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:  March 30, 2013

 

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, INC.

(Exact name of registrant as specified in its charter)

 


 

Delaware

 

75-2018505

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

901 S. Central Expressway, Richardson, Texas

 

75080

(Address of principal executive offices)

 

(Zip Code)

 

(972) 234-2525

(Registrant’s telephone number, including area code)

 


 

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

 

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

 

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

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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

 

The number of shares of the registrant’s common stock outstanding as of May 3, 2013: 58,672,408.

 

 

 



 

PART I—FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

FOSSIL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

UNAUDITED

IN THOUSANDS

 

 

 

March 30,
2013

 

December 29,
2012

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

241,396

 

$

177,236

 

Securities available for sale

 

56

 

127

 

Accounts receivable - net of allowances of $75,762 and $82,362, respectively

 

272,860

 

363,456

 

Inventories

 

520,306

 

506,314

 

Deferred income tax assets-net

 

31,442

 

34,238

 

Prepaid expenses and other current assets

 

81,598

 

62,741

 

Total current assets

 

1,147,658

 

1,144,112

 

 

 

 

 

 

 

Investments

 

0

 

6,965

 

Property, plant and equipment - net of accumulated depreciation of $269,411 and $262,041, respectively

 

329,223

 

335,446

 

Goodwill

 

201,356

 

184,793

 

Intangible and other assets-net

 

178,332

 

170,673

 

Total long-term assets

 

708,911

 

697,877

 

Total assets

 

$

1,856,569

 

$

1,841,989

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

124,859

 

$

149,561

 

Short-term debt

 

1,600

 

2,794

 

Accrued expenses:

 

 

 

 

 

Compensation

 

50,044

 

55,563

 

Royalties

 

29,819

 

53,547

 

Co-op advertising

 

15,048

 

24,500

 

Transaction taxes

 

17,908

 

27,973

 

Other

 

56,733

 

61,575

 

Income taxes payable

 

18,307

 

31,265

 

Total current liabilities

 

314,318

 

406,778

 

 

 

 

 

 

 

Long-term income taxes payable

 

10,172

 

8,662

 

Deferred income tax liabilities

 

87,292

 

79,756

 

Long-term debt

 

151,129

 

75,140

 

Other long-term liabilities

 

48,304

 

31,189

 

Total long-term liabilities

 

296,897

 

194,747

 

Commitments and contingencies (Note 12)

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common stock, 59,203 and 59,631 shares issued at March 30, 2013 and December 29, 2012, respectively

 

592

 

596

 

Additional paid-in capital

 

140,083

 

138,097

 

Retained earnings

 

1,083,717

 

1,066,082

 

Accumulated other comprehensive income

 

12,243

 

28,760

 

Total Fossil, Inc. stockholders’ equity

 

1,236,635

 

1,233,535

 

Noncontrolling interest

 

8,719

 

6,929

 

Total stockholders’ equity

 

1,245,354

 

1,240,464

 

Total liabilities and stockholders’ equity

 

$

1,856,569

 

$

1,841,989

 

 

See notes to the condensed consolidated financial statements.

 

2



 

FOSSIL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

UNAUDITED

IN THOUSANDS, EXCEPT PER SHARE DATA

 

 

 

For the 13 Weeks Ended

 

 

 

March 30, 2013

 

March 31, 2012

 

Net sales

 

$

680,899

 

$

589,533

 

Cost of sales

 

302,428

 

260,553

 

Gross profit

 

378,471

 

328,980

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Selling and distribution

 

203,189

 

181,438

 

General and administrative

 

80,961

 

64,681

 

Total operating expenses

 

284,150

 

246,119

 

 

 

 

 

 

 

Operating income

 

94,321

 

82,861

 

Interest expense

 

1,231

 

814

 

Other income-net

 

9,784

 

2,549

 

 

 

 

 

 

 

Income before income taxes

 

102,874

 

84,596

 

Provision for income taxes

 

28,894

 

23,524

 

 

 

 

 

 

 

Net income

 

73,980

 

61,072

 

Less: Net income attributable to noncontrolling interest

 

1,794

 

2,932

 

Net income attributable to Fossil, Inc.

 

$

72,186

 

$

58,140

 

 

 

 

 

 

 

Other comprehensive (loss) income, net of taxes:

 

 

 

 

 

Currency translation adjustment

 

$

(19,837

)

$

10,071

 

Unrealized (loss) gain on securities available for sale

 

(71

)

50

 

Forward contracts hedging intercompany foreign currency payments-change in fair values

 

3,391

 

(1,349

)

Total other comprehensive (loss) income

 

(16,517

)

8,772

 

 

 

 

 

 

 

Total comprehensive income

 

57,463

 

69,844

 

Less: Comprehensive income attributable to noncontrolling interest

 

1,794

 

2,932

 

Comprehensive income attributable to Fossil, Inc.

 

$

55,669

 

$

66,912

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

Basic

 

$

1.22

 

$

0.94

 

Diluted

 

$

1.21

 

$

0.93

 

Weighted average common shares outstanding:

 

 

 

 

 

Basic

 

59,393

 

61,859

 

Diluted

 

59,783

 

62,459

 

 

See notes to the condensed consolidated financial statements.

 

3



 

FOSSIL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

UNAUDITED

IN THOUSANDS

 

 

 

For the 13 Weeks Ended

 

 

 

March 30, 2013

 

March 31, 2012

 

Operating Activities:

 

 

 

 

 

Net income

 

$

73,980

 

$

61,072

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation, amortization and accretion

 

18,758

 

15,227

 

Stock-based compensation

 

2,546

 

3,144

 

Decrease in allowance for returns-net of inventory in transit

 

(238

)

(2,917

)

Loss on disposal of assets

 

266

 

517

 

Equity in income of joint venture

 

0

 

(270

)

Gain on equity method investment

 

(6,410

)

0

 

Decrease in allowance for doubtful accounts

 

(4,202

)

(1,396

)

Excess tax benefits from stock-based compensation

 

(4,082

)

(9,901

)

Deferred income taxes and other

 

8,292

 

3,919

 

 

 

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

99,403

 

88,197

 

Inventories

 

(11,507

)

(19,355

)

Prepaid expenses and other current assets

 

(14,721

)

(5,527

)

Accounts payable

 

(20,369

)

(45,310

)

Accrued expenses

 

(49,000

)

(60,930

)

Income taxes payable

 

(6,813

)

9,029

 

 

 

 

 

 

 

Net cash provided by operating activities

 

85,903

 

35,499

 

 

 

 

 

 

 

Investing Activities:

 

 

 

 

 

Additions to property, plant and equipment

 

(19,485

)

(10,029

)

Increase in intangible and other assets

 

(723

)

(27

)

Net change in restricted cash

 

452

 

(157

)

Business acquisitions-net of cash acquired

 

(15,165

)

0

 

 

 

 

 

 

 

Net cash used in investing activities

 

(34,921

)

(10,213

)

 

 

 

 

 

 

Financing Activities:

 

 

 

 

 

Acquisition of common stock

 

(61,188

)

(67,878

)

Distribution of noncontrolling interest earnings

 

(4

)

(3,786

)

Excess tax benefits from stock-based compensation

 

4,082

 

9,901

 

Debt borrowings

 

218,098

 

3,899

 

Debt payments

 

(142,718

)

(4

)

Proceeds from exercise of stock options

 

1,991

 

4,352

 

 

 

 

 

 

 

Net cash provided by (used in) financing activities

 

20,261

 

(53,516

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

(7,083

)

1,210

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

64,160

 

(27,020

)

Cash and cash equivalents:

 

 

 

 

 

Beginning of period

 

177,236

 

287,498

 

 

 

 

 

 

 

End of period

 

$

241,396

 

$

260,478

 

 

See notes to the condensed consolidated financial statements.

 

4



 

FOSSIL, 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, 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 March 30, 2013, and the results of operations for the thirteen week periods ended March 30, 2013 (“First Quarter”) and March 31, 2012 (“Prior Year Quarter”), respectively. All adjustments are of a normal, recurring nature.

 

These interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Annual Report on Form 10-K filed by the Company pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), for the fiscal year ended December 29, 2012 (the “2012 Form 10-K”). Operating results for the First Quarter are not necessarily indicative of the results to be achieved for the full fiscal year.

 

The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), which require the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the periods reported. Actual results could differ from those estimates. The Company has not made any changes in its significant accounting policies from those disclosed in the 2012 Form 10-K.

 

Business. The Company is a global design, marketing and distribution company that specializes in consumer fashion accessories. Its principal offerings include an extensive line of men’s and women’s fashion watches and jewelry, handbags, small leather goods, belts, sunglasses, soft accessories and clothing. 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.

 

Foreign Currency Hedging Instruments. 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’s foreign subsidiaries were to settle their contracts designated as cash flow hedges that were denominated in Euros, British Pounds, Mexican Pesos, Australian Dollars, Canadian Dollars and Japanese Yen, the net result would have been a gain of approximately $4.4 million, net of taxes, as of March 30, 2013. The Company applies the hedge accounting rules as required by Accounting Standard Codification (“ASC”) 815, Derivatives and Hedging (“ASC 815”). See “Note 8—Derivatives and Risk Management” for additional disclosures about the Company’s use of forward contracts.

 

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.

 

5



 

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

 

 

 

For the 13 Weeks Ended

 

 

 

March 30, 2013

 

March 31, 2012

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

Net income attributable to Fossil, Inc.

 

$

72,186

 

$

58,140

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

Basic EPS computation:

 

 

 

 

 

Basic weighted average common shares outstanding

 

59,393

 

61,859

 

Basic EPS

 

$

1.22

 

$

0.94

 

 

 

 

 

 

 

Diluted EPS computation:

 

 

 

 

 

Basic weighted average common shares outstanding

 

59,393

 

61,859

 

Stock options, stock appreciation rights and restricted stock units

 

390

 

600

 

Diluted weighted average common shares outstanding

 

59,783

 

62,459

 

Diluted EPS

 

$

1.21

 

$

0.93

 

 

Approximately 201,000 and 237,000 shares issuable under stock-based awards were not included in the diluted EPS calculation at the end of the First Quarter and Prior Year Quarter, respectively, because they were antidilutive.

 

Restricted Cash. As of March 30, 2013 and December 29, 2012, the Company had short-term restricted cash balances of $0.2 million and $0.3 million, respectively, and long-term restricted cash balances of $0.7 million and $1.0 million, respectively, primarily pledged as collateral to secure bank guarantees for the purpose of obtaining retail space.  Short-term restricted cash is reported in prepaid expenses and other current assets in the Company’s condensed consolidated balance sheets as a component of current assets.  Long-term restricted cash is reported in intangible and other assets-net in the Company’s condensed consolidated balance sheets as a component of long-term assets.

 

Recently Issued Accounting Standards. In March 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 (“ASU 2013-05”).  ASU 2013-05 addresses the accounting for the cumulative translation adjustment when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity.  The guidance outlines the events when cumulative translation adjustments should be released into net income and is intended by FASB to eliminate some disparity in current accounting practice.  The guidance in ASU 2013-05 will become effective for the Company for annual and interim periods beginning after December 15, 2013. The Company will apply the guidance prospectively to any derecognition events that may occur after the effective date, and does not expect the adoption of ASU 2013-05 to have a material impact on the Company’s condensed consolidated results of operations or financial position.

 

In February 2013, the FASB issued ASU 2013-04, Liabilities (Topic 405): Obligations Resulting From Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date (“ASU 2013-04”). The update requires an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed as of the reporting date. The amount is equal to the sum of the obligation the entity agreed to pay among its co-obligors and any additional amount the entity expects to pay on behalf of its co-obligors. ASU 2013-04 will become effective for the Company for annual and interim periods beginning after December 15, 2013 and is required to be applied retrospectively to all prior periods presented for obligations that existed upon adoption of ASU 2013-04. The Company does not expect the adoption of ASU 2013-04 to have a material impact on the Company’s condensed consolidated results of operations or financial position.

 

In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”), to address certain comparability issues between financial statements prepared in accordance with GAAP and those prepared in accordance with International Financial Reporting Standards.  In January 2013, the FASB issued ASU 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities (“ASU 2013-01”), which clarifies which instruments and transactions are subject to the offsetting disclosure requirements established by ASU 2011-11.  ASU 2011-11 will require an entity to provide enhanced disclosures about certain financial instruments and derivatives, as defined in ASU 2013-01, to enable users to understand the effects of offsetting in the financial statements as well as the effects of master netting arrangements on an entity’s financial condition.  The amendments in ASU 2011-11 and ASU 2013-01 are effective for annual and interim reporting periods beginning on or after January 1, 2013, with respective disclosures required for all comparative periods presented.  The Company does not expect the adoption of ASU 2011-11 and ASU 2013-01 to have a material impact on the Company’s condensed consolidated results of operations or financial position.

 

6



 

Recently Adopted Accounting Standards. In July 2012, the FASB issued ASU 2012-02, Intangibles—Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment (“ASU 2012-02”). The amendments in this update permit an entity to make a qualitative assessment to determine if it is more likely than not that an indefinite-lived intangible asset other than goodwill is impaired. If an entity concludes that it is more likely than not that the fair value of an indefinite-lived intangible asset other than goodwill is less than its carrying amount, it is required to perform the quantitative impairment test for that asset. This ASU aligns the guidance of impairment testing for indefinite-lived intangible assets other than goodwill with that in ASU 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment (“ASU 2011-08”). The guidance in ASU 2012-02 was effective for the Company beginning December 30, 2012 and did not have a material impact on the Company’s condensed consolidated results of operations or financial position.

 

In February 2013, the FASB issued ASU 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“ASU 2013-02”).  FASB issued ASU 2013-02 to improve the transparency of changes in other comprehensive income (“OCI”) and items reclassified out of accumulated other comprehensive income (“AOCI”) in financial statements.  ASU 2013-12 requires an entity to provide information about amounts reclassified out of AOCI by component.  In addition, an entity must present either on the face of the income statement or in the notes, significant amounts reclassified out of AOCI by the respective line items of net income. See “Note 6—Stockholders’ Equity and Benefit Plans” for additional disclosures about the Company’s OCI.  The guidance in ASU 2013-02 became effective for the Company on December 30, 2012 and did not have a material impact on the Company’s condensed consolidated results of operations or financial position.

 

2. ACQUISITIONS AND GOODWILL

 

Skagen Designs, Ltd. Acquisition.  On April 2, 2012, the Company acquired Skagen Designs, Ltd. and certain of its international affiliates (“Skagen Designs”). Skagen Designs was a privately held Nevada-based company that globally marketed and distributed contemporary Danish design accessories including watches, clocks, jewelry and sunglasses. The primary purpose of the acquisition was to add an attractive brand to the Company’s portfolio that the Company could grow using its established distribution channels. The purchase price was $231.7 million in cash and 150,000 shares of the Company’s common stock valued at $19.9 million based on the mean between the highest and lowest sales price of the Company’s common stock on NASDAQ on April 2, 2012. To fund the cash purchase price, the Company utilized approximately $200 million of availability under its $350 million revolving line of credit and excess cash available in its international subsidiaries to fund the international portion of the purchase price. In addition, subject to the purchase agreement, the sellers could have received up to 100,000 additional shares of the Company’s common stock if the Company’s net sales of SKAGEN® branded products exceeded 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 expenses-other in the Company’s condensed 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. During the First Quarter, the contingent consideration liability remained valued at zero. 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 Prior Year Quarter. 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 general and administrative expenses on the Company’s consolidated statements of comprehensive income. There were no acquisition and integration costs incurred during the First Quarter.

 

The Company’s consolidated statements of comprehensive income for fiscal year 2012 included $93.8 million of net sales and $11.2 million of operating income, related to the results of operations of Skagen Designs since April 2, 2012. Operating income for fiscal year 2012 was favorably impacted by $10.0 million related to Skagen Designs’ ongoing operations.

 

During the First Quarter, the purchase accounting was finalized with no change since fiscal year end December 29, 2012. 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 exceeded the fair values of the tangible and intangible assets acquired, goodwill was recorded equal to the difference. The element of goodwill that is not separable into identifiable intangible assets represents expected synergies. The following table summarizes the allocation of the purchase price to the fair value of the assets acquired and the liabilities assumed as of April 2, 2012, the effective date of the acquisition (in thousands):

 

7



 

Cash paid, net of cash acquired

 

$

229,012

 

Value of common stock issued

 

19,899

 

Contingent consideration

 

9,950

 

Total transaction consideration

 

$

258,861

 

Accounts receivable

 

$

16,595

 

Inventories

 

22,638

 

Prepaid expenses and other current assets

 

3,306

 

Property, plant and equipment

 

4,232

 

Goodwill

 

140,387

 

Trade name

 

64,700

 

Customer lists

 

24,400

 

Patents

 

1,500

 

Noncompete agreement

 

1,900

 

Other long-term assets

 

2,972

 

Current liabilities

 

(20,840

)

Long-term liabilities

 

(2,929

)

Total net assets acquired

 

$

258,861

 

 

The goodwill and trade name assets recognized from the acquisition have indefinite useful lives, were tested for impairment at fiscal year end 2012 and will continue to be tested for impairment annually. The amortization periods for the acquired customer lists, patents and noncompete agreements have amortization periods of three years to nine years. Approximately $133.8 million of the goodwill recognized in the acquisition is expected to be deductible for tax purposes.

 

The following unaudited pro forma information presents the combined results of operations of Fossil, Inc. and Skagen Designs as if the acquisition had occurred at the beginning of each period presented below. The pro forma information is not necessarily indicative of what the financial position or results of operations actually would have been had the acquisition been completed at the beginning of each period presented below. In addition, the unaudited pro forma financial information is not indicative of, nor does it purport to project, the future financial position or operating results of Fossil, Inc. The unaudited pro forma information does not give effect to any potential cost savings or other operating efficiencies that could result from the acquisition. The following table presents the unaudited pro forma financial information (in thousands, except per share data):

 

 

 

For the 13 Weeks Ended

 

 

 

March 30,
2013

 

March 31,
2012

 

 

 

 

 

 

 

Net sales

 

$

680,899

 

$

619,977

 

Net income attributable to Fossil, Inc.

 

72,186

 

58,637

 

Earnings per share:

 

 

 

 

 

Basic

 

$

1.22

 

$

0.95

 

Diluted

 

$

1.21

 

$

0.94

 

 

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.

 

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 in accordance with ASC 810, Consolidation, instead of treating it as an equity method investment. In accordance with ASC 805, Business Combinations, the Company remeasured its preexisting investment in Fossil Spain to fair value as of January 1, 2013, resulting in a gain of $6.4 million, which was recorded in other income-net on the Company’s condensed consolidated statements of comprehensive income.  The results of Fossil Spain’s operations have been included in the Company’s condensed consolidated financial statements since January 1, 2013. The Company recorded approximately $10.7 million of goodwill related to the acquisition.

 

8



 

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 5.1 million Euros (approximately $6.7 million at December 31, 2012).  The Company recorded a contingent consideration liability of 5.9 million Euros (approximately $7.8 million) related to the variable portion of the purchase price as of January 1, 2013.  The variable portion will be determined based on Fossil Spain’s aggregated results of operations less dividends distributed by Fossil Spain to General De Relojeria with a minimum annual variable price of 2.0 million Euros (approximately $2.6 million at March 30, 2013) and a maximum annual variable price of 3.5 million Euros (approximately $4.5 million at March 30, 2013) for each of the calendar years 2013, 2014, and 2015.

 

Both the fixed and variable portions of the purchase price were recorded in other long-term liabilities in the condensed consolidated balance sheets at March 30, 2013.

 

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 $26.0 million, comprised of $18.7 million in cash and $7.3 million in forgiveness of a payable to the Company. The Company recorded approximately $8.1 million of goodwill related to the acquisition. The results of Bentrani’s operations have been included in the Company’s condensed consolidated financial statements since the acquisition date.

 

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):

 

 

 

North America
wholesale

 

Europe
wholesale

 

Asia
Pacific
wholesale

 

Total

 

Balance at December 29, 2012

 

$

109,270

 

$

63,884

 

$

11,639

 

$

184,793

 

Acquisitions

 

8,130

 

10,723

 

0

 

18,853

 

Foreign currency changes

 

102

 

(2,306

)

(86

)

(2,290

)

Balance at March 30, 2013

 

$

117,502

 

$

72,301

 

$

11,553

 

$

201,356

 

 

3. INVENTORIES

 

Inventories consisted of the following (in thousands):

 

 

 

March 30,
2013

 

December 29,
2012

 

Components and parts

 

$

60,566

 

$

62,731

 

Work-in-process

 

6,757

 

8,071

 

Finished goods

 

452,983

 

435,512

 

Inventories

 

$

520,306

 

$

506,314

 

 

4. WARRANTY RESERVE

 

The Company’s warranty liabilities are primarily related to watch products. 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 and is recorded in accrued expenses-other in the condensed consolidated balance sheets.  As changes in warranty costs are experienced, the warranty accrual is adjusted as necessary. Warranty liability activity consisted of the following (in thousands):

 

9



 

 

 

For the 13 Weeks Ended

 

 

 

March 30, 2013

 

March 31, 2012

 

Beginning balance

 

$

13,383

 

$

10,996

 

Settlements in cash or kind

 

(2,461

)

(993

)

Warranties issued and adjustments to preexisting warranties (1)

 

2,396

 

2,085

 

Liabilities assumed in acquisition

 

340

 

0

 

Ending balance

 

$

13,658

 

$

12,088

 

 


(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 Weeks Ended

 

 

 

March 30, 2013

 

March 31, 2012

 

Income tax expense

 

$

28,894

 

$

23,524

 

Income tax rate

 

28.1

%

27.8

%

 

The lower effective tax rate in the Prior Year Quarter was attributable to management’s decision to indefinitely reinvest the undistributed earnings of certain foreign subsidiaries. The First Quarter effective tax rate was favorably impacted by audit settlements.

 

As of March 30, 2013, the total amount of unrecognized tax benefits, excluding interest and penalties, was $9.2 million, of which $6.0 million would favorably impact the effective tax rate in future periods, if recognized. The U.S. Internal Revenue Service completed its examination of the Company’s 2007-2009 federal income tax returns, and the Company has settled all outstanding federal income tax liabilities for those years.  The Company is subject to examinations in various state and foreign jurisdictions for its 2005-2012 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 of the condensed consolidated balance sheet date. As of March 30, 2013, the Company had recorded $0.1 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 and penalties included in the condensed consolidated balance sheets at March 30, 2013 was $0.8 million and $0.3 million, respectively. For the First Quarter, the Company accrued income tax-related interest expense of $0.1 million.

 

6. STOCKHOLDERS’ EQUITY AND BENEFIT PLANS

 

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 Exchange Act. During the First Quarter, the Company completed its $750 million buyback plan authorized in August 2010. The Company repurchased 9.6 million shares of common stock under that plan, of which $38.6 million, or 0.4 million shares, were repurchased during the First Quarter.  In addition, the Company repurchased $18.0 million of its common stock in the First Quarter, or 0.2 million shares, under the Company’s $1 billion repurchase plan, which was authorized in 2012. As of March 30, 2013, the Company had $1.0 billion of repurchase authorizations remaining under the combined repurchase plans.

 

During the First Quarter, the Company effectively retired 0.6 million shares of common stock repurchased under its repurchase programs. The effective retirement of repurchased common stock decreased common stock by $6,000, additional paid-in capital by $2.0 million, retained earnings by $54.6 million and treasury stock by $56.5 million.

 

10



 

At December 29, 2012 and March 30, 2013, all treasury stock had been effectively retired.

 

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

 

 

 

 

 

 

 

For the 13 Weeks Ended
March 30, 2013

 

For Fiscal Year 2012

 

Fiscal Year Authorized

 

Dollar Value
Authorized

 

Termination Date

 

Number of
Shares
Repurchased

 

Dollar Value
Repurchased

 

Number of
Shares
Repurchased

 

Dollar Value
Repurchased

 

2012

 

$

1,000.0

 

December 2016

 

0.2

 

$

18.0

 

0.0

 

$

0.0

 

2010

 

$

30.0

 

None

 

0.0

 

$

0.0

 

0.0

 

$

0.0

 

2010

 

$

750.0

 

December 2013

 

0.4

 

$

38.6

 

3.0

 

$

261.3

 

 

Stock-Based Compensation Plans. The Company accounts for stock-based compensation in accordance with the provisions of ASC 718, Compensation-Stock Compensation (“ASC 718”), using the Black-Scholes option pricing model to determine the fair value of stock options and stock appreciation rights at the date of grant. The Company’s grants under its current stock-based compensation plans generally include: (i) stock options and restricted stock for its international employees, (ii)  restricted stock units for its non-employee directors and (iii) stock appreciation rights, restricted stock and restricted stock units for its U.S.-based employees. There have been no significant changes to the Company’s stock-based compensation plans since the 2012 Form 10-K.

 

The following table summarizes stock options and stock appreciation rights activity during the First Quarter:

 

Stock Options and Stock Appreciation Rights

 

Number of
Shares

 

Weighted-
Average
Exercise Price

 

Weighted-
Average
Remaining
Contractual
Term
(Years)

 

Aggregate
Intrinsic
Value

 

 

 

in thousands

 

 

 

 

 

in thousands

 

Outstanding at December 29, 2012

 

1,039

 

$

63.56

 

6.4

 

$

36,708

 

Granted

 

32

 

105.47

 

 

 

 

 

Exercised

 

(101

)

32.99

 

 

 

6,844

 

Forfeited or expired

 

(12

)

82.79

 

 

 

 

 

Outstanding at March 30, 2013

 

958

 

67.97

 

6.4

 

35,658

 

Exercisable at March 30, 2013

 

617

 

51.21

 

5.6

 

30,582

 

Nonvested at March 30, 2013

 

341

 

98.23

 

7.8

 

5,076

 

Expected to vest

 

309

 

$

98.23

 

7.8

 

$

4,618

 

 

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 March 30, 2013 and (ii) the fair market value of the Company’s common stock on the exercise date for options/rights that were exercised during the First Quarter.

 

11



 

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 March 30, 2013:

 

 

 

Stock Options and Stock 
Appreciation Rights Outstanding

 

Stock Options and Stock Appreciation
Rights Exercisable

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

 

 

Weighted-

 

Average

 

 

 

Weighted-

 

 

 

 

 

Average

 

Remaining

 

 

 

Average

 

 

 

Number of

 

Exercise

 

Contractual

 

Number of

 

Exercise

 

Range of Exercise Prices

 

Shares

 

Price

 

Term (Years)

 

Shares

 

Price

 

 

 

in thousands

 

 

 

 

 

in thousands

 

 

 

$13.65 - $26.29

 

223

 

$

17.87

 

3.9

 

180

 

$

18.81

 

$26.29 - $39.44

 

216

 

34.79

 

5.3

 

215

 

34.78

 

$39.44 - $52.58

 

30

 

43.15

 

4.8

 

30

 

43.15

 

$65.73 - $78.88

 

7

 

68.59

 

8.4

 

3

 

69.53

 

$78.88 - $92.02

 

196

 

81.46

 

7.6

 

106

 

81.23

 

$92.02 - $105.17

 

8

 

99.37

 

9.3

 

1

 

93.29

 

$105.17 - $118.31

 

25

 

106.40

 

8.0

 

0

 

0.00

 

$118.31 - $131.46

 

253

 

128.02

 

8.5

 

82

 

127.93

 

Total

 

958

 

$

67.97

 

6.4

 

617

 

$

51.21

 

 

Restricted Stock and Restricted Stock Units. The following table summarizes restricted stock and restricted stock unit activity during the First Quarter:

 

Restricted Stock and Restricted Stock Units

 

Number of
Shares

 

Weighted-Average
Grant-Date Fair
Value

 

 

 

IN THOUSANDS

 

 

 

Nonvested at December 29, 2012

 

277

 

$

68.69

 

Granted

 

104

 

106.22

 

Vested

 

(139

)

53.62

 

Forfeited

 

(7

)

72.73

 

Nonvested at March 30, 2013

 

235

 

94.09

 

Expected to vest

 

216

 

$

94.09

 

 

The total fair value of restricted stock and restricted stock units vested during the First Quarter was approximately $14.7 million.

 

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):

 

 

 

For the 13 Weeks Ended March 30, 2013

 

 

 

 

 

Unrealized

 

 

 

 

 

 

 

Currency

 

Gains (Losses) on

 

Gains

 

 

 

 

 

Translation

 

Securities Available

 

(Losses) on

 

 

 

 

 

Adjustments

 

for Sale

 

Forward Contracts

 

Total

 

Beginning balance

 

$

30,181

 

$

(475

)

$

(946

)

$

28,760

 

Other comprehensive (loss) income before reclassifications, net of tax expense of $3,474

 

(19,837

)

(71

)

3,345

 

(16,563

)

 

 

 

 

 

 

 

 

 

 

Amounts reclassed from accumulated other comprehensive income, net of tax expense of $87

 

0

 

0

 

(46

)

(46

)

 

 

 

 

 

 

 

 

 

 

Total other comprehensive (loss) income

 

(19,837

)

(71

)

3,391

 

(16,517

)

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

10,344

 

$

(546

)

$

2,445

 

$

12,243

 

 

12



 

 

 

For the 13 Weeks Ended March 31, 2012

 

 

 

 

 

Unrealized

 

 

 

 

 

 

 

Currency

 

Gains (Losses) on

 

Gains

 

 

 

 

 

Translation

 

Securities Available

 

(Losses) on

 

 

 

 

 

Adjustments

 

for Sale

 

Forward Contracts

 

Total

 

Beginning balance

 

$

18,953

 

$

(446

)

$

3,673

 

$

22,180

 

Other comprehensive income (loss) before reclassifications, net of tax benefit of $1,081

 

10,071

 

50

 

(497

)

9,624

 

 

 

 

 

 

 

 

 

 

 

Amounts reclassed from accumulated other comprehensive income, net of tax expense of $444

 

0

 

0

 

852

 

852

 

 

 

 

 

 

 

 

 

 

 

Total other comprehensive income (loss)

 

10,071

 

50

 

(1,349

)

8,772

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

29,024

 

$

(396

)

$

2,324

 

$

30,952

 

 

7. SEGMENT INFORMATION

 

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 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 (including 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 sales and catalog activities. 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.

 

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

 

13



 

 

 

For the 13 Weeks Ended
March 30, 2013

 

For the 13 Weeks Ended
March 31, 2012

 

 

 

Net Sales

 

Operating
Income

 

Net Sales

 

Operating
Income

 

 

 

 

 

 

 

 

 

 

 

North America wholesale:

 

 

 

 

 

 

 

 

 

External customers

 

$

255,165

 

$

60,408

 

$

225,000

 

$

53,509

 

Intersegment

 

45,946

 

 

 

42,826

 

 

 

Europe wholesale:

 

 

 

 

 

 

 

 

 

External customers

 

173,906

 

38,547

 

152,950

 

31,098

 

Intersegment

 

40,688

 

 

 

34,561

 

 

 

Asia Pacific wholesale:

 

 

 

 

 

 

 

 

 

External customers

 

86,776

 

27,550

 

76,709

 

25,243

 

Intersegment

 

202,196

 

 

 

166,293

 

 

 

Direct to consumer

 

165,052

 

7,112

 

134,874

 

8,382

 

Intersegment items

 

(288,830

)

 

 

(243,680

)

 

 

Corporate

 

 

 

(39,296

)

 

 

(35,371

)

Consolidated

 

$

680,899

 

$

94,321

 

$

589,533

 

$

82,861

 

 

The following tables reflect net sales for each class of similar products in the periods presented (in thousands except percentage data):

 

 

 

For the 13 Weeks Ended
March 30, 2013

 

For the 13 Weeks Ended
March 31, 2012

 

 

 

Net Sales

 

Percentage
of Total

 

Net Sales

 

Percentage
of Total

 

 

 

 

 

 

 

 

 

 

 

Watches

 

$

513,017

 

75.3

%

$

418,432

 

71.0

%

Leathers

 

102,788

 

15.1

 

104,047

 

17.7

 

Jewelry

 

42,314

 

6.2

 

39,152

 

6.6

 

Other

 

22,780

 

3.4

 

27,902

 

4.7

 

Total

 

$

680,899

 

100.0

%

$

589,533

 

100.0

%

 

8. DERIVATIVES AND RISK MANAGEMENT

 

The Company is exposed to certain risks relating to its ongoing business operations, which it attempts to manage by using derivative instruments. 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 foreign currency forward contracts (“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. The majority of the Company’s 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. 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 designated as hedging instruments as of March 30, 2013 and December 29, 2012.

 

The forward contracts that the Company purchased to hedge exchange rate risk associated with intercompany inventory transactions 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.

 

14



 

At the inception of the 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 currency exchange contract match the terms of the forecasted transaction, the Company concludes that the hedge is effective.

 

The accounting for gains and losses that result from changes in the fair values of derivative instruments depends on whether the derivatives have been designated and qualify as hedging instruments. Changes in the fair value of derivatives not designated as hedging instruments are recognized in earnings when they occur. 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 (loss) income, net of taxes and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. Due to the high degree of effectiveness between the hedging instruments and the underlying exposures being hedged, the Company’s hedges resulted in no ineffectiveness in the condensed consolidated statements of comprehensive income, and there were no components excluded from the assessment of hedge effectiveness for the First Quarter or Prior Year Quarter.

 

All derivative instruments are recognized as either assets or liabilities at fair value in the condensed consolidated balance sheets. Forward contracts designated as cash flow hedges are recorded at fair value at each balance sheet date and the change in fair value is recorded to accumulated other comprehensive income (loss) within the equity section of the balance sheet until such forward contract’s gains (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 deferred in accumulated other comprehensive income (loss) will be recognized in earnings when the hedged cash flows occur. However, for cash flow hedges that are terminated because the forecasted transaction is not expected to occur in the original specified time period, the derivative’s gains or losses are immediately recognized in earnings. There were no gains or losses reclassified into earnings as a result of the discontinuation of cash flow hedges in the First Quarter or Prior Year Quarter. Hedge accounting is discontinued if it is determined that the derivative is not highly effective. The Company records all cash flow 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 March 30, 2013, the Company had the following outstanding forward contracts that were entered into to hedge the future payments of intercompany inventory transactions (in thousands):

 

Functional Currency

 

Contract Currency

 

Type

 

Amount

 

Type

 

Amount

 

Euro

 

172,450

 

U.S. Dollar

 

225,318

 

British Pound

 

17,650

 

U.S. Dollar

 

27,688

 

Japanese Yen

 

2,083,700

 

U.S. Dollar

 

24,924

 

Canadian Dollar

 

22,680

 

U.S. Dollar

 

22,388

 

Mexican Peso

 

167,607

 

U.S. Dollar

 

12,850

 

Australian Dollar

 

10,350

 

U.S. Dollar

 

10,607

 

 

The effective portion of gains and losses on derivative instruments that was recognized in other comprehensive (loss) income, net of taxes during the First Quarter and the Prior Year Quarter is set forth below (in thousands):

 

Derivatives Designated as Cash
Flow Hedges Under ASC 815

 

For the 13 Weeks
Ended
March 30, 2013

 

For the 13 Weeks
Ended
March 31, 2012

 

Foreign exchange forward contracts

 

$

3,345

 

$

(497

)

 

 

 

 

 

 

Total gain (loss) recognized in other comprehensive income (loss)

 

$

3,345

 

$

(497

)

 

The following table illustrates the effective portion of gains and losses on derivative instruments recorded in other comprehensive (loss) income, net of taxes during the term of the hedging relationship and reclassified into earnings during the First Quarter and Prior Year Quarter (in thousands):

 

15



 

Foreign Exchange Forward
Contracts Under ASC 815

 

Condensed
Consolidated
Statements of
Comprehensive
Income
Location

 

 

 

For the 13 Weeks
Ended
March 30, 2013

 

For the 13 Weeks
Ended
March 31, 2012

 

Cash flow hedging instruments

 

Other income-net

 

Total (loss) gain reclassified from other comprehensive (loss) income

 

$

(46

)

$

852

 

 

The following table discloses the fair value amounts for the Company’s derivative instruments as separate asset and liability values, presents the fair value of derivative instruments on a gross basis, and identifies the line items in the condensed consolidated balance sheets in which the fair value amounts for these categories of derivative instruments are included (in thousands):

 

 

 

Asset Derivatives

 

Liability Derivatives

 

 

 

March 30, 2013

 

December 29, 2012

 

March 30, 2013

 

December 29, 2012

 

 

 

Condensed

 

 

 

 

 

 

 

Condensed

 

 

 

 

 

 

 

Foreign Exchange
Contracts Under

 

Consolidated
Balance

 

Fair

 

Consolidated
Balance Sheet

 

Fair

 

Consolidated
Balance

 

Fair

 

Consolidated
Balance Sheet

 

Fair

 

ASC 815

 

Sheet Location

 

Value

 

Location

 

Value

 

Sheet Location

 

Value

 

Location

 

Value

 

Cash flow hedging
instruments

 

Prepaid expenses
and other
current assets

 

$

7,614

 

Prepaid expenses
and other
current assets

 

$

2,336

 

Accrued expenses-
other

 

$

1,706

 

Accrued expenses-
other

 

$

4,560

 

Cash flow hedging
instruments

 

Intangible and
other assets-
net

 

1,064

 

Intangible and
other assets-
net

 

240

 

Other long-term
liabilities

 

13

 

Other long-term
liabilities

 

582

 

Total

 

 

 

$

8,678

 

 

 

$

2,576

 

 

 

$

1,719

 

 

 

$

5,142

 

 

At the end of the First Quarter, the Company had foreign exchange forward contracts with maturities extending through September 2014. The estimated net amount of the existing gains or losses at March 30, 2013 that is expected to be reclassified into earnings within the next twelve months is a gain of $3.6 million. See “Note 1—Financial Statement 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 1 — Quoted prices in active markets for identical assets or liabilities.

 

·                          Level 2 — Inputs, other than quoted prices in active markets, that are observable either directly or indirectly.

 

·                          Level 3 — Unobservable inputs based on the Company’s assumptions.

 

ASC 820 requires the use of observable market data if such data is available without undue cost and effort.

 

The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of March 30, 2013 (in thousands):

 

16



 

 

 

Fair Value at March 30, 2013

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

Investments in publicly traded equity securities

 

$

56

 

$

0

 

$

0

 

$

56

 

Forward contracts

 

0

 

8,678

 

0

 

8,678

 

Deferred compensation plan assets:

 

 

 

 

 

 

 

 

 

Investment in publicly traded mutual funds

 

3,256

 

0

 

0

 

3,256

 

Total

 

$

3,312

 

$

8,678

 

$

0

 

$

11,990

 

Liabilities:

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

0

 

$

0

 

$

7,532

 

$

7,532

 

Forward contracts

 

0

 

1,719

 

0

 

1,719

 

Total

 

$

0

 

$

1,719

 

$

7,532

 

$

9,251

 

 

The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of December 29, 2012 (in thousands):

 

 

 

Fair Value at December 29, 2012

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

Investments in publicly traded equity securities

 

$

127

 

$

0

 

$

0

 

$

127

 

Forward contracts

 

0

 

2,576

 

0

 

2,576

 

Deferred compensation plan assets:

 

 

 

 

 

 

 

 

 

Investment in publicly traded mutual funds

 

3,188

 

0

 

0

 

3,188

 

Total

 

$

3,315

 

$

2,576

 

$

0

 

$

5,891

 

Liabilities:

 

 

 

 

 

 

 

 

 

Forward contracts

 

$

0

 

$

5,142

 

$

0

 

$

5,142

 

Total

 

$

0

 

$

5,142

 

$

0

 

$

5,142

 

 

The fair values of the Company’s securities available for sale and deferred compensation plan assets are based on quoted prices. The deferred compensation plan assets are recorded in intangible and other assets-net in the Company’s condensed consolidated balance sheets. The fair values of the Company’s forward contracts are based on published quotations of spot currency rates and forward points, which are converted into implied forward currency rates.

 

The Company has evaluated its short-term and long-term debt and believes, based on the interest rates, related terms and maturities, that the fair values of such instruments approximate their carrying amounts. As of March 30, 2013 and December 29, 2012, the carrying values of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximated their fair values due to the short-term maturities of these accounts.

 

The fair value of the contingent consideration liability related to Fossil Spain is determined using Level 3 inputs. See “Note 2 — Acquisitions and Goodwill” for additional disclosure about the acquisition. The contingent consideration is based on Fossil Spain’s earnings during the three year period from December 31, 2013 to December 31, 2015. The contingent consideration for calendar years 2013 and 2014 will be paid each year within thirty days of calculation of the amount. The contingent consideration for calendar year 2015 will be paid upon the execution of the purchase agreement in 2016. The fair value of the contingent consideration was determined using present value techniques with forecasted future cash flows for Fossil Spain as the significant unobservable input. Future revenue growth based on management’s projections for calendar years 2013, 2014, and 2015 ranges from 3% to 10%. Operating expenses are projected to be approximately 28% of revenues for calendar years 2013, 2014, and 2015. A discount rate of 19% was used to calculate the present value of the contingent consideration. An increase in future cash flows may result in a higher estimated fair value of the contingent consideration liability. Alternatively, 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.

 

10. CONTROLLING AND NONCONTROLLING INTEREST

 

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

 

17



 

 

 

Fossil, Inc.

 

 

 

Total

 

 

 

Stockholders’

 

Noncontrolling

 

Stockholders’

 

 

 

Equity

 

Interest

 

Equity

 

Balance at December 29, 2012

 

$

1,233,535

 

$

6,929

 

$

1,240,464

 

Net income

 

72,186

 

1,794

 

73,980

 

Currency translation adjustments

 

(19,837

)

0

 

(19,837

)

Unrealized loss on securities available for sale

 

(71

)

0

 

(71

)

Forward contracts hedging intercompany foreign currency payments - change in fair values

 

3,391

 

0

 

3,391

 

Common stock issued upon exercise of stock options and stock appreciation rights

 

1,991

 

0

 

1,991

 

Tax benefit derived from stock-based compensation

 

4,082

 

0

 

4,082

 

Distribution of noncontrolling interest earnings

 

0

 

(4

)

(4

)

Acquisition of common stock

 

(61,188

)

0

 

(61,188

)

Stock-based compensation expense

 

2,546

 

0

 

2,546

 

Balance at March 30, 2013

 

$

1,236,635

 

$

8,719

 

$

1,245,354

 

 

 

 

 

 

 

 

 

 

 

Fossil, Inc.

 

 

 

Total

 

 

 

Stockholders’

 

Noncontrolling

 

Stockholders’

 

 

 

Equity

 

Interest

 

Equity

 

Balance at December 31, 2011

 

$

1,105,929

 

$

10,917

 

$

1,116,846

 

Net income

 

58,140

 

2,932

 

61,072

 

Currency translation adjustments

 

10,071

 

0

 

10,071

 

Unrealized gain on securities available for sale

 

50

 

0

 

50

 

Forward contracts hedging intercompany foreign currency payments - change in fair values

 

(1,349

)

0

 

(1,349

)

Common stock issued upon exercise of stock options and stock appreciation rights

 

4,352

 

0

 

4,352

 

Tax benefit derived from stock-based compensation

 

9,901

 

0

 

9,901

 

Distribution of noncontrolling interest earnings

 

0

 

(3,786

)

(3,786

)

Acquisition of common stock

 

(67,878

)

0

 

(67,878

)

Stock-based compensation expense

 

3,144

 

0

 

3,144

 

Balance at March 31, 2012

 

$

1,122,360

 

$

10,063

 

$

1,132,423

 

 

11. INTANGIBLE AND OTHER ASSETS

 

The following table summarizes intangible and other assets (in thousands):

 

18



 

 

 

 

 

March 30, 2013

 

December 29, 2012

 

 

 

Useful

 

Carrying

 

Accumulated

 

Carrying

 

Accumulated

 

 

 

Lives

 

Amount

 

Amortization

 

Amount

 

Amortization

 

Intangibles-subject to amortization:

 

 

 

 

 

 

 

 

 

 

 

Trademarks

 

10 yrs.

 

$

4,135

 

$

2,476

 

$

4,135

 

$

2,400

 

Customer lists

 

5-10 yrs.

 

42,501

 

11,113

 

32,144

 

9,980

 

Patents

 

3-20 yrs.

 

2,273

 

951

 

2,273

 

815

 

Noncompete agreement

 

6 yrs.

 

1,881

 

314

 

1,895

 

237

 

Other

 

7-20 yrs.

 

254

 

193

 

258

 

194

 

Total intangibles-subject to amortization

 

 

 

51,044

 

15,047

 

40,705

 

13,626

 

Intangibles-not subject to amortization:

 

 

 

 

 

 

 

 

 

 

 

Trade names

 

 

 

83,631

 

 

 

83,647

 

 

 

Other assets:

 

 

 

 

 

 

 

 

 

 

 

Key money deposits

 

 

 

35,170

 

14,178

 

35,655

 

14,060

 

Other deposits

 

 

 

17,508

 

 

 

17,591

 

 

 

Deferred compensation plan assets

 

 

 

3,256

 

 

 

3,188

 

 

 

Deferred tax asset-net

 

 

 

6,492

 

 

 

6,536

 

 

 

Restricted cash

 

 

 

681

 

 

 

991

 

 

 

Shop-in-shop

 

 

 

11,651

 

5,671

 

11,396

 

5,297

 

Other

 

 

 

3,796

 

1

 

3,948

 

1

 

Total other assets

 

 

 

78,554

 

19,850

 

79,305

 

19,358

 

Total intangible and other assets

 

 

 

$

213,229

 

$

34,897

 

$

203,657

 

$

32,984

 

Total intangible and other assets-net

 

 

 

 

 

$

178,332

 

 

 

$

170,673

 

 

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 $1.3 million and $0.2 million for the First Quarter and Prior Year Quarter, respectively. Estimated aggregate future amortization expense by fiscal year for intangible assets is as follows (in thousands):

 

 

 

Amortization
Expense

 

2013 (remaining)

 

$

3,985

 

2014

 

5,065

 

2015

 

4,673

 

2016

 

4,535

 

2017

 

4,277

 

2018

 

$

4,858

 

 

12. COMMITMENTS AND CONTINGENCIES

 

Litigation. The Company is occasionally subject to litigation or other legal proceedings in the normal course of its business. The Company does not believe that the outcome of any currently pending legal matters, individually or collectively, will have a material effect on the business or financial condition of the Company.

 

13. DEBT

 

Long term U.S.-Based Activity.  During the First Quarter, the Company had net borrowings of $75.0 million under its U.S. revolving line of credit (the “Revolver”), which was primarily used to repurchase shares of common stock under its repurchase programs.  As of March 30, 2013, the Company had $140.0 million outstanding and available borrowings of approximately $209.1 million under the Revolver. The Company incurred approximately $0.7 million of interest expense related to the Revolver during the First Quarter and no interest expense during the Prior Year Quarter as a result of having no outstanding borrowings under the Revolver. The Company was in compliance with all covenants in the Revolver as of March 30, 2013.

 

19



 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following is a discussion of the financial condition and results of operations of Fossil, Inc. and its wholly and majority-owned subsidiaries for the thirteen week period ended March 30, 2013 (the “First Quarter”) as compared to the thirteen week period ended March 31, 2012 (the “Prior Year Quarter”). This discussion should be read in conjunction with the condensed consolidated financial statements and the related notes thereto.

 

General

 

We are a global design, marketing and distribution company that specializes in consumer fashion accessories. Our principal offerings include an extensive line of men’s and women’s fashion watches and jewelry, handbags, small leather goods, belts, sunglasses, soft accessories and clothing. 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 catalogs and 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 129 retail stores located in premier retail sites and 95 outlet stores located in major outlet malls as of March 30, 2013. In addition, we offer an extensive collection of our FOSSIL brand products through our catalogs and on our website, www.fossil.com, as well as proprietary and licensed watch and jewelry brands through other managed and affiliate websites.

 

Internationally, our products are sold to department stores, specialty retail stores and specialty watch and jewelry stores in approximately 130 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 188 retail stores and 65 outlet stores in select international markets as of March 30, 2013. Our products are also sold through licensed and franchised FOSSIL retail stores, retail concessions operated by us and kiosks in certain international markets, as well as our websites in certain countries.

 

Our business is subject to economic cycles and 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. If economic conditions worsen or if the global or regional economies slip back into a recession, our revenues and earnings for fiscal year 2013 or beyond could be negatively impacted.

 

Our business is also subject to the risks inherent in global sourcing of supply. Certain key components in our products come from limited sources of supply, which exposes us to potential supply shortages that could disrupt the manufacture and sale of our products. Any interruption or delay in the supply of key components could significantly harm our ability to meet scheduled product deliveries to our customers and cause us to lose sales. Interruptions or delays in supply may be caused by a number of factors that are outside of our and our contractor manufacturers’ control, such as natural disasters like the earthquake and tsunami in Japan in early fiscal year 2011.

 

Future sales and earnings growth are also contingent upon our ability to anticipate and respond to changing fashion trends and consumer preferences in a timely manner while continuing to develop innovative products in the respective markets in which we compete. As is typical with new products, market acceptance of new designs and products that we may introduce is subject to uncertainty. In addition, we generally make decisions regarding product designs several months in advance of the time when consumer acceptance can be measured. We believe the net sales growth we have experienced over the last several fiscal quarters is the result of our ability to design innovative watch products incorporating a number of new materials that not only differentiate us from our competition but also continue to provide a solid value proposition to consumers across all of our brands.

 

The majority of our products are sold at price points ranging from $85 to $600. Although the current economic environment continues to weigh on consumer discretionary spending levels, we believe that the price/value relationship and the differentiation and innovation of our products, in comparison to those of our competitors, will allow us to maintain or grow our market share in those markets in which we compete. Historically, during recessionary periods, the strength of our balance sheet, our strong operating cash flow and the relative size of our business with our wholesale customers, in comparison to that of our competitors, have allowed us to weather recessionary periods for longer periods of time and generally resulted in market share gains to us.

 

20



 

Our international operations are subject to many risks, including foreign currency. Generally, a strengthening of the U.S. dollar against currencies of other countries in which we operate will reduce the translated amounts of sales and operating expenses of our subsidiaries, which results in a reduction of our consolidated operating income. We manage these currency risks by using derivative instruments. The primary risks managed by using derivative instruments are the future payments by non-U.S. dollar functional currency subsidiaries of intercompany inventory transactions denominated in U.S. dollars. We enter into foreign exchange forward contracts to manage fluctuations in global currencies that will ultimately be used to settle such U.S. dollar denominated inventory purchases.

 

For a more complete discussion of the risks facing our business, see “Part I, Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 29, 2012.

 

Critical Accounting Policies and Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the periods reported. On an on-going basis, we evaluate our estimates and judgments, including those related to product returns, bad debt, inventories, long-lived asset impairment, impairment of goodwill and trade names, income taxes, warranty costs, hedge accounting, litigation reserves and stock-based compensation. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances. Our estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. There have been no changes to the critical accounting policies disclosed in “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the fiscal year ended December 29, 2012.

 

Recently Issued Accounting Standards

 

In March 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 (“ASU 2013-05”).  ASU 2013-05 addresses the accounting for the cumulative translation adjustment when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity.  The guidance outlines the events when cumulative translation adjustments should be released into net income and is intended by FASB to eliminate some disparity in current accounting practice.  The guidance in ASU 2013-05 will become effective for us for annual and interim periods beginning after December 15, 2013. We will apply the guidance prospectively to any derecognition events that may occur after the effective date, and we do not expect the adoption of ASU 2013-05 to have a material impact on our condensed consolidated results of operations or financial position.

 

In February 2013, the FASB issued ASU 2013-04, Liabilities (Topic 405): Obligations Resulting From Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date (“ASU 2013-04”). The update requires an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed as of the reporting date. The amount is equal to the sum of the obligation the entity agreed to pay among its co-obligors and any additional amount the entity expects to pay on behalf of its co-obligors. ASU 2013-04 will become effective for us for annual and interim periods beginning after December 15, 2013 and is required to be applied retrospectively to all prior periods presented for obligations that existed upon adoption of ASU 2013-04. We do not expect the adoption of ASU 2013-04 to have a material impact our condensed consolidated results of operations or financial position.

 

In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”), to address certain comparability issues between financial statements prepared in accordance with GAAP and those prepared in accordance with International Financial Reporting Standards.  In January 2013, the FASB issued ASU 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities (“ASU 2013-01”), which clarifies which instruments and transactions are subject to the offsetting disclosure requirements established by ASU 2011-11.  ASU 2011-11 will require an entity to provide enhanced disclosures about certain financial instruments and derivatives, as defined in ASU 2013-01, to enable users to understand the effects of offsetting in the financial statements as well as the effects of master netting arrangements on an entity’s financial condition.  The amendments in ASU 2011-11 and ASU 2013-01 are effective for annual and interim reporting periods beginning on or after January 1, 2013, with respective disclosures required for all comparative periods presented.  We do not expect the adoption of ASU 2011-11 and ASU 2013-01 to have a material impact on our condensed consolidated results of operations or financial position.

 

21



 

Recently Adopted Accounting Standards

 

In July 2012, the FASB issued ASU 2012-02, Intangibles—Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment (“ASU 2012-02”). The amendments in this update permit an entity to make a qualitative assessment to determine if it is more likely than not that an indefinite-lived intangible asset other than goodwill is impaired. If an entity concludes that it is more likely than not that the fair value of an indefinite-lived intangible asset other than goodwill is less than its carrying amount, it is required to perform the quantitative impairment test for that asset. This ASU aligns the guidance of impairment testing for indefinite-lived intangible assets other than goodwill with that in ASU 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment (“ASU 2011-08”). The guidance in ASU 2012-02 was effective for us beginning December 30, 2012 and did not have a material impact on our condensed consolidated results of operations or financial position.

 

In February 2013, the FASB issued ASU 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“ASU 2013-02”).  FASB issued ASU 2013-02 to improve the transparency of changes in other comprehensive income (“OCI”) and items reclassified out of accumulated other comprehensive income (“AOCI”) in financial statements.  ASU 2013-12 requires an entity to provide information about amounts reclassified out of AOCI by component.  In addition, an entity must present either on the face of the income statement or in the notes, significant amounts reclassified out of AOCI by the respective line items of net income.  See “Note 6-Stockholders’ Equity and Benefit Plans” for additional disclosures about our OCI.  The guidance in ASU 2013-02 became effective for us on December 30, 2012 and did not have a material impact on our condensed consolidated results of operations or financial position.

 

Results of Operations

 

The following tables set forth, for the periods indicated, (i) the percentages of our net sales represented by certain line items from our condensed consolidated statements of comprehensive income and (ii) the percentage changes in these line items between the periods indicated.

 

 

 

Percentage of Net Sales

 

Percentage

 

 

 

For the 13 Weeks Ended

 

Change from

 

 

 

March 30, 2013

 

March 31, 2012

 

2012

 

 

 

 

 

 

 

 

 

Net sales

 

100.0

%

100.0

%

15.5

%

Cost of sales

 

44.4

 

44.2

 

16.1

 

Gross profit

 

55.6

 

55.8

 

15.0

 

Operating expenses:

 

 

 

 

 

 

 

Selling and distribution

 

29.8

 

30.7

 

12.0

 

General and administrative

 

11.9

 

11.0

 

25.2

 

Operating income

 

13.9

 

14.1

 

13.8

 

Interest expense

 

0.2

 

0.2

 

*

 

Other income-net

 

1.4

 

0.4

 

*

 

Income before income taxes

 

15.1

 

14.3

 

21.6

 

Provision for income taxes

 

4.2

 

3.9

 

22.8

 

Net income

 

10.9

 

10.4

 

21.1

 

Net income attributable to noncontrolling interest

 

0.3

 

0.5

 

(38.8

)

Net income attributable to Fossil, Inc.

 

10.6

%

9.9

%

24.2

%

 


* Not meaningful

 

Net Sales. The following tables set forth consolidated net sales by segment and the percentage relationship of each segment to consolidated net sales for the periods indicated (in millions, except percentage data):

 

 

 

Amounts

 

Percentage of Total

 

 

 

For the 13 Weeks Ended

 

For the 13 Weeks Ended

 

 

 

March 30, 2013

 

March 31, 2012

 

March 30, 2013

 

March 31, 2012

 

Wholesale:

 

 

 

 

 

 

 

 

 

North America

 

$

255.2

 

$

225.0

 

37.5

%

38.2

%

Europe

 

173.9

 

152.9

 

25.6

 

25.9

 

Asia Pacific

 

86.8

 

76.7

 

12.7

 

13.0

 

Total wholesale

 

515.9

 

454.6

 

75.8

 

77.1

 

Direct to consumer

 

165.0

 

134.9

 

24.2

 

22.9

 

Consolidated

 

$

680.9

 

$

589.5

 

100.0

%

100.0

%

 

22



 

The following table illustrates by factor the total year-over-year percentage change in net sales by segment and on a consolidated basis:

 

Analysis of Percentage Change in Net Sales during the First Quarter Versus Prior Year Quarter

Attributable to Changes in the Following Factors

 

 

 

Exchange
Rates

 

Acquisitions

 

Organic
Change

 

Total
Change

 

North America wholesale

 

0.1

%

4.0

%

9.3

%

13.4

%

Europe wholesale

 

0.2

 

11.2

 

2.3

 

13.7

 

Asia Pacific wholesale

 

(2.1

)

4.1

 

11.2

 

13.2

 

Direct to consumer

 

(0.4

)

2.4

 

20.3

 

22.3

 

Consolidated

 

(0.2

)%

5.5

%

10.2

%

15.5

%

 

The following net sales discussion excludes the impact on sales growth attributable to foreign currency exchange rate changes as noted in the above table.

 

Consolidated Net Sales.    Net sales rose 15.7% as a result of double-digit sales growth across each of our wholesale and retail operations in comparison to the Prior Year Quarter.  Our acquisition of Skagen Designs, Ltd. and certain of its international affiliates (“Skagen”) on April 2, 2012 contributed $29.1 million towards overall sales during the First Quarter.  On an organic basis, excluding sales related to acquisitions, worldwide net sales increased 10.2% for the First Quarter.  Global watch sales were the key driver, increasing 15.6%, or $65.4 million, while jewelry sales increased 5.4%, or $2.1 million.  These sales gains were partially offset by sales decreases in eyewear of 35.7%, or $4.8 million, and leathers of 1.3%, or $1.3 million.  The decrease in eyewear was primarily a result of our repositioning of the FOSSIL branded products in this category, while the decrease in leathers was the result of decreased sell through rates at retail.

 

North America Wholesale Net Sales. Net sales from the North America wholesale segment increased 13.3%, or $29.8 million, during the First Quarter in comparison to the Prior Year Quarter.  North America sales were 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 will take place in January 2014, leaving every month in this fiscal year misaligned.  Accordingly, our fiscal calendar will not re-align with the NRF calendar until January 2014.  Additionally, sales were favorably impacted by a timing shift of approximately $15 million from the second quarter of fiscal 2013 into the First Quarter.  We believe this favorable shift was largely attributable to the early timing of Easter in the current fiscal year as compared to the prior fiscal year.  North America sales growth was primarily driven by a 22.9%, or $37.0 million, increase in watch sales, including $9.9 million of sales related to SKAGEN branded products during the First Quarter.  These sales gains were partially offset by decreases in our leathers and eyewear categories of 6.3%, or $2.9 million, and 35.1%, or $2.3 million, respectively.  The decrease in leather product sales was primarily attributable to decreased sell through rates in our women’s handbags category.  The First Quarter was also negatively impacted by the discontinuation of our footwear business.  U.S. shipments increased 12.9%, or $25.8 million, while shipments from our Canadian and Mexican subsidiaries increased 16.5% and 35.3%, respectively, during the First Quarter as compared to the Prior Year Quarter.

 

Europe Wholesale Net Sales.  Europe wholesale net sales rose 13.5%, or $20.5 million, including a $12.8 million contribution from sales of SKAGEN branded products during the First Quarter in comparison to the Prior Year Quarter.  Growth in our watch category made the most significant contribution, increasing 22.1%, or $24.1 million.  Sales to third party distributors favorably impacted the First Quarter, increasing 18.2%, or $5.7 million, as compared to the Prior Year Quarter as a result of increased sell-through rates.  These sales gains were partially offset by decreases in the eyewear and leathers categories of 61.0%, or $2.7 million, and 18.6%, or $2.5 million, respectively.  The decrease in eyewear was largely due to door reduction, while the decrease in leathers was primarily attributable to decreased sell-through rates at retail.

 

Asia Pacific Wholesale Net Sales.  Asia Pacific wholesale net sales rose 15.3%, or $11.7 million, during the First Quarter in comparison to the Prior Year Quarter.  The growth was primarily driven by our watch category and included $3.1 million of SKAGEN branded products. At the end of the First Quarter, we operated 281 concession locations in Asia with a net 11 new concessions opened during the First Quarter.  For the First Quarter, concession sales increased by 26.1% with comp sales growing 4.0% in comparison to the Prior Year Quarter.

 

Direct to Consumer Net Sales.  Direct to consumer net sales for the First Quarter increased by 22.7%, or $30.7 million, in comparison to the Prior Year Quarter, primarily the result of square footage growth of 24.2% and comparable store sales increases of 4.3%.  The comparable store sales gain represents the 20th consecutive quarter of positive comparable store sales increases and comes on top of comparable store sales gains of 7.7% and 21.3% in the first quarter of fiscal 2012 and 2011, respectively.

 

23



 

Global outlet comparable store sales increased