |
|
$ |
137,963 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
expected cash payments for current U.S. income tax expense for fiscal years 2014, 2013 and 2012 were reduced by approximately $4.7 million, $12.0 million and
$15.1 million, respectively, as a result of tax deductions related to the exercise of non-qualified stock options and stock appreciation rights and the vesting of restricted stock and
restricted stock units. The expected cash payments for current foreign tax expense for fiscal years 2014, 2013 and 2012 were reduced by $0.4 million, $0.8 million and
$0.5 million, respectively, as a result of tax deductions related to the exercise of stock options and the vesting of restricted stock granted to foreign employees. The income tax benefits
resulting from these stock-based compensation plans have been recorded to additional paid-in capital in the Company's consolidated balance sheets. Total deferred income tax expense (benefit) of
$2.0 million, ($2.6) million and $6.9 million for fiscal years 2014, 2013 and 2012, respectively, are included in deferred income taxes on the Company's consolidated statements of cash
flows.
90
Table of Contents
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Taxes (Continued)
The Company was granted a 60% tax holiday for its watch assembly activities in Switzerland for tax years 2008 through 2012. In 2013 and 2014, the Company paid the full Swiss tax rate on
its watch assembly activities. This tax holiday reduced current foreign income taxes by approximately $1.2 million in fiscal year 2012.
A
reconciliation of the U.S. federal statutory income tax rate of 35% to the Company's effective tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
2014 |
|
2013 |
|
2012 |
|
Tax at statutory rate |
|
|
35.0 |
% |
|
35.0 |
% |
|
35.0 |
% |
State, net of federal tax benefit |
|
|
0.9 |
|
|
0.9 |
|
|
1.0 |
|
Foreign rate differential |
|
|
(12.3 |
) |
|
(12.5 |
) |
|
(10.0 |
) |
U.S. tax on foreign income |
|
|
6.3 |
|
|
5.9 |
|
|
3.1 |
|
Income tax contingencies |
|
|
0.7 |
|
|
0.0 |
|
|
(1.7 |
) |
Valuation allowances |
|
|
(0.3 |
) |
|
0.9 |
|
|
0.0 |
|
Other |
|
|
0.4 |
|
|
0.7 |
|
|
0.6 |
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
30.7 |
% |
|
30.9 |
% |
|
28.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
U.S. federal income taxes and foreign withholding taxes are not recorded on undistributed earnings of certain foreign subsidiaries where management plans to continue reinvesting
these earnings outside the U.S. The amount of undistributed earnings that would be subject to tax if distributed was approximately $800.6 million at January 3, 2015. Determining tax
amounts that would be payable if these earnings were distributed to the U.S. parent company is not practicable.
The
total amount of unrecognized tax benefits, excluding interest and penalties that would favorably impact the effective tax rate in future periods if recognized, was
$12.8 million, $9.6 million and $10.7 million for fiscal years 2014, 2013 and 2012, respectively. The IRS began its examination of the Company's 2010-2012 federal income tax
returns in the first quarter of fiscal 2014. The Company is also subject to tax examinations in various state and foreign jurisdictions for the Company's 2007-2013 tax years, none of which the Company
believes are individually significant. Audit outcomes and timing of audit settlements are subject to significant uncertainty.
The
Company has classified uncertain tax positions as long-term income taxes payable unless such amounts are expected to be paid within twelve months from January 3, 2015. As of
January 3, 2015, the Company had recorded $5.3 million of unrecognized tax benefits, excluding interest and penalties, for positions that could be settled within the next twelve months.
Consistent with its past practice, the Company recognizes interest and/or penalties related to income tax overpayments and income tax underpayments in income tax expense and income taxes
receivable/payable, respectively. The total amount of accrued income tax-related interest in the Company's consolidated balance sheets was $1.8 million and $1.2 million at
January 3, 2015 and December 28, 2013, respectively. The total amount of accrued income tax-related penalties in the Company's consolidated balance sheets was $0.4 million and
$0.4 million at January 3, 2015 and December 28, 2013, respectively. The Company accrued income tax-related interest expense (benefit) of $0.7 million, ($1.0) million and
($1.0) million in fiscal years 2014, 2013 and 2012, respectively.
91
Table of Contents
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Taxes (Continued)
The
following is a tabular reconciliation of the total amounts of unrecognized tax benefits for the fiscal years indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
2014 |
|
2013 |
|
2012 |
|
Balance at beginning of year |
|
$ |
14,314 |
|
$ |
15,549 |
|
$ |
17,974 |
|
Gross increases tax positions in prior years |
|
|
4,234 |
|
|
3,310 |
|
|
1,245 |
|
Gross decreases tax positions in prior years |
|
|
(1,018 |
) |
|
(4,384 |
) |
|
(2,580 |
) |
Gross increasescurrent year tax positions |
|
|
3,508 |
|
|
3,575 |
|
|
2,486 |
|
Settlements |
|
|
(194 |
) |
|
(3,456 |
) |
|
(3,582 |
) |
Lapse in statute of limitations |
|
|
(617 |
) |
|
(297 |
) |
|
0 |
|
Change due to currency revaluation |
|
|
(141 |
) |
|
17 |
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
20,086 |
|
$ |
14,314 |
|
$ |
15,549 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13. Commitments and Contingencies
License Agreements. The Company has various license agreements to market watches and jewelry bearing certain trademarks or patents
owned by various
third parties. In accordance with these agreements, the Company incurred royalty expense of approximately $258.6 million, $214.1 million and $181.8 million in fiscal years 2014,
2013 and 2012, respectively. These amounts are included in the Company's cost of sales or, if advertising related, in SG&A. At fiscal year-end 2014, certain of the Company's significant license
agreements had expiration dates between fiscal years 2015 and 2024. These license agreements require the Company to pay royalties ranging from 4% to 16% of defined net sales. The Company has minimum
royalty commitments through fiscal year 2019 under these license agreements as summarized below, by fiscal year (in thousands):
|
|
|
|
|
|
|
Minimum Royalty
Commitments |
|
2015 |
|
$ |
226,363 |
|
2016 |
|
|
95,866 |
|
2017 |
|
|
101,649 |
|
2018 |
|
|
76,973 |
|
2019 |
|
|
8,401 |
|
|
|
|
|
|
|
|
$ |
509,252 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
These
minimum royalty commitments do not include amounts owed under these license agreements obligating the Company to pay the licensors a percentage of net sales of these licensed
products.
Leases. The Company leases its retail and outlet store facilities as well as certain of its office and warehouse facilities and
equipment under
non-cancelable operating leases and capital leases. Most of the retail and outlet store leases provide for contingent rental payments based on operating results and require the payment of taxes,
insurance and other costs applicable to the property. Generally, these leases include renewal options for various periods at stipulated rates. Rent expense under these
agreements was approximately $190.6 million, $143.8 million and $131.5 million for fiscal years 2014, 2013 and 2012, respectively. Contingent rent expense was approximately
$14.1 million, $12.1 million and
92
Table of Contents
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Commitments and Contingencies (Continued)
$11.1 million
for fiscal years 2014, 2013 and 2012, respectively. Capital leases are included as a component of short-term and current portion of long-term debt and in long-term debt in the
Company's consolidated balance sheets. Future minimum rental commitments under non-cancelable leases, by fiscal year, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Operating Leases |
|
Capital Leases |
|
2015 |
|
$ |
158,692 |
|
$ |
1,039 |
|
2016 |
|
|
140,757 |
|
|
1,021 |
|
2017 |
|
|
115,521 |
|
|
1,003 |
|
2018 |
|
|
100,526 |
|
|
991 |
|
2019 |
|
|
88,308 |
|
|
976 |
|
Thereafter |
|
|
316,109 |
|
|
2,188 |
|
|
|
|
|
|
|
|
|
|
|
$ |
919,913 |
|
$ |
7,218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less amounts representing interest at 1.4% to 10.8% |
|
|
|
|
|
373 |
|
|
|
|
|
|
|
|
|
Capital lease obligations |
|
|
|
|
$ |
6,845 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase Obligations. As of January 3, 2015, the Company had purchase obligations totaling $310.4 million.
Asset Retirement Obligations. ASC 410, Asset Retirement and Environmental Obligations
requires
(i) that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made and
(ii) that the associated asset retirement costs be capitalized as part of the carrying amount of the long-lived asset. The Company's asset retirement obligations relate to costs associated with
the retirement of leasehold improvements under office leases within the North America wholesale, the Europe wholesale and the Asia Pacific wholesale segments, and under retail store leases within the
Direct to consumer segment.
The
following table summarizes the changes in the Company's asset retirement obligations (in thousands):
|
|
|
|
|
|
|
|
Fiscal Year:
|
|
2014 |
|
2013 |
|
Beginning asset retirement obligation |
|
$ |
8,306 |
|
$ |
6,560 |
|
Liabilities incurred during the period |
|
|
1,587 |
|
|
1,839 |
|
Revisions in estimated retirement obligations |
|
|
2 |
|
|
(9 |
) |
Liabilities settled during the period |
|
|
(860 |
) |
|
(278 |
) |
Accretion expense |
|
|
364 |
|
|
288 |
|
Currency translation |
|
|
(474 |
) |
|
(94 |
) |
|
|
|
|
|
|
|
|
Ending asset retirement obligations |
|
$ |
8,925 |
|
$ |
8,306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
93
Table of Contents
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. Stockholders' Equity
Common and Preferred Stock. The Company has 100,000,000 shares of common stock, par value $0.01 per share, authorized, with 50,771,079,
and
54,707,810 shares issued at fiscal year-end 2014 and 2013, respectively. The Company has 1,000,000 shares of preferred stock, par value $0.01 per share, authorized, with none issued or outstanding at
fiscal year-end 2014 and 2013. Rights, preferences and other terms of preferred stock will be determined by the Board of Directors at the time of issuance.
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.
During
the period from the announcement of the Company's $750 million and $1 billion buyback authorizations in August 2010 and December 2012, respectively, until the end of
the fiscal year 2014, the Company has repurchased approximately $1.7 billion of its common stock, representing approximately 18.6 million shares. The Company has not repurchased any
shares under the $30 million and $1 billion repurchase plans authorized in 2010 and 2014, respectively.
During
fiscal year 2014, the Company effectively retired 4.1 million shares of common stock repurchased under its repurchase programs. The effective retirement of repurchased
common stock decreased common stock by $41,000, additional paid-in capital by $3.2 million, retained earnings by $431.7 million and treasury stock by $435.0 million. At
December 28, 2013 and January 3, 2015, all treasury stock had been effectively retired. As of January 3, 2015, the Company had $1.1 billion of repurchase authorizations
remaining under the combined repurchase plans.
The
following table shows the Company's common stock repurchase activity for the periods indicated (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 2014 Fiscal Year |
|
For the 2013 Fiscal Year |
|
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 |
|
|
0.0 |
|
$ |
0.0 |
|
|
0.0 |
|
$ |
0.0 |
|
2012 |
|
$ |
1,000.0 |
|
December 2016 |
|
|
4.1 |
|
$ |
435.0 |
|
|
4.9 |
|
$ |
536.3 |
|
2010 |
|
$ |
30.0 |
|
None |
|
|
0.0 |
|
$ |
0.0 |
|
|
0.0 |
|
$ |
0.0 |
|
2010 |
|
$ |
750.0 |
|
December 2013(1) |
|
|
0.0 |
|
$ |
0.0 |
|
|
0.4 |
|
$ |
38.6 |
|
- (1)
- In
the first quarter of fiscal year 2013, the Company completed this repurchase plan.
Noncontrolling Interest. In October 2012, the Company acquired the outstanding minority interest shares in Fossil Mexico, S.A. de
C.V.
("Fossil Mexico") and Servicios Fossil Mexico, S.A. de C.V. ("Fossil Servicios"), representing the entire noncontrolling interest in these subsidiaries, for approximately
$14.1 million in cash. The transaction was accounted for as an equity transaction, and the Company's ownership interest in both Fossil Mexico and Fossil Servicios increased
94
Table of Contents
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. Stockholders' Equity (Continued)
to
100%. The following table summarizes the effects of changes in the Company's ownership interest in its subsidiaries on stockholders' equity (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
2014 |
|
2013 |
|
2012 |
|
Net income attributable to Fossil Group, Inc. |
|
$ |
376,707 |
|
$ |
378,152 |
|
$ |
343,401 |
|
|
|
|
|
|
|
|
|
|
|
|
Transfers to noncontrolling interest: |
|
|
|
|
|
|
|
|
|
|
Decrease in Fossil Group, Inc.'s additional paid-in capital for purchases of 49 common shares of Fossil Mexico and 49 common shares of Fossil
Servicios |
|
|
0 |
|
|
0 |
|
|
(7,332 |
) |
|
|
|
|
|
|
|
|
|
|
|
Change from net income attributable to Fossil Group, Inc. and transfers to noncontrolling interest |
|
$ |
376,707 |
|
$ |
378,152 |
|
$ |
336,069 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15. Employee Benefit Plans
Deferred Compensation and Savings Plans. The Company has a defined contribution savings plan (the "401(k) Plan") for substantially all
U.S.-based
full-time employees of the Company. The Company's common stock is one of several investment alternatives available under the 401(k) Plan. Effective January 1, 2012, the Company added a Roth
401(k) option to the 401(k) Plan. The Company has a discretionary match for the 401(k) Plan. After ninety 90 days of service (minimum of 250 hours worked), the Company matches 50% of
employee contributions up to 6% of their compensation. Matching contributions made by the Company to the 401(k) Plan totaled approximately $3.0 million, $2.7 million and
$2.7 million for fiscal years 2014, 2013 and 2012, respectively. The Company also has the right to make additional matching contributions not to exceed 15% of employee compensation. The Company
did not make any additional matching contributions during fiscal years 2014, 2013 and 2012.
In
December 1998, the Company adopted the Fossil Group, Inc. and Affiliates Deferred Compensation Plan (the "Deferred Plan"). Eligible participants may elect to defer up to 50% of
their salary or up to 100% of any bonuses paid pursuant to the terms and conditions of the Deferred Plan. In addition, the Company may make employer contributions to participants under the Deferred
Plan from time to time. The Company made no contributions to the Deferred Plan during fiscal years 2014, 2013 and 2012. In prior periods, the Company made payments pursuant to the Deferred Plan into a
Rabbi Trust. The funds held in the Rabbi Trust are directed to certain investments available through life insurance products. As of January 3, 2015, the Company had an asset of
$2.5 million related to the Company's invested balances recorded in intangible and other assetsnet and a liability of $3.3 million related to the participants' invested
balances recorded in accrued expensesother, each on the Company's consolidated balance sheets.
Stock-Based Compensation Plans. The Company's grants under its current stock-based compensation plans generally include: (i) stock
options and
restricted stock units for its international employees, (ii) restricted stock units for its nonemployee directors and (iii) stock appreciation rights, restricted stock and restricted
stock units for its U.S.-based employees. As of January 3, 2015, the Company had approximately $22.7 million of total unrecognized compensation cost related to non-vested share-based
compensation arrangements granted under the Company's stock based
95
Table of Contents
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. Employee Benefit Plans (Continued)
compensation
plans. This cost is expected to be recognized over a weighted-average period of approximately 1.5 years.
Long-Term Incentive Plans. An aggregate of 4,685,030 shares of the Company's common stock were reserved for issuance pursuant to the
Company's 2008
Long-Term Incentive Plan ("2008 LTIP"), adopted in March 2008. Under the 2008 LTIP, designated employees of the Company, including officers, certain contractors, and outside directors of the Company,
are eligible to receive (i) stock options, (ii) stock appreciation rights, (iii) restricted or non-restricted stock awards, (iv) restricted stock units, (v) cash
awards, or (vi) any combination of the foregoing. The 2008 LTIP is administered by the Compensation Committee of the Company's Board of Directors (the "Compensation Committee"). Each award
issued under the 2008 LTIP terminates at the time designated by the Compensation Committee, not to exceed ten years. The current outstanding stock options, stock appreciation rights, restricted stock
and restricted stock units issued under the 2008 LTIP predominantly have original vesting periods of three years. All stock appreciation rights and restricted stock units are settled in shares of the
Company's common stock. The exercise prices of stock options granted under the 2008 LTIP were not less than the fair market value of the Company's common stock at the date of grant. Effective
January 1, 2012, the Company's Board of Directors approved changes to the equity compensation package for nonemployee directors. Each nonemployee director receives restricted stock units valued
at $120,000 on the date of the Company's annual stockholders' meeting. These grants vest on the earlier of one year from the date of grant or the Company's next annual stockholders' meeting date.
Prior
to the Company establishing the 2008 LTIP, stock-based compensation awards were made to employees and nonemployee directors pursuant to the Company's initial Long-Term Incentive
Plan ("LTIP") and Nonemployee Director Stock Option Plan ("Nonemployee Plan"), respectively. Each award issued under the LTIP terminates at the time designated by the Compensation Committee, not to
exceed ten years. The currently outstanding stock options, stock appreciation rights, restricted stock and restricted stock units issued under the LTIP and Nonemployee Plan have original vesting
periods that predominately range from three to five years. All stock appreciation rights and restricted stock units are settled in shares of the Company's common stock. The exercise prices of stock
options granted under the Nonemployee Plan were not less than the fair market value of the Company's common stock at the date of grant. Pursuant to the Nonemployee Plan, 50% of the stock options
granted became exercisable on the first anniversary of the date of grant and in two additional installments of 25% each on the second and third anniversaries. On March 26, 2008, the Company's
Board of Directors elected to terminate these prior plans. The termination of the LTIP and the Nonemployee Plan did not impair outstanding awards representing 60,085 shares and 15,750 shares,
respectively, of the Company's common stock at January 3, 2015 which continued in accordance with their original terms.
96
Table of Contents
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. Employee Benefit Plans (Continued)
Stock Options and Stock Appreciation Rights. The fair value of stock options and stock appreciation rights granted under the Company's
stock-based
compensation plans was estimated on the date of grant
using the Black-Scholes option pricing model. The table below outlines the weighted average assumptions for these award grants:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
2014 |
|
2013 |
|
2012 |
|
Risk-free interest rate |
|
|
0.9 |
% |
|
0.8 |
% |
|
1.1 |
% |
Expected term (in years) |
|
|
3.4 |
|
|
4.7 |
|
|
5.1 |
|
Expected volatility |
|
|
47.1 |
% |
|
55.1 |
% |
|
51.1 |
% |
Expected dividend yield |
|
|
0.0 |
% |
|
0.0 |
% |
|
0.0 |
% |
Estimated fair value per stock option/stock appreciation right granted |
|
$ |
38.88 |
|
$ |
48.19 |
|
$ |
56.08 |
|
The
expected term of the stock options represent the estimated period of time until exercise and is based on historical experience of similar awards. Expected stock price volatility is
based on the
historical volatility of the Company's common stock. The risk-free interest rate is based on the implied yield available on U.S. Treasury securities with an equivalent remaining term.
The
Company generally receives a tax deduction when stock options are exercised or when restricted stock vests. Generally for stock options, the tax deduction is related to the excess of
the stock price at the time the stock options are exercised over the exercise price of the stock options. For restricted stock, the tax deduction is equal to the fair market value of the Company's
common stock on the date the restricted stock vests multiplied by the number of shares of restricted stock. Excess tax benefits from stock-based compensation on the Company's consolidated statements
of cash flows for fiscal years 2014, 2013 and 2012 amounted to approximately $1.4 million, $8.4 million and $11.7 million, respectively.
97
Table of Contents
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. Employee Benefit Plans (Continued)
The
following table summarizes stock option and stock appreciation rights activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options and Stock Appreciation Rights
|
|
Shares |
|
Weighted-Average
Exercise Price |
|
Weighted-Average
Remaining
Contractual
Term (Years) |
|
Aggregate
Intrinsic
Value |
|
|
|
in thousands
|
|
|
|
|
|
in thousands
|
|
Outstanding at December 31, 2011 |
|
|
1,220 |
|
$ |
41.20 |
|
|
5.8 |
|
$ |
49,125 |
|
Granted |
|
|
279 |
|
|
124.61 |
|
|
|
|
|
|
|
Exercised |
|
|
(386 |
) |
|
30.28 |
|
|
|
|
|
32,201 |
|
Forfeited or expired |
|
|
(74 |
) |
|
98.53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 29, 2012 |
|
|
1,039 |
|
|
63.56 |
|
|
6.4 |
|
|
36,708 |
|
Granted |
|
|
41 |
|
|
104.62 |
|
|
|
|
|
|
|
Exercised |
|
|
(332 |
) |
|
35.64 |
|
|
|
|
|
24,820 |
|
Forfeited or expired |
|
|
(70 |
) |
|
97.62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 28, 2013 |
|
|
678 |
|
|
76.15 |
|
|
6.2 |
|
|
31,794 |
|
Granted |
|
|
94 |
|
|
111.90 |
|
|
|
|
|
|
|
Exercised |
|
|
(91 |
) |
|
39.20 |
|
|
|
|
|
6,391 |
|
Forfeited or expired |
|
|
(18 |
) |
|
120.77 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 3, 2015 |
|
|
663 |
|
|
85.08 |
|
|
5.6 |
|
|
20,751 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at January 3, 2015 |
|
|
479 |
|
$ |
73.45 |
|
|
5.1 |
|
$ |
20,296 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
aggregate intrinsic value in the table above is before income taxes and is based on the exercise price for outstanding and exercisable options/rights at January 3, 2015 and
based on the fair market
value of the Company's common stock on the exercise date for options/rights that were exercised during the fiscal year.
Stock Options and Stock Appreciation Rights Outstanding and Exercisable. The following table summarizes information with respect to
stock options and
stock appreciation rights outstanding and exercisable at January 3, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options Outstanding |
|
Stock Options
Exercisable |
|
Range of Exercise Prices
|
|
Number of
Shares |
|
Weighted-Average
Exercise Price |
|
Weighted-Average
Remaining
Contractual
Term (Years) |
|
Number of
Shares |
|
Weighted-
Average
Exercise
Price |
|
|
|
in thousands
|
|
|
|
|
|
in thousands
|
|
|
|
$13.65 - $21.51 |
|
|
56 |
|
$ |
15.09 |
|
|
3.6 |
|
|
56 |
|
$ |
15.09 |
|
$25.77 - $42.76 |
|
|
103 |
|
|
34.94 |
|
|
3.7 |
|
|
103 |
|
|
34.94 |
|
$43.92 - $67.10 |
|
|
5 |
|
|
43.92 |
|
|
3.0 |
|
|
5 |
|
|
43.92 |
|
$69.53 - $106.40 |
|
|
97 |
|
|
80.86 |
|
|
6.3 |
|
|
95 |
|
|
80.80 |
|
$106.89 - $131.46 |
|
|
167 |
|
|
128.10 |
|
|
7.1 |
|
|
114 |
|
|
128.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
428 |
|
$ |
79.24 |
|
|
5.6 |
|
|
373 |
|
$ |
72.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98
Table of Contents
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. Employee Benefit Plans (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Appreciation Rights Outstanding |
|
Stock Appreciation
Rights Exercisable |
|
Range of Exercise Prices
|
|
Number of
Shares |
|
Weighted-Average
Exercise Price |
|
Weighted-Average
Remaining
Contractual
Term (Years) |
|
Number of
Shares |
|
Weighted-
Average
Exercise
Price |
|
|
|
in thousands
|
|
|
|
|
|
in thousands
|
|
|
|
$13.65 - $21.51 |
|
|
18 |
|
$ |
13.65 |
|
|
2.1 |
|
|
18 |
|
$ |
13.65 |
|
$25.77 - $42.76 |
|
|
17 |
|
|
35.69 |
|
|
2.5 |
|
|
17 |
|
|
35.68 |
|
$43.92 - $67.10 |
|
|
3 |
|
|
67.10 |
|
|
5.5 |
|
|
2 |
|
|
67.10 |
|
$69.53 - $106.40 |
|
|
70 |
|
|
93.62 |
|
|
5.6 |
|
|
39 |
|
|
87.56 |
|
$106.89 - $131.46 |
|
|
127 |
|
|
117.46 |
|
|
6.5 |
|
|
30 |
|
|
127.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
235 |
|
$ |
95.68 |
|
|
5.6 |
|
|
106 |
|
$ |
77.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock and Restricted Stock Units. The following table summarizes restricted stock and restricted stock unit activity:
|
|
|
|
|
|
|
|
Restricted Stock and Restricted Stock Units
|
|
Number of
Shares |
|
Weighted-Average
Grant Date
Fair Value |
|
|
|
in thousands
|
|
|
|
Nonvested at December 31, 2011 |
|
|
352 |
|
$ |
45.70 |
|
Granted |
|
|
102 |
|
|
110.72 |
|
Vested |
|
|
(161 |
) |
|
45.14 |
|
Forfeited |
|
|
(16 |
) |
|
67.62 |
|
|
|
|
|
|
|
|
|
Nonvested at December 29, 2012 |
|
|
277 |
|
|
68.69 |
|
Granted |
|
|
140 |
|
|
106.76 |
|
Vested |
|
|
(171 |
) |
|
57.83 |
|
Forfeited |
|
|
(27 |
) |
|
86.51 |
|
|
|
|
|
|
|
|
|
Nonvested at December 28, 2013 |
|
|
219 |
|
|
99.27 |
|
Granted |
|
|
164 |
|
|
110.95 |
|
Vested |
|
|
(115 |
) |
|
90.66 |
|
Forfeited |
|
|
(13 |
) |
|
108.76 |
|
|
|
|
|
|
|
|
|
Nonvested at January 3, 2015 |
|
|
255 |
|
$ |
110.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
total fair value of shares/units vested during fiscal years 2014, 2013 and 2012 was $12.6 million, $18.1 million and $19.1 million, respectively.
The
Company maintains a defined benefit plan for its employees located in Switzerland. The plan is funded through payments to an insurance company. The payments are determined by
periodic actuarial calculations. During fiscal years 2014, 2013 and 2012, the Company recorded pension gains of $0.2 million and pension expenses of $6.2 million and $2.8 million,
respectively, related to this plan. The liability for the Company's defined benefit plan was $12.4 million and $8.6 million at the end of fiscal years 2014 and 2013, respectively. This
liability is recorded in other long-term liabilities on the Company's consolidated balance sheets.
99
Table of Contents
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. Employee Benefit Plans (Continued)
Under
French law, the Company is required to maintain a defined benefit plan for its employees located in France, which is referred to as a "retirement indemnity". The amount of the
retirement indemnity is based on the employee's last salary and duration of employment with the Company. The employee's right to receive the retirement indemnity is subject to the employee remaining
with the Company until retirement. In each of fiscal years 2014, 2013 and 2012, the Company recorded pension expenses of $0.3 million per year for its retirement indemnity obligations. The
liability for the Company's retirement indemnity was $1.6 million and $1.5 million at the end of fiscal years 2014 and 2013, respectively. This liability is recorded in other long-term
liabilities on the Company's consolidated balance sheets.
16. Supplemental Cash Flow Information
The following table summarizes supplemental cash flow information (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
2014 |
|
2013 |
|
2012 |
|
Cash paid during the year for: |
|
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
15,924 |
|
$ |
9,450 |
|
$ |
5,155 |
|
Income taxes |
|
$ |
167,702 |
|
$ |
167,624 |
|
$ |
105,433 |
|
Supplemental disclosures of non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment included in accounts payable |
|
$ |
5,030 |
|
$ |
8,317 |
|
$ |
11,713 |
|
Additions to property, plant and equipment acquired under capital leases |
|
$ |
1,180 |
|
$ |
1,068 |
|
$ |
4,884 |
|
Issuance of common stock for acquisition |
|
$ |
0 |
|
$ |
0 |
|
$ |
19,899 |
|
17. Supplemental Disclosure for Accumulated Other Comprehensive Income
The following table illustrates changes in the balances of each component of accumulated other comprehensive income, net of taxes (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 3, 2015 |
|
|
|
|
|
Cash Flow Hedges |
|
|
|
|
|
|
|
Currency
Translation
Adjustments |
|
Forward
Contracts |
|
Interest
Rate
Swap |
|
Pension
Plan |
|
Total |
|
Beginning balance |
|
$ |
38,152 |
|
$ |
(2,091 |
) |
$ |
(106 |
) |
$ |
736 |
|
$ |
36,691 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before reclassifications |
|
|
(65,240 |
) |
|
37,182 |
|
|
(3,397 |
) |
|
(4,804 |
) |
|
(36,259 |
) |
Tax (expense) benefit |
|
|
(153 |
) |
|
(14,255 |
) |
|
1,238 |
|
|
421 |
|
|
(12,749 |
) |
Amounts reclassed from accumulated other comprehensive income |
|
|
0 |
|
|
8,893 |
|
|
(2,774 |
) |
|
0 |
|
|
6,119 |
|
Tax (expense) benefit |
|
|
0 |
|
|
(3,037 |
) |
|
1,011 |
|
|
0 |
|
|
(2,026 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss) |
|
|
(65,393 |
) |
|
17,071 |
|
|
(396 |
) |
|
(4,383 |
) |
|
(53,101 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
(27,241 |
) |
$ |
14,980 |
|
$ |
(502 |
) |
$ |
(3,647 |
) |
$ |
(16,410 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
Table of Contents
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. Supplemental Disclosure for Accumulated Other Comprehensive Income (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 28, 2013 |
|
|
|
|
|
|
|
Cash Flow Hedges |
|
|
|
|
|
|
|
Currency
Translation
Adjustments |
|
Securities
Available
for Sale |
|
Forward
Contracts |
|
Interest
Rate Swap |
|
Pension
Plan |
|
Total |
|
Beginning balance |
|
$ |
30,181 |
|
$ |
(475 |
) |
$ |
(946 |
) |
$ |
0 |
|
$ |
0 |
|
$ |
28,760 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before reclassifications |
|
|
7,971 |
|
|
(83 |
) |
|
(2,148 |
) |
|
(1,592 |
) |
|
583 |
|
|
4,731 |
|
Tax (expense) benefit |
|
|
0 |
|
|
0 |
|
|
757 |
|
|
561 |
|
|
153 |
|
|
1,471 |
|
Amounts reclassed from accumulated other comprehensive income |
|
|
0 |
|
|
(558 |
) |
|
(145 |
) |
|
(1,423 |
) |
|
0 |
|
|
(2,126 |
) |
Tax (expense) benefit |
|
|
0 |
|
|
0 |
|
|
(101 |
) |
|
498 |
|
|
0 |
|
|
397 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss) |
|
|
7,971 |
|
|
475 |
|
|
(1,145 |
) |
|
(106 |
) |
|
736 |
|
|
7,931 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
38,152 |
|
$ |
0 |
|
$ |
(2,091 |
) |
$ |
(106 |
) |
$ |
736 |
|
$ |
36,691 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 29, 2012 |
|
|
|
|
|
|
|
Cash Flow
Hedges |
|
|
|
|
|
Currency
Translation
Adjustments |
|
Securities
Available
for Sale |
|
Forward
Contracts |
|
Total |
|
Beginning balance |
|
$ |
18,953 |
|
$ |
(446 |
) |
$ |
3,673 |
|
$ |
22,180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before reclassifications |
|
|
11,228 |
|
|
(29 |
) |
|
1,232 |
|
|
12,431 |
|
Tax (expense) benefit |
|
|
0 |
|
|
0 |
|
|
(806 |
) |
|
(806 |
) |
Amounts reclassed from accumulated other comprehensive income |
|
|
0 |
|
|
0 |
|
|
7,761 |
|
|
7,761 |
|
Tax (expense) benefit |
|
|
0 |
|
|
0 |
|
|
(2,716 |
) |
|
(2,716 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss) |
|
|
11,228 |
|
|
(29 |
) |
|
(4,619 |
) |
|
6,580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
30,181 |
|
$ |
(475 |
) |
$ |
(946 |
) |
$ |
28,760 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18. Major Customer, Segment and Geographic Information
Major Customer
Wholesale customers of the Company consist principally of major department stores and specialty retail stores located throughout the
world. No individual customer accounts for 10% or more of the Company's net sales.
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.
101
Table of Contents
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
18. Major Customer, Segment and Geographic Information (Continued)
The Company manages its business primarily on a geographic basis. The Company's reportable operating segments are comprised of North America wholesale, Europe wholesale, Asia Pacific
wholesale and Direct to consumer. The North America wholesale, Europe wholesale and Asia Pacific wholesale reportable segments do not include activities related to the Direct to consumer segment. The
North America wholesale segment primarily includes sales to wholesale or distributor customers based in Canada, Mexico, the United States and countries in South America. The Europe wholesale segment
primarily includes sales to wholesale or distributor customers based in European countries, the Middle
East and Africa. The Asia Pacific wholesale segment primarily includes sales to wholesale or distributor customers based in Australia, China (as well as the Company's assembly and procurement
operations), India, Indonesia, Japan, Malaysia, New Zealand, Singapore, South Korea, Taiwan and Thailand. The Direct to consumer segment includes Company-owned retail stores, e-commerce activities and
catalog costs. Each reportable operating segment provides similar products and services.
The
Company evaluates the performance of its reportable segments based on net sales and operating income. Net sales for geographic segments are generally based on the location of the
customers. Operating income for each segment includes net sales to third parties, related cost of sales and operating expenses directly attributable to the segment. General corporate expenses,
including certain administrative, legal, accounting, technology support costs, equity compensation costs, payroll costs attributable to executive management and amounts related to intercompany
eliminations are not allocated to the various segments. Intercompany sales of products between segments are referred to as intersegment items. Intercompany profit attributable to the Company's factory
operations is included in the Asia Pacific wholesale and Europe wholesale segments in accordance with the geographic location of the factories. These intercompany factory profits are eliminated in
consolidation. Summary information by operating segment is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2014 |
|
|
|
Net Sales |
|
Operating
Income |
|
Depreciation
and
Amortization |
|
Long-term
Assets |
|
Total Assets |
|
North America wholesale |
|
|
|
|
|
|
|
$ |
10,364 |
|
$ |
256,287 |
|
$ |
716,278 |
|
External customers |
|
$ |
1,213,097 |
|
$ |
251,003 |
|
|
|
|
|
|
|
|
|
|
Intersegment |
|
|
233,058 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe wholesale |
|
|
|
|
|
|
|
|
10,520 |
|
|
145,791 |
|
|
385,339 |
|
External customers |
|
|
931,228 |
|
|
261,250 |
|
|
|
|
|
|
|
|
|
|
Intersegment |
|
|
233,239 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Asia Pacific wholesale |
|
|
|
|
|
|
|
|
6,669 |
|
|
51,175 |
|
|
584,887 |
|
External customers |
|
|
440,656 |
|
|
122,778 |
|
|
|
|
|
|
|
|
|
|
Intersegment |
|
|
1,075,401 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct to consumer |
|
|
924,710 |
|
|
115,050 |
|
|
33,728 |
|
|
159,619 |
|
|
352,780 |
|
Intersegment items |
|
|
(1,541,698 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Corporate |
|
|
|
|
|
(183,545 |
) |
|
22,049 |
|
|
104,826 |
|
|
168,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
3,509,691 |
|
$ |
566,536 |
|
$ |
83,330 |
|
$ |
717,698 |
|
$ |
2,207,552 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102
Table of Contents
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
18. Major Customer, Segment and Geographic Information (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2013 |
|
|
|
Net Sales |
|
Operating
Income |
|
Depreciation
and
Amortization |
|
Long-term
Assets |
|
Total Assets |
|
North America wholesale |
|
|
|
|
|
|
|
$ |
7,886 |
|
$ |
260,506 |
|
$ |
680,025 |
|
External customers |
|
$ |
1,216,634 |
|
$ |
305,834 |
|
|
|
|
|
|
|
|
|
|
Intersegment |
|
|
209,913 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe wholesale |
|
|
|
|
|
|
|
|
9,324 |
|
|
185,892 |
|
|
535,261 |
|
External customers |
|
|
828,098 |
|
|
219,041 |
|
|
|
|
|
|
|
|
|
|
Intersegment |
|
|
172,943 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Asia Pacific wholesale |
|
|
|
|
|
|
|
|
4,764 |
|
|
42,943 |
|
|
516,553 |
|
External customers |
|
|
396,641 |
|
|
129,971 |
|
|
|
|
|
|
|
|
|
|
Intersegment |
|
|
970,985 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct to consumer |
|
|
818,598 |
|
|
88,082 |
|
|
30,798 |
|
|
161,245 |
|
|
335,208 |
|
Intersegment items |
|
|
(1,353,841 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Corporate |
|
|
|
|
|
(181,332 |
) |
|
21,495 |
|
|
100,366 |
|
|
163,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
3,259,971 |
|
$ |
561,596 |
|
$ |
74,267 |
|
$ |
750,952 |
|
$ |
2,230,414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2012 |
|
|
|
Net Sales |
|
Operating
Income |
|
Depreciation
and
Amortization |
|
Long-term
Assets |
|
Total Assets |
|
North America wholesale |
|
|
|
|
|
|
|
$ |
4,880 |
|
$ |
236,639 |
|
$ |
610,979 |
|
External customers |
|
$ |
1,083,489 |
|
$ |
246,616 |
|
|
|
|
|
|
|
|
|
|
Intersegment |
|
|
203,266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe wholesale |
|
|
|
|
|
|
|
|
6,529 |
|
|
150,977 |
|
|
354,823 |
|
External customers |
|
|
696,988 |
|
|
174,469 |
|
|
|
|
|
|
|
|
|
|
Intersegment |
|
|
166,952 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Asia Pacific wholesale |
|
|
|
|
|
|
|
|
3,958 |
|
|
37,639 |
|
|
416,825 |
|
External customers |
|
|
361,514 |
|
|
127,263 |
|
|
|
|
|
|
|
|
|
|
Intersegment |
|
|
757,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct to consumer |
|
|
715,517 |
|
|
98,754 |
|
|
26,259 |
|
|
170,461 |
|
|
313,498 |
|
Intersegment items |
|
|
(1,127,698 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Corporate |
|
|
|
|
|
(158,262 |
) |
|
18,880 |
|
|
102,161 |
|
|
145,864 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
2,857,508 |
|
$ |
488,840 |
|
$ |
60,506 |
|
$ |
697,877 |
|
$ |
1,841,989 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103
Table of Contents
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
18. Major Customer, Segment and Geographic Information (Continued)
The following table indicates revenue for each class of similar products for fiscal years 2014, 2013 and 2012 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2014 |
|
Fiscal Year 2013 |
|
Fiscal Year 2012 |
|
|
|
Net Sales |
|
Percentage
of Total |
|
Net Sales |
|
Percentage
of Total |
|
Net Sales |
|
Percentage
of Total |
|
Watches |
|
$ |
2,736,511 |
|
|
78.0 |
% |
$ |
2,513,081 |
|
|
77.1 |
% |
$ |
2,141,481 |
|
|
74.9 |
% |
Leathers |
|
|
419,391 |
|
|
11.9 |
|
|
436,285 |
|
|
13.4 |
|
|
440,113 |
|
|
15.4 |
|
Jewelry |
|
|
276,485 |
|
|
7.9 |
|
|
228,748 |
|
|
7.0 |
|
|
181,636 |
|
|
6.4 |
|
Other |
|
|
77,304 |
|
|
2.2 |
|
|
81,857 |
|
|
2.5 |
|
|
94,278 |
|
|
3.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,509,691 |
|
|
100.0 |
% |
$ |
3,259,971 |
|
|
100.0 |
% |
$ |
2,857,508 |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic Information
Net sales and long-lived assets related to the Company's operations in the U.S., Europe, Asia Pacific and all other international
markets were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2014 |
|
|
|
Net Sales(1) |
|
Long-term
Assets |
|
United States |
|
$ |
1,588,566 |
|
$ |
395,526 |
|
Europe |
|
|
1,195,948 |
(2) |
|
237,068 |
|
Asia Pacific |
|
|
566,237 |
|
|
67,352 |
|
All other international |
|
|
158,940 |
|
|
17,752 |
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
3,509,691 |
|
$ |
717,698 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2013 |
|
|
|
Net Sales(1) |
|
Long-term
Assets |
|
United States |
|
$ |
1,525,107 |
|
$ |
411,458 |
|
Europe |
|
|
1,052,497 |
(2) |
|
264,173 |
|
Asia Pacific |
|
|
504,124 |
|
|
65,091 |
|
All other international |
|
|
178,243 |
|
|
10,230 |
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
3,259,971 |
|
$ |
750,952 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104
Table of Contents
FOSSIL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
18. Major Customer, Segment and Geographic Information (Continued)
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2012 |
|
|
|
Net Sales(1) |
|
Long-term
Assets |
|
United States |
|
$ |
1,354,337 |
|
$ |
391,232 |
|
Europe |
|
|
880,012 |
(2) |
|
241,766 |
|
Asia Pacific |
|
|
448,217 |
|
|
54,150 |
|
All other international |
|
|
174,942 |
|
|
10,729 |
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
2,857,508 |
|
$ |
697,877 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- (1)
- Net
sales are based on the location of the selling entity.
- (2)
- Net
sales from Germany accounted for more than 10% of the Company's consolidated net sales and were approximately $612.5 million,
$578.8 million and $472.4 million in fiscals years 2014, 2013 and 2012, respectively.
105
Table of Contents
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. 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 January 3, 2015, the end of the period covered by this Annual Report on
Form 10-K. 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 at the reasonable assurance level as of January 3, 2015.
Management's Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of the consolidated financial statements for external reporting purposes in accordance with generally accepted accounting principles.
Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness of internal
control over financial reporting to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or
procedures may deteriorate over time.
Management,
including our CEO and our CFO, assessed the effectiveness of the Company's internal control over financial reporting as of January 3, 2015. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal ControlIntegrated Framework
(2013). Based on its assessment and those criteria, management has concluded that the Company maintained effective internal control over financial reporting as of
January 3, 2015.
Deloitte &
Touche LLP, the independent registered public accounting firm that audited the Company's consolidated financial statements included in this Annual Report on
Form 10-K, has issued an attestation report on the Company's internal control over financial reporting, which is included herein.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the fourth quarter ended January 3, 2015 that
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
106
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board of Directors and Stockholders of
Fossil Group, Inc.
Richardson, Texas
We
have audited the internal control over financial reporting of Fossil Group, Inc. and subsidiaries (the "Company") as of January 3, 2015, based on criteria established in Internal ControlIntegrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's
management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Management's Report on Internal
Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A
company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or
persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because
of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material
misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to
future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In
our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 3, 2015, based on the criteria established in Internal ControlIntegrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We
have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and consolidated financial
statement schedule as of and for the year ended January 3, 2015 of the Company and our report dated February 20, 2015 expressed an unqualified opinion on those consolidated financial
statements and consolidated financial statement schedule.
/s/
Deloitte & Touche LLP
Dallas,
Texas
February 20, 2015
107
Table of Contents
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information under the headings "Directors and Nominees," "Executive Officers," "Section 16(a) Beneficial Ownership Reporting
Compliance" and "Board Committees and Meetings" in our proxy statement to be filed with the SEC pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year
covered by this report, is incorporated herein by reference.
We
have adopted a code of ethics that applies to all our directors and employees, including the principal executive officer, principal financial officer, principal accounting officer and
controller. The full text of our Code of Conduct and Ethics is published on the Investor Relations section of our website at www.fossilgroup.com. We
intend to disclose any future amendments to certain provisions of the Code of Conduct and Ethics, or waivers of such provisions granted to executive officers and directors, on this website within five
business days following the date of any such amendment or waiver.
Item 11. Executive Compensation
The information required in response to this Item is incorporated herein by reference to our proxy statement to be filed with the SEC
pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year covered by this report.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required in response to this Item is incorporated herein by reference to our proxy statement to be filed with the SEC
pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year covered by this report.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required in response to this Item is incorporated herein by reference to our proxy statement to be filed with the SEC
pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year covered by this report.
Item 14. Principal Accountant Fees and Services
The information required in response to this Item is incorporated herein by reference to our proxy statement to be filed with the SEC
pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year covered by this report.
108
Table of Contents
PART IV
Item 15. Exhibits and Consolidated Financial Statement Schedules
- (a)
- Documents
filed as part of Report.
The
exhibits required to be filed by this Item 15 are set forth in the Exhibit Index accompanying this report.
109
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
|
|
|
February 20, 2015 |
|
FOSSIL GROUP, INC. |
|
|
/s/ KOSTA N. KARTSOTIS
Kosta N. Kartsotis, Chairman of the Board of Directors and Chief Executive Officer |
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
|
|
|
|
|
Signature
|
|
Capacity
|
|
Date
|
|
|
|
|
|
/s/ KOSTA N. KARTSOTIS
Kosta N. Kartsotis |
|
Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer) |
|
February 20, 2015 |
/s/ DENNIS R. SECOR
Dennis R. Secor |
|
Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) |
|
February 20, 2015 |
/s/ ELAINE AGATHER
Elaine Agather |
|
Director |
|
February 20, 2015 |
/s/ JEFFREY N. BOYER
Jeffrey N. Boyer |
|
Director |
|
February 20, 2015 |
/s/ WILLIAM B. CHIASSON
William B. Chiasson |
|
Director |
|
February 20, 2015 |
/s/ DIANE NEAL
Diane Neal |
|
Director |
|
February 20, 2015 |
/s/ THOMAS M. NEALON
Thomas M. Nealon |
|
Director |
|
February 20, 2015 |
110
Table of Contents
|
|
|
|
|
Signature
|
|
Capacity
|
|
Date
|
|
|
|
|
|
/s/ MARK D. QUICK
Mark D. Quick |
|
Director |
|
February 20, 2015 |
/s/ ELYSIA HOLT RAGUSA
Elysia Holt Ragusa |
|
Director |
|
February 20, 2015 |
/s/ JAL S. SHROFF
Jal S. Shroff |
|
Director |
|
February 20, 2015 |
/s/ JAMES E. SKINNER
James E. Skinner |
|
Director |
|
February 20, 2015 |
/s/ JAMES M. ZIMMERMAN
James M. Zimmerman |
|
Director |
|
February 20, 2015 |
111
Table of Contents
SCHEDULE II
FOSSIL GROUP, INC. AND SUBSIDIARIES
VALUATIONS AND QUALIFYING ACCOUNTS
Fiscal Years 2012, 2013 and 2014
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions |
|
Deductions |
|
|
|
Classification
|
|
Balance at
Beginning of
Period |
|
Charged
(Credited) to
Operations |
|
Actual
Returns or
Writeoffs |
|
Balance at
End of Period |
|
Fiscal Year 2012: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Account receivable allowances: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales returns |
|
$ |
61,580 |
|
$ |
119,106 |
|
$ |
115,430 |
|
$ |
65,256 |
|
Bad debts |
|
$ |
18,241 |
|
$ |
848 |
|
$ |
1,983 |
|
$ |
17,106 |
|
Deferred tax asset valuation allowance |
|
$ |
3,193 |
|
$ |
3,114 |
|
$ |
544 |
|
$ |
5,763 |
|
Fiscal Year 2013: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Account receivable allowances: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales returns |
|
$ |
65,256 |
|
$ |
116,777 |
|
$ |
118,963 |
|
$ |
63,070 |
|
Bad debts |
|
$ |
17,106 |
|
$ |
(1,078 |
) |
$ |
4,258 |
|
$ |
11,770 |
|
Deferred tax asset valuation allowance |
|
$ |
5,763 |
|
$ |
4,988 |
|
$ |
204 |
|
$ |
10,547 |
|
Fiscal Year 2014: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Account receivable allowances: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales returns |
|
$ |
63,070 |
|
$ |
144,694 |
|
$ |
139,557 |
|
$ |
68,207 |
|
Bad debts |
|
$ |
11,770 |
|
$ |
3,257 |
|
$ |
3,187 |
|
$ |
11,840 |
|
Deferred tax asset valuation allowance |
|
$ |
10,547 |
|
$ |
(820 |
) |
$ |
2,906 |
|
$ |
6,821 |
|
112
Table of Contents
EXHIBIT INDEX
|
|
|
|
Exhibit
Number |
|
Description |
|
3.1 |
|
Third Amended and Restated Certificate of Incorporation of Fossil Group, Inc. (incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed on May 25, 2010). |
|
|
|
|
|
3.2 |
|
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). |
|
|
|
|
|
10.1 |
(2) |
Fossil Group, Inc. 1993 Non-Employee Director Stock Option Plan (incorporated by reference to the Company's Registration Statement on Form S-1, SEC File No. 33-45357). |
|
|
|
|
|
10.2 |
(2) |
Amendment Number One to the 1993 Non-Employee Director Stock Option Plan of Fossil Group, Inc. (incorporated by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K filed on March 2,
2011). |
|
|
|
|
|
10.3 |
(2) |
Amendment Number One to the Fossil Group, Inc. 1993 Non-Employee Director Stock Option Plan (incorporated by reference to Exhibit 10.41 to the Company's Annual Report on Form 10-K filed on March 5,
2008). |
|
|
|
|
|
10.4 |
(2) |
Fossil Group, Inc. 1993 Long-Term Incentive Plan (incorporated by reference to the Company's Registration Statement on Form S-1, SEC File No. 33-45357). |
|
|
|
|
|
10.5 |
(2) |
Amendment Number One to the 1993 Long-Term Incentive Plan of Fossil Group, Inc. (incorporated by reference to Exhibit 10.8 to the Company's Annual Report on Form 10-K filed on March 2,
2011). |
|
|
|
|
|
10.6 |
(2) |
Amendment Number Two to the 1993 Long-Term Incentive Plan of Fossil Group, Inc. (incorporated by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K filed on March 2,
2011). |
|
|
|
|
|
10.7 |
(2) |
Amendment Number Three to the 1993 Long-Term Incentive Plan of Fossil Group, Inc. (incorporated by reference to Exhibit 10.12 to the Company's Annual Report on Form 10-K filed on March 5,
2008). |
|
|
|
|
|
10.8 |
(2) |
Amendment Number Four to the 1993 Long-Term Incentive Plan of Fossil Group, Inc. (incorporated by reference to Exhibit 10.8 to the Company's Annual Report on Form 10-K filed on February 29,
2012). |
|
|
|
|
|
10.9 |
(2) |
Amendment Number Five to the 2004 Long-Term Incentive Plan of Fossil Group, Inc. (incorporated by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K filed on February 29,
2012). |
|
|
|
|
|
10.10 |
(2) |
Amendment Number Six to the 2004 Long-Term Incentive Plan of Fossil Group, Inc. (incorporated by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K filed on February 29,
2012). |
|
|
|
|
113
Table of Contents
|
|
|
|
Exhibit
Number |
|
Description |
|
10.11 |
(2) |
Form of Restricted Stock Award under the Fossil Group, Inc. 2004 Long-Term Incentive Plan. (incorporated by reference to Exhibit 10.12 to the Company's Annual Report on Form 10-K filed on February 29,
2012). |
|
|
|
|
|
10.12 |
(2) |
Form of Restricted Stock Unit Award under the Fossil Group, Inc. 2004 Long-Term Incentive Plan. (incorporated by reference to Exhibit 10.14 to the Company's Annual Report on Form 10-K filed on
February 29, 2012). |
|
|
|
|
|
10.13 |
(2) |
Form of Stock Appreciation Rights Award under the Fossil Group, Inc. 2004 Long-Term Incentive Plan. (incorporated by reference to Exhibit 10.16 to the Company's Annual Report on Form 10-K filed on
February 29, 2012). |
|
|
|
|
|
10.14 |
(2) |
Fossil Group, Inc. 2008 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on May 23, 2008). |
|
|
|
|
|
10.15 |
(2) |
Amendment Number One to the 2008 Long-Term Incentive Plan of Fossil Group, Inc. (incorporated by reference to Exhibit 10.23 to the Company's Annual Report on Form 10-K filed on February 29,
2012). |
|
|
|
|
|
10.16 |
(2) |
Amendment Number Two to the 2008 Long-Term Incentive Plan of Fossil Group, Inc. (incorporated by reference to Exhibit 10.24 to the Company's Annual Report on Form 10-K filed on February 29,
2012). |
|
|
|
|
|
10.17 |
(2) |
Form of Restricted Stock Unit Award under the Fossil Group, Inc. 2008 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.61 to the Company's Annual Report on Form 10-K filed on March 3,
2010). |
|
|
|
|
|
10.18 |
(2) |
Form of Stock Option Award Agreement for Outside Directors under the Fossil Group, Inc. 2008 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K
filed on January 5, 2009). |
|
|
|
|
|
10.19 |
(2) |
Form of Revised Restricted Stock Unit Award Agreement under the Fossil Group, Inc. 2008 Long-Term Incentive Plan for Non-U.S. Participants (incorporated by reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q filed on May 13, 2010). |
|
|
|
|
|
10.20 |
(2) |
Fossil Group, Inc. 2010 Cash Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on May 25, 2010). |
|
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|
|
|
10.21 |
(2) |
Third Amended and Restated Fossil Group, Inc. and Affiliates Deferred Compensation Plan (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on December 21,
2010). |
|
|
|
|
|
10.22 |
|
Credit Agreement, dated as of May 17, 2013, by and among Fossil, Inc., Fossil Intermediate, Inc., Fossil Trust, Fossil Partners, L.P., Arrow Merchandising, Inc., Fossil Stores I, Inc., Fossil
Holdings, LLC, Fossil International Holdings, Inc., Wells Fargo Bank, National Association, Bank of America, N.A., JPMorgan Chase Bank, N.A., HSBC Bank USA, National Association, Fifth Third Bank, Wells Fargo Securities, LLC, Merrill
Lynch Pierce, Fenner & Smith Incorporated and J.P. Morgan Securities LLC. (The exhibits and schedules to the Credit Agreement have not been filed herewith and will be provided to the Securities and Exchange Commission
supplementally upon request.) (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on May 20, 2013). |
|
|
|
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114
Table of Contents
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Exhibit
Number |
|
Description |
|
10.23 |
|
Guaranty Agreement, dated as of May 17, 2013, executed and delivered by Fossil Intermediate, Inc., Fossil Partners, L.P., Fossil Trust, Fossil Stores I, Inc. and Fossil International Holdings,
Inc. to Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed on May 20, 2013). |
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10.24 |
|
Pledge Agreement, dated as of May 17, 2013, by and among Fossil, Inc. and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K
filed on May 20, 2013). |
|
|
|
|
|
10.25 |
|
Fossil Group, Inc. 1993 Savings and Retirement Plan (incorporated by reference to the Company's Registration Statement on Form S-1, SEC File No. 33-45357). |
|
|
|
|
|
10.26 |
|
Master License Agreement dated as of August 30, 1994, by and between Fossil Group, Inc. and Fossil Partners, L.P. (incorporated by reference to Exhibit 10.6 to the Company's Annual Report on
Form 10-K filed on March 2, 2011). |
|
|
|
|
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10.27 |
|
Agreement of Limited Partnership of Fossil Partners, L.P. (incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K filed on March 2, 2011). |
|
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|
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10.28 |
|
Form of Executive Retirement Agreement (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on March 14, 2012). |
|
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|
|
|
10.29 |
|
Form of Restricted Stock Unit Award (2012) under the Fossil Group, Inc. 2008 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed on
March 14, 2012). |
|
|
|
|
|
10.30 |
|
Form of Stock Appreciation Rights Award (2012) under the Fossil Group, Inc. 2008 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed on
March 14, 2012). |
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|
|
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10.31 |
|
First Amendment to the Restricted Stock Unit Award Under the 2004 Long-Term Incentive Plan of Fossil Group, Inc. for Mark Quick, dated as of October 26, 2012 (incorporated by reference to Exhibit 10.1 to
the Company's Current Report on Form 8-K filed on November 1, 2012). |
|
|
|
|
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10.32 |
|
First Amendment to the Stock Appreciation Rights Award Under the 2004 Long-Term Incentive Plan of Fossil Group, Inc. for Mark Quick, dated as of October 26, 2012 (incorporated by reference to Exhibit 10.2
to the Company's Current Report on Form 8-K filed on November 1, 2012). |
|
|
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|
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10.33 |
|
First Amendment to Credit Agreement and Incremental Revolving Credit Commitment Agreement, dated as of May 23, 2014, by and among Fossil Group, Inc., Wells Fargo Bank, National Association, Bank of America, N.A.,
JPMorgan Chase Bank, N.A., HSBC Bank USA, National Association, Citibank, N.A., Compass Bank, Branch Banking and Trust Company, Keybank National Association, Royal Bank of Canada and U.S. Bank National Association (incorporated by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K filed on May 27, 2014). |
|
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|
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21.1 |
(1) |
Subsidiaries of Fossil Group, Inc. |
|
|
|
|
|
23.1 |
(1) |
Consent of Independent Registered Public Accounting Firm. |
|
|
|
|
|
31.1 |
(1) |
Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002. |
|
|
|
|
115
Table of Contents
|
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|
|
Exhibit
Number |
|
Description |
|
31.2 |
(1) |
Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
32.1 |
(3) |
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. |
|
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|
|
|
32.2 |
(3) |
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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101.INS |
(1) |
XBRL Instance Document. |
|
|
|
|
|
101.SCH |
(1) |
XBRL Taxonomy Extension Schema Document. |
|
|
|
|
|
101.DEF |
(1) |
XBRL Taxonomy Extension Definition Link 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)
- Management
contract or compensatory plan or arrangement.
- (3)
- Furnished
herewith.
116
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Exhibit 21.1
Subsidiaries of Fossil Group, Inc.
as of January 3, 2015
|
|
|
|
|
|
|
|
|
Name of Subsidiary
|
|
Place of
Incorporation |
|
Parent Company |
|
Percent
Ownership |
|
Fossil Intermediate, Inc. |
|
Delaware |
|
Fossil Group, Inc. |
|
|
100 |
|
Fossil Stores I, Inc. |
|
Delaware |
|
Fossil Group, Inc. |
|
|
100 |
|
Arrow Merchandising, Inc. |
|
Texas |
|
Fossil Group, Inc. |
|
|
100 |
|
Fossil Canada, Inc. |
|
Canada |
|
Fossil Group, Inc. |
|
|
100 |
|
Fossil Europe B.V. |
|
the Netherlands |
|
Fossil Group, Inc. |
|
|
100 |
|
Fossil Japan, Inc |
|
Japan |
|
Fossil Group, Inc. |
|
|
100 |
|
Fossil Holdings, LLC |
|
Delaware |
|
Fossil Group, Inc. |
|
|
100 |
|
Fossil (Gibraltar) Ltd. |
|
Gibraltar |
|
Fossil Group, Inc. |
|
|
100 |
|
Fossil International Holdings, Inc. |
|
Delaware |
|
Fossil Group, Inc. |
|
|
100 |
|
Fossil (East) Limited |
|
Hong Kong |
|
Fossil Group, Inc. |
|
|
100 |
|
Swiss Technology Holding GmbH |
|
Switzerland |
|
Fossil Group, Inc. |
|
|
100 |
|
Fossil Trust |
|
Delaware |
|
Fossil Intermediate, Inc. |
|
|
100 |
|
Fossil Holdings LLC Luxembourg, SCS |
|
Luxembourg |
|
Fossil Group, Inc. |
|
|
100 |
|
Fossil Partners, L.P. |
|
Texas |
|
Fossil Trust |
|
|
99 |
|
Fossil Mexico, S.A. de C.V. |
|
Mexico |
|
Fossil International Holdings, Inc. |
|
|
100 |
|
Servicios Fossil Mexico, S.A. de C.V. |
|
Mexico |
|
Fossil International Holdings, Inc. |
|
|
100 |
|
Fossil Luxembourg Sarl |
|
Luxembourg |
|
Fossil Holdings LLC Luxembourg, SCS |
|
|
100 |
|
Pulse Time Center Company, Ltd. |
|
Hong Kong |
|
Fossil (East) Limited |
|
|
98 |
|
Fossil (Hong Kong) Ltd |
|
Hong Kong |
|
Fossil (East) Limited |
|
|
100 |
|
Fossil Singapore Pte. Ltd. |
|
Singapore |
|
Fossil (East) Limited |
|
|
100 |
|
FDT, Ltd. |
|
Hong Kong |
|
Fossil (East) Limited |
|
|
51 |
|
Fossil (Australia) Pty Ltd. |
|
Australia |
|
Fossil (East) Limited |
|
|
100 |
|
Fossil Time Malaysia Sdn. Bhd. |
|
Malaysia |
|
Fossil (East) Limited |
|
|
100 |
|
Fossil Industries Ltd. |
|
Hong Kong |
|
Fossil (East) Limited |
|
|
100 |
|
Fossil Trading (Shanghai) Company Ltd. |
|
China |
|
Fossil (East) Limited |
|
|
100 |
|
Fossil (Asia) Holdings Ltd. |
|
Hong Kong |
|
Fossil (East) Limited |
|
|
100 |
|
Fossil (Korea) Limited |
|
Korea |
|
Fossil (East) Limited |
|
|
100 |
|
Fossil India Private Ltd. |
|
India |
|
Fossil (East) Limited |
|
|
99 |
|
Fossil Asia Pacific Ltd. |
|
Hong Kong |
|
Fossil (East) Limited |
|
|
100 |
|
Fossil Commercial (Shanghai) Company Ltd. |
|
China |
|
Fossil (East) Limited |
|
|
100 |
|
Fossil Services (Shenzhen) Co. Ltd. |
|
China |
|
Fossil (East) Limited |
|
|
100 |
|
Skagen Designs, Ltd. |
|
Hong Kong |
|
Fossil (East) Limited |
|
|
100 |
|
Shanghai Fossil Retail Co. Ltd. |
|
China |
|
Fossil (East) Limited |
|
|
100 |
|
Fossil (New Zealand) Limited |
|
New Zealand |
|
Fossil (Australia) Pty Ltd. |
|
|
100 |
|
Fossil Retail Stores (Australia) Pty. Ltd. |
|
Australia |
|
Fossil (Australia) Pty Ltd. |
|
|
100 |
|
Fossil Management Services Pty. Ltd. |
|
Australia |
|
Fossil (Australia) Pty Ltd. |
|
|
100 |
|
|
|
|
|
|
|
|
|
|
Name of Subsidiary
|
|
Place of
Incorporation |
|
Parent Company |
|
Percent
Ownership |
|
Pulse Time Center (Shenzhen) Co. Ltd. |
|
China |
|
Pulse Time Center Company, Ltd. |
|
|
100 |
|
Fossil (Macau) Limited |
|
Macau |
|
Fossil (Hong Kong) Ltd |
|
|
100 |
|
Fossil Europe GmbH |
|
Germany |
|
Fossil Europe B.V. |
|
|
100 |
|
Fossil Italia, S.r.l. |
|
Italy |
|
Fossil Europe B.V. |
|
|
100 |
|
GUM S.A. |
|
France |
|
Fossil Europe B.V. |
|
|
100 |
|
Fossil S.L. |
|
Spain |
|
Fossil Europe B.V. |
|
|
50 |
|
Fossil U.K. Holdings Ltd. |
|
United Kingdom |
|
Fossil Europe B.V. |
|
|
100 |
|
FESCO GmbH |
|
Germany |
|
Fossil Europe B.V. |
|
|
100 |
|
Fossil Switzerland GmbH |
|
Switzerland |
|
Fossil Europe B.V. |
|
|
100 |
|
Fossil (Austria) GmbH |
|
Austria |
|
Fossil Europe B.V. |
|
|
100 |
|
Fossil Sweden AB |
|
Sweden |
|
Fossil Europe B.V. |
|
|
100 |
|
Fossil Stores Belgium BVBA |
|
Belgium |
|
Fossil Europe B.V. |
|
|
100 |
|
Fossil Stores Spain SL |
|
Spain |
|
Fossil Europe B.V. |
|
|
100 |
|
Fossil Belgium BVBA |
|
Belgium |
|
Fossil Europe B.V. |
|
|
100 |
|
Fossil France SA |
|
France |
|
GUM, SA |
|
|
100 |
|
Logisav Sarl |
|
France |
|
Fossil France SA |
|
|
100 |
|
Fossil Norway AS |
|
Norway |
|
Fossil Sweden AB |
|
|
100 |
|
Fossil Denmark A/S |
|
Denmark |
|
Fossil Sweden AB |
|
|
100 |
|
Fossil Stores France SAS |
|
France |
|
Fossil France SA |
|
|
100 |
|
Fossil Stores S.r.l. |
|
Italy |
|
Fossil Italia, S.r.l. |
|
|
100 |
|
Fossil U.K. Ltd. |
|
United Kingdom |
|
Fossil U.K. Holdings Ltd. |
|
|
100 |
|
Montres Antima SA |
|
Switzerland |
|
Swiss Technology Holding GmbH |
|
|
100 |
|
Skagen Designs Retail U.K. Ltd. |
|
United Kingdom |
|
Fossil U.K. Holdings Ltd. |
|
|
100 |
|
In Time-Portugal |
|
Portugal |
|
Fossil S.L. |
|
|
100 |
|
Fossil Group Europe, GmbH |
|
Switzerland |
|
Swiss Technology Holding GmbH |
|
|
100 |
|
Fossil Management GmbH |
|
Switzerland |
|
Swiss Technology Holding GmbH |
|
|
100 |
|
Fossil China Sourcing |
|
China |
|
Fossil Group Europe GmbH |
|
|
99 |
|
Swiss Technology Production SA |
|
Switzerland |
|
Swiss Technology Holding GmbH |
|
|
51 |
|
Fossil Chile Holdings, SpA |
|
Chile |
|
Fossil International Holdings, Inc. |
|
|
100 |
|
Fossil Chile, SpA |
|
Chile |
|
Fossil Chile Holdings, SpA |
|
|
100 |
|
Latin America Services, Ltd |
|
BVI |
|
Fossil International Holdings, Inc. |
|
|
100 |
|
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Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Post- Effective Amendment No. 1 to Registration Statement No. 33-77526
and Registration Statement Nos. 33-65980, 333-70477, and 333-151645 on Form S-8, and Registration Statement Nos. 333-189408 and 333-196739 on Form S-3 of our reports dated
February 20, 2015, relating to the consolidated financial statements and consolidated financial statement schedule of Fossil Group, Inc., and subsidiaries and the effectiveness of Fossil
Group, Inc. and subsidiaries' internal control over financial reporting, appearing in this Annual Report on Form 10-K of Fossil Group, Inc. for the year ended January 3,
2015.
/s/
Deloitte & Touche LLP
Dallas,
Texas
February 20, 2015
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CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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EXHIBIT 31.1
CERTIFICATION
I,
Kosta N. Kartsotis, certify that:
- 1.
- I
have reviewed this Annual Report on Form 10-K of Fossil Group, Inc.;
- 2.
- Based
on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
- 3.
- Based
on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
- 4.
- The
registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
- a.
- Designed
such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
- b.
- Designed
such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
- c.
- Evaluated
the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
- d.
- Disclosed
in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over
financial reporting; and
- 5.
- The
registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
- a.
- All
significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process, summarize and report financial information; and
- b.
- Any
fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over
financial reporting.
|
|
|
February 20, 2015 |
|
/s/ KOSTA N. KARTSOTIS
Kosta N. Kartsotis Chief Executive Officer |
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CERTIFICATION
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EXHIBIT 31.2
CERTIFICATION
I,
Dennis R. Secor, certify that:
- 1.
- I
have reviewed this Annual Report on Form 10-K of Fossil Group, Inc.;
- 2.
- Based
on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
- 3.
- Based
on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
- 4.
- The
registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
- a.
- Designed
such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
- b.
- Designed
such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
- c.
- Evaluated
the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
- d.
- Disclosed
in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over
financial reporting; and
- 5.
- The
registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
- a.
- All
significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process, summarize and report financial information; and
- b.
- Any
fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over
financial reporting.
|
|
|
February 20, 2015 |
|
/s/ DENNIS R. SECOR
Dennis R. Secor Executive Vice President
Chief Financial Officer and Treasurer |
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CERTIFICATION
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Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Fossil Group, Inc. (the "Company") on Form 10-K for the fiscal year ended
January 3, 2015 as filed with the Securities and Exchange Commission on the date hereof (the "Form 10-K"), I, Kosta N. Kartsotis, Chief Executive Officer of the Company, hereby certify,
pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
- (1)
- The
Form 10-K fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
- (2)
- The
information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the
Company.
|
|
|
Dated: February 20, 2015 |
|
/s/ KOSTA N. KARTSOTIS
Kosta N. Kartsotis Chief Executive Officer |
A
signed original of this written statement required by Section 906 has been provided to Fossil Group, Inc. and will be retained by Fossil Group, Inc. and furnished
to the Securities and Exchange Commission or its staff upon request.
The
foregoing certification is being furnished as an exhibit to the Form 10-K pursuant to Item 601(b)(32) of Regulation S-K and Section 906 of the
Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) and, accordingly, is not being filed as part of the
Form 10-K for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not incorporated by reference into any filing of the Company, whether made before or after
the date hereof, regardless of any general incorporation language in such filing.
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CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
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Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Fossil Group, Inc. (the "Company") on Form 10-K for the fiscal year ended
January 3, 2015 as filed with the Securities and Exchange Commission on the date hereof (the "Form 10- K"), I, Dennis R. Secor, Executive Vice President, Chief Financial Officer and
Treasurer of the Company, hereby certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that to the best of my
knowledge:
- (1)
- The
Form 10-K fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
- (2)
- The
information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the
Company.
|
|
|
Dated: February 20, 2015 |
|
/s/ DENNIS R. SECOR
Dennis R. Secor Executive Vice President
Chief Financial Officer and Treasurer |
A
signed original of this written statement required by Section 906 has been provided to Fossil Group, Inc. and will be retained by Fossil Group, Inc. and furnished
to the Securities and Exchange Commission or its staff upon request.
The
foregoing certification is being furnished as an exhibit to the Form 10-K pursuant to Item 601(b)(32) of Regulation S-K and Section 906 of the
Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) and, accordingly, is not being filed as part of the
Form 10-K for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not incorporated by reference into any filing of the Company, whether made before or after
the date hereof, regardless of any general incorporation language in such filing.
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CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
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