Fossil Group, Inc. - Quarter Report: 2015 July (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

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

 

For the quarterly period ended: July 4, 2015

 

OR

 

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

 

For the transition period from                     to                    

 

Commission file number: 000-19848

 

 

FOSSIL GROUP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

(972) 234-2525

(Registrant’s telephone number, including area code)

 

 

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

 

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

 

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

 

 

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

 

The number of shares of the registrant’s common stock outstanding as of August 6, 2015: 48,146,973

 

 

 

PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

FOSSIL GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

UNAUDITED

IN THOUSANDS

 

		July 4,			January 3,
		2015			2015
Assets
Current assets:
Cash and cash equivalents		$	249,864		$	276,261
Accounts receivable - net of allowances of $61,773 and $80,047, respectively		254,517			430,498
Inventories		669,334			597,281
Deferred income tax assets-net		34,833			34,084
Prepaid expenses and other current assets		157,791			151,730
Total current assets		1,366,339			1,489,854
Property, plant and equipment - net of accumulated depreciation of $377,782 and $360,191, respectively		329,160			345,606
Goodwill		197,741			197,728
Intangible and other assets-net		166,201			174,364
Total long-term assets		693,102			717,698
Total assets		$	2,059,441		$	2,207,552
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	161,380		$	159,267
Short-term and current portion of long-term debt		20,288			16,646
Accrued expenses:
Compensation		59,593			50,776
Royalties		21,224			54,013
Co-op advertising		17,504			28,591
Transaction taxes		15,552			35,301
Other		71,068			75,609
Income taxes payable		15,301			26,626
Total current liabilities		381,910			446,829
Long-term income taxes payable		13,540			16,610
Deferred income tax liabilities		87,395			87,860
Long-term debt		674,445			613,659
Other long-term liabilities		57,749			58,793
Total long-term liabilities		833,129			776,922
Commitments and contingencies (Note 13)
Stockholders’ equity:
Common stock, 48,291 and 50,771 shares issued and outstanding at July 4, 2015 and January 3, 2015, respectively		483			508
Additional paid-in capital		178,633			171,669
Retained earnings		698,372			822,093
Accumulated other comprehensive income (loss)		(44,542		)	(16,410		)
Total Fossil Group, Inc. stockholders’ equity		832,946			977,860
Noncontrolling interest		11,456			5,941
Total stockholders’ equity		844,402			983,801
Total liabilities and stockholders’ equity		$	2,059,441		$	2,207,552

 

See notes to the condensed consolidated financial statements.

 

2

 

FOSSIL GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

UNAUDITED

IN THOUSANDS, EXCEPT PER SHARE DATA

 

		For the 13			For the 13			For the 26			For the 27
		Weeks Ended			Weeks Ended			Weeks Ended			Weeks Ended
		July 4, 2015			July 5, 2014			July 4, 2015			July 5, 2014
Net sales		$	739,975		$	773,820		$	1,465,060		$	1,550,365
Cost of sales		330,510			329,218			654,870			662,542
Gross profit		409,465			444,602			810,190			887,823
Operating expenses:
Selling, general and administrative expenses		332,560			359,844			665,042			698,366
Restructuring charges		6,471			0			18,559			0
Total operating expenses		339,031			359,844			683,601			698,366
Operating income		70,434			84,758			126,589			189,457
Interest expense		5,014			3,887			9,193			7,593
Other income (expense) - net		14,294			(1,097		)	21,479			(1,448		)
Income before income taxes		79,714			79,774			138,875			180,416
Provision for income taxes		22,894			24,875			41,417			56,355
Net income		56,820			54,899			97,458			124,061
Less: Net income attributable to noncontrolling interest		2,172			2,382			4,740			5,201
Net income attributable to Fossil Group, Inc.		$	54,648		$	52,517		$	92,718		$	118,860
Other comprehensive income (loss), net of taxes:
Currency translation adjustment		$	5,559		$	1,524		$	(27,947	)	$	399
Derivative instruments-net change		(246		)	(651		)	(185		)	(412		)
Pension plan activity		0			(3,293		)	0			(3,293		)
Total other comprehensive income (loss)		5,313			(2,420		)	(28,132		)	(3,306		)
Total comprehensive income		62,133			52,479			69,326			120,755
Less: Comprehensive income attributable to noncontrolling interest		2,172			2,382			4,740			5,201
Comprehensive income attributable to Fossil Group, Inc.		$	59,961		$	50,097		$	64,586		$	115,554
Earnings per share:
Basic		$	1.12		$	0.98		$	1.87		$	2.21
Diluted		$	1.12		$	0.98		$	1.87		$	2.20
Weighted average common shares outstanding:
Basic		48,634			53,494			49,464			53,821
Diluted		48,744			53,678			49,615			54,028

 

See notes to the condensed consolidated financial statements.

 

3

 

FOSSIL GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

UNAUDITED

IN THOUSANDS

 

		For the 26			For the 27
		Weeks Ended			Weeks Ended
		July 4, 2015			July 5, 2014
Operating Activities:
Net income		$	97,458		$	124,061
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion		43,650			48,978
Stock-based compensation		9,276			9,637
Decrease in allowance for returns-net of inventory in transit		(8,438		)	(3,685		)
Loss on disposal of assets		2,519			423
Impairment losses		6,602			5,501
Decrease in allowance for doubtful accounts		(2,006		)	(887		)
Excess tax benefits from stock-based compensation		(170		)	(950		)
Deferred income taxes and other		6,804			(973		)
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable		183,993			158,595
Inventories		(91,020		)	(95,426		)
Prepaid expenses and other current assets		(19,666		)	(36,280		)
Accounts payable		(1,040		)	9,377
Accrued expenses		(50,563		)	(60,033		)
Income taxes payable		(14,898		)	(2,842		)
Net cash provided by operating activities		162,501			155,496
Investing Activities:
Additions to property, plant and equipment		(32,464		)	(43,440		)
Increase in intangible and other assets		(1,400		)	(6,598		)
Skagen Designs arbitration settlement		5,968			0
Business acquisitions-net of cash acquired		(4,820		)	0
Net investment hedge settlement		0			410
Net cash used in investing activities		(32,716		)	(49,628		)
Financing Activities:
Acquisition of common stock		(218,659		)	(187,158		)
Distribution of noncontrolling interest earnings and other		(5,056		)	(5,392		)
Excess tax benefits from stock-based compensation		170			950
Debt borrowings		1,482,165			401,800
Debt payments		(1,419,161		)	(363,694		)
Proceeds from exercise of stock options		582			1,508
Net cash used in financing activities		(159,959		)	(151,986		)
Effect of exchange rate changes on cash and cash equivalents		3,777			(1,719		)
Net decrease in cash and cash equivalents		(26,397		)	(47,837		)
Cash and cash equivalents:
Beginning of period		276,261			320,479
End of period		$	249,864		$	272,642

 

See notes to the condensed consolidated financial statements.

 

4

 

FOSSIL GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

 

1. FINANCIAL STATEMENT POLICIES

 

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

 

The condensed consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary to present a fair statement of the Company’s financial position as of July 4, 2015, and the results of operations for the thirteen-week periods ended July 4, 2015 (“Second Quarter”) and July 5, 2014 (“Prior Year Quarter”), respectively, and the twenty-six week period ended July 4, 2015 (“Year To Date Period”) and the twenty-seven week period ended July 5, 2014 (“Prior Year YTD Period”).  All adjustments are of a normal, recurring nature.  The Company’s fiscal year periodically results in a 53-week year instead of a normal 52-week year. The prior fiscal year ended January 3, 2015 was a 53-week year, with the additional week included in the first quarter of the fiscal year. Accordingly, the information presented herein includes twenty-six weeks of operations for the Year To Date Period as compared to twenty-seven weeks included in the Prior Year YTD Period.

 

Effective during the first quarter of the current fiscal year, the Company made changes to the presentation of its reportable segments to reflect changes in the way its chief operating decision maker evaluates the performance of its operations, develops strategy and allocates capital resources. The Company has realigned its operating structure. Strategic and brand directions are set centrally and regional management is now fully empowered and responsible to drive those strategies and brand directions across all brands and channels within their regions. As part of the new operating structure, the regional teams manage both the wholesale and retail businesses within their regions whereas previously the retail business was managed globally. Additionally, with the implementation of new reporting systems, the Company has the ability to extract discrete financial information that aligns with its operating structure and is consistent with how management now evaluates the business performance. The Company’s reportable segments now consist of the following: (i) Americas, (ii) Europe and (iii) Asia. Prior to the Company’s first quarter fiscal 2015 Form 10-Q, as reported in the 2014 Form 10-K (as defined below), the Company’s reportable segments consisted of the following: (i) North America wholesale, (ii) Europe wholesale, (iii) Asia Pacific wholesale and (iv) Direct to consumer.

 

These changes to the Company’s reportable segments include the following:

 

(1)         Reclassification of the Company’s retail, e-commerce and catalog activities, all of which were previously recorded within the Company’s Direct to consumer segment, to the Americas, Europe and Asia segments based on the geographic location of the activities.

 

(2)         The Company’s wholesale operations in North America, Europe and Asia Pacific previously recorded within the North America wholesale, Europe wholesale and Asia Pacific wholesale segments, respectively, have been reclassified to the Americas, Europe and Asia segments, respectively.

 

(3)         Intercompany profit attributable to the Company’s factory operations was previously included in the Asia Pacific wholesale and Europe wholesale segments in accordance with the geographic location of the factories, and is now eliminated from all reporting segments.

 

(4)         Certain corporate costs are not allocated to the various segments because they are managed at the corporate level for internal purposes. Prior to the change in reporting segments, these expenses included, and after the change in reporting segments, continue to include, general corporate expenses, including certain administrative, legal, accounting, technology support costs, equity compensation costs and payroll costs attributable to executive management. Additionally, certain brand management, product development, art, creative/product design, marketing and back office supply chain expenses which were previously included in North America wholesale, Europe wholesale, Asia Pacific wholesale and Direct to consumer segments prior to the change in reporting segments are now reported in corporate. Conversely, certain back office costs reported in corporate prior to the change in reporting segments are now included in the various reporting segments in which they are now managed.

 

The Company’s historical segment disclosures have been recast to be consistent with the current presentation.

 

These interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Annual Report on Form 10-K filed by the Company pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), for the fiscal year ended January 3, 2015 (the “2014 Form 10-K”). Operating results for the Second Quarter and Year To Date Period are not necessarily indicative of the results to be achieved for the full fiscal year.

 

5

 

The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), which require the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the periods reported. Actual results could differ from those estimates. The Company has not made any changes in its significant accounting policies from those disclosed in the 2014 Form 10-K. Certain prior year amounts have been reclassified to conform to the current year presentation.

 

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

 

Hedging Instruments. The Company is exposed to certain market risks relating to foreign exchange rates and interest rates. The Company actively monitors and attempts to manage these exposures using derivative instruments including foreign currency forward contracts and interest rate swaps. The Company’s foreign subsidiaries periodically enter into foreign exchange forward contracts to hedge the future payment of intercompany inventory transactions denominated in U.S. dollars. If the Company was to settle its euro, British pound, Canadian dollar, Japanese yen, Australian dollar and Mexican peso forward contracts as of July 4, 2015, the net result would have been a net gain of approximately $14.6 million, net of taxes. To help protect against adverse existing and forecasted fluctuations in interest rates, the Company has entered into interest rate swap agreements to effectively convert portions of its existing and forecasted variable rate debt obligations to fixed rates. To reduce exposure to changes in currency exchange rates adversely affecting the Company’s investment in a euro-denominated subsidiary, the Company entered into a forward contract designated as a net investment hedge that was settled during the Prior Year Quarter. The Company does not hold or issue derivative financial instruments for trading or speculative purposes. See “Note 10—Derivatives and Risk Management” for additional disclosures about the Company’s use of derivatives.

 

Operating expenses. Operating expenses include selling, general and administrative expenses (“SG&A”) and restructuring charges. SG&A expenses include selling and distribution expenses primarily consisting of sales and distribution labor costs, sales distribution center and warehouse facility costs, depreciation expense related to sales distribution and warehouse facilities, the four-wall operating costs of the Company’s retail stores, point-of-sale expenses, advertising expenses and art, design and product development labor costs. SG&A also includes general and administrative expenses primarily consisting of administrative support labor and “back office” or support costs such as treasury, legal, information services, accounting, internal audit, human resources, executive management costs and costs associated with stock-based compensation. Restructuring charges include costs to reorganize, refine and optimize the Company’s infrastructure and store closures. See “Note 15—Restructuring” for additional information on the Company’s restructuring plan.

 

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

 

6

 

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

 

		For the 13			For the 13			For the 26			For the 27
		Weeks Ended			Weeks Ended			Weeks Ended			Weeks Ended
		July 4, 2015			July 5, 2014			July 4, 2015			July 5, 2014
Numerator:
Net income attributable to Fossil Group, Inc		$	54,648		$	52,517		$	92,718		$	118,860
Denominator:
Basic EPS computation:
Basic weighted average common shares outstanding		48,634			53,494			49,464			53,821
Basic EPS		$	1.12		$	0.98		$	1.87		$	2.21
Diluted EPS computation:
Basic weighted average common shares outstanding		48,634			53,494			49,464			53,821
Effect of stock options, stock appreciation rights, restricted stock units and performance restricted stock units		110			184			151			207
Diluted weighted average common shares outstanding		48,744			53,678			49,615			54,028
Diluted EPS		$	1.12		$	0.98		$	1.87		$	2.20

 

Approximately 569,000, 400,000, 334,000 and 302,000 weighted average common shares issuable under stock-based awards were not included in the diluted EPS calculation at the end of the Second Quarter, Year To Date Period, Prior Year Quarter and Prior Year YTD Period, respectively, because they were antidilutive.

 

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

 

In April 2015, FASB issued ASU 2015-04, Compensation—Retirement Benefits (Topic 715): Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets (“ASU 2015-04”). ASU 2015-04 provides an entity with a fiscal year-end that does not coincide with a month-end a practical expedient that allows the entity to measure defined benefit plan assets and obligations using the month-end that is closest to the entity’s fiscal year-end and apply that practical expedient consistently from year to year. If an entity has a significant event in an interim period that requires the remeasurement of defined benefit plan assets and obligations such as a partial settlement, ASU 2015-04 also provides a practical expedient that permits the entity to remeasure defined benefit plan assets and obligations using the month-end that is closest to the date of the significant event and adjust for any effects of the significant event not captured in the month-end measurement. If an entity applies the practical expedient and a contribution is made between the month-end date used for measurement and the entity’s fiscal year-end, the entity should disclose the amount of the contribution to allow reconciliation of the fair value of plan assets in the fair value hierarchy to the ending balance of the fair value of plan assets. ASU 2015-04 is effective for annual periods beginning after December 15, 2015 with early adoption permitted. This standard will not have a material impact on the Company’s consolidated results of operations or financial position.

 

In April 2015, FASB issued ASU 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU 2015-03 is effective for annual periods beginning after December 15, 2015 with early adoption permitted. This standard will not have a material impact on the Company’s consolidated results of operations or financial position.

 

In January 2015, FASB issued ASU 2015-01, Income Statement—Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items (“ASU 2015-01”). ASU 2015-01 eliminates from U.S. GAAP the concept of extraordinary items as part of its initiative to reduce complexity in accounting standards. As a result, an entity will no longer be required to segregate extraordinary items from the results of ordinary operations, to separately present an extraordinary item on its income statement, net of tax, after income from continuing operations or to disclose income taxes and earnings-per-share data applicable to an extraordinary item. However, ASU 2015-01 will still retain the presentation and disclosure guidance for items that are unusual in nature and occur infrequently. ASU 2015-01 is effective for annual periods beginning after December 15, 2015 with early adoption permitted. This standard will not have a material impact on the Company’s consolidated results of operations or financial position.

 

7

 

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

 

In June 2014, FASB issued ASU 2014-12, Compensation—Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (“ASU 2014-12”). ASU 2014-12 requires that a performance target, that affects vesting and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. ASU 2014-12 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015, with early adoption permitted. The Company is evaluating the effect of adopting ASU 2014-12, but does not expect that adoption will have a material impact on the Company’s consolidated results of operations or financial position.

 

In May 2014, FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets, unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In July 2015, FASB deferred the effective date of ASU 2014-09.  The new revenue standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017 and allows either a full retrospective adoption to all periods presented or a modified retrospective adoption approach with the cumulative effect of initial application of the revised guidance recognized at the date of initial application. Early adoption is permitted for periods beginning after December 15, 2016. The Company is evaluating the effect of adopting ASU 2014-09, but does not expect that adoption will have a material impact on the Company’s consolidated results of operations or financial position.

 

Recently Adopted Accounting Standards. In accordance with U.S. GAAP, the following provision, which had no material impact on the Company’s financial position, results of operations or cash flows, was adopted effective the first quarter of fiscal year 2015: ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.

 

2. ACQUISITION AND GOODWILL

 

Fossil Accessories South Africa Acquisition. On February 1, 2015, the Company closed a share purchase agreement with S. Keren Watch Group (“SKWG”), pursuant to which the Company acquired 51% ownership in the Cape Town, South Africa-based distributor for approximately $4.8 million in cash, net of cash acquired and including working capital adjustments (the “SKWG Acquisition”). SKWG had been a distribution partner for the Company for over 23 years, representing all Fossil brands and most of the Company’s licensed brands in South Africa. Upon closing of the share purchase, SKWG was renamed Fossil Accessories South Africa Pty, Ltd. The Company recorded $4.5 million of goodwill related to the acquisition.

 

Goodwill is the excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed. The changes in the carrying amount of goodwill, which is not subject to amortization, were as follows (in thousands):

 

		Americas			Europe			Asia			Total
Balance at January 3, 2015		$	119,438		$	66,433		$	11,857		$	197,728
Acquisitions		0			4,487			0			4,487
Foreign currency changes		(102		)	(4,413		)	41			(4,474		)
Balance at July 4, 2015		$	119,336		$	66,507		$	11,898		$	197,741

 

3. INVENTORIES

 

Inventories consisted of the following (in thousands):

 

		July 4,			January 3,
		2015			2015
Components and parts		$	58,942		$	48,797
Work-in-process		9,352			13,719
Finished goods		601,040			534,765
Inventories		$	669,334		$	597,281

 

8

 

4. WARRANTY LIABILITIES

 

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

 

		For the 26			For the 27
		Weeks Ended			Weeks Ended
		July 4, 2015			July 5, 2014
Beginning balance		$	13,500		$	15,658
Settlements in cash or kind		(4,019		)	(5,576		)
Warranties issued and adjustments to preexisting warranties (1)		4,038			5,925
Liabilities assumed in acquisition		44			0
Ending balance		$	13,563		$	16,007

 

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

 

5. INCOME TAXES

 

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

 

		For the 13			For the 13			For the 26			For the 27
		Weeks Ended			Weeks Ended			Weeks Ended			Weeks Ended
		July 4, 2015			July 5, 2014			July 4, 2015			July 5, 2014
Income tax expense		$	22,894		$	24,875		$	41,417		$	56,355
Income tax rate		28.7		%	31.2		%	29.8		%	31.2		%

 

The lower effective tax rates in the Second Quarter and the Year to Date Period, as compared to the Prior Year Quarter and Prior Year YTD Period, respectively, was primarily attributable to the recognition of income tax benefits due to the settlement of audits.

 

As of July 4, 2015, the total amount of unrecognized tax benefits, excluding interest and penalties, was $13.1 million, of which $10.3 million would favorably impact the effective tax rate in future periods, if recognized. During the Second Quarter, the U.S. Internal Revenue Service closed its examination of the Company’s 2010-2012 federal income tax returns, and the Company expects a refund of $2.2 million, which is recorded in prepaid expenses and other current assets in the Company’s condensed consolidated balance sheets. The Company is subject to examinations in various state and foreign jurisdictions for its 2007-2013 tax years, none of which the Company believes are significant, individually or in the aggregate. Tax audit outcomes and timing of tax audit settlements are subject to significant uncertainty.

 

The Company has classified uncertain tax positions as long-term income taxes payable, unless such amounts are expected to be paid within twelve months of the condensed consolidated balance sheet date. As of July 4, 2015, the Company had recorded $1.7 million of unrecognized tax benefits, excluding interest and penalties, for positions that are expected to be settled within the next twelve months. Consistent with its past practice, the Company recognizes interest and/or penalties related to income tax overpayments and income tax underpayments in income tax expense and income taxes receivable/payable, respectively. The total amount of accrued income tax-related interest and penalties included in the condensed consolidated balance sheets at July 4, 2015 was $1.7 million and $0.4 million, respectively. For the Second Quarter and Year To Date Period, the Company accrued income tax-related interest expense of $0.2 million and $0.4 million, respectively.

 

6. STOCKHOLDERS’ EQUITY

 

Common Stock Repurchase Programs. Purchases of the Company’s common stock are made from time to time pursuant to its repurchase programs, subject to market conditions and at prevailing market prices, through the open market. Repurchased shares of common stock are recorded at cost and become authorized but unissued shares which may be issued in the future for general corporate or other purposes. The Company may terminate or limit its stock repurchase program at any time. In the event the repurchased shares are cancelled, the Company accounts for retirements by allocating the repurchase price to common stock, additional paid-in capital and retained earnings. The repurchase price allocation is based upon the equity contribution associated with historical issuances. The repurchase programs are conducted pursuant to Rule 10b-18 of the Securities Exchange Act of 1934.

 

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During the Year To Date Period, the Company effectively retired 2.5 million shares of common stock repurchased under its repurchase programs. The effective retirement of repurchased common stock decreased common stock by approximately $25,500, additional paid-in capital by $0.6 million, retained earnings by $216.4 million and treasury stock by $217.0 million. At January 3, 2015 and July 4, 2015, all treasury stock had been effectively retired. As of July 4, 2015, the Company had $841.7 million of repurchase authorizations remaining under its combined repurchase programs.

 

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

 

							For the 13 Weeks Ended					For the 13 Weeks Ended
							July 4, 2015					July 5, 2014
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		1.3		$	102.5		0.0		$	0.0
2012		$	1,000.0		December 2016 (1)		0.0		$	0.0		0.6		$	67.3
2010		$	30.0		None		0.0		$	0.0		0.0		$	0.0

 

							For the 26 Weeks Ended					For the 27 Weeks Ended
							July 4, 2015					July 5, 2014
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		2.2		$	188.2		0.0		$	0.0
2012		$	1,000.0		December 2016 (1)		0.3		$	28.8		1.6		$	184.6
2010		$	30.0		None		0.0		$	0.0		0.0		$	0.0

 

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

 

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

 

		Fossil Group, Inc.						Total
		Stockholders’			Noncontrolling			Stockholders’
		Equity			Interest			Equity
Balance at January 3, 2015		$	977,860		$	5,941		$	983,801
Net income		92,718			4,740			97,458
Currency translation adjustment		(27,947		)	0			(27,947		)
Derivative instruments-net change		(185		)	0			(185		)
Common stock issued upon exercise of stock options		582			0			582
Tax expense derived from stock-based compensation		(699		)	0			(699		)
Distribution of noncontrolling interest earnings		0			(5,056		)	(5,056		)
Business acquisition		0			5,831			5,831
Acquisition of common stock		(218,659		)	0			(218,659		)
Stock-based compensation expense		9,276			0			9,276
Balance at July 4, 2015		$	832,946		$	11,456		$	844,402

 

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		Fossil Group, Inc.						Total
		Stockholders’			Noncontrolling			Stockholders’
		Equity			Interest			Equity
Balance at December 28, 2013		$	1,068,677		$	6,690		$	1,075,367
Net income		118,860			5,201			124,061
Currency translation adjustment		399			0			399
Derivative instruments-net change		(412		)	0			(412		)
Common stock issued upon exercise of stock options		1,508			0			1,508
Tax benefit derived from stock-based compensation		950			0			950
Distribution of noncontrolling interest earnings and other.		0			(5,392		)	(5,392		)
Pension plan activity		(3,293		)	0			(3,293		)
Acquisition of common stock		(187,158		)	0			(187,158		)
Stock-based compensation expense		9,637			0			9,637
Balance at July 5, 2014		$	1,009,168		$	6,499		$	1,015,667

 

7. EMPLOYEE BENEFIT PLANS

 

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

 

							Weighted-
							Average
				Weighted-			Remaining		Aggregate
				Average			Contractual		Intrinsic
Stock Options and Stock Appreciation Rights		Shares		Exercise Price			Term		Value
		(in Thousands)					(in Years)		(in Thousands)
Outstanding at April 4, 2015		775		$	84.93		5.8		$	10,714
Granted		0
Exercised		(7	)	41.30					244
Forfeited or expired		(24	)	98.15
Outstanding at July 4, 2015		744		84.94			5.5		7,667
Exercisable at July 4, 2015		540		$	83.20		4.8		$	7,664

 

The aggregate intrinsic value shown in the table above is before income taxes and is based on (i) the exercise price for outstanding and exercisable options/rights at July 4, 2015 and (ii) the fair market value of the Company’s common stock on the exercise date for options/rights that were exercised during the Second Quarter.

 

Stock Options and Stock Appreciation Rights Outstanding and Exercisable. The following tables summarize information with respect to stock options and stock appreciation rights outstanding and exercisable at July 4, 2015:

 

Stock Options Outstanding									Stock Options Exercisable
							Weighted-
				Weighted-			Average				Weighted-
				Average			Remaining				Average
Range of		Number of		Exercise			Contractual		Number of		Exercise
Exercise Prices		Shares		Price			Term		Shares		Price
		(in Thousands)					(in Years)		(in Thousands)
$13.65 - $21.51		51		$	15.13		3.0		51		$	15.13
$30.71 - $67.10		93		36.32			3.5		93		36.32
$69.53 - $106.40		96		80.86			5.6		94		80.79
$106.89 - $131.46		165		128.10			6.2		165		128.10
Total		405		$	81.56		5.0		403		$	81.55

 

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Stock Appreciation Rights Outstanding									Stock Appreciation Rights Exercisable
							Weighted-
				Weighted-			Average				Weighted-
				Average			Remaining				Average
Range of		Number of		Exercise			Contractual		Number of		Exercise
Exercise Prices		Shares		Price			Term		Shares		Price
		(in Thousands)					(in Years)		(in Thousands)
$13.65 - $21.51		17		$	13.65		1.7		17		$	13.65
$30.71 - $67.10		17		40.16			2.4		17		38.71
$69.53 - $106.40		197		84.25			6.9		43		90.35
$106.89 - $131.46		108		117.73			6.0		60		121.69
Total		339		$	88.98		6.1		137		$	88.08

 

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

 

				Weighted-Average
Restricted Stock, Restricted Stock Units				Grant Date Fair
and Performance Restricted Stock Units		Number of Shares		Value
		(in Thousands)
Nonvested at April 4, 2015		446		$	90.39
Granted		23		79.23
Vested		(16	)	103.84
Forfeited		(16	)	92.96
Nonvested at July 4, 2015		437		$	89.22

 

The total fair value of restricted stock and restricted stock units vested during the Second Quarter was approximately $1.3 million. Vesting of performance restricted stock units is based on achievement of sales growth and operating margin targets in relation to the performance of a certain identified peer group.

 

8. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

 

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

 

		For the 13 Weeks Ended July 4, 2015
		Currency			Cash Flow Hedges
		Translation			Forward			Interest			Pension
		Adjustments			Contracts			Rate Swaps			Plan			Total
Beginning balance		$	(60,747	)	$	19,315		$	(4,776	)	$	(3,647	)	$	(49,855	)
Other comprehensive income (loss) before reclassifications		5,559			2,701			10,460			0			18,720
Tax (expense) benefit		0			253			(3,812		)	0			(3,559		)
Amounts reclassed from accumulated other comprehensive income		0			10,555			4,604			0			15,159
Tax (expense) benefit		0			(3,634		)	(1,677		)	0			(5,311		)
Total other comprehensive income (loss)		5,559			(3,967		)	3,721			0			5,313
Ending balance		$	(55,188	)	$	15,348		$	(1,055	)	$	(3,647	)	$	(44,542	)

 

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