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: September 30, 2017July 4, 2020
OR
|
| |
o ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 000-19848
__________________________________________________________________
FOSSIL GROUP, INC.
(Exact name of registrant as specified in its charter)
__________________________________________________________________
|
| | | | |
Delaware | | 75-2018505 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | | | |
901 S. Central Expressway, | Richardson, | Texas | | 75080 |
(Address of principal executive offices) | | (Zip Code) |
(972) (972) 234-2525
(Registrant’s telephone number, including area code)
__________________________________________________________________
Securities registered pursuant to Section 12(b) of the Act: |
| | | | |
Title of each class | | Ticker Symbol | | Name of each exchange on which registered |
Common Stock, par value $0.01 per share | | FOSL | | The Nasdaq Stock Market LLC |
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, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act (check one):
|
| | | | |
Large accelerated filero | ☐ | | Accelerated filerx | ☒ |
| | |
Non-accelerated filer o
| | Smaller reporting company o
|
(Do not check if a smaller reporting company) | | |
Non-accelerated filer | ☐ | | Smaller reporting company | ☐ |
Emerging growth companyo | ☐ | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o☐ No x☒
The number of shares of the registrant’s common stock outstanding as of November 2, 2017: 48,527,898August 10, 2020: 51,299,163
FOSSIL GROUP, INC.
FORM 10-Q
FOR THE FISCAL QUARTER ENDED SEPTEMBER 30, 2017JULY 4, 2020
INDEX
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
FOSSIL GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED
IN THOUSANDS
| | | September 30, 2017 | | December 31, 2016 | July 4, 2020 | | December 28, 2019 |
Assets | |
| | |
| |
| | |
|
Current assets: | |
| | |
| |
| | |
|
Cash and cash equivalents | $ | 166,922 |
| | $ | 297,330 |
| $ | 277,561 |
| | $ | 200,218 |
|
Accounts receivable - net of allowances of $70,081 and $79,707, respectively | 310,895 |
| | 375,520 |
| |
Accounts receivable - net of allowances for doubtful accounts of $16,496 and $13,234, respectively | | 130,083 |
| | 289,744 |
|
Inventories | 682,986 |
| | 542,487 |
| 375,906 |
| | 452,278 |
|
Prepaid expenses and other current assets | 125,533 |
| | 131,953 |
| 98,123 |
| | 117,218 |
|
Total current assets | 1,286,336 |
| | 1,347,290 |
| 881,673 |
| | 1,059,458 |
|
Property, plant and equipment - net of accumulated depreciation of $453,894 and $414,761, respectively | 243,448 |
| | 273,851 |
| |
Goodwill | — |
| | 355,263 |
| |
Property, plant and equipment - net of accumulated depreciation of $467,478 and $464,913, respectively | | 133,334 |
| | 151,500 |
|
Operating lease right-of-use assets | | 253,884 |
| | 288,166 |
|
Intangible and other assets-net | 220,588 |
| | 210,493 |
| 182,438 |
| | 105,608 |
|
Total long-term assets | 464,036 |
| | 839,607 |
| 569,656 |
| | 545,274 |
|
Total assets | $ | 1,750,372 |
| | $ | 2,186,897 |
| $ | 1,451,329 |
| | $ | 1,604,732 |
|
Liabilities and Stockholders’ Equity | |
| | |
| |
| | |
|
Current liabilities: | |
| | |
| |
| | |
|
Accounts payable | $ | 248,824 |
| | $ | 163,644 |
| $ | 127,927 |
| | $ | 172,191 |
|
Short-term and current portion of long-term debt | 40,209 |
| | 26,368 |
| 25,166 |
| | 26,228 |
|
Accrued expenses: | |
| | |
| |
| | |
|
Current operating lease liabilities | | 67,755 |
| | 68,838 |
|
Compensation | 64,862 |
| | 52,993 |
| 46,427 |
| | 51,573 |
|
Royalties | 26,897 |
| | 30,062 |
| 33,818 |
| | 28,427 |
|
Co-op advertising | 17,772 |
| | 29,111 |
| |
Customer liabilities | | 62,509 |
| | 80,803 |
|
Transaction taxes | 40,482 |
| | 26,743 |
| 15,988 |
| | 25,683 |
|
Other | 101,390 |
| | 69,565 |
| 65,325 |
| | 76,209 |
|
Income taxes payable | 13,077 |
| | 16,099 |
| 18,823 |
| | 29,228 |
|
Total current liabilities | 553,513 |
| | 414,585 |
| 463,738 |
| | 559,180 |
|
Long-term income taxes payable | 22,951 |
| | 18,584 |
| 33,041 |
| | 31,284 |
|
Deferred income tax liabilities | 500 |
| | 55,877 |
| 2,103 |
| | 2,097 |
|
Long-term debt | 444,303 |
| | 609,961 |
| 243,920 |
| | 178,796 |
|
Long-term operating lease liabilities | | 270,056 |
| | 288,689 |
|
Other long-term liabilities | 76,107 |
| | 72,452 |
| 41,908 |
| | 40,845 |
|
Total long-term liabilities | 543,861 |
| | 756,874 |
| 591,028 |
| | 541,711 |
|
Commitments and contingencies (Note 13) |
|
| |
|
|
|
| |
|
|
Stockholders’ equity: | |
| | |
| |
| | |
|
Common stock, 48,524 and 48,269 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively | 485 |
| | 483 |
| |
Common stock, 51,293 and 50,516 shares issued and outstanding at July 4, 2020 and December 28, 2019, respectively | | 513 |
| | 505 |
|
Additional paid-in capital | 235,990 |
| | 213,352 |
| 288,641 |
| | 283,371 |
|
Retained earnings | 489,528 |
| | 887,825 |
| 191,669 |
| | 299,793 |
|
Accumulated other comprehensive income (loss) | (84,710 | ) | | (95,424 | ) | (84,767 | ) | | (80,615 | ) |
Total Fossil Group, Inc. stockholders’ equity | 641,293 |
| | 1,006,236 |
| 396,056 |
| | 503,054 |
|
Noncontrolling interest | 11,705 |
| | 9,202 |
| |
Noncontrolling interests | | 507 |
| | 787 |
|
Total stockholders’ equity | 652,998 |
| | 1,015,438 |
| 396,563 |
| | 503,841 |
|
Total liabilities and stockholders’ equity | $ | 1,750,372 |
| | $ | 2,186,897 |
| $ | 1,451,329 |
| | $ | 1,604,732 |
|
See notes to the unaudited condensed consolidated financial statements.
FOSSIL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)
UNAUDITED
IN THOUSANDS, EXCEPT PER SHARE DATA
| | | For the 13 Weeks Ended September 30, 2017 | | For the 13 Weeks Ended October 1, 2016 | | For the 39 Weeks Ended September 30, 2017 | | For the 39 Weeks Ended October 1, 2016 | For the 13 Weeks Ended July 4, 2020 | | For the 13 Weeks Ended June 29, 2019 | | For the 27 Weeks Ended July 4, 2020 | | For the 26 Weeks Ended June 29, 2019 |
Net sales | $ | 688,722 |
| | $ | 737,990 |
| | $ | 1,867,358 |
| | $ | 2,083,206 |
| $ | 259,009 |
| | $ | 501,393 |
| | $ | 649,727 |
| | $ | 966,661 |
|
Cost of sales | 368,829 |
| | 352,910 |
| | 956,600 |
| | 994,039 |
| 118,413 |
| | 236,285 |
| | 368,771 |
| | 453,626 |
|
Gross profit | 319,893 |
| | 385,080 |
| | 910,758 |
| | 1,089,167 |
| 140,596 |
| | 265,108 |
| | 280,956 |
| | 513,035 |
|
Operating expenses: | |
| | |
| | |
| | |
| |
| | |
| | | | |
Selling, general and administrative expenses | 314,623 |
| | 339,432 |
| | 937,330 |
| | 1,013,664 |
| 166,869 |
| | 256,110 |
| | 429,731 |
| | 513,794 |
|
Goodwill and trade name impairments
| — |
| | — |
| | 407,128 |
| | — |
| |
Trade name impairments | | — |
| | — |
| | 2,464 |
| | — |
|
Restructuring charges | 5,769 |
| | 14,473 |
| | 41,818 |
| | 14,473 |
| 10,532 |
| | 7,317 |
| | 19,907 |
| | 17,504 |
|
Total operating expenses | 320,392 |
| | 353,905 |
| | 1,386,276 |
| | 1,028,137 |
| 177,401 |
| | 263,427 |
| | 452,102 |
| | 531,298 |
|
Operating income (loss) | (499 | ) | | 31,175 |
| | (475,518 | ) | | 61,030 |
| (36,805 | ) | | 1,681 |
| | (171,146 | ) | | (18,263 | ) |
Interest expense | 12,070 |
| | 6,967 |
| | 32,096 |
| | 19,386 |
| 7,874 |
| | 7,353 |
| | 15,338 |
| | 15,474 |
|
Other income (expense) - net | 3,860 |
| | 1,591 |
| | 11,501 |
| | 6,402 |
| 879 |
| | 507 |
| | (6,411 | ) | | 26,417 |
|
Income (loss) before income taxes | (8,709 | ) | | 25,799 |
| | (496,113 | ) | | 48,046 |
| (43,800 | ) | | (5,165 | ) | | (192,895 | ) | | (7,320 | ) |
Provision for income taxes | (3,230 | ) | | 6,451 |
| | (100,746 | ) | | 13,230 |
| (20,840 | ) | | 1,444 |
| | (84,491 | ) | | 11,051 |
|
Net income (loss) | (5,479 | ) | | 19,348 |
| | (395,367 | ) | | 34,816 |
| (22,960 | ) | | (6,609 | ) | | (108,404 | ) | | (18,371 | ) |
Less: Net income attributable to noncontrolling interest | (80 | ) | | 1,992 |
| | 2,931 |
| | 5,646 |
| |
Less: Net income attributable to noncontrolling interests | | (417 | ) | | 702 |
| | (280 | ) | | 1,182 |
|
Net income (loss) attributable to Fossil Group, Inc. | $ | (5,399 | ) | | $ | 17,356 |
| | $ | (398,298 | ) | | $ | 29,170 |
| $ | (22,543 | ) | | $ | (7,311 | ) | | $ | (108,124 | ) | | $ | (19,553 | ) |
Other comprehensive income (loss), net of taxes: | |
| | |
| | |
| | |
| |
| | |
| | | | |
Currency translation adjustment | $ | 5,222 |
| | $ | 1,662 |
| | $ | 32,078 |
| | $ | 9,383 |
| $ | 6,497 |
| | $ | (304 | ) | | $ | (4,696 | ) | | $ | (2,794 | ) |
Cash flow hedges - net change | (9,771 | ) | | 1,360 |
| | (21,364 | ) | | (4,741 | ) | (5,698 | ) | | (1,845 | ) | | 544 |
| | (2,854 | ) |
Pension plan activity | — |
| | — |
| | — |
| | 1,714 |
| |
Total other comprehensive income (loss) | (4,549 | ) | | 3,022 |
| | 10,714 |
| | 6,356 |
| 799 |
| | (2,149 | ) | | (4,152 | ) | | (5,648 | ) |
Total comprehensive income (loss) | (10,028 | ) | | 22,370 |
| | (384,653 | ) | | 41,172 |
| (22,161 | ) | | (8,758 | ) | | (112,556 | ) | | (24,019 | ) |
Less: Comprehensive income attributable to noncontrolling interest | (80 | ) | | 1,992 |
| | 2,931 |
| | 5,646 |
| |
Less: Comprehensive income attributable to noncontrolling interests | | (417 | ) | | 702 |
| | (280 | ) | | 1,182 |
|
Comprehensive income (loss) attributable to Fossil Group, Inc. | $ | (9,948 | ) | | $ | 20,378 |
| | $ | (387,584 | ) | | $ | 35,526 |
| $ | (21,744 | ) | | $ | (9,460 | ) | | $ | (112,276 | ) | | $ | (25,201 | ) |
Earnings (loss) per share: | |
| | |
| | |
| | |
| |
| | |
| | | | |
Basic | $ | (0.11 | ) | | $ | 0.36 |
| | $ | (8.22 | ) | | $ | 0.61 |
| $ | (0.44 | ) | | $ | (0.15 | ) | | $ | (2.13 | ) | | $ | (0.39 | ) |
Diluted | $ | (0.11 | ) | | $ | 0.36 |
| | $ | (8.22 | ) | | $ | 0.60 |
| $ | (0.44 | ) | | $ | (0.15 | ) | | $ | (2.13 | ) | | $ | (0.39 | ) |
Weighted average common shares outstanding: | |
| | |
| | |
| | |
| |
| | |
| | | | |
Basic | 48,521 |
| | 48,130 |
| | 48,439 |
| | 48,127 |
| 51,189 |
| | 50,326 |
| | 50,866 |
| | 49,972 |
|
Diluted | 48,521 |
| | 48,291 |
| | 48,439 |
| | 48,286 |
| 51,189 |
| | 50,326 |
| | 50,866 |
| | 49,972 |
|
See notes to the unaudited condensed consolidated financial statements.
FOSSIL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
UNAUDITED
IN THOUSANDS
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
For the 13 Weeks Ended July 4, 2020 |
| Common stock | | Additional paid-in capital | | Treasury stock | | Retained earnings | | Accumulated other comprehensive income (loss) | | Stockholders' equity attributable to Fossil Group, Inc. | | Noncontrolling interest | | Total stockholders' equity |
Shares | | Par value |
Balance, April 4, 2020 | 50,583 |
| | $ | 506 |
| | $ | 286,297 |
| | $ | — |
| | $ | 214,212 |
| | $ | (85,566 | ) | | $ | 415,449 |
| | $ | 924 |
| | $ | 416,373 |
|
Common stock issued upon exercise of stock options, stock appreciation rights and restricted stock units | 849 |
| | 8 |
| | (8 | ) | |
|
| | — |
| | — |
| | — |
| | — |
| | — |
|
Acquisition of common stock for employee tax withholding |
|
| |
|
| |
|
| | (523 | ) | | — |
| | — |
| | (523 | ) | | — |
| | (523 | ) |
Retirement of common stock | (139 | ) | | (1 | ) | | (522 | ) | | 523 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Stock-based compensation |
|
| |
|
| | 2,874 |
| |
|
| | — |
| | — |
| | 2,874 |
| | — |
| | 2,874 |
|
Net income (loss) | — |
| | — |
| | — |
| | — |
| | (22,543 | ) | | — |
| | (22,543 | ) | | (417 | ) | | (22,960 | ) |
Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | 799 |
| | 799 |
| | — |
| | 799 |
|
Balance, July 4, 2020 | 51,293 |
| | $ | 513 |
| | $ | 288,641 |
| | $ | — |
| | $ | 191,669 |
| | $ | (84,767 | ) | | $ | 396,056 |
| | $ | 507 |
| | $ | 396,563 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
For the 13 Weeks Ended June 29, 2019 |
| Common stock | | Additional paid-in capital | | Treasury stock | | Retained earnings | | Accumulated other comprehensive income (loss) | | Stockholders' equity attributable to Fossil Group, Inc. | | Noncontrolling interest | | Total stockholders' equity |
Shares | | Par value |
Balance, March 30, 2019 | 49,772 |
| | $ | 498 |
| | $ | 273,434 |
| | $ | — |
| | $ | 339,916 |
| | $ | (68,190 | ) | | $ | 545,658 |
| | $ | 3,568 |
| | $ | 549,226 |
|
Common stock issued upon exercise of stock options, stock appreciation rights and restricted stock units | 861 |
| | 9 |
| | (9 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Acquisition of common stock for employee tax withholding | — |
| | — |
| | — |
| | (2,364 | ) | | — |
| | — |
| | (2,364 | ) | | — |
| | (2,364 | ) |
Retirement of common stock | (180 | ) | | (2 | ) | | (2,362 | ) | | 2,364 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Stock-based compensation | — |
| | — |
| | 5,325 |
| | — |
| | — |
| | — |
| | 5,325 |
| | — |
| | 5,325 |
|
Net income (loss) | — |
| | — |
| | — |
| | — |
| | (7,311 | ) | | — |
| | (7,311 | ) | | 702 |
| | (6,609 | ) |
Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | (2,149 | ) | | (2,149 | ) | | — |
| | (2,149 | ) |
Distribution of noncontrolling interest earnings | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (3,791 | ) | | (3,791 | ) |
Balance, June 29, 2019 | 50,453 |
| | $ | 505 |
| | $ | 276,388 |
| | $ | — |
| | $ | 332,605 |
| | $ | (70,339 | ) | | $ | 539,159 |
| | $ | 479 |
| | $ | 539,638 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
For the 27 Weeks Ended July 4, 2020 |
| Common stock | | Additional paid-in capital | | Treasury stock | | Retained earnings | | Accumulated other comprehensive income (loss) | | Stockholders' equity attributable to Fossil Group, Inc. | | Noncontrolling interest | | Total stockholders' equity |
Shares | | Par value |
Balance, December 28, 2019 | 50,516 |
| | $ | 505 |
| | $ | 283,371 |
| | $ | — |
| | $ | 299,793 |
| | $ | (80,615 | ) | | $ | 503,054 |
| | $ | 787 |
| | $ | 503,841 |
|
Common stock issued upon exercise of stock options, stock appreciation rights and restricted stock units | 940 |
| | 9 |
| | (9 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | �� |
|
Acquisition of common stock for employee tax withholding | — |
| | — |
| | — |
| | (699 | ) | | — |
| | — |
| | (699 | ) | | — |
| | (699 | ) |
Retirement of common stock | (163 | ) | | (1 | ) | | (698 | ) | | 699 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Stock-based compensation | — |
| | — |
| | 5,977 |
| | — |
| | — |
| | — |
| | 5,977 |
| | — |
| | 5,977 |
|
Net income (loss) | — |
| | — |
| | — |
| | — |
| | (108,124 | ) | | — |
| | (108,124 | ) | | (280 | ) | | (108,404 | ) |
Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | (4,152 | ) | | (4,152 | ) | |
|
| | (4,152 | ) |
Balance, July 4, 2020 | 51,293 |
| | $ | 513 |
| | $ | 288,641 |
| | $ | — |
| | $ | 191,669 |
| | $ | (84,767 | ) | | $ | 396,056 |
| | $ | 507 |
| | $ | 396,563 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
For the 26 Weeks Ended June 29, 2019 |
| Common stock | | Additional paid-in capital | | Treasury stock | | Retained earnings | | Accumulated other comprehensive income (loss) | | Stockholders' equity attributable to Fossil Group, Inc. | | Noncontrolling interest | | Total stockholders' equity |
Shares | | Par value |
Balance, December 29, 2018 | 49,518 |
| | $ | 495 |
| | $ | 268,113 |
| | $ | — |
| | $ | 381,626 |
| | $ | (64,691 | ) | | $ | 585,543 |
| | $ | 3,088 |
| | $ | 588,631 |
|
Common stock issued upon exercise of stock options, stock appreciation rights and restricted stock units | 1,210 |
| | 13 |
| | 157 |
| | — |
| | — |
| | — |
| | 170 |
| | — |
| | 170 |
|
Acquisition of common stock for employee tax withholding | — |
| | — |
| | — |
| | (3,879 | ) | | — |
| | — |
| | (3,879 | ) | | — |
| | (3,879 | ) |
Retirement of common stock | (275 | ) | | (3 | ) | | (3,876 | ) | | 3,879 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Stock-based compensation | — |
| | — |
| | 11,994 |
| | — |
| | — |
| | — |
| | 11,994 |
| | — |
| | 11,994 |
|
Net income (loss) | — |
| | — |
| | — |
| | — |
| | (19,553 | ) | | — |
| | (19,553 | ) | | 1,182 |
| | (18,371 | ) |
Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | (5,648 | ) | | (5,648 | ) | | — |
| | (5,648 | ) |
Distribution of noncontrolling interest earnings and other | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (3,791 | ) | | (3,791 | ) |
Adoption of Accounting Standards Update ("ASU") 2016-02 | — |
| | — |
| | — |
| | — |
| | (29,468 | ) | | — |
| | (29,468 | ) | | — |
| | (29,468 | ) |
Balance, June 29, 2019 | 50,453 |
| | $ | 505 |
| | $ | 276,388 |
| | $ | — |
| | $ | 332,605 |
| | $ | (70,339 | ) | | $ | 539,159 |
| | $ | 479 |
| | $ | 539,638 |
|
See notes to the unaudited condensed consolidated financial statements.
FOSSIL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
IN THOUSANDS
|
| | | | | | | |
| For the 39 Weeks Ended September 30, 2017 | | For the 39 Weeks Ended October 1, 2016 |
Operating Activities: | |
| | |
|
Net income (loss) | $ | (395,367 | ) | | $ | 34,816 |
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |
| | |
|
Depreciation, amortization and accretion | 61,526 |
| | 73,198 |
|
Stock-based compensation | 22,384 |
| | 23,894 |
|
Decrease in allowance for returns-net of inventory in transit | (6,129 | ) | | (14,955 | ) |
Loss (gain) on disposal of assets | 1,686 |
| | (9,866 | ) |
Fixed asset and other long-lived asset impairment losses | 2,726 |
| | 2,213 |
|
Goodwill and trade name impairment losses | 407,128 |
| | — |
|
Non-cash restructuring charges | 7,031 |
| | 12,523 |
|
Increase (decrease) in allowance for doubtful accounts | 4,161 |
| | (3,915 | ) |
Deferred income taxes and other | (111,177 | ) | | (9,309 | ) |
Changes in operating assets and liabilities, net of effect of acquisitions: | |
| | |
|
Accounts receivable | 85,078 |
| | 74,706 |
|
Inventories | (116,002 | ) | | (76,869 | ) |
Prepaid expenses and other current assets | (5,620 | ) | | 17,640 |
|
Accounts payable | 80,146 |
| | (16,887 | ) |
Accrued expenses | 20,863 |
| | (38,572 | ) |
Income taxes payable | 1,734 |
| | (9,257 | ) |
Net cash provided by operating activities | 60,168 |
| | 59,360 |
|
Investing Activities: | |
| | |
|
Additions to property, plant and equipment | (17,239 | ) | | (53,524 | ) |
Decrease in intangible and other assets | 478 |
| | 2,509 |
|
Misfit working capital settlement | — |
| | 788 |
|
Proceeds from the sale of property, plant and equipment | 533 |
| | 44,584 |
|
Net investment hedge settlement | — |
| | 752 |
|
Net cash used in investing activities | (16,228 | ) | | (4,891 | ) |
Financing Activities: | |
| | |
|
Acquisition of common stock | (947 | ) | | (6,448 | ) |
Distribution of noncontrolling interest earnings | (428 | ) | | (4,543 | ) |
Debt borrowings | 1,162,074 |
| | 756,000 |
|
Debt payments | (1,311,597 | ) | | (839,629 | ) |
Payment for shares of Fossil, S.L. | — |
| | (8,657 | ) |
Debt issuance costs and other | (5,579 | ) | | (2,585 | ) |
Net cash used in financing activities | (156,477 | ) | | (105,862 | ) |
Effect of exchange rate changes on cash and cash equivalents | (17,871 | ) | | (1,930 | ) |
Net decrease in cash and cash equivalents | (130,408 | ) | | (53,323 | ) |
Cash and cash equivalents: | |
| | |
|
Beginning of period | 297,330 |
| | 289,275 |
|
End of period | $ | 166,922 |
| | $ | 235,952 |
|
|
| | | | | | | |
| For the 27 Weeks Ended July 4, 2020 | | For the 26 Weeks Ended June 29, 2019 |
Operating Activities: | |
| | |
|
Net Income (loss) | $ | (108,404 | ) | | $ | (18,371 | ) |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | |
| | |
|
Depreciation, amortization and accretion | 22,867 |
| | 28,312 |
|
Non-cash lease expense | 56,159 |
| | 60,915 |
|
Stock-based compensation | 5,977 |
| | 9,627 |
|
Decrease in allowance for returns and markdowns | (11,364 | ) | | (19,085 | ) |
Property, plant and equipment and other long-lived asset impairment losses | 20,335 |
| | 2,560 |
|
Trade name impairment losses | 2,464 |
| | — |
|
Non-cash restructuring charges | 1,409 |
| | 4,621 |
|
Bad debt expense | 5,456 |
| | 273 |
|
Other non-cash items | (468 | ) | | (2,369 | ) |
Gain on asset divestitures | — |
| | (23,134 | ) |
Changes in operating assets and liabilities: | |
| | |
|
Accounts receivable | 148,234 |
| | 130,494 |
|
Inventories | 69,763 |
| | (82,173 | ) |
Prepaid expenses and other current assets | 16,135 |
| | (4,197 | ) |
Accounts payable | (44,262 | ) | | 10,637 |
|
Accrued expenses | (17,022 | ) | | (74,773 | ) |
Income taxes | (92,994 | ) | | 3,494 |
|
Operating lease liabilities | (62,654 | ) | | (52,934 | ) |
Net cash provided by (used in) operating activities | 11,631 |
| | (26,103 | ) |
Investing Activities: | |
| | |
|
Additions to property, plant and equipment | (5,648 | ) | | (10,511 | ) |
Increase in intangible and other assets | (1,256 | ) | | (1,910 | ) |
Proceeds from the sale of property, plant and equipment | 76 |
| | 1,235 |
|
Proceeds from asset divestitures | — |
| | 41,570 |
|
Net cash (used in) provided by investing activities | (6,828 | ) | | 30,384 |
|
Financing Activities: | |
| | |
|
Acquisition of common stock for employee tax withholdings | (699 | ) | | (3,879 | ) |
Distribution of noncontrolling interest earnings | — |
| | (3,791 | ) |
Debt borrowings | 297,040 |
| | 3,552 |
|
Debt payments | (227,741 | ) | | (173,396 | ) |
Payment for shares of Fossil Accessories South Africa Pty. Ltd. | — |
| | (1,045 | ) |
Debt issuance costs and other | (10,000 | ) | | 124 |
|
Net cash provided by (used in) financing activities | 58,600 |
| | (178,435 | ) |
Effect of exchange rate changes on cash, cash equivalents, and restricted cash | 13,556 |
| | (2,242 | ) |
Net increase (decrease) in cash, cash equivalents, and restricted cash | 76,959 |
| | (176,396 | ) |
Cash, cash equivalents, and restricted cash: | |
| | |
|
Beginning of period | 207,749 |
| | 410,883 |
|
End of period | $ | 284,708 |
| | $ | 234,487 |
|
See notes to the unaudited condensed consolidated financial statements.
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 Company’s fiscal year periodically results in a 53-week year instead of a normal 52-week year. The current fiscal year ending January 2, 2021 is a 53-week year, with the additional week being included in the first quarter. Accordingly, the information presented herein includes the thirteen-week periods ended July 4, 2020 (“Second Quarter”) and June 29, 2019 (“Prior Year Quarter”) and the 27 weeks of operations for the year to date period ended July 4, 2020 (“Year To Date Period”) as compared to 26 weeks included in the prior year to date period ended June 29, 2019 (“Prior Year YTD Period”). 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 September 30, 2017,July 4, 2020, and the results of operations for the thirteen-week periods ended September 30, 2017 (“Third Quarter”) and October 1, 2016 (“Second Quarter, Prior Year Quarter”), respectively, and the thirty-nine week periods ended September 30, 2017 (“Quarter, Year To Date Period”)Period and October 1, 2016 (“Prior Year YTD Period”).Period. All adjustments are of a normal, recurring nature.
These interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Annual Report on Form 10-K filed by the Company pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), for the fiscal year ended December 31, 201628, 2019 (the “2016“2019 Form 10-K”). Operating results for the ThirdSecond 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. We base our estimates on the information available at the time and various other assumptions believed to be reasonable under the circumstances, including estimates of the impact of the coronavirus (“COVID-19”) pandemic. Actual results could differ from those estimates.estimates, including the impact of the COVID-19 pandemic. The Company has not made any changes in its significant accounting policies from those disclosed in the 20162019 Form 10-K other than10-K. Certain prior period amounts have been reclassified to conform to the adoption of ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ("ASU 2017-04").current period presentation.
Business. The Company isa global design, marketing and distribution company that specializes in consumer fashion accessories. Its principal offerings include an extensive line of men's and women's fashion watches and jewelry, handbags, small leather goods, belts and sunglasses. In the watch and jewelry product categories, the Company has a diverse portfolio of globally recognized owned and licensed brand names under which its products are marketed. The Company's products are distributed globally through various distribution channels, including wholesale in countries where it has a physical presence, direct to the consumer through its retail stores and commercial websites and through third-party distributors in countries where the Company does not maintain a physical presence. The Company's products are offered at varying price points to meet the needs of its customers, whether they are value-conscious or luxury oriented. Based on its extensive range of accessory products, brands, distribution channels and price points, the Company is able to target style-conscious consumers across a wide age spectrum on a global basis.
Hedging Instruments.Going Concern Assessment and Management's Plans. In March 2020, a novel strain of coronavirus was declared a global pandemic by the World Health Organization. The Company's business operations and financial performance for the Second Quarter and Year To Date Period were materially impacted by COVID-19. The COVID-19 pandemic has negatively affected the global economies, disrupted global supply chains and financial markets, and led to significant travel and transportation restrictions, including mandatory closures of non-essential businesses and orders to “shelter-in-place.” The Company is exposedfocused on protecting the health and safety of its employees, customers and suppliers to certain market risks relatingminimize potential disruptions and supporting the community to foreign exchange rates and interest rates. The Company actively monitors and attempts to mitigate but does not eliminate these exposures using derivative instruments including foreign exchange forward contracts ("forward contracts") and interest rate swaps. The Company’s foreign subsidiaries periodically enter into forward contracts to hedgeaddress challenges posed by the future paymentglobal COVID-19 pandemic. At the end of intercompany inventory transactions denominated in U.S. dollars. Additionally, the Company enters into forward contracts to manage fluctuations in Japanese yen exchange rates that will be used to settle future third-party inventory component purchases by a U.S. dollar functional currency subsidiary. Iffirst quarter of fiscal year 2020, the Company was to settle its euro, Canadian dollar, British pound, Japanese yen, Mexican peso, Australian dollar and U.S dollar forward contracts asmajority of September 30, 2017, the result would have been a net loss of approximately $12.1 million, net of taxes. This unrealized loss is recognized in other comprehensive income (loss), net of taxes on the Company's consolidated statementsstores and many of income (loss)its customers' stores were closed. During the Second Quarter, many regional and comprehensive income (loss). Additionally, tolocal governments lifted or modified restrictions and orders and the extent that anymajority of these contracts are not considered to be perfectly effectivestores have re-opened although generally in offsetting the changea limited capacity.
The Company's Term Credit Agreement (as defined in the value of the cash flows being hedged, any changes in fair value relating to the ineffective portion of these contracts would be recognized in other income (expense)-net on the Company's consolidated statements of income (loss)"Note 15–Debt Activity") contains certain affirmative and comprehensive income (loss). Also, thenegative covenants. The Company has entered into an interest rate swap agreementa new amendment to effectively convert portionsits Term Credit Agreement to amend, among other things, certain of these financial covenants as a result of the impact of COVID-19. Refer to “Note 15–Debt Activity" for additional details on the Term Credit Agreement. The Company is currently in compliance with its covenants. However, due to the uncertainty related to the duration of COVID-19, the Company could experience material further decreases to revenues and
cash flows and may experience difficulty in remaining in compliance with financial covenants under the Term Credit Agreement, as amended.
The Company has taken certain actions, and plans to take further actions, to address the decrease in revenues and cash flow as a result of COVID-19 in order to maintain liquidity and in order to remain in compliance with financial covenants. The Company has implemented a number of cost saving measures, including store closures and spending reductions. Specifically, effective March 30, 2020, the Company implemented base salary reductions for a substantial number of the Company's global employees, including each of its variable rate debtexecutive officers. Further, the cash fees for all non-employee directors serving on the Company's Board of Directors were deferred for the first quarter of fiscal year 2020 until the end of the year and the cash fees were reduced by 20% for the Second Quarter. The Company also implemented weekly work hour reductions (e.g., from 40 hours to 32 or 24 hours) and work-reduction furloughs for certain other employees, many of which continued until the beginning of August 2020. The Company has entered into agreements, or is in discussions with, most of its retail and corporate office landlords to modify rent payments, receive other concessions or otherwise reduce its operating costs for these locations. The Company has also extended the payment terms with a number of its vendors and suppliers globally and has agreements, or is in discussions with, licensors of certain third party trademarks to reduce its royalty obligations in fiscal 2020. In addition, the Company is reducing marketing and capital spending, eliminating all non-business critical spending and implementing additional restructuring activities under New World Fossil 2.0 as discussed in "Note 16–Restructuring."
The Company believes its cost reduction plans are probable of being successfully implemented, which will result in adequate cash flows to support its ongoing operations and to meet its covenant requirements for one year following the date these financial statements are issued. The accompanying consolidated financial statements are prepared in accordance with generally accepted accounting principles applicable to a fixed rate. Changesgoing concern, which contemplates the realization of assets and the satisfaction of liabilities in the fair valuenormal course of the interest rate swap is recorded as a component of accumulated other comprehensive income (loss) within stockholders' equity, and is recognized in interest expense in the period in which the payment is settled. To reduce exposure to changes in currency exchange rates adversely affecting the Company’s investment in foreign currency-denominated subsidiaries, the Company periodically enters into forward contracts designated as net investment hedges. Both realized and unrealized gains and losses from net investment hedges are recognized in the cumulative translation adjustment component of other comprehensive income (loss), and will be reclassified into earnings in the event the Company's underlying investmentsbusiness.
are liquidated or disposed. The Company does not hold or issue derivative financial instruments for trading or speculative purposes. See “Note 10—Derivatives and Risk Management” for additional disclosures about the Company’s use of derivatives.
Operating Expenses. Operating expenses include selling, general and administrative expenses (“SG&A”), goodwill and trade name impairmentimpairments and restructuring charges. SG&A expenses include selling and distribution expenses primarily consisting of sales and distribution labor costs, sales distribution center and warehouse facility costs, depreciation expense related to sales distribution and warehouse facilities, the four-wall operating costs of the Company’s retail stores, point-of-sale expenses, advertising expenses and art, design and product development labor costs. SG&A also includes general and administrative expenses primarily consisting of administrative support labor and “back office” or support costs such as treasury, legal, information services, accounting, internal audit, human resources, executive management costs and costs associated with stock-based compensation. Restructuring charges include costs to reorganize, refine and optimize the Company’s infrastructure as well as store closure expenses.
Earnings (Loss) Per Share (“EPS”). Basic EPS is based on the weighted average number of common shares outstanding during each period. Diluted EPS adjusts basic EPS for the effects of dilutive common stock equivalents outstanding during each period using the treasury stock method.
The following table reconciles the numerators and denominators used in the computations of both basic and diluted EPS (in thousands, except per share data):
|
| | | | | | | | | | | | | | | |
| For the 13 Weeks Ended July 4, 2020 | | For the 13 Weeks Ended June 29, 2019 | | For the 27 Weeks Ended July 4, 2020 | | For the 26 Weeks Ended June 29, 2019 |
Numerator: | |
| | |
| | | | |
Net income (loss) attributable to Fossil Group, Inc. | $ | (22,543 | ) | | $ | (7,311 | ) | | $ | (108,124 | ) | | $ | (19,553 | ) |
Denominator: | | | |
| | |
| | |
|
Basic EPS computation: | | | |
| | | | |
|
Basic weighted average common shares outstanding | 51,189 |
| | 50,326 |
| | 50,866 |
| | 49,972 |
|
Basic EPS | $ | (0.44 | ) | | $ | (0.15 | ) | | $ | (2.13 | ) | | $ | (0.39 | ) |
Diluted EPS computation: | | | |
| | | | |
|
Basic weighted average common shares outstanding | 51,189 |
| | 50,326 |
| | 50,866 |
| | 49,972 |
|
Diluted weighted average common shares outstanding | 51,189 |
| | 50,326 |
| | 50,866 |
| | 49,972 |
|
Diluted EPS | $ | (0.44 | ) | | $ | (0.15 | ) | | $ | (2.13 | ) | | $ | (0.39 | ) |
|
| | | | | | | | | | | | | | | |
| For the 13 Weeks Ended September 30, 2017 | | For the 13 Weeks Ended October 1, 2016 | | For the 39 Weeks Ended September 30, 2017 | | For the 39 Weeks Ended October 1, 2016 |
Numerator: | |
| | |
| | |
| | |
|
Net income (loss) attributable to Fossil Group, Inc. | $ | (5,399 | ) | | $ | 17,356 |
| | $ | (398,298 | ) | | $ | 29,170 |
|
Denominator: | | | |
| | |
| | |
|
Basic EPS computation: | | | |
| | |
| | |
|
Basic weighted average common shares outstanding | 48,521 |
| | 48,130 |
| | 48,439 |
| | 48,127 |
|
Basic EPS | $ | (0.11 | ) | | $ | 0.36 |
| | $ | (8.22 | ) | | $ | 0.61 |
|
Diluted EPS computation: | | | |
| | |
| | |
|
Basic weighted average common shares outstanding | 48,521 |
| | 48,130 |
| | 48,439 |
| | 48,127 |
|
Effect of stock options, stock appreciation rights, restricted stock units and performance restricted stock units | — |
| | 161 |
| | — |
| | 159 |
|
Diluted weighted average common shares outstanding | 48,521 |
| | 48,291 |
| | 48,439 |
| | 48,286 |
|
Diluted EPS | $ | (0.11 | ) | | $ | 0.36 |
| | $ | (8.22 | ) | | $ | 0.60 |
|
At the end of the ThirdSecond Quarter and Year To Date Period, approximately 5.12.5 million and 4.4 million weighted average shares issuable under stock-based awards, respectively, were not included in the diluted EPS calculation because they were antidilutive. The total antidilutive weighted average shares included approximately 1.20.3 million weighted average performance-based shares at the end of both the ThirdSecond Quarter and Year To Date Period.Period, respectively.
At the end of the Prior Year Quarter and Prior Year YTD Period, approximately 1.63.4 million and 1.53.9 million weighted average shares issuable under stock-based awards, respectively, were not included in the diluted EPS calculation because they were antidilutive. Approximately 1.1The total antidilutive weighted average shares included 0.7 million and 0.9 million weighted average performance-based shares were not included in the diluted EPS calculation at the end of both the Prior Year Quarter and Prior Year YTD Period, respectively.
Cash, Cash Equivalents and Restricted Cash. The following table provides a reconciliation of the cash, cash equivalents, and restricted cash balances as of July 4, 2020 and June 29, 2019 that are presented in the performance targets were not met.condensed consolidated statement of cash flows (in thousands):
|
| | | | | | | |
| July 4, 2020 | | June 29, 2019 |
Cash and cash equivalents | $ | 277,561 |
| | $ | 226,596 |
|
Restricted cash included in prepaid expenses and other current assets | 30 |
| | 30 |
|
Restricted cash included in intangible and other assets-net | 7,117 |
| | 7,861 |
|
Cash, cash equivalents and restricted cash | $ | 284,708 |
| | $ | 234,487 |
|
Recently Issued Accounting Standards
In August 2017,December 2019, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2017-12, Derivatives and HedgingASU 2019-12, Income Taxes (Topic 815)740): Targeted Improvements toSimplifying the Accounting for Hedging Activities ("Income Taxes ("ASU 2017-12"2019-12"). ASU 2017-122019-12 simplifies the accounting for income taxes by removing certain exceptions to general principles in Income Taxes (Topic 740). It also clarifies and amends and simplifies hedge accountingexisting guidance in order to enable entities to better portray the economics of their risk management activities.improve consistent application. The guidance is effective for fiscal years beginning after December 15, 2018, including
interim periods within those periods. Early adoption is permitted. The Company is currently evaluating the impact of the standard on its consolidated financial statements and related disclosures.
In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting ("ASU 2017-09"). ASU 2017-09 clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award changes as a result of the modification. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. Early adoption is permitted. The Company is still evaluating the effect of adopting ASU 2017-09.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business ("ASU 2017-01"). ASU 2017-01 clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. This standard will not have a material impact on the Company’s consolidated results of operations or financial position.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash ("ASU 2016-18"). ASU 2016-18 requires that a statement of cash flows explain the change during the period in total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for annual periods, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted. This standard will not have a material impact on the Company’s consolidated results of operations or financial position.
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”). ASU 2016-16 requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. ASU 2016-16 is effective for fiscal years,2020, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. This standard will not have a material impact on the Company’s consolidated results of operations or financial position.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows(Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 provides guidance on how certain cash receipts and cash payments should be presented and classified in the statement of cash flows with the objective of reducing existing diversity in practice with respect to these items. ASU 2016-15 is effective for annual periods, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted. This standard will not have a material impact on the Company’s consolidated results of operations or financial position.
In March 2016, the FASB issued ASU 2016-04, Liabilities—Extinguishments of Liabilities (Subtopic 405-20)- Recognition of Breakage for Certain Prepaid Stored-Value Products (“ASU 2016-04”). ASU 2016-04 entitles a company to derecognize amounts related to expected breakage to the extent that it is probable a significant reversal of the recognized breakage amount will not subsequently occur. ASU 2016-04 is effective for annual periods, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted. This standard will not have a material impact on the Company’s consolidated results of operations or financial position.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842): Amendments to the FASB Accounting Standards Codification® (“ASU 2016-02”), which supersedes the existing guidance for lease accounting, Leases (Topic 840). ASU 2016-02 requires lessees to recognize leases on their balance sheets, and modifies accounting, presentation and disclosure for both lessors and lessees. ASU 2016-02 requires a modified retrospective approach for all leases existing at, or entered into after, the date of initial application, with an option to elect to use certain transition relief. ASU 2016-02 is effective for annual periods, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted. Many of the Company’s leases are considered operating leases and are not capitalized under ASC 840. Under ASC 842 the majority of these leases will qualify for capitalization and will result in the recognition of lease assets and lease liabilities once the new standard is adopted.years. The Company is in the process of reviewing lease contracts to determine the impact of adopting ASU 2016-02, but expects thedoes not expect this standard to have a material impact on the Company's financial position.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets, unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The FASB later amended ASU-2014-09 with the following:
•ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date
ASU 2016-08 Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
ASU 2016-10 Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing
ASU 2016-12 Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients
•ASU 2016-20 Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers
ASU 2017-13 Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842)
The Company has performed a review of our revenue streams including reviewing key contracts and comparing current accounting policies and practices to the new standard to identify potential differences that could arise from the application of ASU 2014-09. The Company currently anticipates that the performance obligations underlying its core revenue streams (i.e., its retail and standard wholesale businesses) will remain substantially unchanged. Revenues for these businesses are generated through the sale of finished products, and will continue to be generally recognized at the point in time when merchandise is transferred to the customer and in an amount that considers the impacts of estimated allowances. The Company does anticipate some timing changes, including accelerated recognition of markdowns given to customers and a change in classification of certain customer considerations between gross profit and SG&A expenses. The Company does not believe these changes will have a material impact on the Company's financial position or results of operations. The Company is currently finalizing its review of customer contracts. The standard will require additional disclosures about the nature of revenue as well as the judgment involved in the timing of revenue recognition. The Company will adopt ASU 2014-09 in the first quarter of fiscal 2018 and will use the modified retrospective approach.
Recently Adopted Accounting Standards
In January 2017, the FASB issued ASU 2017-04. Under ASU 2017-04, goodwill impairment testing is done by comparing the fair value of the reporting unit to its carrying value. If the carrying amount exceeds the fair value, the Company would recognize an impairment charge for the amount that the reporting unit's carrying value exceeds the fair value, not to exceed the total amount of goodwill allocated to that reporting unit. The Company concluded that ASU 2017-04 is preferable to the current guidance due to efficiency, since ASU 2017-04 eliminates the requirement to determine the fair value of individual assets and liabilities of a reporting unit to measure goodwill impairment. The Company early adopted ASU 2017-04 effective June 15, 2017 in conjunction with the interim impairment test of goodwill for all reporting units and goodwill impairment was recorded according to the new standard. The Company believes the adoption of ASU 2017-04 did not change the amount of impairment charges recorded in the second quarter of fiscal 2017. See “Note 2—Goodwill and Intangibles Impairment Charges” for additional information on our interim goodwill impairment test performed.
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 simplified several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. ASU 2016-09 was effective for the Company beginning fiscal year 2017 and did not have a material impact on the Company’s consolidated results of operations or financial position. As a result of adoption, the Company now recognizes excess tax benefits or deficiencies associated with share-based compensation activity as an income tax expense or benefit in the period the shares vest or are settled.
Recently Adopted Accounting Standards
In addition, the Company now presents excess tax benefits from share-based compensation activity with other income tax cash flows as an operating activity on the statement of cash flows, which differs from the Company’s historical classification of excess tax benefits as a financing activity. The Company has elected to apply this change in cash flow presentation on a prospective basis. The standard also permits the Company to make a policy election for how it accounts for forfeitures, and the Company has elected to continue estimating forfeitures.
In July 2015,August 2018, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory (“2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40) ("ASU 2015-11”2018-15"). ASU 2015-11 requires2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that inventory be measuredis a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The Company adopted ASU 2018-15 at the lower of cost and net realizable value. The standard was effective for the Company beginning fiscal year 2017 and did not have a material impact on the Company’s consolidated results of operations or financial position.
2. GOODWILL AND INTANGIBLES IMPAIRMENT CHARGES
The Company evaluates its goodwill and intangible assets for impairment on an annual basis, or as facts and circumstances warrant. At the end of the fiscal year 2016, the Company's market capitalization exceeded the carrying amount of its net assets by 23%. At the end of the first quarter of fiscal 2017,year 2020, and it did not have a material effect on the Company's condensed consolidated financial statements.
In August 2018, the FASB issued ASU 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General(Subtopic 715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans ("ASU 2018-14"). ASU 2018-14 removes certain disclosures that are not considered cost beneficial, clarifies certain required disclosures and adds additional disclosures. The Company experienced a decline in market
capitalization and, as a resultadopted ASU 2018-14 at the beginning of the decline, the Company's market capitalization was 14% below the carrying amount of its net assets as of April 1, 2017. During the secondfirst quarter of fiscal 2017,year 2020, and it did not have a material effect on the Company's market capitalization continuedcondensed consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to decline, at which point the Company determined the decrease in stock priceDisclosure Requirements for Fair Value Measurement ("ASU 2018-13"). ASU 2018-13 (i) eliminates certain disclosure requirements related to be sustained and thus a strong indicator of impairment. Due to a change in key assumptions used in interim testing, including the decline in market capitalization and decline in sales projections, the Company believed that impairment of goodwill and trade names was probable as of June 15, 2017, and therefore performed interim tests for each reporting unit and trade name. Using a combination of discounted cash flow and guideline public company methodologies, the Company compared the fair value hierarchy, (ii) adds new disclosure requirements related to the changes in unrealized gains and losses for recurring Level 3 fair value measurements and the range and weighted average of eachsignificant observable inputs used to develop Level 3 fair value measurements and (iii) modifies certain disclosure requirements related to measurement uncertainty for fair value measurements. The Company adopted ASU 2018-13 at the beginning of its three reporting units with their carrying value and concluded that goodwill was fully impaired. Accordingly, in the secondfirst quarter of fiscal 2017,year 2020, and it did not have a material effect on the Company's condensed consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). ASU 2016-13 modifies the measurement of expected credit losses of certain financial instruments, including trade receivables. The estimate of expected credit losses will require the consideration of historical information, current information and reasonable and supportable forecasts. The Company recognizedadopted ASU 2016-13 at
the beginning of the first quarter of fiscal year 2020 on a pre-tax impairment charge in operationsprospective basis, and it did not have a material effect on the Company's condensed consolidated financial statements.
2. REVENUE
Disaggregation of $202.3 million, $114.3 millionRevenue. The Company's revenue disaggregated by major product category and $42.9 million in the Americas, Europe and Asia segments, respectively.
The changes in the carrying amounttiming of goodwill wererevenue recognition was as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| For the 13 Weeks Ended July 4, 2020 |
| Americas | | Europe | | Asia | | Corporate | | Total |
Product type | | | | | | | | | |
Watches | $ | 84,474 |
| | $ | 62,188 |
| | $ | 62,832 |
| | $ | 5 |
| | $ | 209,499 |
|
Leathers | 17,381 |
| | 5,027 |
| | 4,146 |
| |
| | 26,554 |
|
Jewelry | 2,670 |
| | 11,395 |
| | 1,141 |
| |
| | 15,206 |
|
Other | 1,224 |
| | 935 |
| | 1,129 |
| | 4,462 |
| | 7,750 |
|
Consolidated | $ | 105,749 |
| | $ | 79,545 |
| | $ | 69,248 |
| | $ | 4,467 |
| | $ | 259,009 |
|
| | | | | | | | | |
Timing of revenue recognition | | | | | | | | | |
Revenue recognized at a point in time | $ | 105,156 |
| | $ | 79,218 |
| | $ | 69,085 |
| | $ | 2,364 |
| | $ | 255,823 |
|
Revenue recognized over time | 593 |
| | 327 |
| | 163 |
| | 2,103 |
| | 3,186 |
|
Consolidated | $ | 105,749 |
| | $ | 79,545 |
| | $ | 69,248 |
| | $ | 4,467 |
| | $ | 259,009 |
|
|
| | | | | | | | | | | | | | | |
| Americas | | Europe | | Asia | | Total |
Balance at December 31, 2016 | $ | 202,187 |
| | $ | 110,291 |
| | $ | 42,785 |
| | $ | 355,263 |
|
Foreign currency changes | 162 |
| | 3,983 |
| | 85 |
| | 4,230 |
|
Impairment charges | (202,349 | ) | | (114,274 | ) | | (42,870 | ) | | $ | (359,493 | ) |
Balance at September 30, 2017 | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
|
| | | | | | | | | | | | | | | | | | | |
| For the 13 Weeks Ended June 29, 2019 |
| Americas | | Europe | | Asia | | Corporate | | Total |
Product type | | | | | | | | | |
Watches | $ | 185,131 |
| | $ | 114,471 |
| | $ | 113,624 |
| | $ | 59 |
| | $ | 413,285 |
|
Leathers | 33,637 |
| | 9,229 |
| | 9,764 |
| | — |
| | 52,630 |
|
Jewelry | 1,642 |
| | 18,425 |
| | 719 |
| | — |
| | 20,786 |
|
Other | 2,697 |
| | 4,957 |
| | 2,168 |
| | 4,870 |
| | 14,692 |
|
Consolidated | $ | 223,107 |
| | $ | 147,082 |
| | $ | 126,275 |
| | $ | 4,929 |
| | $ | 501,393 |
|
| | | | | | | | | |
Timing of revenue recognition | | | | | | | | | |
Revenue recognized at a point in time | $ | 222,365 |
| | $ | 146,728 |
| | $ | 126,083 |
| | $ | 2,427 |
| | $ | 497,603 |
|
Revenue recognized over time | 742 |
| | 354 |
| | 192 |
| | 2,502 |
| | 3,790 |
|
Consolidated | $ | 223,107 |
| | $ | 147,082 |
| | $ | 126,275 |
| | $ | 4,929 |
| | $ | 501,393 |
|
During
|
| | | | | | | | | | | | | | | | | | | |
| For the 27 Weeks Ended July 4, 2020 |
| Americas | | Europe | | Asia | | Corporate | | Total |
Product Type | | | | | | | | | |
Watches | $ | 203,748 |
| | $ | 160,086 |
| | $ | 155,575 |
| | $ | 16 |
| | $ | 519,425 |
|
Leathers | 45,371 |
| | 14,457 |
| | 14,033 |
| |
| | 73,861 |
|
Jewelry | 6,693 |
| | 28,902 |
| | 2,827 |
| |
| | 38,422 |
|
Other | 2,854 |
| | 4,350 |
| | 3,000 |
| | 7,815 |
| | 18,019 |
|
Consolidated | $ | 258,666 |
| | $ | 207,795 |
| | $ | 175,435 |
| | $ | 7,831 |
| | $ | 649,727 |
|
| | | | | | | | | |
Timing of revenue recognition | | | | | | | | | |
Revenue recognized at a point in time | $ | 257,442 |
| | $ | 207,138 |
| | $ | 175,073 |
| | $ | 3,855 |
| | $ | 643,508 |
|
Revenue recognized over time | 1,224 |
| | 657 |
| | 362 |
| | 3,976 |
| | 6,219 |
|
Consolidated | $ | 258,666 |
| | $ | 207,795 |
| | $ | 175,435 |
| | $ | 7,831 |
| | $ | 649,727 |
|
|
| | | | | | | | | | | | | | | | | | | |
| For the 26 Weeks Ended June 29, 2019 |
| Americas | | Europe | | Asia | | Corporate | | Total |
Product Type | | | | | | | | | |
Watches | $ | 333,448 |
| | $ | 230,723 |
| | $ | 215,230 |
| | $ | 62 |
| | $ | 779,463 |
|
Leathers | 64,389 |
| | 20,586 |
| | 21,559 |
| | — |
| | 106,534 |
|
Jewelry | 10,818 |
| | 39,175 |
| | 1,953 |
| | — |
| | 51,946 |
|
Other | 4,821 |
| | 9,876 |
| | 4,432 |
| | 9,589 |
| | 28,718 |
|
Consolidated | $ | 413,476 |
| | $ | 300,360 |
| | $ | 243,174 |
| | $ | 9,651 |
| | $ | 966,661 |
|
| | | | | | | | | |
Timing of revenue recognition | | | | | | | | | |
Revenue recognized at a point in time | $ | 412,066 |
| | $ | 299,645 |
| | $ | 242,789 |
| | $ | 3,599 |
| | $ | 958,099 |
|
Revenue recognized over time | 1,410 |
| | 715 |
| | 385 |
| | 6,052 |
| | 8,562 |
|
Consolidated | $ | 413,476 |
| | $ | 300,360 |
| | $ | 243,174 |
| | $ | 9,651 |
| | $ | 966,661 |
|
Contract Balances. As of July 4, 2020, the second quarterCompany had 0 material contract assets on the Company's condensed consolidated balance sheets and 0 deferred contract costs. The Company had contract liabilities of fiscal 2017, the SKAGEN trade name with a carrying amount of $55.6 million was written down to its implied fair value of $27.3 million, resulting in a pre-tax impairment charge of $28.3 million; the MISFIT trade name with a carrying amount of $11.8 million was deemed not recoverable, resulting in a pre-tax impairment charge of $11.8(i) $11.9 million and the MICHELE trade name with a carrying amount$13.4 million as of $18.5July 4, 2020 and December 28, 2019, respectively, related to remaining performance obligations on licensing income, (ii) $4.6 million was written downand $5.3 million as of July 4, 2020 and December 28, 2019, respectively, primarily related to its implied fair valueremaining performance obligations on wearable technology products and (iii) $4.1 million and $3.3 million as of $10.9 million, resulting in a pre-tax impairment charge of $7.6 million. The fair values of the Company's indefinite-lived SKAGENJuly 4, 2020 and MICHELE trade names were estimated using the relief from royalty method. The fair value of the Company's definite-lived MISFIT trade name was estimated using a discounted cash flow methodology. A reduction in expected future cash flows negatively affected the valuation comparedDecember 28, 2019, respectively, related to previous valuation assumptions.gift cards issued.
3. INVENTORIES
Inventories consisted of the following (in thousands):
|
| | | | | | | |
| July 4, 2020 | | December 28, 2019 |
Components and parts | $ | 27,759 |
| | $ | 35,626 |
|
Work-in-process | 3,101 |
| | 11,034 |
|
Finished goods | 345,046 |
| | 405,618 |
|
Inventories | $ | 375,906 |
| | $ | 452,278 |
|
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Components and parts | $ | 60,258 |
| | $ | 49,438 |
|
Work-in-process | 9,471 |
| | 12,345 |
|
Finished goods | 613,257 |
| | 480,704 |
|
Inventories | $ | 682,986 |
| | $ | 542,487 |
|
4. WARRANTY LIABILITIES
The Company’s warranty liability is recorded in accrued expenses-other in the Company’s condensed consolidated balance sheets. Warranty liability activity consisted of the following (in thousands):
| | | For the 39 Weeks Ended September 30, 2017 | | For the 39 Weeks Ended October 1, 2016 | For the 27 Weeks Ended July 4, 2020 | | For the 26 Weeks Ended June 29, 2019 |
Beginning balance | $ | 15,421 |
| | $ | 13,669 |
| $ | 23,095 |
| | $ | 22,807 |
|
Settlements in cash or kind | (11,608 | ) | | (7,338 | ) | (7,129 | ) | | (7,749 | ) |
Warranties issued and adjustments to preexisting warranties (1) | 14,984 |
| | 8,604 |
| 7,161 |
| | 5,909 |
|
Ending balance | $ | 18,797 |
| | $ | 14,935 |
| $ | 23,127 |
| | $ | 20,967 |
|
(1) Changes in cost estimates related to preexisting warranties are aggregated with accruals for new standard warranties issued and foreign currency changes.
5. INCOME TAXES
The Company’s income tax (benefit) expense and related effective rates were as follows (in thousands, except percentage data):
|
| | | | | | | | | | | | | | | |
| For the 13 Weeks Ended July 4, 2020 | | For the 13 Weeks Ended June 29, 2019 | | For the 27 Weeks Ended July 4, 2020 | | For the 26 Weeks Ended June 29, 2019 |
Income tax (benefit) expense | $ | (20,840 | ) | | $ | 1,444 |
| | $ | (84,491 | ) | | $ | 11,051 |
|
Effective tax rate | 47.6 | % | | (28.0 | )% | | 43.8 | % | | (151.0 | )% |
|
| | | | | | | | | | | | | | | |
| For the 13 Weeks Ended September 30, 2017 | | For the 13 Weeks Ended October 1, 2016 | | For the 39 Weeks Ended September 30, 2017 | | For the 39 Weeks Ended October 1, 2016 |
Income tax (benefit) expense | $ | (3,230 | ) | | $ | 6,451 |
| | $ | (100,746 | ) | | $ | 13,230 |
|
Effective tax rate | 37.1 | % | | 25.0 | % | | 20.3 | % | | 27.5 | % |
For the Second Quarter, the Company computed its effective tax rate using actual year-to-date information rather than a full year forecast to compute the annual effective tax rate, which is consistent with the method used in the Prior Year Quarter. Estimating a reliable or meaningful annual effective tax rate for fiscal year 2020 was not possible due to the range of potential impacts and resulting uncertainties related to the global COVID-19 pandemic. Accordingly, the Company concluded that computing its effective tax rate using actual year-to-date results is the best estimate of tax expense (benefit) for the Second Quarter and Year To Date Period.The higher effective tax rate in the ThirdSecond Quarter was favorable as compared to the Prior Year Quarter is attributableprimarily due to changes enacted in the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), which was signed into law on March 27, 2020. The CARES Act included many beneficial income tax provisions including utilization of net operating losses ("NOLs"), temporary changes to the limitation on interest deductions, and technical corrections to tax depreciation for qualified improvement property. The Tax Cuts and Jobs Act had eliminated the option for most taxpayers to carryback a higher structural rate resulting from an increased forecasted loss fromNOL after 2017. A NOL could only be carried forward and was limited to 80% of taxable income. The CARES Act now allows U.S. taxpayers to carryback a NOL arising in tax years 2018, 2019 and 2020 to prior years when the Company's U.S. operations which is tax-benefited at a higherstatutory tax rate thanwas 35%. The Second Quarter tax benefit was primarily due to the tax rates used to calculate the tax expense on the profits from the Company's foreign operations. There were also favorable discrete items occurring in the quarter. These positive impacts wereU.S. NOL carryback provision, which was partially offset by the increased tax expense resulting from all of the foreign income taxes and some of the U.S. goodwill impairment charge being permanently nondeductible for tax purposes.discrete items. The lower effective tax rate can vary from quarter to quarter due to changes in the Company's global mix of earnings, impacts of COVID-19, the resolution of income tax audits and changes in tax law.
The Prior Year Quarter effective tax rate was negative because income tax expense was accrued on certain foreign entities with positive taxable income and no benefit was recognized for losses in the U.S. and certain other foreign jurisdictions. Due to the Global Intangible Low-Taxed Income ("GILTI") provision of the Tax Cuts and Jobs Act, certain foreign income is included in U.S. taxable income effectively absorbing the U.S. NOLs, eliminating the availability of any future tax benefit or loss carryback prior to the NOL carryback provision in the CARES Act.
The Year toTo Date Period as comparedeffective tax rate was favorable to the Prior Year YTD Period is primarily attributable to the increased tax expense resulting from all of the foreign and some of the U.S. goodwill impairment charge being permanently nondeductible for tax purposes and unfavorable discrete items that occurred in the Year to Date Period, mostly due to the additionalchanges from the CARES Act allowing NOL carrybacks. The Prior Year YTD Period effective tax rate was negative because income tax expense resulting fromwas accrued on certain foreign entities with positive taxable income and no benefit was recognized for losses in the adoption of ASU 2016-09. See "Note 1-Financial Statement Policies" for additional disclosures about ASU 2016-09.U.S. and certain other foreign jurisdictions.
As of September 30, 2017,July 4, 2020, the Company's total amount of unrecognized tax benefits, excluding interest and penalties, was $21.7$35.7 million, of which $19.0$29.9 million would favorably impact the effective tax rate in future periods, if recognized. The Company is subject to examinations in various state and foreign jurisdictions for its 2011-20162011-2018 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 paidsettled within twelve months of the condensed consolidated balance sheet date. As of September 30, 2017,July 4, 2020, the Company had recorded $2.3$11.2 million of unrecognized tax benefits, excluding interest and penalties, for positions that are expected to be settled within the next twelve months. Consistent with its past practice, the Company recognizes interest and/or penalties related to income tax overpayments and income tax underpayments in income tax expense and income taxes receivable/payable. At September 30, 2017,July 4, 2020, the total amount of accrued income tax-related interest and penalties included in the condensed consolidated balance sheetsheets was $2.8$6.4 million and $1.3$1.0 million, respectively. TheFor the Second Quarter, the Company accrued income tax related interest expense accrued in the Third Quarter was offset by reductions of interest expense associated with the derecognition of uncertain tax benefits. For the Year To Date Period, the Company accrued income tax-related interest expense $0.5$1.1 million.
An increase in long-term deferred tax assets is mostly attributable to the future tax amortization of the tax basis in goodwill and trade names which were impaired for GAAP purposes, as well as an increased amount of foreign tax credit carry forwards.
As of September 30, 2017, as a result of proposed U.S. Tax Reform and the planned refinancing of existing debt obligations, the Company is continuing to evaluate its current assertions with respect to certain undistributed earnings in various foreign jurisdictions. At present, the Company believes it can meet its future U.S. obligations through a combination of earnings not considered indefinitely reinvested, future current earnings of foreign subsidiaries, and distributions of earnings in jurisdictions within which no additional U.S. tax would be incurred as a result of excess foreign tax credits associated with such earnings. The Company will continue to monitor its indefinite reinvestment assertions with respect to all foreign jurisdictions as developments occur within proposed U.S. Tax Reform proposals and the planned refinancing of its existing debt obligations.
6. STOCKHOLDERS’ EQUITY
Common Stock Repurchase Programs. Purchases of the Company’s common stock have been made from time to time pursuant to its repurchase programs, subject to market conditions and at prevailing market prices, through the open market. RepurchasedPreferred Stock. The Company has 100,000,000 shares of common stock, are recordedpar value $0.01 per share, authorized, with 51,292,617 and 50,516,477 shares issued and outstanding at costJuly 4, 2020 and becomeDecember 28, 2019, respectively. The Company has 1,000,000 shares of preferred stock, par value $0.01 per share, authorized, but unissued shares which maywith NaN issued or outstanding at July 4, 2020 or December 28, 2019. Rights, preferences and other terms of preferred stock will be issued indetermined by the future for general corporate or other purposes. InBoard of Directors at the event the repurchased shares are canceled, the Company accounts for retirements by allocating the repurchase price to common stock, additional paid-in capitaltime of issuance.
Common Stock Repurchase Programs. At July 4, 2020 and retained earnings. The repurchase price allocation is based upon the equity contribution associated with historical issuances. The repurchase programs have been conducted pursuant to Rule 10b-18 of the Exchange Act.
At December 31, 2016 and September 30, 2017,28, 2019, all treasury stock had been effectively retired. As of September 30, 2017,July 4, 2020, the Company had $824.2$30.0 million of repurchase authorizations remaining under its combined repurchase programs. However, under the Company's credit agreement, theprogram. The Company is restricted from making open market repurchases of its common stock.
The following tables reflect the Company’sdid not repurchase any common stock under its authorized stock repurchase activity forplans during the periods indicated (in millions): |
| | | | | | | | | | | | | | | | | | | |
| | | | | For the 13 Weeks Ended September 30, 2017 | | For the 13 Weeks Ended October 1, 2016 |
Fiscal Year Authorized | Dollar Value Authorized | | Termination Date | | Number of Shares Repurchased | | Dollar Value Repurchased | | Number of Shares Repurchased | | Dollar Value Repurchased |
2014 | $ | 1,000.0 |
| | December 2018 | | — |
| | $ | — |
| | — |
| | $ | — |
|
2010 | $ | 30.0 |
| | None | | — |
| | $ | — |
| | — |
| | $ | — |
|
Second Quarter, Prior Year Quarter, Year To Date Period or Prior Year YTD Period. |
| | | | | | | | | | | | | | | | | | | |
| | | | | For the 39 Weeks Ended September 30, 2017 | | For the 39 Weeks Ended October 1, 2016 |
Fiscal Year Authorized | Dollar Value Authorized | | Termination Date | | Number of Shares Repurchased | | Dollar Value Repurchased | | Number of Shares Repurchased | | Dollar Value Repurchased |
2014 | $ | 1,000.0 |
| | December 2018 | | — |
| | $ | — |
| | 0.1 |
| | $ | 5.2 |
|
2010 | $ | 30.0 |
| | None | | — |
| | $ | — |
| | — |
| | $ | — |
|
Controlling and Noncontrolling Interest. The following tables summarize the changes in equity attributable to controlling and noncontrolling interest (in thousands):
|
| | | | | | | | | | | |
| Fossil Group, Inc. Stockholders’ Equity | | Noncontrolling Interest | | Total Stockholders’ Equity |
Balance at December 31, 2016 | $ | 1,006,236 |
| | $ | 9,202 |
| | $ | 1,015,438 |
|
Net income (loss) | (398,298 | ) | | 2,931 |
| | (395,367 | ) |
Currency translation adjustment | 32,078 |
| | — |
| | 32,078 |
|
Cash flow hedges - net change | (21,364 | ) | | — |
| | (21,364 | ) |
Distribution of noncontrolling interest earnings | — |
| | (428 | ) | | (428 | ) |
Acquisition of common stock | (947 | ) | | — |
| | (947 | ) |
Stock-based compensation expense | 23,588 |
| | — |
| | 23,588 |
|
Balance at September 30, 2017 | $ | 641,293 |
| | $ | 11,705 |
| | $ | 652,998 |
|
|
| | | | | | | | | | | |
| Fossil Group, Inc. Stockholders’ Equity | | Noncontrolling Interest | | Total Stockholders’ Equity |
Balance at January 2, 2016 | $ | 921,388 |
| | $ | 11,155 |
| | $ | 932,543 |
|
Net income | 29,170 |
| | 5,646 |
| | 34,816 |
|
Currency translation adjustment | 9,383 |
| | — |
| | 9,383 |
|
Cash flow hedges - net change | (4,741 | ) | | — |
| | (4,741 | ) |
Pension plan activity | 1,714 |
| | — |
| | 1,714 |
|
Common stock issued upon exercise of stock options | 57 |
| | — |
| | 57 |
|
Tax expense derived from stock-based compensation | (1,756 | ) | | — |
| | (1,756 | ) |
Distribution of noncontrolling interest earnings | — |
| | (4,543 | ) | | (4,543 | ) |
Acquisition of common stock | (6,448 | ) | | — |
| | (6,448 | ) |
Stock-based compensation expense | 23,894 |
| | — |
| | 23,894 |
|
Balance at October 1, 2016 | $ | 972,661 |
| | $ | 12,258 |
| | $ | 984,919 |
|
7. EMPLOYEE BENEFIT PLANS
Stock-Based Compensation Plans. The following table summarizes stock options and stock appreciation rights activity during the ThirdSecond Quarter:
|
| | | | | | | | | | | | | |
Stock Options and Stock Appreciation Rights | | Shares | | Weighted- Average Exercise Price | | Weighted- Average Remaining Contractual Term | | Aggregate Intrinsic Value |
| | (in Thousands) | | | | (in Years) | | (in Thousands) |
Outstanding at April 4, 2020 | | 444 |
| | $ | 77.78 |
| | 2.4 | | $ | — |
|
Granted | | — |
| | — |
| | | | |
Exercised | | — |
| | — |
| | | | — |
|
Forfeited or expired | | (16 | ) | | 74.09 |
| | | | |
Outstanding at July 4, 2020 | | 428 |
| | 77.92 |
| | 2.2 | | — |
|
Exercisable at July 4, 2020 | | 428 |
| | $ | 77.92 |
| | 2.2 | | $ | — |
|
|
| | | | | | | | | | | | | |
Stock Options and Stock Appreciation Rights | | Shares | | Weighted- Average Exercise Price | | Weighted- Average Remaining Contractual Term | | Aggregate Intrinsic Value |
| | (in Thousands) | | | | (in Years) | | (in Thousands) |
Outstanding at July 1, 2017 | | 2,236 |
| | $ | 50.29 |
| | 5.8 | | $ | — |
|
Granted | | — |
| | — |
| | | | |
|
Exercised | | — |
| | — |
| | | | — |
|
Forfeited or expired | | (27 | ) | | 63.35 |
| | | | |
|
Outstanding at September 30, 2017 | | 2,209 |
| | 50.14 |
| | 5.6 | | — |
|
Exercisable at September 30, 2017 | | 882 |
| | $ | 67.67 |
| | 4.5 | | $ | — |
|
AggregateThe 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 September 30, 2017 and (ii) the fair market value of the Company’s common stock on the exercise date for options/rights that were exercised during the Third Quarter.July 4, 2020.
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 September 30, 2017:
July 4, 2020:
| | Cash Stock Appreciation Rights Outstanding | | Cash Stock Appreciation Rights Exercisable | |
Stock Options Outstanding | | Stock Options Outstanding | | Stock Options Exercisable |
Range of Exercise Prices | | Number of Shares | | Weighted- Average Exercise Price | | Weighted- Average Remaining Contractual Term | | Number of Shares | | Weighted- Average Exercise Price | | Number of Shares | | Weighted- Average Exercise Price | | Weighted- Average Remaining Contractual Term | | Number of Shares | | Weighted- Average Exercise Price |
| | (in Thousands) | | | | (in Years) | | (in Thousands) | | | | (in Thousands) | | | | (in Years) | | (in Thousands) | | |
$29.78 - $47.99 | | 61 |
| | $ | 36.73 |
| | 6.2 | | 11 |
| | $ | 36.73 |
| |
$55.04 - $82.55 | | | 55 |
| | $ | 81.23 |
| | 0.7 | | 55 |
| | $ | 81.23 |
|
$83.83 - $125.75 | | | 4 |
| | 83.83 |
| | 0.1 | | 4 |
| | 83.83 |
|
$127.84 - $191.75 | | | 82 |
| | 128.05 |
| | 1.5 | | 82 |
| | 128.05 |
|
Total | | 61 |
| | $ | 36.73 |
| | 6.2 | | 11 |
| | $ | 36.73 |
| | 141 |
| | $ | 108.50 |
| | 1.2 | | 141 |
| | $ | 108.50 |
|
|
| | | | | | | | | | | | | | | | |
Stock Appreciation Rights Outstanding | | Stock Appreciation Rights Exercisable |
Range of Exercise Prices | | Number of Shares | | Weighted- Average Exercise Price | | Weighted- Average Remaining Contractual Term | | Number of Shares | | Weighted- Average Exercise Price |
| | (in Thousands) | | | | (in Years) | | (in Thousands) | | |
$29.49 - $47.99 | | 167 |
| | $ | 41.77 |
| | 3.4 | | 167 |
| | $ | 41.77 |
|
$55.04 - $82.55 | | 59 |
| | 77.98 |
| | 2.4 | | 59 |
| | 77.98 |
|
$83.83 - $125.75 | | 61 |
| | 105.77 |
| | 1.2 | | 61 |
| | 105.77 |
|
Total | | 287 |
| | $ | 62.87 |
| | 2.7 | | 287 |
| | $ | 62.87 |
|
|
| | | | | | | | | | | | | | | | |
Stock Options Outstanding | | Stock Options Exercisable |
Range of Exercise Prices | | Number of Shares | | Weighted- Average Exercise Price | | Weighted- Average Remaining Contractual Term | | Number of Shares | | Weighted- Average Exercise Price |
| | (in Thousands) | | | | (in Years) | | (in Thousands) | | |
$13.65 - $29.49 | | 35 |
| | $ | 14.12 |
| | 1.4 | | 35 |
| | $ | 14.12 |
|
$29.78 - $47.99 | | 79 |
| | 37.00 |
| | 1.5 | | 79 |
| | 37.00 |
|
$55.04 - $83.83 | | 91 |
| | 80.80 |
| | 3.2 | | 91 |
| | 80.80 |
|
$95.91 - $131.46 | | 129 |
| | 127.97 |
| | 4.1 | | 129 |
| | 127.97 |
|
Total | | 334 |
| | $ | 81.69 |
| | 3.0 | | 334 |
| | $ | 81.69 |
|
|
| | | | | | | | | | | | | | | | |
Stock Appreciation Rights Outstanding | | Stock Appreciation Rights Exercisable |
Range of Exercise Prices | | Number of Shares | | Weighted- Average Exercise Price | | Weighted- Average Remaining Contractual Term | | Number of Shares | | Weighted- Average Exercise Price |
| | (in Thousands) | | | | (in Years) | | (in Thousands) | | |
$13.65 - $29.49 | | 101 |
| | $ | 29.49 |
| | 6.8 | | 34 |
| | $ | 29.49 |
|
$29.78 - $47.99 | | 1,485 |
| | 38.07 |
| | 6.2 | | 310 |
| | 38.91 |
|
$55.04 - $83.83 | | 125 |
| | 79.16 |
| | 4.8 | | 90 |
| | 79.91 |
|
$95.91 - $131.46 | | 103 |
| | 114.46 |
| | 3.7 | | 103 |
| | 114.46 |
|
Total | | 1,814 |
| | $ | 44.78 |
| | 6.0 | | 537 |
| | $ | 59.74 |
|
Restricted Stock, Restricted Stock Units and Performance Restricted Stock Units. The following table summarizes restricted stock restricted stock unitsunit and performance restricted stock unitsunit activity during the ThirdSecond Quarter:
|
| | | | | | | |
Restricted Stock Units and Performance Restricted Stock Units | | Number of Shares | | Weighted-Average Grant Date Fair Value Per Share |
| | (in Thousands) | | |
Nonvested at April 4, 2020 | | 2,072 |
| | $ | 15.34 |
|
Granted | | 1,078 |
| | 3.74 |
|
Vested | | (848 | ) | | 14.99 |
|
Forfeited | | (325 | ) | | 11.90 |
|
Nonvested at July 4, 2020 | | 1,977 |
| | $ | 9.70 |
|
|
| | | | | | | |
Restricted Stock, Restricted Stock Units and Performance Restricted Stock Units | | Number of Shares | | Weighted-Average Grant Date Fair Value Per Share |
| | (in Thousands) | | |
Nonvested at July 1, 2017 | | 2,785 |
| | $ | 24.21 |
|
Granted | | 254 |
| | 9.98 |
|
Vested | | (17 | ) | | 37.81 |
|
Forfeited | | (57 | ) | | 23.86 |
|
Nonvested at September 30, 2017 | | 2,965 |
| | $ | 22.92 |
|
The total fair value of restricted stock and restricted stock units vested during the ThirdSecond Quarter was approximately $0.2$3.1 million. Vesting of performance restricted stock units is based on achievement of operating margin growth and achievement of sales growth and operating margin targets in relation to the performance of a certain identified peer group, particular sales growth in relation to a defined sales plan and achievement of succession plans for key talent.group.
8. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following tables illustratediscloses changes in the balances of each component of accumulated other comprehensive income (loss), net of taxes (in thousands):
| | | For the 13 Weeks Ended September 30, 2017 | For the 13 Weeks Ended July 4, 2020 |
| Currency Translation Adjustments | | Cash Flow Hedges | | | | | Currency Translation Adjustments | | Cash Flow Hedges | | | | |
| | Forward Contracts | | Interest Rate Swaps | | Pension Plan | | Total | | Forward Contracts | | Pension Plan | | Total |
Beginning balance | $ | (75,011 | ) | | $ | (1,284 | ) | | $ | 41 |
| | $ | (3,907 | ) | | $ | (80,161 | ) | $ | (91,667 | ) | | $ | 9,225 |
| | $ | (3,124 | ) | | $ | (85,566 | ) |
Other comprehensive income (loss) before reclassifications | 5,222 |
| | (16,776 | ) | | 5 |
| | — |
| | (11,549 | ) | 6,497 |
| | (847 | ) | | — |
| | 5,650 |
|
Tax (expense) benefit | — |
| | 2,853 |
| | (2 | ) | | — |
| | 2,851 |
| — |
| | 217 |
| | — |
| | 217 |
|
Amounts reclassed from accumulated other comprehensive income (loss) | — |
| | (4,940 | ) | | (25 | ) | | — |
| | (4,965 | ) | — |
| | 5,920 |
| | — |
| | 5,920 |
|
Tax (expense) benefit | — |
| | 807 |
| | 9 |
| | — |
| | 816 |
| — |
| | (852 | ) | | — |
| | (852 | ) |
Total other comprehensive income (loss) | 5,222 |
| | (9,790 | ) | | 19 |
| | — |
| | (4,549 | ) | 6,497 |
| | (5,698 | ) | | — |
| | 799 |
|
Ending balance | $ | (69,789 | ) | | $ | (11,074 | ) | | $ | 60 |
| | $ | (3,907 | ) | | $ | (84,710 | ) | $ | (85,170 | ) | | $ | 3,527 |
| | $ | (3,124 | ) | | $ | (84,767 | ) |
| | | For the 13 Weeks Ended October 1, 2016 | For the 13 Weeks Ended June 29, 2019 |
| Currency Translation Adjustments | | Cash Flow Hedges | | | | | Currency Translation Adjustments | | Cash Flow Hedges | | | | |
| | Forward Contracts | | Interest Rate Swaps | | Pension Plan | | Total | | Forward Contracts | | Pension Plan | | Total |
Beginning balance | $ | (73,986 | ) | | $ | 2,943 |
| | $ | (1,623 | ) | | $ | (4,506 | ) | | $ | (77,172 | ) | $ | (77,358 | ) | | $ | 7,573 |
| | $ | 1,595 |
| | $ | (68,190 | ) |
Other comprehensive income (loss) before reclassifications | 1,942 |
| | 3,313 |
| | 466 |
| | — |
| | 5,721 |
| (304 | ) | | 492 |
| | — |
| | 188 |
|
Tax (expense) benefit | (280 | ) | | (605 | ) | | (170 | ) | | — |
| | (1,055 | ) | — |
| | 226 |
| | — |
| | 226 |
|
Amounts reclassed from accumulated other comprehensive income (loss) | — |
| | 2,621 |
| | (413 | ) | | — |
| | 2,208 |
| — |
| | 2,769 |
| | — |
| | 2,769 |
|
Tax (expense) benefit | — |
| | (714 | ) | | 150 |
| | — |
| | (564 | ) | — |
| | (206 | ) | | — |
| | (206 | ) |
Total other comprehensive income (loss) | 1,662 |
| | 801 |
| | 559 |
| | — |
| | 3,022 |
| (304 | ) | | (1,845 | ) | | — |
| | (2,149 | ) |
Ending balance | $ | (72,324 | ) | | $ | 3,744 |
| | $ | (1,064 | ) | | $ | (4,506 | ) | | $ | (74,150 | ) | $ | (77,662 | ) | | $ | 5,728 |
| | $ | 1,595 |
| | $ | (70,339 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
| For the 39 Weeks Ended September 30, 2017 | For the 27 Weeks Ended July 4, 2020 |
| Currency Translation Adjustments | | Cash Flow Hedges | | | | | Currency Translation Adjustments | | Cash Flow Hedges | | | |
| | Forward Contracts | | Interest Rate Swaps | | Pension Plan | | Total | | Forward Contracts | | Pension Plan | | Total |
Beginning balance | $ | (101,867 | ) | | $ | 10,693 |
| | $ | (343 | ) | | $ | (3,907 | ) | | $ | (95,424 | ) | $ | (80,474 | ) | | $ | 2,983 |
| | $ | (3,124 | ) | | $ | (80,615 | ) |
Other comprehensive income (loss) before reclassifications | 32,078 |
| | (33,243 | ) | | 230 |
| | — |
| | (935 | ) | (4,696 | ) | | 7,178 |
| | — |
| | 2,482 |
|
Tax (expense) benefit | — |
| | 11,512 |
| | (84 | ) | | — |
| | 11,428 |
| — |
| | (1,235 | ) | | — |
| | (1,235 | ) |
Amounts reclassed from accumulated other comprehensive income (loss) | — |
| | 1,981 |
| | (404 | ) | | — |
| | 1,577 |
| |
Amounts reclassed from accumulated other comprehensive income | | — |
| | 6,281 |
| | — |
| | 6,281 |
|
Tax (expense) benefit | — |
| | (1,945 | ) | | 147 |
| | — |
| | (1,798 | ) | — |
| | (882 | ) | | — |
| | (882 | ) |
Total other comprehensive income (loss) | 32,078 |
| | (21,767 | ) | | 403 |
| — |
| — |
| | 10,714 |
| (4,696 | ) | | 544 |
| | — |
| | (4,152 | ) |
Ending balance | $ | (69,789 | ) | | $ | (11,074 | ) | | $ | 60 |
| | $ | (3,907 | ) | | $ | (84,710 | ) | $ | (85,170 | ) | | $ | 3,527 |
| | $ | (3,124 | ) | | $ | (84,767 | ) |
|
| | | | | | | | | | | | | | | |
| | | | | | | |
| For the 26 Weeks Ended June 29, 2019 |
| Currency Translation Adjustments | | Cash Flow Hedges | | | | |
| | Forward Contracts | | Pension Plan | | Total |
Beginning balance | $ | (74,868 | ) | | $ | 8,582 |
| | $ | 1,595 |
| | $ | (64,691 | ) |
Other comprehensive income (loss) before reclassifications | (2,794 | ) | | 2,202 |
| | — |
| | (592 | ) |
Tax (expense) benefit | — |
| | (38 | ) | | — |
| | (38 | ) |
Amounts reclassed from accumulated other comprehensive income (loss) | — |
| | 5,424 |
| | — |
| | 5,424 |
|
Tax (expense) benefit | — |
| | (406 | ) | | — |
| | (406 | ) |
Total other comprehensive income (loss) | (2,794 | ) | | (2,854 | ) | | — |
| | (5,648 | ) |
Ending balance | $ | (77,662 | ) | | $ | 5,728 |
| | $ | 1,595 |
| | $ | (70,339 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| For the 39 Weeks Ended October 1, 2016 |
| Currency Translation Adjustments | | Cash Flow Hedges | | | | |
| | Forward Contracts | | Interest Rate Swaps | | Pension Plan | | Total |
Beginning balance | $ | (81,707 | ) | | $ | 8,114 |
| | $ | (693 | ) | | $ | (6,220 | ) | | $ | (80,506 | ) |
Other comprehensive income (loss) before reclassifications | 9,767 |
| | 2,055 |
| | (1,915 | ) | | 2,010 |
| | 11,917 |
|
Tax (expense) benefit | (280 | ) | | 433 |
| | 698 |
| | (296 | ) | | 555 |
|
Amounts reclassed from accumulated other comprehensive income (loss) | 104 |
| | 9,888 |
| | (1,331 | ) | | — |
| | 8,661 |
|
Tax (expense) benefit | — |
| | (3,030 | ) | | 485 |
| | — |
| | (2,545 | ) |
Total other comprehensive income (loss) | 9,383 |
| | (4,370 | ) | | (371 | ) | | 1,714 |
| | 6,356 |
|
Ending balance | $ | (72,324 | ) | | $ | 3,744 |
| | $ | (1,064 | ) | | $ | (4,506 | ) | | $ | (74,150 | ) |
See “Note 10—Derivatives and Risk Management” for additional disclosures about the Company’s use of derivatives.
9. SEGMENT INFORMATION
The Company reports segment information based on the “management approach”. The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of the Company’s reportable segments.
The Company manages its business primarily on a geographic basis. The Company’s reportable operating segments are comprised of (i) Americas, (ii) Europe and (iii) Asia. Each reportable operating segment includes sales to wholesale and distributor customers, and sales through Company-owned retail stores and e-commerce activities based on the location of the selling entity. The Americas segment primarily includes sales to customers based in Canada, Latin America and the United States. The Europe segment primarily includes sales to customers based in European countries, the Middle East and Africa. The Asia segment primarily includes sales to customers based in Australia, China (including Hong Kong, Macau and Taiwan), India, Indonesia, Japan, Malaysia, New Zealand, Singapore, South Korea Taiwan and Thailand. Each reportable operating segment provides similar products and services.
The Company evaluates the performance of its reportable segments based on net sales and operating income (loss). Net sales for geographic segments are based on the location of the selling entity. Operating income (loss) for each segment includes net sales to third parties, related cost of sales and operating expenses directly attributable to the segment. Global strategic initiatives such as brand buildingCorporate includes peripheral revenue generating activities from factories and omni-channel activitiesintellectual property and general corporate expenses, including certain administrative, legal, accounting, technology support costs, equity compensation costs, payroll costs attributable to executive management, brand management, product development, art, creative/product design, marketing, strategy, compliance and back office supply chain expenses that are not allocated to the various segments because they are managed at the corporate level.level internally. The Company does not include intercompany transfers between segments for management reporting purposes.
Summary information by operating segment was as follows (in thousands): |
| | | | | | | | | | | | | | | |
| For the 13 Weeks Ended July 4, 2020 | | For the 13 Weeks Ended June 29, 2019 |
| Net Sales | | Operating Income (Loss) | | Net Sales | | Operating Income (Loss) |
Americas | $ | 105,749 |
| | $ | 4,781 |
| | $ | 223,107 |
| | $ | 29,540 |
|
Europe | 79,545 |
| | (10,498 | ) | | 147,082 |
| | 12,463 |
|
Asia | 69,248 |
| | 6,624 |
| | 126,275 |
| | 26,959 |
|
Corporate | 4,467 |
| | (37,712 | ) | | 4,929 |
| | (67,281 | ) |
Consolidated | $ | 259,009 |
| | $ | (36,805 | ) | | $ | 501,393 |
| | $ | 1,681 |
|
| | | For the 13 Weeks Ended September 30, 2017 | | For the 13 Weeks Ended October 1, 2016 | For the 27 Weeks Ended July 4, 2020 | | For the 26 Weeks Ended June 29, 2019 |
| Net Sales | | Operating Income (Loss) | | Net Sales | | Operating Income (Loss) | Net Sales | | Operating Income (Loss)(1) | | Net Sales | | Operating Income (Loss) |
Americas | $ | 308,102 |
| | $ | 18,843 |
| | $ | 361,226 |
| | $ | 56,455 |
| $ | 258,666 |
| | $ | (32,353 | ) | | $ | 413,476 |
| | $ | 40,458 |
|
Europe | 247,184 |
| | 39,332 |
| | 243,139 |
| | 49,013 |
| 207,795 |
| | (13,154 | ) | | 300,360 |
| | 26,743 |
|
Asia | 133,436 |
| | 21,999 |
| | 133,625 |
| | 23,654 |
| 175,435 |
| | 17,864 |
| | 243,174 |
| | 48,000 |
|
Corporate | — |
| | (80,673 | ) | | — |
| | (97,947 | ) | 7,831 |
| | (143,503 | ) | | 9,651 |
| | (133,464 | ) |
Consolidated | $ | 688,722 |
| | $ | (499 | ) | | $ | 737,990 |
| | $ | 31,175 |
| $ | 649,727 |
| | $ | (171,146 | ) | | $ | 966,661 |
| | $ | (18,263 | ) |
___________________________________________________________________________________________________________________
(1)Subsequent to the issuance of the Company's condensed consolidated financial statements for the 14 weeks ended April 4, 2020, the Company's management determined that Operating Loss for the Americas and Corporate segments for the 14 weeks ended April 4, 2020 was incorrectly presented as certain charges totaling $24.5 million were incorrectly attributed to the Americas segment rather than the Corporate segment. As a result, Operating Loss for the Americas and Corporate segments for the 27 week period ended July 4, 2020 has been corrected. The Company’s management evaluated the materiality of the disclosure misstatement from a quantitative and qualitative perspective and concluded the misstatement was not material to the 14 weeks ended April 4, 2020.
|
| | | | | | | | | | | | | | | |
| For the 39 Weeks Ended September 30, 2017 | | For the 39 Weeks Ended October 1, 2016 |
| Net Sales | | Operating Income (Loss) | | Net Sales | | Operating Income (Loss) |
Americas | $ | 874,449 |
| | $ | (121,976 | ) | | $ | 1,042,223 |
| | $ | 168,352 |
|
Europe | 637,566 |
| | (33,859 | ) | | 669,076 |
| | 109,193 |
|
Asia | 355,343 |
| | (2,702 | ) | | 371,907 |
| | 60,519 |
|
Corporate | — |
| | (316,981 | ) | | — |
| | (277,034 | ) |
Consolidated | $ | 1,867,358 |
| | $ | (475,518 | ) | | $ | 2,083,206 |
| | $ | 61,030 |
|
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 September 30, 2017 | | For the 13 Weeks Ended October 1, 2016 | For the 13 Weeks Ended July 4, 2020 | | For the 13 Weeks Ended June 29, 2019 |
| Net Sales | | Percentage of Total | | Net Sales | | Percentage of Total | Net Sales | | Percentage of Total | | Net Sales | | Percentage of Total |
Watches | $ | 551,913 |
| | 80.1 | % | | $ | 567,148 |
| | 76.9 | % | $ | 209,499 |
| | 80.9 | % | | $ | 413,285 |
| | 82.4 | % |
Leathers | 75,660 |
| | 11.0 |
| | 93,338 |
| | 12.6 |
| 26,554 |
| | 10.3 |
| | 52,630 |
| | 10.5 |
|
Jewelry | 47,729 |
| | 6.9 |
| | 60,237 |
| | 8.2 |
| 15,206 |
| | 5.9 |
| | 20,786 |
| | 4.2 |
|
Other | 13,420 |
| | 2.0 |
| | 17,267 |
| | 2.3 |
| 7,750 |
| | 2.9 |
| | 14,692 |
| | 2.9 |
|
Total | $ | 688,722 |
| | 100.0 | % | | $ | 737,990 |
| | 100.0 | % | $ | 259,009 |
| | 100.0 | % | | $ | 501,393 |
| | 100.0 | % |
|
| | | | | | | | | | | | | |
| For the 27 Weeks Ended July 4, 2020 | | For the 26 Weeks Ended June 29, 2019 |
| Net Sales | | Percentage of Total | | Net Sales | | Percentage of Total |
Watches | $ | 519,425 |
| | 79.9 | % | | $ | 779,463 |
| | 80.6 | % |
Leathers | 73,861 |
| | 11.4 |
| | 106,534 |
| | 11.0 |
|
Jewelry | 38,422 |
| | 5.9 |
| | 51,946 |
| | 5.4 |
|
Other | 18,019 |
| | 2.8 |
| | 28,718 |
| | 3.0 |
|
Total | $ | 649,727 |
| | 100.0 | % | | $ | 966,661 |
| | 100.0 | % |
|
| | | | | | | | | | | | | |
| For the 39 Weeks Ended September 30, 2017 | | For the 39 Weeks Ended October 1, 2016 |
| Net Sales | | Percentage of Total | | Net Sales | | Percentage of Total |
Watches | $ | 1,471,144 |
| | 78.8 | % | | $ | 1,581,233 |
| | 75.9 | % |
Leathers | 217,946 |
| | 11.7 |
| | 278,995 |
| | 13.4 |
|
Jewelry | 139,900 |
| | 7.5 |
| | 171,709 |
| | 8.2 |
|
Other | 38,368 |
| | 2.0 |
| | 51,269 |
| | 2.5 |
|
Total | $ | 1,867,358 |
| | 100.0 | % | | $ | 2,083,206 |
| | 100.0 | % |
10. DERIVATIVES AND RISK MANAGEMENT
Cash Flow Hedges. The primary risks managed by using derivative instruments are the fluctuations in global currencies that will ultimately be used by non-U.S. dollar functional currency subsidiaries to settle future payments of intercompany inventory transactions denominated in U.S. dollars. Specifically, the Company projects future intercompany purchases by its non-U.S. dollar functional currency subsidiaries generally over a period of up to 24 months. The Company enters into forward contracts, generally for up to 85% of the forecasted purchases, to manage fluctuations in global currencies that will ultimately be used to settle such U.S. dollar denominated inventory purchases. Additionally, the Company enters into forward contracts to manage fluctuations in Japanese yen exchange rates that will be used to settle future third-party inventory component purchases by a U.S. dollar functional currency subsidiary. Forward contracts represent agreements to exchange the currency of one country for the currency of another country at an agreed-upon settlement date and exchange rate. These forward contracts are designated as single cash flow hedges. Fluctuations in exchange rates will either increase or decrease the Company’s U.S. dollar equivalent cash flows from these inventory transactions, which will affect the Company’s U.S. dollar earnings. Gains or losses on the forward contracts are expected to offset these fluctuations to the extent the cash flows are hedged by the forward contracts.
These forward contracts meet the criteria for hedge accounting, which requires that they represent foreign currency-denominated forecasted transactions in which (i) the operating unit that has the foreign currency exposure is a party to the hedging instrument and (ii) the hedged transaction is denominated in a currency other than the hedging unit’s functional currency.
At the inception of each forward contract designated as a cash flow hedge, the hedging relationship is expected to be highly effective in achieving offsetting cash flows attributable to the hedged risk. The Company assesses hedge effectiveness under the critical terms matched method at inception and at least quarterly throughout the life of the hedging relationship. If the critical terms (i.e., amounts, currencies and settlement dates) of the forward contract match the terms of the forecasted transaction, the Company concludes that the hedge is effective. Hedge accounting is discontinued if it is determined that the derivative is not highly effective.
For a derivative instrument that is designated and qualifies as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of accumulated other comprehensive income (loss), net of taxes and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. Due to the high degree of effectiveness between the hedging instruments and the underlying exposures being hedged, the Company’s hedges resulted in no ineffectiveness in the condensed consolidated statements of income (loss) and comprehensive income (loss), and there were no components excluded from the assessment of hedge effectiveness for the Third Quarter, Prior Year Quarter, Year To Date Period or Prior Year YTD Period.
All derivative instruments are recognized as either assets or liabilities at fair value in the condensed consolidated balance sheets. Derivatives designated as cash flow hedges are recorded at fair value at each balance sheet date and the change in fair value is recorded to accumulated other comprehensive income (loss) within the equity section of the Company’s condensed consolidated balance sheet until such derivative’s gains or losses become realized or the cash flow hedge relationship is terminated. If the cash flow hedge relationship is terminated, the derivative’s gains or losses that are recorded in accumulated other comprehensive income (loss) will be recognized in earnings when the hedged cash flows occur. However, for cash flow hedges that are terminated because the forecasted transaction is not expected to occur in the original specified time period, the derivative’s gains or losses are immediately recognized in earnings. There were no gains or losses reclassified into earnings as a result of the discontinuance of cash flow hedges in the Third Quarter, Prior Year Quarter, Year To Date Period or Prior Year YTD Period. Hedge accounting is discontinued if it is determined that the derivative is not highly effective. The Company records all forward contract hedge assets and liabilities on a gross basis as they do not meet the balance sheet netting criteria because the Company does not have master netting agreements established with the derivative counterparties that would allow for net settlement. Derivatives designated as cash flow hedges are recorded at fair value at each balance sheet date and the change in fair value is recorded to accumulated other comprehensive income (loss) within the equity section of the Company’s condensed consolidated balance sheets until such derivative’s gains or losses become realized or the cash flow hedge relationship is terminated.
Hedge accounting must be discontinued for a cash flow hedge of a forecasted transaction upon determining that it is no longer probable that the forecasted transaction will occur within the period originally specified at hedge inception. The cumulative hedge accounting gain or loss associated with the discontinued hedge would remain in accumulated other comprehensive income (loss), and would be reclassified into earnings when the forecasted transaction affects earnings, unless it is probable that the forecasted transaction will not occur by the end of the originally specified time period or within an additional two-month period of time thereafter. In that case, the entire amount recorded in accumulated other comprehensive income (loss) would immediately be reclassified into earnings. However, in rare cases, the existence of extenuating circumstances that are related to the nature of the forecasted transaction and are outside the control or influence of the Company may cause the forecasted transaction to be probable of occurring on a date that is beyond the additional two-month period of time, in which case the net derivative instrument gain or loss related to the discontinued cash flow hedge will continue to be reported in accumulated other comprehensive income (loss) until it is reclassified into earnings. The Company has identified some delays in the timing of forecasted inventory transactions and has applied the extenuating case exception since the delays are attributable to the COVID-19 pandemic. The Company determined that the delayed forecasted transactions are still probable of occurring after the additional two-month period, and therefore will retain the amounts associated with the discontinued cash flow hedge in accumulated other comprehensive income (loss) until the forecasted transaction affects earnings.
If the cash flow hedge relationship is terminated, the derivative’s gains or losses that are recorded in accumulated other comprehensive income (loss) are immediately recognized in earnings. There were no gains or losses reclassified into earnings as a result of the discontinuance of cash flow hedges in the Second Quarter, Prior Year Quarter, Year To Date Period or Prior Year YTD Period.
As of September 30, 2017,July 4, 2020, the Company had the following outstanding forward contracts designated as cash flow hedges that were entered into to hedge the future payments of inventory transactions (in millions):
|
| | | | | | | | |
Functional Currency | | Contract Currency |
Type | | Amount | | Type | | Amount |
Euro | | 76.3 |
| | U.S. dollar | | 87.4 |
|
Canadian dollar | | 27.2 |
| | U.S. dollar | | 20.7 |
|
British pound | | 9.3 |
| | U.S. dollar | | 12.1 |
|
Japanese yen | | 935.6 |
| | U.S. dollar | | 8.8 |
|
Mexican peso | | 52.7 |
| | U.S. dollar | | 2.7 |
|
Australian dollar | | 1.7 |
| | U.S. dollar | | 1.2 |
|
U.S. dollar | | 13.4 |
| | Japanese yen | | 1,425.0 |
|
|
| | | | | | | | |
Functional Currency | | Contract Currency |
Type | | Amount | | Type | | Amount |
Euro | | 253.4 |
| | U.S. dollar | | 291.0 |
|
Canadian dollar | | 95.0 |
| | U.S. dollar | | 73.2 |
|
British pound | | 43.5 |
| | U.S. dollar | | 58.1 |
|
Japanese yen | | 4,636.4 |
| | U.S. dollar | | 42.8 |
|
Mexican peso | | 378.6 |
| | U.S. dollar | | 20.3 |
|
Australian dollar | | 21.2 |
| | U.S. dollar | | 16.5 |
|
U.S. dollar | | 41.1 |
| | Japanese yen | | 4,470.0 |
|
The Company is also exposed to interest rate risk related to its outstanding debt. To manage the interest rate risk related to its U.S.-based term loan (as amended and restated, the "Term Loan") which had an outstanding balance of $168.3 million net of debt issuance costs as of September 30, 2017, the Company entered into an interest rate swap agreement on July 26, 2013 with a term of approximately five years. The objective of this hedge is to offset the variability of future payments associated with interest rates on the Term Loan. The interest rate swap agreement hedges the 1-month London Interbank Offer Rate ("LIBOR") based variable rate debt obligations under the Term Loan. Under the terms of the swap, the Company pays a fixed interest rate of 1.288% per annum to the swap counterparty plus the LIBOR rate applicable margin of 3.50%. See “Note 14—Debt Activity” for additional disclosures about the Company’s Term Loan. The notional amount amortizes through May 17, 2018 and coincides with repayments on the underlying loan. The Company receives interest from the swap counterparty at a variable rate based on 1-month LIBOR. This hedge is designated as a cash flow hedge.
Non-designated Hedges. The Company also periodically enters into forward contracts to manage exchange rate risks associated with certain intercompany transactions and for which the Company does not elect hedge accounting treatment. As of September 30, 2017,July 4, 2020, the Company had non-designated forward contracts of approximately $2.2$0.1 million on 28.31.5 million rand associated with a South African rand-denominated foreign subsidiary. Changes in the fair value of derivatives not designated as hedging instruments are recognized in earnings when they occur.
The effective portion of gains and losses on cash flow hedges that were recognized in other comprehensive income (loss), net of taxes during the ThirdSecond Quarter and Prior Year Quarter Year To Date Period and Prior Year YTD Period are set forth below (in thousands): |
| | | | | | | |
| For the 13 Weeks Ended July 4, 2020 | | For the 13 Weeks Ended June 29, 2019 |
Cash flow hedges: | |
| | |
|
Forward contracts | $ | (630 | ) | | $ | 718 |
|
Total gain (loss) recognized in other comprehensive income (loss), net of taxes | $ | (630 | ) | | $ | 718 |
|
|
| | | | | | | |
| For the 27 Weeks Ended July 4, 2020 | | For the 26 Weeks Ended June 29, 2019 |
Cash flow hedges: | |
| | |
|
Forward contracts | $ | 5,943 |
| | $ | 2,164 |
|
Total gain (loss) recognized in other comprehensive income (loss), net of taxes | $ | 5,943 |
| | $ | 2,164 |
|
|
| | | | | | | |
| For the 13 Weeks Ended September 30, 2017 | | For the 13 Weeks Ended October 1, 2016 |
Cash flow hedges: | |
| | |
|
Forward contracts | $ | (13,923 | ) | | $ | 2,708 |
|
Interest rate swaps | 3 |
| | 296 |
|
Total gain (loss) recognized in other comprehensive income (loss), net of taxes | $ | (13,920 | ) | | $ | 3,004 |
|
|
| | | | | | | |
| For the 39 Weeks Ended September 30, 2017 | | For the 39 Weeks Ended October 1, 2016 |
Cash flow hedges: | |
| | |
|
Forward contracts | $ | (21,731 | ) | | $ | 2,488 |
|
Interest rate swaps | 146 |
| | (1,217 | ) |
Total gain (loss) recognized in other comprehensive income (loss), net of taxes | $ | (21,585 | ) | | $ | 1,271 |
|
The following table illustratestables disclose the effective portion of gains and losses on derivative instruments recorded in accumulated other comprehensive income (loss), net of taxes during the term of the hedging relationship and reclassified into earnings, and gains and losses on derivatives not designated as hedging instruments recorded directly to earnings during the ThirdSecond Quarter and Prior Year Quarter Year To Date Period and Prior Year YTD Period (in thousands):
| | Derivative Instruments | | Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) Location | | Effect of Derivative Instruments | | For the 13 Weeks Ended September 30, 2017 | | For the 13 Weeks Ended October 1, 2016 | | Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) Location | | Effect of Derivative Instruments | | For the 13 Weeks Ended July 4, 2020 | | For the 13 Weeks Ended June 29, 2019 |
Forward contracts designated as cash flow hedging instruments | | Other income (expense)-net | | Total gain (loss) reclassified from accumulated other comprehensive income (loss) | | $ | (4,133 | ) | | $ | 1,907 |
| | Cost of sales | | Total gain (loss) reclassified from accumulated other comprehensive income (loss) | | $ | 2,665 |
| | $ | 2,769 |
|
Forward contracts designated as cash flow hedging instruments | | | Other income (expense)-net | | Total gain (loss) reclassified from accumulated other comprehensive income (loss) | | $ | 2,403 |
| | $ | (206 | ) |
Forward contracts not designated as hedging instruments | | Other income (expense)-net | | Total gain (loss) recognized in income | | $ | (12 | ) | | $ | 75 |
| | Other income (expense)-net | | Total gain (loss) recognized in income | | $ | (113 | ) | | $ | (20 | ) |
Interest rate swap designated as a cash flow hedging instrument | | Interest expense | | Total gain (loss) reclassified from accumulated other comprehensive income (loss) | | $ | (16 | ) | | $ | (263 | ) | |
|
| | | | | | | | | | | | |
Derivative Instruments | | Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) Location | | Effect of Derivative Instruments | | For the 27 Weeks Ended July 4, 2020 | | For the 26 Weeks Ended June 29, 2019 |
Forward contracts designated as cash flow hedging instruments | | Cost of sales | | Total gain (loss) reclassified from accumulated other comprehensive income (loss) | | $ | 5,311 |
| | $ | 4,790 |
|
Forward contracts designated as cash flow hedging instruments | | Other income (expense)-net | | Total gain (loss) reclassified from accumulated other comprehensive income (loss) | | $ | 88 |
| | $ | 228 |
|
Forward contracts not designated as hedging instruments | | Other income (expense)-net | | Total gain (loss) recognized in income | | $ | 92 |
| | $ | (33 | ) |
|
| | | | | | | | | | | | |
Derivative Instruments | | Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) Location | | Effect of Derivative Instruments | | For the 39 Weeks Ended September 30, 2017 | | For the 39 Weeks Ended October 1, 2016 |
Forward contracts designated as cash flow hedging instruments | | Other income (expense)-net | | Total gain (loss) reclassified from accumulated other comprehensive income (loss) | | $ | 36 |
| | $ | 6,858 |
|
Forward contracts not designated as hedging instruments | | Other income (expense)-net | | Total gain (loss) recognized in income | | $ | 170 |
| | $ | (222 | ) |
Interest rate swap designated as a cash flow hedging instrument | | Interest expense | | Total gain (loss) reclassified from accumulated other comprehensive income (loss) | | $ | (257 | ) | | $ | (846 | ) |
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 | | Asset Derivatives | | Liability Derivatives |
| | September 30, 2017 | | December 31, 2016 | | September 30, 2017 | | December 31, 2016 | | July 4, 2020 | | December 28, 2019 | | July 4, 2020 | | December 28, 2019 |
Derivative Instruments | | Condensed Consolidated Balance Sheets Location | | Fair Value | | Condensed Consolidated Balance Sheets Location | | Fair Value | | Condensed Consolidated Balance Sheets Location | | Fair Value | | Condensed Consolidated Balance Sheets Location | | Fair Value | | Condensed Consolidated Balance Sheets Location | | Fair Value | | Condensed Consolidated Balance Sheets Location | | Fair Value | | Condensed Consolidated Balance Sheets Location | | Fair Value | | Condensed Consolidated Balance Sheets Location | | Fair Value |
Forward contracts designated as cash flow hedging instruments | | Prepaid expenses and other current assets | | $ | 2,710 |
| | Prepaid expenses and other current assets | | $ | 23,288 |
| | Accrued expenses- other | | $ | 15,215 |
| | Accrued expenses- other | | $ | 4,696 |
| | Prepaid expenses and other current assets | | $ | 3,016 |
| | Prepaid expenses and other current assets | | $ | 3,327 |
| | Accrued expenses-other | | $ | 160 |
| | Accrued expenses-other | | $ | 1,657 |
|
Forward contracts not designated as cash flow hedging instruments | | Prepaid expenses and other current assets | | 72 |
| | Prepaid expenses and other current assets | | — |
| | Accrued expenses- other | | 1 |
| | Accrued expenses- other | | 2 |
| | Prepaid expenses and other current assets | | — |
| | Prepaid expenses and other current assets | | — |
| | Accrued expenses-other | | — |
| | Accrued expenses-other | | 63 |
|
Interest rate swap designated as a cash flow hedging instrument | | Prepaid expenses and other current assets | | 109 |
| | Prepaid expenses and other current assets | | — |
| | Accrued expenses- other | | 15 |
| | Accrued expenses- other | | 613 |
| |
Forward contracts designated as cash flow hedging instruments | | Intangible and other assets-net | | 448 |
| | Intangible and other assets-net | | 5,648 |
| | Other long-term liabilities | | 4,557 |
| | Other long-term liabilities | | 268 |
| | Intangible and other assets-net | | — |
| | Intangible and other assets-net | | 21 |
| | Other long-term liabilities | | — |
| | Other long-term liabilities | | 104 |
|
Interest rate swap designated as a cash flow hedging instrument | | Intangible and other assets-net | | — |
| | Intangible and other assets-net | | 73 |
| | Other long-term liabilities | | — |
| | Other long-term liabilities | | — |
| |
Total | | | | $ | 3,339 |
| | | | $ | 29,009 |
| | | | $ | 19,788 |
| | | | $ | 5,579 |
| | | | $ | 3,016 |
| | | | $ | 3,348 |
| | | | $ | 160 |
| | | | $ | 1,824 |
|
The following tables summarize the effects of the Company's derivative instruments on earnings (in thousands):
|
| | | | | | | | | | | | | | | | |
| | Effect of Derivative Instruments |
| | For the 13 Weeks Ended July 4, 2020 | | For the 13 Weeks Ended June 29, 2019 |
| | Cost of Sales | | Other Income (Expense)-net | | Cost of Sales | | Other Income (Expense)-net |
Total amounts of income and expense line items presented in the condensed consolidated statements of income (loss) and comprehensive income (loss) in which the effects of cash flow hedges are recorded | | $ | 118,413 |
| | $ | 879 |
| | $ | 236,285 |
| | $ | 507 |
|
Gain (loss) on cash flow hedging relationships: | | | | | | | | |
Forward contracts designated as cash flow hedging instruments: | | | | | | | | |
Total gain (loss) reclassified from other comprehensive income (loss) | | $ | 2,665 |
| | $ | 2,403 |
| | $ | 2,769 |
| | $ | (206 | ) |
|
| | | | | | | | | | | | | | | | |
| | Effect of Derivative Instruments |
| | For the 27 Weeks Ended July 4, 2020 | | For the 26 Weeks Ended June 29, 2019 |
| | Cost of Sales | | Other Income (Expense)-net | | Cost of Sales | | Other Income (Expense)-net |
Total amounts of income and expense line items presented in the condensed consolidated statements of income (loss) and comprehensive income (loss) in which the effects of cash flow hedges are recorded | | $ | 368,771 |
| | $ | (6,411 | ) | | $ | 453,626 |
| | $ | 26,417 |
|
Gain (loss) on cash flow hedging relationships: | | | | | | | | |
Forward contracts designated as cash flow hedging instruments: | | | | | | | | |
Total gain (loss) reclassified from other comprehensive income (loss) | | $ | 5,311 |
| | $ | 88 |
| | $ | 4,790 |
| | $ | 228 |
|
At the end of the ThirdSecond Quarter, the Company had forward contracts designated as cash flow hedges with maturities extending through June 2019.2021. As of September 30, 2017,July 4, 2020, an estimated net lossgain of $9.2$2.5 million is expected to be reclassified into earnings within the next twelve months at prevailing foreign currency exchange rates. See “Note 1—Financial Statement Policies” for additional disclosures on foreign currency hedging instruments.
11. FAIR VALUE MEASUREMENTS
The Company defines fair value as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date.
Accounting Standards Codification ("ASC")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 September 30, 2017July 4, 2020 (in thousands):
|
| | | | | | | | | | | | | | | |
| Fair Value at July 4, 2020 |
| Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | |
| | |
| | |
| | |
|
Forward contracts | $ | — |
| | $ | 3,016 |
| | $ | — |
| | $ | 3,016 |
|
Deferred compensation plan assets: | |
| | |
| | |
| | |
|
Investment in publicly traded mutual funds | 5,220 |
| | — |
| | — |
| | 5,220 |
|
Total | $ | 5,220 |
| | $ | 3,016 |
| | $ | — |
| | $ | 8,236 |
|
Liabilities: | |
| | |
| | |
| | |
|
Contingent consideration | $ | — |
| | $ | — |
| | $ | 1,441 |
| | $ | 1,441 |
|
Forward contracts | — |
| | 160 |
| | — |
| | 160 |
|
Total | $ | — |
| | $ | 160 |
| | $ | 1,441 |
| | $ | 1,601 |
|
|
| | | | | | | | | | | | | | | |
| Fair Value at September 30, 2017 |
| Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | |
| | |
| | |
| | |
|
Forward contracts | $ | — |
| | $ | 3,230 |
| | $ | — |
| | $ | 3,230 |
|
Deferred compensation plan assets: | |
| | |
| | |
| | |
|
Investment in publicly traded mutual funds | 2,605 |
| | — |
| | — |
| | 2,605 |
|
Interest rate swap | — |
| | 109 |
| | — |
| | 109 |
|
Total | $ | 2,605 |
| | $ | 3,339 |
| | $ | — |
| | $ | 5,944 |
|
Liabilities: | |
| | |
| | |
| | |
|
Forward contracts | $ | — |
| | $ | 19,773 |
| | — |
| | $ | 19,773 |
|
Interest rate swap | — |
| | 15 |
| | — |
| | 15 |
|
Total | $ | — |
| | $ | 19,788 |
| | $ | — |
| | $ | 19,788 |
|
The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of December 31, 201628, 2019 (in thousands):
|
| | | | | | | | | | | | | | | |
| Fair Value at December 28, 2019 |
| Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | |
| | |
| | |
| | |
|
Forward contracts | $ | — |
| | $ | 3,348 |
| | $ | — |
| | $ | 3,348 |
|
Deferred compensation plan assets: | |
| | |
| | |
| | |
|
Investment in publicly traded mutual funds | 5,243 |
| | — |
| | — |
| | 5,243 |
|
Total | $ | 5,243 |
| | $ | 3,348 |
| | $ | — |
| | $ | 8,591 |
|
Liabilities: | |
| | |
| | |
| | |
|
Contingent consideration | $ | — |
| | $ | — |
| | $ | 1,141 |
| | $ | 1,141 |
|
Forward contracts | — |
| | 1,824 |
| | — |
| | 1,824 |
|
Total | $ | — |
| | $ | 1,824 |
| | $ | 1,141 |
| | $ | 2,965 |
|
|
| | | | | | | | | | | | | | | |
| Fair Value at December 31, 2016 |
| Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | |
| | |
| | |
| | |
|
Forward contracts | $ | — |
| | $ | 28,936 |
| | $ | — |
| | $ | 28,936 |
|
Deferred compensation plan assets: | |
| | |
| | |
| | |
|
Investment in publicly traded mutual funds | 2,385 |
| | — |
| | — |
| | 2,385 |
|
Interest rate swap | — |
| | 73 |
| | — |
| | 73 |
|
Total | $ | 2,385 |
| | $ | 29,009 |
| | $ | — |
| | $ | 31,394 |
|
Liabilities: | |
| | |
| | |
| | |
|
Forward contracts | — |
| | 4,966 |
| | — |
| | 4,966 |
|
Interest rate swap | — |
| | 613 |
| | — |
| | 613 |
|
Total | $ | — |
| | $ | 5,579 |
| | $ | — |
| | $ | 5,579 |
|
The fair values of the Company’s deferred compensation plan assets are based on quoted prices. The deferred compensation plan assets are recorded in intangible and other assets-net in the Company’s condensed consolidated balance sheets. The fair values of the Company’s forward contracts are based on published quotations of spot currency rates and forward points, which are converted into implied forward currency rates. The fair values of the interest rate swap assets and liabilities are determined using valuation models based on market observable inputs, including forward curves, mid-market price and volatility levels. See “Note 10—Derivatives and Risk Management” for additional disclosures about the interest rate swaps and forward contracts.
As of September 30, 2017,July 4, 2020, debt, excluding unamortized debt issuance costs and capital leases, was recorded at cost and had a carrying value of $486.1$288.5 million and had a fair value of approximately $480.6$270.5 million. The fair value of debt was obtained from a third-party based on observable market inputs.
The fair value of goodwill and trade names are measured on a non-recurring basis using Level 3 inputs, including forecasted cash flows, discountsdiscount rates and implied royalty rates.
During the secondfirst quarter of fiscal 2017,year 2020, the Company fully impaired its goodwill balance and recorded pre-tax impairment charges of $202.3 million, $114.3 million and $42.9 million in the Americas, Europe and Asia segments, respectively.
During the second quarter of fiscal 2017, the SKAGENMICHELE trade name with a carrying amount of $55.6$10.9 million was written down to its implied fair value of $27.3$8.4 million, resulting in a pre-tax impairment charge of $28.3 million;$2.5 million in the MISFITYear To Date Period. The trade name with a carrying amount of $11.8 million was deemed not recoverable, resulting in a pre-tax impairment charge of $11.8 million and the MICHELE trade name with a carrying amount of $18.5 million was written down to its implied fair value of
$10.9 million, resulting in a pre-tax impairment charge of $7.6 million. Trade name impairment charges were recorded in the Corporate cost area. See “Note 2—Goodwill and Intangibles Impairment Charges” for additional disclosures about goodwill andNaN trade name impairment.impairment was recorded during the Second Quarter.
In accordanceDuring the Year To Date Period, operating lease right-of-use assets with the provisionsa carrying amount of ASC 360, Property, Plant$30.8 million and Equipment, property, plant and equipment-net with a carrying amount of $6.0$4.6 million related to retail store leasehold improvements, and fixturing and related key money in the amountshop-in-shops were written down to a fair value of $0.6$10.9 million were deemed not recoverable,and $1.3 million, respectively, resulting in an impairment chargecharges of $6.6 million during the Year To Date Period.$23.2 million.
The fair values of operating lease right-of-use assets and fixed assets related to Company-owned retail stores were determined using Level 3 inputs.inputs, including forecasted cash flows and discount rates. Of the $6.6$23.2 million impairment expense, $3.6$16.0 million, $1.4$4.0 million, and $0.5$0.4 million werewas recorded in restructuring chargesSG&A in the Americas, Europe and Asia segments, respectively, and $0.8$1.9 million, $0.7 million and $0.3$0.2 million werewas recorded in SG&Arestructuring charges in the EuropeAmericas, Asia and AsiaEurope segments, respectively.
During
The fair value of the second quartercontingent consideration liability related to Fossil South Africa was determined using Level 3 inputs. The contingent consideration is based on Fossil South Africa's projected earnings and dividends. The present value of fiscal 2017, the contingent consideration liability was valued at $1.4 million as of July 4, 2020. The Company recorded a pre-tax impairment charge$0.1 million of $1.6the variable consideration in accrued expenses-other and $1.3 million related toin other long-term liabilities in the write off of a cost method investment.condensed consolidated balance sheets at July 4, 2020.
12. INTANGIBLE AND OTHER ASSETS
The following table summarizes intangible and other assets (in thousands):
| | | | | | September 30, 2017 | | December 31, 2016 | | | | July 4, 2020 | | December 28, 2019 |
| | Useful | | Gross | | Accumulated | | Gross | | Accumulated | | Useful | | Gross | | Accumulated | | Gross | | Accumulated |
| | Lives | | Amount | | Amortization | | Amount | | Amortization | | Lives | | Amount | | Amortization | | Amount | | Amortization |
Intangibles-subject to amortization: | | | | |
| | |
| | |
| | |
| | | | |
| | |
| | |
| | |
|
Trademarks | | 10 yrs. | | $ | 4,310 |
| | $ | 3,621 |
| | $ | 4,310 |
| | $ | 3,443 |
| | 10 yrs. | | $ | 3,672 |
| | $ | 3,095 |
| | $ | 3,612 |
| | $ | 2,993 |
|
Customer lists | | 5-10 yrs. | | 54,875 |
| | 32,417 |
| | 53,625 |
| | 26,986 |
| | 5-10 yrs. | | 51,819 |
| | 46,294 |
| | 52,517 |
| | 44,013 |
|
Patents | | 3-20 yrs. | | 2,325 |
| | 2,124 |
| | 2,325 |
| | 2,099 |
| | 3-20 yrs. | | 2,347 |
| | 1,955 |
| | 2,308 |
| | 1,937 |
|
Noncompete agreement | | 3-6 yrs. | | 2,548 |
| | 2,102 |
| | 2,505 |
| | 1,662 |
| |
Developed technology | | 7 yrs. | | 36,100 |
| | 9,025 |
| | 36,100 |
| | 5,157 |
| | 7 yrs. | | 2,193 |
| | 822 |
| | 2,193 |
| | 548 |
|
Trade name | | 6 yrs. | | — |
| | — |
| | 15,700 |
| | 2,617 |
| | 6 yrs. | | 4,502 |
| | 563 |
| | 4,502 |
| | 188 |
|
Other | | 7-20 yrs. | | 265 |
| | 236 |
| | 253 |
| | 215 |
| | 7-20 yrs. | | 410 |
| | 284 |
| | 383 |
| | 272 |
|
Total intangibles-subject to amortization | | | | 100,423 |
| | 49,525 |
| | 114,818 |
| | 42,179 |
| | | | 64,943 |
| | 53,013 |
| | 65,515 |
| | 49,951 |
|
Intangibles-not subject to amortization: | | | | |
| | |
| | |
| | |
| | | | |
| | |
| | |
| | |
|
Trade names | | | | 38,645 |
| | |
| | 74,485 |
| | |
| | | | 8,865 |
| | |
| | 11,315 |
| | |
|
Other assets: | | | | |
| | |
| | |
| | |
| | | | |
| | |
| | |
| | |
|
Key money deposits | | | | 27,841 |
| | 24,195 |
| | 26,948 |
| | 22,038 |
| |
Other deposits | | | | 19,579 |
| | |
| | 19,344 |
| | |
| |
Deposits | | | | | 18,941 |
| | |
| | 18,558 |
| | |
|
Deferred compensation plan assets | | | | 2,605 |
| | |
| | 2,385 |
| | |
| | | | 5,220 |
| | |
| | 5,243 |
| | |
|
Deferred tax asset-net | | | | 98,374 |
| | |
| | 23,061 |
| | |
| | | | 37,234 |
| | |
| | 38,275 |
| | |
|
Restricted cash | | | | 373 |
| | |
| | 500 |
| | |
| | | | 7,117 |
| | |
| | 7,501 |
| | |
|
Shop-in-shop | | | | 10,161 |
| | 9,816 |
| | 8,807 |
| | 8,019 |
| |
Tax receivable | | 404 |
| | | | — |
| | | | 90,065 |
| | | | 6,507 |
| | |
Forward contracts | | | | 448 |
| | |
| | 5,648 |
| | |
| |
Investments | | 500 |
| | | | 2,078 |
| | | | 327 |
| | | | 500 |
| | |
Other | | | | 4,771 |
| | |
| | 4,655 |
| | |
| | | | 2,739 |
| | |
| | 2,145 |
| | |
|
Total other assets | | | | 165,056 |
| | 34,011 |
| | 93,426 |
| | 30,057 |
| | | | 161,643 |
| | | | 78,729 |
| | |
Total intangible and other assets | | | | $ | 304,124 |
| | $ | 83,536 |
| | $ | 282,729 |
| | $ | 72,236 |
| | | | $ | 235,451 |
| | $ | 53,013 |
| | $ | 155,559 |
| | $ | 49,951 |
|
Total intangible and other assets-net | | | | |
| | $ | 220,588 |
| | |
| | $ | 210,493 |
| | | | |
| | $ | 182,438 |
| | |
| | $ | 105,608 |
|
Key money is the amount of funds paid to a landlord or tenant to acquire the rights of tenancy under a commercial property lease for a certain property. Key money represents the “right to lease” with an automatic right of renewal. This right
can be subsequently sold by the Company or can be recovered should the landlord refuse to allow the automatic right of renewal to be exercised. Key money is amortized over the initial lease term, which ranges from approximately four to 18 years.
Amortization expense for intangible assets was approximately $3.0 million and $3.7$1.7 million for both the ThirdSecond Quarter and Prior Year Quarter respectively, and $10.4$3.6 million and $11.2$3.4 million for the Year To Date Period and Prior Year YTD Period, respectively. Estimated aggregate future amortization expense by fiscal year for intangible assets is as follows (in thousands):
|
| | | | |
Fiscal Year | | Amortization Expense |
2020 (remaining) | | $ | 3,469 |
|
2021 | | $ | 3,268 |
|
2022 | | $ | 2,455 |
|
2023 | | $ | 881 |
|
2024 | | $ | 861 |
|
Thereafter | | $ | 996 |
|
|
| | | | |
Fiscal Year | | Amortization Expense |
2017 (remaining) | | $ | 3,028 |
|
2018 | | $ | 11,848 |
|
2019 | | $ | 11,518 |
|
2020 | | $ | 10,979 |
|
2021 | | $ | 7,143 |
|
2022 | | $ | 6,263 |
|
13. COMMITMENTS AND CONTINGENCIES
Litigation. The Company is occasionally subject to litigation or other legal proceedings in the normal course of its business. The Company does not believe that the outcome of any currently pending legal matters, individually or collectively, will have a material effect on the business or financial condition of the Company.
14. LEASES
The Company's leases consist primarily of retail space, offices, warehouses, distribution centers, equipment and vehicles. The Company determines if an agreement contains a lease at inception based on the Company's right to the economic benefits of the leased assets and its right to direct the use of the leased asset. Right-of-use ("ROU") assets represent the Company's right to use an underlying asset, and ROU liabilities represent the Company's obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the lease commencement date based on the present value of the lease payments over the lease term. As the Company's leases do not provide an implicit rate, the Company uses its estimated incremental borrowing rate based on the information available at the commencement date adjusted for the lease term and lease country to determine the present value of the lease payments.
Some leases include one or more options to renew at the Company's discretion, with renewal terms that can extend the lease from one to ten additional years. The renewal options are not included in the measurement of ROU assets and ROU liabilities unless the Company is reasonably certain to exercise the optional renewal periods. Short-term leases are leases having a term of twelve months or less at inception. The Company does not record a related lease asset or liability for short-term leases. The Company has certain leases containing lease and non-lease components which are accounted for as a single lease component. The Company has certain leases agreements where lease payments are based on a percentage of retail sales over contractual levels and others include rental payments adjusted periodically for inflation. The variable portion of these lease payments is not included in the Company's lease liabilities. The Company's lease agreements do not contain any significant restrictions or covenants other than those that are customary in such arrangements.
As a result of the COVID-19 pandemic, the Company received lease concessions from landlords in the form of rent deferrals and rent foregiveness in the Second Quarter. The Company chose the policy election provided by the FASB in April 2020 to record rent concessions as if no modifications to leases contracts were made, and thus no changes to the ROU assets and ROU liabilities were recorded in respect to these concessions. This guidance is only applicable to COVID-19 related lease concessions that do not result in a substantial increase in the rights of the lessor or the obligations of the lessee. As of July 4, 2020, the Company had outstanding deferred rent payments of $17.4 million, and the Company received rent foregiveness of $3.6 million in the Second Quarter.
The components of lease expense were as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | |
Lease Cost | | Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) Location | | For the 13 Weeks Ended July 4, 2020 | | For the 13 Weeks Ended June 29, 2019 | | For the 27 Weeks Ended July 4, 2020 | | For the 26 Weeks Ended June 29, 2019 |
Operating lease cost(1)(2) | | SG&A | | $ | 26,303 |
| | $ | 29,385 |
| | $ | 54,509 |
| | $ | 60,244 |
|
Finance lease cost: | | | | | | | | | | |
Amortization of ROU assets | | SG&A | | $ | 135 |
| | $ | 114 |
| | $ | 236 |
| | $ | 240 |
|
Interest on lease liabilities | | Interest expense | | $ | 7 |
| | $ | 11 |
| | $ | 18 |
| | $ | 20 |
|
Short-term lease cost | | SG&A | | $ | 138 |
| | $ | 429 |
| | $ | 339 |
| | $ | 813 |
|
Variable lease cost | | SG&A | | $ | 3,485 |
| | $ | 8,549 |
| | $ | 11,178 |
| | $ | 17,341 |
|
(1)Includes sublease income, which was immaterial.
(2)Excludes the impact of deferred or abated rent amounts
The following table discloses supplemental balance sheet information for the Company’s leases (in thousands):
|
| | | | | | | | | | |
Leases | | Condensed Consolidated Balance Sheets Location | | July 4, 2020 | | December 28, 2019 |
Assets | | | | | | |
Operating | | Operating lease ROU assets | | $ | 253,884 |
| | $ | 288,166 |
|
Finance | | Property, plant and equipment - net of accumulated depreciation of $4,284 and $4,015, respectively | | $ | 5,767 |
| | $ | 5,918 |
|
| | | | | | |
Liabilities | | | | | | |
Current: | | | | | | |
Operating | | Current operating lease liabilities | | $ | 67,755 |
| | $ | 68,838 |
|
Finance | | Short-term and current portion of long-term debt | | $ | 1,017 |
| | $ | 1,011 |
|
Noncurrent: | | | | | | |
Operating | | Long-term operating lease liabilities | | $ | 270,056 |
| | $ | 288,689 |
|
Finance | | Long-term debt | | $ | 1,023 |
| | $ | 1,468 |
|
The following table discloses the weighted-average remaining lease term and weighted-average discount rate for the Company's leases:
|
| | | | | | |
Lease Term and Discount Rate | | July 4, 2020 | | December 28, 2019 |
Weighted-average remaining lease term: | | | | |
Operating leases | | 6.1 years |
| | 6.1 years |
|
Finance leases | | 1.7 years |
| | 2.3 years |
|
Weighted-average discount rate: | | | | |
Operating leases | | 14.0 | % | | 13.9 | % |
Finance leases | | 1.2 | % | | 1.2 | % |
Future minimum lease payments by year as of July 4, 2020 were as follows (in thousands):
|
| | | | | | | | |
Fiscal Year | | Operating Leases (1) | | Finance Leases |
2020 (remaining) | | $ | 58,270 |
| | $ | 577 |
|
2021 | | 98,476 |
| | 986 |
|
2022 | | 85,490 |
| | 493 |
|
2023 | | 68,109 |
| | — |
|
2024 | | 49,442 |
| | — |
|
2025 | | 35,650 |
| | — |
|
Thereafter | | 128,836 |
| | — |
|
Total lease payments | | $ | 524,273 |
| | $ | 2,056 |
|
Less: Interest | | 186,462 |
| | 16 |
|
Total lease obligations | | $ | 337,811 |
| | $ | 2,040 |
|
(1) Future minimum lease payments exclude the impact of deferred or abated rent amounts
Future minimum lease payments by year as of December 28, 2019 were as follows (in thousands):
|
| | | | | | | | |
Fiscal Year | | Operating Leases | | Finance Leases |
2020 | | $ | 116,778 |
| | $ | 1,042 |
|
2021 | | 94,795 |
| | 978 |
|
2022 | | 81,536 |
| | 488 |
|
2023 | | 64,582 |
| | — |
|
2024 | | 45,846 |
| | — |
|
Thereafter | | 153,255 |
| | — |
|
Total lease payments | | $ | 556,792 |
| | $ | 2,508 |
|
Less: Interest | | 199,265 |
| | 30 |
|
Finance lease obligations | | $ | 357,527 |
| | $ | 2,478 |
|
Supplemental cash flow information related to leases was as follows (in thousands):
|
| | | | | | | |
| For the 27 Weeks Ended July 4, 2020 | | For the 26 Weeks Ended June 29, 2019 |
Cash paid for amounts included in the measurement of lease liabilities: | | | |
Operating cash flows from operating leases(1) | $ | 62,654 |
| | $ | 52,934 |
|
Operating cash flows from finance leases | 18 |
| | 20 |
|
Financing cash flows from finance leases | 482 |
| | 478 |
|
Leased assets obtained in exchange for new operating lease liabilities | 19,177 |
| | 16,939 |
|
(1) Cash flows for the 27 weeks ended July 4, 2020 exclude the impact of deferred or abated rent amounts
As of July 4, 2020, the Company did not have any material operating or finance leases that have been signed but not commenced.
15. DEBT ACTIVITY
On March 10, 2017,February 20, 2020, the Company entered into an Amendment No. 1 (the “First Amendment”) to that certain Term Credit Agreement, dated as of September 26, 2019, by and among the Second AmendmentCompany, as borrower, JPMorgan Chase Bank, N.A., as administrative agent, and the lenders (the “Term Credit Agreement Lenders”) party thereto (as amended to date, the “Term Credit Agreement”).
Pursuant to the Amended and Restated Credit Agreement (the “Second Amendment”). The Second Amendment reduced the Company's revolving credit facility (the "Revolving Credit Facility") available under the Company’s existing credit amendment from $1.05 billion to $850.0 million. The Second Amendment also removed the incremental term loan that was available under the credit agreement, extended the maturity dateterms of the credit agreement to May 17, 2019First Amendment, the Company, the administrative agent and removed the Company’s ability to make offers to the lenders party thereto agreed to extend the maturity datemodify certain terms of the Term Loan orCredit Agreement to, among other things, (i) increase the Revolving Credit Facility. The Second Amendment also amendedinterest rate applicable to the repayment schedule forterm loans under the Term LoanCredit Agreement (a) in the case of Eurodollar loans, from the adjusted LIBO rate plus 6.50% to the adjusted LIBO rate plus 8.00%, and requires(b) in the Company to make monthly payments on the last business daycase of each month beginning April 30, 2018. On and after April 1, 2018, interest on the Term Loan that is based upon thealternate base rate will be due and payable in arrears onloans, from the last business dayalternate base rate plus 5.50% to the alternate base rate plus 7.00%; (ii) increase the maximum total leverage ratio permitted from 1.50 to 1.00 as of each calendar month, and interest on the Term Loan that is based upon the LIBOR rate will be due and payable on the last day of each fiscal quarter to (a) 2.75 to 1.00 as of the last day of each fiscal quarter ending April 4, 2020, July 4, 2020, October 3, 2020 and January 2, 2021, (b) 2.25 to 1.00 as of the last day of each fiscal quarter ending April 3, 2021, July 3, 2021 and October 2, 2021, and (c) 1.50 to 1.00 as of the last day of each subsequent fiscal quarter; (iii) limit the amount of borrowings in aggregate principal amount at any time outstanding under that certain asset-based revolving credit agreement, dated as of September 26, 2019, by and among the Company and Fossil Partners L.P., as the U.S. borrowers, and Fossil Group Europe GmbH, Fossil Asia Pacific Limited, Fossil (Europe) GmbH, Fossil (UK) Limited and Fossil Canada Inc., as the non-U.S. borrowers, certain other subsidiaries of the Company from time to time party thereto designated as borrowers, certain subsidiaries of the Company from time to time party thereto, as guarantors, JPMorgan Chase Bank, N.A., as administrative agent, and J.P. Morgan AG, as French collateral agent (The "Revolving Facility"), to the lesser of the borrowing base thereunder and $200 million; (iv) extend the applicable interest period; provided,periods for certain prepayment fees, so that if the Company voluntarily prepays the term loans prior to February 20, 2022, or if the Company incurs certain indebtedness which results in a mandatory prepayment under the Term Credit Agreement prior to February 20, 2022, the Company is required to pay a prepayment fee of 2.00% with respect to the principal amount prepaid prior to February 20, 2021 and 1.00% with respect to the principal amount prepaid between February 21, 2021 and February 20, 2022; and (v) require the Company to pay the foregoing prepayment fee
upon acceleration of the loans under the Term Credit Agreement. The First Amendment also modified the negative covenants and events of default in the Term Credit Agreement to reduce the Company’s flexibility with respect to certain matters. The Company incurred debt issue costs of $8.1 million in connection with the First Amendment.
On May 12, 2020, the Company entered into Amendment No. 2 to the Term Credit Agreement to extend the deadline for delivery of the Company’s unaudited quarterly financial statements and related deliverables for the fiscal quarter ended April 4, 2020 to the earlier of (i) July 6, 2020 and (ii) the date on which the Company was required to file with the SEC its quarterly report on Form 10-Q for the fiscal quarter ended April 4, 2020.
On June 5, 2020, the Company entered into Amendment No. 3 (the “Third Amendment”) to the Term Credit Agreement to modify certain terms of the Term Credit Agreement to, among other things, (i) increase the interest rate applicable to the term loans under the Term Credit Agreement (a) in the case of Eurodollar loans, from the adjusted LIBO rate plus 8.00% to the adjusted LIBO rate plus 8.50%, and (b) in the case of alternate base rate loans, from the alternate base rate plus 7.00% to the alternate base rate plus 7.50%; (ii) (a) require a $15.0 million principal prepayment at the time of the Third Amendment, (b) increase the quarterly amortization payment to be paid on September 30, 2020 to $8.0 million from $5.0 million, and (c) increase each quarterly amortization payment thereafter to $10.0 million; (iii) change provisions related to prepayment fees such interest period extends for over one month, then interestthat (a) prepayment fees will be duewaived for a period of 90 days following the date of the Third Amendment for prepayments in connection with certain refinancings of the term loans and payable(b) prepayment fees will be 2% for a period of twelve months after such 90-day period, and 1% for next twelve-month period; (iv) reduce the minimum liquidity levels required to be maintained by the Company at the end of each onefiscal month, intervalthrough and including November 2020, from $150.0 million to $125.0 million; (v) waive the quarterly test for maximum total leverage ratio for fiscal year 2020 and the first three fiscal quarters of fiscal year 2021, and during such interest period. The Second Amendment also amended the mandatory prepayment provisions under the credit agreement and provides that to the extent there are excess proceeds remaining from the issuance of debt byperiod require the Company following the repayment in fullto maintain specified minimum levels of the Term Loan, the Company will be required to repay the Revolving Credit Facility inEBITDA; and (vi) increase the amount of equity interests in certain “first tier” foreign subsidiaries that must be pledged as collateral securing the obligations under the Term Credit Agreement from 65% to 100% of such excess proceeds, with a corresponding permanent reductionequity interests.
While the Third Amendment amended, among other things, certain of the financial covenants in the RevolvingTerm Credit FacilityAgreement to address the financial impact of COVID-19, any material further decreases to the Company’s revenues and cash flows, or the Company's inability to successfully achieve its cost reduction targets, could result in the amountCompany not meeting one or more of up to $50.0 million. In accordance with the Second Amendment, dividends paid from foreign subsidiaries to U.S. subsidiaries or Fossil Group, Inc., must first be used to repayamended financial covenants under its Term Credit Agreement within the next twelve months. See “Note 1-Significant Accounting Policies" for additional information.
As of July 4, 2020, the Company had $170.0 million and $123.8 million outstanding under the Term LoanCredit Agreement and then up to $50.0 million of the Revolving Credit Facility.
The Second Amendment amended the applicable margin used to calculate the interest rate that is applicable to base rate loans and LIBOR rate loans under the Company’s credit agreement. As of September 30, 2017, the interest rate margin for base rate loans was 2.50% per annum and the interest rate margin for LIBOR rate loans was 3.50% per annum. On October 1, 2017, the applicable margin on the Term Loan automatically increased to 2.75% per annum for base rate loans and 3.75% per annum for LIBOR rate loans. If the Term Loan has not been repaid in full on or prior to March 31, 2018, then on such date, the applicable margin will automatically increase to 3.25% per annum for base rate loans and 4.25% per annum for LIBOR rate loans. The Second Amendment also changed the commitment fee payable by the Company with respect to the Revolving Credit Facility, to 0.50% per annum.respectively. The Company will incur an additional fee of 0.25% times the outstanding principal amount of the total credit exposure under the credit agreement if the Term Loan has not been repaid in full on or prior to March 31, 2018. Furthermore, the Second Amendment changed the consolidated total leverage ratio that the Company must comply with from 3.25 to 1.00 to the ratios as set forth below:
|
| | |
Period | | Maximum Ratio |
July 2, 2017 through and including September 30, 2017 | | 3.50 to 1.00 |
October 1, 2017 through and including March 31, 2018 | | 3.25 to 1.00 |
April 1, 2018 through and including September 29, 2018 | | 3.50 to 1.00 |
September 30, 2018 and thereafter | | 3.25 to 1.00 |
The Company made principalhad net payments of $6.3$20.0 million and $18.8$30.0 million under the Term LoanCredit Agreement during the ThirdSecond Quarter and Year To Date Period, respectively. The Company also madehad net payments of $158.0$35.1 million and $131.3net borrowings of $95.8 million under the Revolving Credit Facility during the ThirdSecond Quarter and Year To Date Period, respectively. Amounts available under the Revolving Credit Facility arewere reduced by any amounts outstanding under standby letters of credit. As of September 30, 2017,July 4, 2020, the Company had available borrowing capacity of $270.5$32.5 million under the Revolving Credit Facility. The Company's domestic subsidiary receives short-term loans from certain of its foreign subsidiaries at the end of each fiscal quarter which are used to reduce its external borrowings. These intercompany loans are repaid at the beginning of the following fiscal quarter. At the end of the Third Quarter, these intercompany loans totaled $411.8 million. The Company incurred approximately $2.2$4.5 million and $6.3$9.2 million of interest expense related to the Term LoanCredit Agreement during the ThirdSecond Quarter and Year To Date Period, respectively, including the impact of the related interest rate swap.respectively. The Company incurred approximately $8.1$0.6 million and $20.5$1.0 million of interest expense related to the Revolving Credit Facility during the ThirdSecond Quarter and Year To Date Period, respectively. The Company incurred approximately $0.9$2.6 million and $2.7$4.7 million of interest expense related to the amortization of debt issuance costs and the original issue discount during the ThirdSecond Quarter and Year To Date Period, respectively.
15.16. RESTRUCTURING
The Company implemented a multi-year restructuring program that began in fiscal year 2016 called New World Fossil ("NWF"NWF 1.0"). As part of and concluded in fiscal year 2019. The remaining liability under NWF 1.0 is no longer material.
In fiscal year 2019, the Company targetslaunched New World Fossil 2.0 - Transform to improveGrow Program (“NWF 2.0”), which is focused on optimizing the Company’s operating profitstructure to be more efficient, with faster decision-making and support sales growth through a leaner infrastructure and an enhanced business model.more customer-centric focus. In addition to optimizing the way the Company goes to market, the Company is also pursuing additional gross margin expansion opportunities. The Company is workingtaking a zero-based budgeting approach to achieve greater efficiencies from productionadjust its business model to distribution through activities such as organizational changes, reducing its overall product assortment, optimizing its base cost structureenable more investment in digital capabilities and consolidating facilities.marketing, move closer to the consumer and react more quickly to the ever-evolving consumer shopping patterns. The Company also intendsplans to buildchange overall business processes and resources, creating a quickermore centrally directed operating model, reducing complexity and more responsiveredundancy, and operating platform. The Company is reducing its retail footprint to reflect the evolving shopping habits of today's consumer, which includes restructuring costs, such as store impairment, recorded lease obligations and termination fees and accelerated depreciation. Of the total estimated $150 million restructuring charges, approximately $27.8 million and $41.8 million were recorded during fiscal year 2016 and the Year To Date period, respectively. The Company estimates total fiscal year 2017 NWF restructuring charges of approximately $45 million.at a lower cost base.
The following table shows a rollforward of the accrued liability related to the Company’s NWF 2.0 restructuring plan (in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| For the 13 Weeks Ended September 30, 2017 |
| Liabilities | | | | | | | | Liabilities |
| July 1, 2017 | | Charges | | Cash Payments | | Non-cash Items | | September 30, 2017 |
Store closures | $ | 4,893 |
| | $ | 2,482 |
| | $ | 4,237 |
| | $ | 2,320 |
| | $ | 818 |
|
Professional services and other | 116 |
| | 765 |
| | 48 |
| | 291 |
| | 542 |
|
Severance and employee-related benefits | 1,535 |
| | 2,522 |
| | 2,467 |
| | — |
| | 1,590 |
|
Total | $ | 6,544 |
| | $ | 5,769 |
| | $ | 6,752 |
| | $ | 2,611 |
| | $ | 2,950 |
|
| | | For the 13 Weeks Ended October 1, 2016 | For the 13 Weeks Ended July 4, 2020 |
| Liabilities | | | | | | | | Liabilities | Liabilities | | | | | | | | Liabilities |
| July 2, 2016 | | Charges | | Cash Payments | | Non-cash Items | | October 1, 2016 | April 4, 2020 | | Charges | | Cash Payments | | Non-cash Items | | July 4, 2020 |
Store closures | $ | — |
| | $ | 12,523 |
| | $ | — |
| | $ | 12,523 |
| | $ | — |
| $ | 28 |
| | $ | 1,961 |
| | $ | 681 |
| | $ | 725 |
| | $ | 583 |
|
Professional services and other | — |
| | 1,950 |
| | 1,300 |
| | — |
| | 650 |
| |
Professional services | | 2,050 |
| | 1,473 |
| | 3,200 |
| | — |
| | 323 |
|
Severance and employee-related benefits | — |
| | — |
| | — |
| | — |
| | — |
| 3,910 |
| | 7,098 |
| | 4,660 |
| | — |
| | 6,348 |
|
Total | $ | — |
| | $ | 14,473 |
| | $ | 1,300 |
| | $ | 12,523 |
| | $ | 650 |
| $ | 5,988 |
| | $ | 10,532 |
| | $ | 8,541 |
| | $ | 725 |
| | $ | 7,254 |
|
| | | For the 39 Weeks Ended September 30, 2017 | For the 13 Weeks Ended June 29, 2019 |
| Liabilities | | | | | | | | Liabilities | Liabilities | | | | | | Liabilities |
| December 31, 2016 | | Charges | | Cash Payments | | Non-cash Items | | September 30, 2017 | March 30, 2019 | | Charges | | Cash Payments | | June 29, 2019 |
Store closures | $ | 4,546 |
| | $ | 8,223 |
| | $ | 6,415 |
| | $ | 5,536 |
| | $ | 818 |
| |
Professional services and other | 794 |
| | 2,195 |
| | 2,156 |
| | 291 |
| | 542 |
| |
Professional services | | $ | 426 |
| | $ | 1,798 |
| | $ | 1,494 |
| | $ | 730 |
|
Severance and employee-related benefits | — |
| | 31,400 |
| | 28,606 |
| | 1,204 |
| | 1,590 |
| — |
| | 4,061 |
| | 289 |
| | 3,772 |
|
Total | $ | 5,340 |
| | $ | 41,818 |
| | $ | 37,177 |
| | $ | 7,031 |
| | $ | 2,950 |
| $ | 426 |
| | $ | 5,859 |
| | $ | 1,783 |
| | $ | 4,502 |
|
| | | For the 39 Weeks Ended October 1, 2016 | For the 27 Weeks Ended July 4, 2020 |
| Liabilities | | | | | | | | Liabilities | Liabilities | | | | | | | | Liabilities |
| January 2, 2016 | | Charges | | Cash Payments | | Non-cash Items | | October 1, 2016 | December 28, 2019 | | Charges | | Cash Payments | | Non-cash Items | | July 4, 2020 |
Store closures | $ | — |
| | $ | 12,523 |
| | $ | — |
| | $ | 12,523 |
| | $ | — |
| $ | 22 |
| | $ | 2,693 |
| | $ | 723 |
| | $ | 1,409 |
| | $ | 583 |
|
Professional services and other | — |
| | 1,950 |
| | 1,300 |
| | — |
| | 650 |
| 2,824 |
| | 4,662 |
| | 7,163 |
| | — |
| | 323 |
|
Severance and employee-related benefits | — |
| | — |
| | — |
| | — |
| | — |
| 4,238 |
| | 12,552 |
| | 10,442 |
| | — |
| | 6,348 |
|
Total | $ | — |
| | $ | 14,473 |
| | $ | 1,300 |
| | $ | 12,523 |
| | $ | 650 |
| $ | 7,084 |
| | $ | 19,907 |
| | $ | 18,328 |
| | $ | 1,409 |
| | $ | 7,254 |
|
Restructuring |
| | | | | | | | | | | | | | | | |
| For the 26 Weeks Ended June 29, 2019 |
| Liabilities | | | | | | | Liabilities |
| December 29, 2018 | | Charges | | Cash Payments | | | June 29, 2019 |
Professional services and other | $ | — |
| | $ | 2,638 |
| | $ | 1,908 |
| | | $ | 730 |
|
Severance and employee-related benefits | — |
| | 4,061 |
| | 289 |
| | | 3,772 |
|
Total | $ | — |
| | $ | 6,699 |
| | $ | 2,197 |
| | | $ | 4,502 |
|
NWF 2.0 restructuring charges by operating segment were as follows (in thousands):
|
| | | | | | | | | | | | |
| For the 13 Weeks Ended July 4, 2020 | For the 13 Weeks Ended June 29, 2019 | For the 27 Weeks Ended July 4, 2020 | For the 26 Weeks Ended June 29, 2019 |
Americas | $ | 2,821 |
| $ | — |
| $ | 3,957 |
| $ | — |
|
Europe | 2,916 |
| 4,554 |
| 3,682 |
| 5,394 |
|
Asia | 2,822 |
| — |
| 4,445 |
| — |
|
Corporate | 1,973 |
| 1,305 |
| 7,823 |
| 1,305 |
|
Consolidated | $ | 10,532 |
| $ | 5,859 |
| $ | 19,907 |
| $ | 6,699 |
|
|
| | | | | | | |
| For the 13 Weeks Ended September 30, 2017 | | For the 13 Weeks Ended October 1, 2016 |
Americas | $ | 2,771 |
| | $ | 10,548 |
|
Europe | 1,445 |
| | 1,639 |
|
Asia | 1,144 |
| | 336 |
|
Corporate | 409 |
| | 1,950 |
|
Consolidated | $ | 5,769 |
| | $ | 14,473 |
|
Additionally, the NWF 2.0 restructuring program is being expanded to address additional challenges posed by COVID-19. The program will include a number of cost saving measures including previously announced store closures. In addition, effective March 30, 2020, the Company implemented base salary reductions for a substantial number of its global employees, including each of its executive officers. Further, the cash fees for all non-employee directors serving on the Company’s Board of Directors were deferred for the first quarter of 2020 until the end of 2020 and the cash fees were reduced by 20% for the Second Quarter of 2020. The Company also implemented weekly work hour reductions (e.g., from 40 hours to 32 or 24 hours) and has implemented work-reduction furloughs for certain other employees. The Company has entered into discussions with most of its retail and corporate office landlords to modify its rent payments, receive other concessions or otherwise reduce its operating costs for these locations. The Company has also extended the payment terms with a number of its vendors and suppliers globally and is in discussions with licensors of certain third party trademarks to reduce the Company’s royalty obligations in 2020. The Company estimates total NWF 2.0 charges of $50 million to $70 million, with approximately $25 million of those charges in fiscal year 2020.
|
| | | | | | | |
| For the 39 Weeks Ended September 30, 2017 | | For the 39 Weeks Ended October 1, 2016 |
Americas | $ | 10,567 |
| | $ | 10,548 |
|
Europe | 9,127 |
| | 1,639 |
|
Asia | 9,283 |
| | 336 |
|
Corporate | 12,841 |
| | 1,950 |
|
Consolidated | $ | 41,818 |
| | $ | 14,473 |
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following is a discussion of the financial condition and results of operations of Fossil Group, Inc. and its subsidiaries for the thirteen and thirty-ninetwenty-seven week periods ended September 30, 2017July 4, 2020 (the “Third“Second Quarter” and “Year"Year To Date Period,”" respectively) as compared to the thirteen and thirty-ninetwenty-six week periods ended October 1, 2016June 29, 2019 (the “Prior Year Quarter” and “Prior"Prior Year YTD Period,”" respectively). 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 and sunglasses. 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 partythird-party distributors in countries where we do not maintain a physical presence. Our products are offered at varying price points to meet the needs of our customers, whether they are value conscious or luxury oriented. Based on our extensive range of accessory products, brands, distribution channels and price points, we are able to target style conscious consumers across a wide age spectrum on a global basis.
Domestically, we sell our products through a diversified distribution network that includes department stores, specialty retail locations, specialty watch and jewelry stores, Company-owned retail and outlet stores, mass market stores and through our FOSSIL® website. website and third-party websites. Our wholesale customer base includes, among others, Amazon, Best Buy, 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 8455 retail stores located in premier retail sites and 122101 outlet stores located in major outlet malls as of September 30, 2017.July 4, 2020. In addition, we offer an extensive collection of our FOSSIL brand products on our website, www.fossil.com, as well as proprietary and licensed watch and jewelry brands through other managed and affiliated websites.
Internationally, our products are sold to department stores, specialty retail stores and specialty watch and jewelry stores in approximately 150 countries worldwide through 23 Company-owned foreign sales subsidiaries and through a network of approximately 80 independent distributors. Internationally, our network of Company-owned stores included 216155 retail stores and 134119 outlet stores as of September 30, 2017.July 4, 2020. Our products are also sold through licensed and franchised FOSSIL retail stores, retail concessions operated by us and kiosks in certain international markets. In addition, we offer an extensive collection of our FOSSIL brand products on our websites in certain countries.
Our business is subject to economic cycles, and retail industry conditions.conditions and the impact of tariffs on our products. Purchases of discretionary fashion accessories, such as our watches, handbags, sunglasses and other products, tend to decline during recessionary periods when disposable income is low and consumers are hesitant to use available credit. In addition, acts of terrorism, acts of war and military action both in the U.S. and abroad can have a significant effect on economic conditions and may negatively affect our ability to procure our products from manufacturers for sale to our customers. Any significant declines in general economic conditions, public safety concerns or uncertainties regarding future economic prospects that affect consumer spending habits could have a material adverse effect on consumer purchases of our products.
Our business is also subject to the risks inherent in global sourcing supply. Certain key components in our products come from limited sources of supply, which exposes us to potential supply shortages that could disrupt the manufacture and sale of our products. Any interruption or delay in the supply of key components could significantly harm our ability to meet scheduled product deliveries to our customers and cause us to lose sales. Interruptions or delays in supply may be caused by a number of factors that are outside of our and our contract manufacturers’ control.
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, including our lines of connected accessories, 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 that we can drive long-term growth with brand building, innovation through design, fashion and new materials and introducing new technology and functionality into our accessories, while continuing to provide a solid value proposition to consumers across all of our brands.
Our international operations are subject to many risks, including foreign currency fluctuations and risks related to the global economy. Generally, a strengthening of the U.S. dollar against currencies of other countries in which we operate will reduce the translated amounts of sales and operating expenses of our subsidiaries, which results in a reduction of our
consolidated operating income. We manage these currency risks by using derivative instruments. The primary risks managed by using derivative instruments are the future payments by non-U.S. dollar functional currency subsidiaries of intercompany
inventory transactions denominated in U.S. dollars. We enter into foreign exchange forward contracts ("forward contracts") to manage fluctuations in global currencies that will ultimately be used to settle such U.S. dollar denominated inventory purchases.
Known or Anticipated Trends: Based on our recent operating results and current perspectives on our operating environment, we anticipate certain trends will continue to impact our operating results:
In March 2020, a novel strain of coronavirus ("COVID-19") was declared a global pandemic by the World Health Organization. Our business operations and financial performance for the Second Quarter and Year To Date Period were materially impacted by COVID-19. The COVID-19 pandemic has negatively affected the global economies, disrupted global supply chains and financial markets, and led to significant travel and transportation restrictions, including mandatory closures of non-essential businesses and orders to “shelter-in-place.” We are focused on protecting the health and safety of our employees, customers and suppliers to minimize potential disruptions and supporting the community to address challenges posed by the global COVID-19 pandemic. At the end of the first quarter of fiscal year 2020 ("First Quarter"), the impact of COVID-19 resulted in the closure of the majority of our stores and many of our wholesale partners' stores. During the Second Quarter, many regional and local governments lifted or modified restrictions and orders. By the end of the Second Quarter, the majority of our stores have re-opened; however, these stores have been impacted by a decrease in retail traffic and reduced hours at many locations. By the date of this filing, an additional number of our stores have reopened in some capacity. The reopening of our remaining stores and our wholesale partners’ stores, which remain closed, is dependent on a number of factors, including, but not limited to, the lifting of any government restrictions and implementation of safety protocols. While we believe the closed stores will open over stages during the next several months, we cannot reasonably estimate the impact such closures will have on our retail and wholesale sales and overall results. We expect revenue declines to continue in our retail and wholesale channels as consumers react to, or otherwise practice, “social distancing” and other safety measures. We experienced a larger decline in revenues in the Second Quarter than in the First Quarter, as a significant number of our retail and wholesale partners’ stores were closed for the majority of the period. For our stores that have reopened, we are seeing trends in traffic down significantly, and those effects are being partially offset by improved conversions.
Since the COVID-19 pandemic began, we have seen strong growth trends in our direct and wholesale e-commerce channels. We expect these trends to continue, as consumers continue to focus on online shopping options.
We have taken certain cost saving and other actions, and plan to take further actions, to address the decrease in revenues and cash flow and other impacts on our business as a result of COVID-19 in order to maintain liquidity and in order to remain in compliance with financial covenants. Examples of some of these actions include the following:
Board of Director and Executive Compensation: We implemented base salary reductions for each of our executive officers for an indefinite time period. Further, the cash fees for all non-employee directors serving on our Board of Directors were deferred for the First Quarter until the end of the year, and the cash fees were reduced by 20% for the Second Quarter.
Other Employee Actions: We have implemented base salary reductions for a substantial number of our employees globally. We also exposedimplemented weekly work hour reductions (e.g., from 40 hours to interest rate risk associated32 or 24 hours) and have implemented work-reduction furloughs for certain other employees. We closed all of our corporate offices at various times in 2020. Many of our offices in Asia and Europe have reopened in some capacity with health and safety guidelines in place. Our offices in the U.S. remain closed with plans to reopen in some capacity in September 2020. We believe our employees have generally been successful in transitioning to a virtual working environment.
Office and Retail Location Expenses: We have entered into agreements, or are in discussions with, most of our retail and corporate office landlords to modify rent payments, receive other concessions or otherwise reduce our operating costs for these locations.
Other Expense Reductions: We have also extended the payment terms with a number of our vendors and suppliers globally and have agreements, or are in discussions with, licensors of certain third party trademarks to reduce our royalty obligations in fiscal year 2020. In addition, we plan to reduce marketing and capital spending and eliminate all non-business critical spending for the balance of 2020.
2020 Operating Expenses: Selling, general and administrative expenses (“SG&A”) for 2020 is expected to be several million dollars lower than 2019 and our original plan for 2020. Our NWF 2.0 initiative is being expanded to include additional expense reduction programs which are partly dependent on the length and depth of the COVID-19 pandemic impact. Expense reductions are expected to be primarily driven by additional store closings and rent concessions, reduced compensation levels, lower marketing investment, and fewer discretionary expenses.
Capital Expenditures: Capital expenditures for 2020 are expected to be approximately $9 million, compared to original guidance of approximately $25 million. This reduction reflects the deferral or cancellation of certain planned investments.
Management believes our cost reduction plans are probable of being successfully implemented, which will result in adequate cash flows to support our ongoing operations and to meet our covenant requirements for one year following the date these financial statements are issued.
Our Term Credit Agreement (as defined in "Note 15-Debt Activity") contains certain affirmative and negative covenants. In June 2020, we entered into Amendment No. 3 to our Term Credit Agreement to amend, among other things, certain of these financial covenants as a result of the impact of COVID-19 on our business. Refer to “Note 15-Debt Activity" for additional details on the Term Credit Agreement. We are currently in compliance with our variable rate debt,covenants and are forecasting to remain in compliance for the year following the date that these financial statements are issued. Due to the uncertainty related to the duration of COVID-19, we could experience material further decreases to revenues and cash flows and may experience difficulty in remaining in compliance with financial covenants under the Term Credit Agreement, as amended.
Business Strategies and Outlook: Notwithstanding the COVID-19 pandemic, we plan to execute on the following strategies to enhance our brands, grow our revenue and achieve profitability. These strategies remain highly relevant and we believe they will be important to our long-term success. The first strategic initiative is delivering compelling storytelling and innovation to build upon brand equities for both owned and licensed brands. Our second strategic initiative is commercial transformation, which we manage withare accelerating due to the current operating environment created by the COVID-19 pandemic. We have deployed substantial resources toward increasing our digital commerce and marketing capabilities in recent years, and that is helping us serve our customers during this time of heightened e-commerce demand. We have invested in a robust set of tools that can support a larger direct to consumer business in the future. Our third strategic initiative is expanding our opportunity in China and India. In these countries, we are continuing to execute against a strategy centered around localized marketing and segmented assortments. Although the impact of COVID-19 is likely to disrupt our growth trajectory in the short to intermediate term, we continue to view China and India as compelling long-term opportunities. Our fourth strategic initiative is to capture greater efficiency in our processes and right-sizing our cost structure. Our NWF 2.0 initiative is a primary example of this strategy. In 2019, we reduced our operating expenses by nearly $50 million through our NWF 2.0 program. Given the current environment and our perspective on the future state of business, we are expanding our NWF 2.0 program to capture an interest rate swap.incremental $50 million in benefits in years 2020 and 2021, which brings the total savings derived from NWF 1.0 and NWF 2.0 from $200 million to $300 million.
Since the outbreak of the COVID-19 pandemic, we have taken quick and strong actions to accelerate aspects of our strategy to generate current year savings, preserve liquidity and improve financial flexibility during the COVID-19 pandemic. Examples of some of these actions include:
•Board of director and executive compensation reductions and deferrals
•Other employee actions, like reduced hours
•Office and retail location expense reductions
•Other expense reductions
•Capital expenditure deferral and cancellations
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 31, 201628, 2019, "Part II, Item 1A. Risk Factors" of our Quarter Report on Form 10-Q for the First Quarter and "Part II, Item 1A. Risk Factors" of this Quarter Report on Form 10-Q.
Results of Operations
Executive Summary. During Since the Thirdonset of the COVID-19 pandemic, we have acted to protect our employees, partners and communities worldwide, adapted to rapidly changing circumstances, mitigated business disruption and strengthened our financial position. While significant disruption has been caused by the COVID-19 pandemic, during the Second Quarter, netinvestments in our digital channels, one of our strategic imperatives, supported sales decreased 7% (8%growth as sales grew strongly through digital channels and partially offset declines in our stores and wholesale channels. As regions in the world lifted stay at home orders during the Second Quarter, we also saw an improvement in sales in our retail stores and through our wholesale partners. By the end of the Second Quarter, 407 of our global stores had re-opened. Overall sales for the Second Quarter were $259 million, down 48% (47% in constant currency), compared with the Prior Year Quarter. Gross margins were 54.3% for the Second Quarter as compared towith 52.9% for the Prior Year Quarter, driven by declines in traditional watches, leathersas disciplined inventory management practices helped us focus on selling through on hand inventory and jewelry, and partially offset by continued growth in wearables. The Third Quarter was favorably impacted by customers accelerating certain deliveriestotal inventories ended at $376 million, down sequentially from the fourth quarter of fiscal year 2017 into the ThirdFirst Quarter primarily to take advantage of pending price increases. We estimate that this acceleration of sales favorably impacted the Third Quarter sales growth rate by roughly three percentage points, and we expect this favorable impact will largely reverse in the fourth quarter of fiscal year 2017. While the overall business remains challenging and the retail environment remains in flux, we continue to bring innovative new products to the market and work towards operational efficiencies to ultimately enhance our profitability. We remain confident wearables can be onecomparable period of the key catalysts that could eventually offset the sales declines we have seen inprior fiscal year. We accelerated and executed cost-savings measures under our traditional watch business for some time now. Wearables products accounted for approximately 10% of our net sales in the Third Quarter, compared to 7% and 9% in the first and second quarters of fiscal year 2017, respectively. Our third generation of connected devices, which are in the market now, add additional features through Android WearNWF 2.0 such as fitness and standalone applications. In addition, our latest generation wearables are thinner, and they have brighter screens and improved functionality. We are supporting these new products with our celebrity influencer campaigns to attract our wearable customers in the digital and social space.
During the Third Quarter, sales of FOSSIL branded products decreased 5% (7% in constant currency), as compared to the Prior Year Quarter. Effectively all of the decline in the FOSSIL branded sales was driven by weakness in our leathers and jewelry categories, partially offset by modest growth in watches led by wearables. Wearables positively impacted the FOSSIL watch category growth rate by approximately 11 percentage points in the Third Quarter. Sales of our SKAGEN branded products decreased 10% (12% in constant currency) as compared to the Prior Year Quarter, with growth in Asia more than offset by declines in the Americas and Europe. Growth in SKAGEN connected watches partially offset the decline in SKAGEN traditional watches.
Our multi-brand global watch portfolio decreased 3% (4% in constant currency)program during the ThirdSecond Quarter as compared to the Prior Year Quarter, representing decreases in the majority of the brands in our portfolio. Growth in wearable products partially offset the declines in traditional watches. In the MICHAEL KORS brand, we launched next generation connected product in August and expanded the distribution channels later during the Third Quarter with positive results. EMPORIO ARMANI hybrid watches launched during the Third Quarter, driving positive sales growth overall for the brand. We launched DIESEL hybrid and display watches and EMPORIO ARMANI display watches on our wearable platform towards the end of the Third Quarter, and preliminary results have been favorable.
We plan to launch five more brands onto the hybrid platform this year, including DKNY, MARC JACOBS, MICHELE, RELIC and TORY BURCH. These new launches will bring us to a total of 14 brands in wearables and support our goal to at least double the wearables business in fiscal year 2017 from fiscal year 2016.
The following table presents as reported and constant currency net sales percentage change information for FOSSIL for the Third Quarter as compared to the Prior Year Quarter:
|
| | | | | | |
| | Growth Percentage |
|
| Brand | As Reported | | Constant Currency |
| FOSSIL | 5.2 | % | | 7.0 | % |
| SKAGEN | 10.0 | % | | 11.6 | % |
Global comparable retail sales (including e-commerce) decreased 6% during the Third Quarter, compared to a decrease of 1% in the Prior Year Quarter, due to continued declines in retail store traffic trends partially offset by consistent growth in e-commerce. During the Third Quarter, we continued to improve conversion through promotional activity, but we were not able overcome the negative traffic we experienced in all regions. During the Third Quarter, our comparable e-commerce sales increased 26% compared to the Prior Year Quarter, led by the Americas, but with increases in all regions.
We continue to make progress on our New World Fossil ("NWF") initiative. The goal of NWF continues to be to build a leaner, more nimble operating platform that can support improved profitability in the future while better serving our customers and competing in the new retail environment. When we launched NWF in fiscal year 2016, we set a target to drive $200 million of profit improvements in the near term, and we are well on our way to delivering that. During a challenging retail environment, we continue to make strong progress on transforming Fossil. This year we expect our NWF initiatives to drive underlying improvement in our product costs as well as significanttransitioned certain temporary reductions in our expense structure that we estimate will be over $100 million this yearcorporate staff to permanent
reductions. We also made progress on a run rate basis. We recognize this transformation will take time, but we are making significant progress to evolveimproving our liquidity through ongoing discussions with key categoriessuppliers, licensors and streamline our business to position us for profitable growth over the long term.
In the Third Quarter, we managed our resources and capital tightly. We are also working to ensure that we have the proper capital structure needed to support our long-term financial objectives. Our goal continues to be to diversify our capital structure beyond just our existing bank partners with longer tenors to support our long term strategic objectives. We are taking the necessary steps to strengthen our financial position to further enable us to execute our strategies well into the future and position our business model for continued strong cash flow generation. During the past year, we have reduced our net debt by $170 million, reduced our net working capital by $230 million and generated positive cash flow from operations.
During the Third Quarter as compared to the Prior Year Quarter, gross profit decreased due to lower sales and a decreased margin rate. The decrease in gross margin rate was primarily driven by the impact of connected products due to both lower connected margins as well as additional valuation charges. Our strategy this year has been to invest in margin to drive significant volume in wearables and leverage that volume to drive future cost efficiencies. So far this year, we have tripled our connected sales volumes compared to the same periods as last year and are well ahead of the initial cost goals that we set for ourselves this year. However, we have not hit the aggressive sales goals that we set for ourselves this year in this new category and are consequently carrying greater levels of connected products that we will need to clear and have deferred some receipts into the first quarter of fiscal year 2018. In the Third Quarter, we recorded a $23 million valuation charge to support our efforts to clear this inventory, which negatively impacted our overall gross margins by 330 basis points. The gross margin rate was also negatively impacted by ongoing promotional activity in our outlets and the e-commerce channel and by an unfavorable currency impact of approximately 60 basis points. Higher sales volumes through off-price channels also modestly reduced gross margins in the Third Quarter. Product cost benefits generated from our NWF supply chain initiatives partially offset these headwinds. Total operating expenses for the Third Quarter decreased to $320 million including $6 million of restructuring costs associated with our NWF initiative. Other income increased as a result of increased net foreign currency gains during the Third Quarter as compared to the Prior Year Quarter. The tax benefit in the Third Quarter was favorably impacted by the increased effective tax rate in the Third Quarter as compared to the Prior Year Quarter. During the Third Quarter, our financial performance resulted in a loss of $0.11 per diluted share.landlords.
Constant Currency Financial Information
As a multinational enterprise, we are exposed to changes in foreign currency exchange rates. The translation of the operations of our foreign-based entities from their local currencies into U.S. dollars is sensitive to changes in foreign currency exchange rates and can have a significant impact on our reported financial results. In general, our overall financial results are affected positively by a weaker U.S. dollar and are affected negatively by a stronger U.S. dollar as compared to the foreign currencies in which we conduct our business.
As a result, in addition to presenting financial measures in accordance with accounting principles generally accepted in the United States of America (“GAAP”), our discussions contain references to constant currency financial information, which is a non-GAAP financial measure. To calculate net sales on a constant currency basis, net sales for the current year for entities reporting in currencies other than the U.S. dollar are translated into U.S. dollars at the average rates during the comparable period of the prior fiscal year. We present constant currency information to provide investors with a basis to evaluate how our underlying business performed, excluding the effects of foreign currency exchange rate fluctuations. The constant currency financial information presented herein should not be considered a substitute for, or superior to, the measures of financial performance prepared in accordance with GAAP. Reconciliations betweenWe provide constant currency financial information and the most directly comparable GAAP measure are included where applicable.
Quarterly Periods Ended September 30, 2017July 4, 2020 and October 1, 2016June 29, 2019
Consolidated Net Sales. Net sales decreased $49.3$242.4 million or 6.7% (8.0%48.3% (47.4% in constant currency), for the ThirdSecond Quarter as compared to the Prior Year Quarter. During the Third Quarter, our leathers products decreased $17.6 million or 18.9% (19.9% in constant currency) primarily as a result of the current product assortment not resonating well with consumers. Globalongoing COVID-19 pandemic. During the Second Quarter, watch sales decreased $15.3$203.8 million or 2.7% (4.1%49.3% (48.4% in constant currency), our leathers products decreased $26.0 million or 49.4% (48.9% in constant currency) and our jewelry business decreased $5.6 million or 26.9% (26.0% in constant currency). As we progressed through the Second Quarter, sales trends improved as a result of an easing of COVID-19 related restrictions in many markets, enabling some return of traffic in our retail stores and wholesale customer locations. Our direct business decreased significantly during the Second Quarter, largely driven by temporary store and concession closures due to COVID-19 and permanent store closures since the end of the Prior Year Quarter in connection with our NWF program. Global comparable retail sales decreased 36%, which includes both our stores and our own e-commerce channels and the impacts of COVID-19 closures in both channels. While many stores re-opened during the Second Quarter, we still experienced significant traffic declines, in traditional watcheswhich were partially offset by increasesimproved conversions. The sales declines in connected watches. Our jewelry business decreased $12.5 million or 20.8% (22.8%our store channel were partially offset by strong growth in constant currency).e-commerce, both in our owned websites and in third party marketplace sites recorded in our wholesale channel. We will continue focusing on sales in the digital channel, as customers continue to shift to digital and we are generating greater return on our investments in digital infrastructure. We have reduced our store footprint by 20 stores since the end of the Prior Year Quarter and expect to reduce it further during the remainder of fiscal year 2020.
Net sales information by product category is summarized as follows (dollars in millions):
| | | For the 13 Weeks Ended September 30, 2017 | | For the 13 Weeks Ended October 1, 2016 | | | | | | | For the 13 Weeks Ended July 4, 2020 | | For the 13 Weeks Ended June 29, 2019 | | | | | | |
| | Growth (Decline) | | Growth (Decline) |
| Net Sales | | Percentage of Total | | Net Sales | | Percentage of Total | | Dollars | | Percentage As Reported | | Percentage Constant Currency | Net Sales | | Percentage of Total | | Net Sales | | Percentage of Total | | Dollars | | Percentage As Reported | | Percentage Constant Currency |
Watches | $ | 551.9 |
| | 80.1 | % | | $ | 567.2 |
| | 76.9 | % | | $ | (15.3 | ) | | (2.7 | )% | | (4.1 | )% | $ | 209.5 |
| | 80.9 | % | | $ | 413.3 |
| | 82.4 | % | | $ | (203.8 | ) | | (49.3 | )% | | (48.4 | )% |
Leathers | 75.7 |
| | 11.0 |
| | 93.3 |
| | 12.6 |
| | (17.6 | ) | | (18.9 | ) | | (19.9 | ) | 26.6 |
| | 10.3 |
| | 52.6 |
| | 10.5 |
| | (26.0 | ) | | (49.4 | ) | | (48.9 | ) |
Jewelry | 47.7 |
| | 6.9 |
| | 60.2 |
| | 8.2 |
| | (12.5 | ) | | (20.8 | ) | | (22.8 | ) | 15.2 |
| | 5.9 |
| | 20.8 |
| | 4.2 |
| | (5.6 | ) | | (26.9 | ) | | (26.0 | ) |
Other | 13.4 |
| | 2.0 |
| | 17.3 |
| | 2.3 |
| | (3.9 | ) | | (22.5 | ) | | (23.6 | ) | 7.7 |
| | 2.9 |
| | 14.7 |
| | 2.9 |
| | (7.0 | ) | | (47.6 | ) | | (46.9 | ) |
Total | $ | 688.7 |
| | 100.0 | % | | $ | 738.0 |
| | 100.0 | % | | $ | (49.3 | ) | | (6.7 | )% | | (8.0 | )% | $ | 259.0 |
| | 100.0 | % | | $ | 501.4 |
| | 100.0 | % | | $ | (242.4 | ) | | (48.3 | )% | | (47.4 | )% |
In the ThirdSecond Quarter, the translation of foreign-based net sales into U.S. dollars increaseddecreased reported net sales by approximately $10.1$4.4 million, including favorableunfavorable impacts of $9.2$1.4 million, $2.3 million and $1.6$0.7 million in our Europe, Asia and Americas segments, respectively, and an unfavorable impact of $0.7 million in our Asia segment when compared to the Prior Year Quarter.
The following table sets forth consolidated net sales by segment (dollars in millions):
| | | For the 13 Weeks Ended September 30, 2017 | | For the 13 Weeks Ended October 1, 2016 | | Growth (Decline) | For the 13 Weeks Ended July 4, 2020 | | For the 13 Weeks Ended June 29, 2019 | | Growth (Decline) |
| Net Sales | | Percentage of Total | | Net Sales | | Percentage of Total | | Dollars | | Percentage As Reported | | Percentage Constant Currency | Net Sales | | Percentage of Total | | Net Sales | | Percentage of Total | | Dollars | | Percentage As Reported | | Percentage Constant Currency |
Americas | $ | 308.1 |
| | 44.7 | % | | $ | 361.2 |
| | 48.9 | % | | $ | (53.1 | ) | | (14.7 | )% | | (15.1 | )% | $ | 105.8 |
| | 40.8 | % | | $ | 223.1 |
| | 44.5 | % | | $ | (117.3 | ) | | (52.6 | )% | | (52.3 | )% |
Europe | 247.2 |
| | 35.9 |
| | 243.2 |
| | 33.0 |
| | 4.0 |
| | 1.6 |
| | (2.1 | ) | 79.5 |
| | 30.7 |
| | 147.1 |
| | 29.4 |
| | (67.6 | ) | | (46.0 | ) | | (45.0 | ) |
Asia | 133.4 |
| | 19.4 |
| | 133.6 |
| | 18.1 |
| | (0.2 | ) | | (0.1 | ) | | 0.4 |
| 69.2 |
| | 26.7 |
| | 126.3 |
| | 25.2 |
| | (57.1 | ) | | (45.2 | ) | | (43.4 | ) |
Corporate | | 4.5 |
| | 1.8 |
| | 4.9 |
| | 0.9 |
| | (0.4 | ) | | (8.2 | ) | | (8.2 | ) |
Total | $ | 688.7 |
| | 100.0 | % | | $ | 738.0 |
| | 100.0 | % | | $ | (49.3 | ) | | (6.7 | )% | | (8.0 | )% | $ | 259.0 |
| | 100.0 | % | | $ | 501.4 |
| | 100.0 | % | | $ | (242.4 | ) | | (48.3 | )% | | (47.4 | )% |
Americas Net Sales. Americas net sales decreased $53.1$117.3 million or 14.7% (15.1%52.6% (52.3% in constant currency), during the ThirdSecond Quarter in comparison to the Prior Year Quarter. During the ThirdSecond Quarter, watches decreased $32.1$100.6 million or 11.7% (12.1%54.3% (54.0% in constant currency), while our leathers business decreased $12.7$16.2 million or 21.6% (22.1%48.2% (47.9% in constant currency), and our jewelry category decreased $6.6increased $1.1 million or 29.5% (29.9%68.8% (68.8% in constant currency). SalesIn the region, sales declined in the U.S., Mexico and Canada. Strong sales growth in e-commerce partially offset the declines in other channels. Sales declined in most brands, most notably in FOSSIL and MICHAEL KORS®. Comparable retail sales declined in the U.S. and Canada weremid-thirties on a percentage basis during the Second Quarter, driven by temporary store closures due to the COVID-19 pandemic, partially offset by growth in Mexico. During the Third Quarter, most brands in the portfolio declined while our EMPORIO ARMANI watch business increased with the introduction of EMPORIO ARMANI Connected. Decreases in traditional watches were partially offset by increases in connected watches, with the strongest performance coming from FOSSIL connected watches. While both our wholesale andstrong positive e-commerce comparable retail businesses declined in the Third Quarter, our retail business was relatively stronger. Comparable retail sales including e-commerce declined moderately in the region as negative comparable sales in our stores were partially offset by positive comparable sales in our e-commerce business.
sales.
The following table sets forth product net sales and the changes in product net sales on both a reported and constant-currency basis from period to period for the Americas segment on a reported and constant currency basis (dollars in millions):
| | | For the 13 Weeks Ended September 30, 2017 | | For the 13 Weeks Ended October 1, 2016 | | | | | | | For the 13 Weeks Ended July 4, 2020 | | For the 13 Weeks Ended June 29, 2019 | | | | | | |
Growth (Decline) | | Net Sales | | Net Sales | | Dollars | | Percentage As Reported | | Percentage Constant Currency | Net Sales | | Net Sales | | Dollars | | Percentage As Reported | | Percentage Constant Currency |
Watches | $ | 242.2 |
| | $ | 274.3 |
| | $ | (32.1 | ) | | (11.7 | )% | | (12.1 | )% | $ | 84.5 |
| | $ | 185.1 |
| | $ | (100.6 | ) | | (54.3 | )% | | (54.0 | )% |
Leathers | 46.2 |
| | 58.9 |
| | (12.7 | ) | | (21.6 | ) | | (22.1 | ) | 17.4 |
| | 33.6 |
| | (16.2 | ) | | (48.2 | ) | | (47.9 | ) |
Jewelry | 15.8 |
| | 22.4 |
| | (6.6 | ) | | (29.5 | ) | | (29.9 | ) | 2.7 |
| | 1.6 |
| | 1.1 |
| | 68.8 |
| | 68.8 |
|
Other | 3.9 |
| | 5.6 |
| | (1.7 | ) | | (30.4 | ) | | (28.6 | ) | 1.2 |
| | 2.8 |
| | (1.6 | ) | | (57.1 | ) | | (57.1 | ) |
Total | $ | 308.1 |
| | $ | 361.2 |
| | $ | (53.1 | ) | | (14.7 | )% | | (15.1 | )% | $ | 105.8 |
| | $ | 223.1 |
| | $ | (117.3 | ) | | (52.6 | )% | | (52.3 | )% |
Europe Net Sales. Europe net sales increased $4.0decreased $67.6 million or 1.6% (decreased 2.1%46.0% (45.0% in constant currency) during the ThirdSecond Quarter in comparison to the Prior Year Quarter. Watches increased $11.6During the Second Quarter, watches decreased $52.3 million or 6.4% (2.5%45.7% (44.7% in constant currency), jewelry declined $3.6$7.0 million or 10.6% (13.5%38.0% (37.5% in constant currency) and our leathers business decreased $2.3declined $4.2 million or 11.4% (14.4%45.7% (44.6% in constant currency). Across the Eurozone, sales were down in all major markets with the Third Quarter. Third Quarter salesgreatest declines in Europe benefited from early deliveries to certain wholesale customers who opted to take shipments planned forGermany, the fourth quarter of fiscal year 2017, given price adjustments, which were required to be announced to customersU.K., Italy and France. Sales decreased in advance. During the Third Quarter, sales growth was led byall major brands, most notably in FOSSIL, MICHAEL KORS watches, and we also experienced growth in EMPORIO ARMANI ARMANI EXCHANGE, FOSSIL and DIESEL branded watches, as the watch category more than offset declines in leathers and jewelry. The sales increases in watches were primarily driven from wearables and benefited from our third generation product launching towards the end of the Third Quarter. Within the region, modest growth in the U.K. and Poland was more than offset by declines in the Middle East.®. Comparable retail sales were moderately negativedeclined in the mid-twenties on a percentage basis during the ThirdSecond Quarter, as positive comparable e-commerce sales were more thandriven by temporary store closures due to the COVID-19 pandemic, partially offset by negative comparativestrong positive e-commerce comparable retail store sales amid declining traffic.sales.
The following table sets forth product net sales and the changes in product net sales on both a reported and constant-currency basis from period to period for the Europe segment on a reported and constant currency basis (dollars in millions):
| | | For the 13 Weeks Ended September 30, 2017 | | For the 13 Weeks Ended October 1, 2016 | | | | | | | For the 13 Weeks Ended July 4, 2020 | | For the 13 Weeks Ended June 29, 2019 | | | | | | |
Growth (Decline) | | Net Sales | | Net Sales | | Dollars | | Percentage As Reported | | Percentage Constant Currency | Net Sales | | Net Sales | | Dollars | | Percentage As Reported | | Percentage Constant Currency |
Watches | $ | 192.3 |
| | $ | 180.7 |
| | $ | 11.6 |
| | 6.4 | % | | 2.5 | % | $ | 62.2 |
| | $ | 114.5 |
| | $ | (52.3 | ) | | (45.7 | )% | | (44.7 | )% |
Leathers | 17.9 |
| | 20.2 |
| | (2.3 | ) | | (11.4 | ) | | (14.4 | ) | 5.0 |
| | 9.2 |
| | (4.2 | ) | | (45.7 | ) | | (44.6 | ) |
Jewelry | 30.5 |
| | 34.1 |
| | (3.6 | ) | | (10.6 | ) | | (13.5 | ) | 11.4 |
| | 18.4 |
| | (7.0 | ) | | (38.0 | ) | | (37.5 | ) |
Other | 6.5 |
| | 8.2 |
| | (1.7 | ) | | (20.7 | ) | | (25.3 | ) | 0.9 |
| | 5.0 |
| | (4.1 | ) | | (82.0 | ) | | (80.0 | ) |
Total | $ | 247.2 |
| | $ | 243.2 |
| | $ | 4.0 |
| | 1.6 | % | | (2.1 | )% | $ | 79.5 |
| | $ | 147.1 |
| | $ | (67.6 | ) | | (46.0 | )% | | (45.0 | )% |
Asia Net Sales. Net sales in Asia decreased $0.2$57.1 million or 0.1% (increased 0.4%45.2% (43.4% in constant currency), driven by declines during the Second Quarter in leathers and jewelry largely offset by growth in watches. Continued growth in India and China was offset by a decline in nearly all other countries. During the Third Quarter as comparedcomparison to the Prior Year Quarter. During the Second Quarter, our leathers categorywatches decreased $2.7$50.8 million or 19.0% (18.3%44.7% (42.9% in constant currency), our jewelry categoryleathers business decreased $2.4$5.7 million or 63.2% (same58.2% (56.1% in constant currency) whileand our watchjewelry category increased $5.2$0.4 million or 4.6% (5.2%57.1% (71.4% in constant currency). The watch category was led by growthSales declined in wearables,most brands during the Second Quarter, most notably in FOSSIL, and EMPORIO ARMANI, brandsMICHAEL KORS and DIESEL®. Sales decreased in particular, while traditional watches continuedall major markets across Asia, except for mainland China, where sales growth was driven by e-commerce channels. Throughout the region our wholesale and retail channels were negatively impacted by shutdowns and traffic declines due to decline.the COVID-19 pandemic. Comparable retail sales declined in the region decreased moderately largelymid-fifties on a percentage basis during the Second Quarter, driven by traffic declines.
temporary store closures due to the COVID-19 pandemic. Compared to our other segments, our comparable stores sales in Asia declined less, but also experienced relatively less offsetting e-commerce growth.
The following table sets forth product net sales and the changes in product net sales on both a reported and constant-currency basis from period to period for the Asia segment on a reported and constant currency basis (dollars in millions):
| | | For the 13 Weeks Ended September 30, 2017 | | For the 13 Weeks Ended October 1, 2016 | | | | | | | For the 13 Weeks Ended July 4, 2020 | | For the 13 Weeks Ended June 29, 2019 | | | | | | |
Growth (Decline) | | Net Sales | | Net Sales | | Dollars | | Percentage As Reported | | Percentage Constant Currency | Net Sales | | Net Sales | | Dollars | | Percentage As Reported | | Percentage Constant Currency |
Watches | $ | 117.3 |
| | $ | 112.1 |
| | $ | 5.2 |
| | 4.6 | % | | 5.2 | % | $ | 62.8 |
| | $ | 113.6 |
| | $ | (50.8 | ) | | (44.7 | )% | | (42.9 | )% |
Leathers | 11.5 |
| | 14.2 |
| | (2.7 | ) | | (19.0 | ) | | (18.3 | ) | 4.1 |
| | 9.8 |
| | (5.7 | ) | | (58.2 | ) | | (56.1 | ) |
Jewelry | 1.4 |
| | 3.8 |
| | (2.4 | ) | | (63.2 | ) | | (63.2 | ) | 1.1 |
| | 0.7 |
| | 0.4 |
| | 57.1 |
| | 71.4 |
|
Other | 3.2 |
| | 3.5 |
| | (0.3 | ) | | (8.6 | ) | | (8.6 | ) | 1.2 |
| | 2.2 |
| | (1.0 | ) | | (45.5 | ) | | (50.0 | ) |
Total | $ | 133.4 |
| | $ | 133.6 |
| | $ | (0.2 | ) | | (0.1 | )% | | 0.4 | % | $ | 69.2 |
| | $ | 126.3 |
| | $ | (57.1 | ) | | (45.2 | )% | | (43.4 | )% |
The following table sets forth the number of stores by concept on the dates indicated below:
| | | September 30, 2017 |
| October 1, 2016 | July 4, 2020 |
| June 29, 2019 |
| Americas |
| Europe |
| Asia |
| Total |
| Americas |
| Europe |
| Asia |
| Total | Americas |
| Europe |
| Asia |
| Total |
| Americas |
| Europe |
| Asia |
| Total |
Full price accessory | 112 |
|
| 109 |
|
| 61 |
|
| 282 |
|
| 128 |
|
| 122 |
|
| 66 |
|
| 316 |
| 80 |
|
| 76 |
|
| 54 |
|
| 210 |
|
| 87 |
|
| 88 |
|
| 51 |
|
| 226 |
|
Outlets | 136 |
|
| 74 |
|
| 46 |
|
| 256 |
|
| 156 |
|
| 73 |
|
| 46 |
|
| 275 |
| 114 |
|
| 74 |
|
| 32 |
|
| 220 |
|
| 115 |
|
| 73 |
|
| 35 |
|
| 223 |
|
Full priced multi-brand | — |
|
| 8 |
|
| 10 |
|
| 18 |
|
| — |
|
| 7 |
|
| 12 |
|
| 19 |
| — |
|
| 3 |
|
| 3 |
|
| 6 |
|
| — |
|
| 4 |
|
| 3 |
|
| 7 |
|
Total stores | 248 |
|
| 191 |
|
| 117 |
|
| 556 |
|
| 284 |
|
| 202 |
|
| 124 |
|
| 610 |
| 194 |
|
| 153 |
|
| 89 |
|
| 436 |
|
| 202 |
|
| 165 |
|
| 89 |
|
| 456 |
|
During the ThirdSecond Quarter, we closed 815 stores and did not open anyopened 4 new stores.stores in connection with our NWF program.
Both stores and our own e-commerce sites are included in comparable retail sales in the thirteenth month of operation. Stores that experience a gross square footage increase of 10% or more due to an expansion and/or relocation are removed from the comparable retail sales base, but are included in total sales. These stores are returned to the comparable retail sales base in the thirteenth month following the expansion and/or relocation. Comparable retail sales are calculated on a comparable calendar period. Therefore, the percentage change in comparable sales for 2020 were calculated on a 27-to-27 week basis to normalize the 27-week Year To Date Period with the 26-week Prior Year YTD Period. Comparable retail sales also exclude the effects of foreign currency fluctuations.
Gross Profit. Gross profit of $319.9$140.6 million in the ThirdSecond Quarter decreased 16.9%47.0% in comparison to $385.1$265.1 million in the Prior Year Quarter, driven by lower sales andas a result of decreased margin rates.sales. Gross profit margin rate decreased 580 basis pointsincreased to 46.4%54.3% in the ThirdSecond Quarter compared to 52.2%52.9% in the Prior Year Quarter. The decrease inQuarter, primarily reflecting a higher mix of e-commerce sales and reduced minimum licensor royalty costs, partially offset by heightened promotional activity and increased freight and duty costs. Currency favorably impacted the gross profit margin rate was primarily driven by the impact of connected products due to both lower connected margins as well as additional valuation charges. Our strategy this year has been to invest in margin to drive significant volume in wearables and leverage that volume to drive future cost efficiencies. So far this year, we have tripled our connected sales volumes and are well ahead of the initial cost goals that we set for ourselves this year. However, we have not hit the aggressive sales goals that we set for ourselves this year in this new category and are consequently carrying greater levels of connected products that we will need to clear and have deferred some receipts into the first quarter of fiscal 2018. In the Third Quarter, we recorded a $23 million valuation charge to support our efforts to clear this inventory, which negatively impacted our overall gross margins by 330 basis points. The gross margin rate was also negatively impacted by ongoing promotional activity in our outlets and the e-commerce channel and by an unfavorable currency impact of approximately 60 basis points. Higher sales volumes through off-price channels also modestly reduced gross margins in the Third Quarter. Product cost benefits generated from our NWF supply chain initiatives partially offset these headwinds.Second Quarter by approximately 50 basis points.
Operating Expenses. Total operating expenses in the ThirdSecond Quarter decreased by $33.5$86.0 million, or 9.5%32.7%, to $320.4$177.4 million compared to $353.9$263.4 million in the Prior Year Quarter. ThirdOperating expenses in the Second Quarter operating expenses included $10.5 million of restructuring costs, of $5.8 million under our NWF initiative,primarily related to employee costs, store closures and professional services, while the Prior Year Quarter included $14.5$7.3 million in restructuring costs as well as a $10 million benefit resulting from real estate gains.
In the Third Quarter,costs. SG&A expenses were $24.8in the Second Quarter decreased $89.2 million lower compared tofrom the Prior Year Quarter primarily as a result of corporatedue to lower compensation, marketing and regional overhead reductions and lower retail store expenses, given the significant number of stores we have closed since the Prior Year Quarter. Advertising royalties were also lower in the Third Quarter driven by the decline in sales of licensed products.discretionary costs. The translation of foreign-denominated expenses during the ThirdSecond Quarter increaseddecreased operating expenses by
approximately $4.1 $2.4 million as a result of the weakerstronger U.S. dollar. As a percentage of net sales, SG&A expenses decreasedincreased to 45.7%64.4% in the ThirdSecond Quarter as compared to 46.0%51.1% in the Prior Year Quarter.
Consolidated
Operating Income (Loss). Operating income (loss) decreased towas a loss of $0.5$36.8 million in the ThirdSecond Quarter as compared to income of $31.2$1.7 million in the Prior Year Quarter. During the Second Quarter, the operating loss was primarily driven by both decreased sales and gross margin rate.COVID-19 impacts on sales. As a percentage of net sales, operating margin (loss) was (0.1%)(14.2)% in the ThirdSecond Quarter compared to 4.2%0.3% in the Prior Year Quarter. Operating margin rate in the ThirdSecond Quarter included a negativefavorable impact of approximately 5020 basis points due to changes in foreign currencies. During the Third Quarter as compared to the Prior Year Quarter, we faced continued retail pressure, most significantly in our traditional businesses in all segments. Additionally, the gross margin rate was negatively impacted by connected products, due to both lower connected margins as well as additional product valuation charges, and lower retail margins due to increased promotional activity in outlets and the e-commerce channel in all segments. Decreased restructuring costs incurred under our NWF plan, as well as corporate and regional overhead reductions and lower retail store expenses favorably impacted operating income (loss) during the Third Quarter as compared to the Prior Year Quarter.
Operating income (loss) by segment is summarized as follows (dollars in millions):
| | | For the 13 Weeks Ended September 30, 2017 | | For the 13 Weeks Ended October 1, 2016 | | Growth (Decline) | | Operating Margin % | For the 13 Weeks Ended July 4, 2020 | | For the 13 Weeks Ended June 29, 2019 | | Change | | Operating Margin % |
| | Dollars | | Percentage | | 2017 | | 2016 | | Dollars | | Percentage | | 2020 | | 2019 |
Americas | $ | 18.9 |
| | $ | 56.4 |
| | $ | (37.5 | ) | | (66.5 | )% | | 6.1 | % | | 15.6 | % | $ | 4.8 |
| | $ | 29.5 |
| | $ | (24.7 | ) | | (83.7 | )% | | 4.5 | % | | 13.2 | % |
Europe | 39.3 |
| | 49.0 |
| | (9.7 | ) | | (19.8 | ) | | 15.9 |
| | 20.2 |
| (10.5 | ) | | 12.5 |
| | (23.0 | ) | | (184.0 | ) | | (13.2 | ) | | 8.5 |
|
Asia | 22.0 |
| | 23.7 |
| | (1.7 | ) | | (7.2 | ) | | 16.5 |
| | 17.7 |
| 6.6 |
| | 27.0 |
| | (20.4 | ) | | (75.6 | ) | | 9.6 |
| | 21.3 |
|
Corporate | (80.7 | ) | | (97.9 | ) | | 17.2 |
| | (17.6 | ) | | | | | (37.7 | ) | | (67.3 | ) | | 29.6 |
| | (44.0 | ) | | | | |
Total operating income (loss) | $ | (0.5 | ) | | $ | 31.2 |
| | $ | (31.7 | ) | | (101.6 | )% | | (0.1 | )% | | 4.2 | % | $ | (36.8 | ) | | $ | 1.7 |
| | $ | (38.5 | ) | | (2,264.7 | )% | | (14.2 | )% | | 0.3 | % |
Interest Expense. Interest expense increased by $5.1$0.5 million during the ThirdSecond Quarter compared to the Prior Year Quarter as a result of highera larger borrowing base and a partial offset by a decreased interest rate spreads due to our amended credit facility.rate.
Other Income (Expense)-Net. During the ThirdSecond Quarter, other income (expense)-net increased by $2.3 millionchanged favorably to $3.9income of $0.9 million in comparison to income of $0.5 million in the Prior Year Quarter. This change wasQuarter, primarily driven by more favorable foreignnet transactional currency activitygains, compared to net transactional currency losses in the Prior Year Quarter.Quarter and partially offset by decreased interest income mainly due to declining interest rates.
Provision for Income Taxes. The income Income tax benefit for the ThirdSecond Quarter was $3.2$20.8 million, resulting in an effective income tax rate of 37.1%47.6%. For the Prior Year Quarter, income tax expense was $6.5$1.4 million, resulting in an effective income tax rate of 25.0%(28.0)%. The higher effective tax rate in the ThirdSecond Quarter as compared todiffered from the Prior Year Quarter was attributableprimarily due to a higher structural rate resulting from an increased forecasted loss fromchanges enacted in the Company's U.S. operationsCoronavirus Aid, Relief, and Economic Security (“CARES”) Act, which was tax-benefited atsigned into law on March 27, 2020. The CARES Act allows U.S. taxpayers to carry back a highernet operating loss (“NOL”) arising in tax years 2018, 2019 and 2020 to prior years when the tax rate than thewas 35%. The Company recognized a U.S. tax rates usedbenefit from its fiscal year 2019 and Second Quarter tax losses, which will be carried back to calculate theoffset taxable income reported in prior years. The Company will receive a refund of 2015 taxes as well as a portion of 2014 taxes.
The Prior Year Quarter effective tax rate was negative because income tax expense was accrued on the profits from the Company'scertain foreign operations. There were also favorable discrete items occurringentities with positive taxable income and no benefit was recognized for losses in the quarter. These positive impacts were partially offset byU.S. and certain foreign jurisdictions. Due to the increased tax expense resulting from allGlobal Intangible Low-Taxed Income (“GILTI”) provision of the Tax Cuts and Jobs Act, certain foreign and some ofincome is included in U.S. taxable income effectively absorbing the U.S. goodwill impairment charge being permanently nondeductible forNOLs, eliminating the availability of any future tax purposes.
Additionally, income taxes are provided for underbenefit or loss carryback prior to the asset and liability method for temporary differencesNOL carryback provision in the recognition of assets and liabilities recognized for income tax and GAAP purposes. Deferred tax assets are periodically assessed for the likelihood of whether they are more likely than not to be realized. We have previously established a valuation allowance in those jurisdictions where we believe recovery is not more likely than not, which generally increases tax expense in the period such determination is made. For those jurisdictions with deferred tax assets not currently subject to a valuation allowance, including the U.S., we have determined that the realization of deferred tax assets continues to be more likely than not.CARES Act.
Net Income (Loss) Attributable to Fossil Group, Inc. Third Second Quarter net income (loss) attributable to Fossil Group, Inc. decreased to $(5.4)was a loss of $22.5 million, or $(0.11)$0.44 per diluted share, in comparison to $17.4a net loss of $7.3 million, or $0.36$0.15 per diluted share, in the Prior Year Quarter. Diluted earnings (loss) per share in the ThirdSecond Quarter included a restructuring chargecharges of $0.08 as compared to a restructuring charge of $0.22 in the Prior Year Quarter. Excluding restructuring, the decline in$0.16 per diluted share. Diluted earnings (loss) per share in the Third Quarter as compared to the Prior Year Quarter was driven by lower sales and gross margins, mainly due to connected mix, and higher interest expenses, partially offset by lower operating expenses and taxes. The tax benefit in the Third Quarter was positivelyincluded restructuring charges of $0.11 per diluted share. Currency fluctuations favorably impacted by the increased effective tax rate in the Third Quarter as compared to the Prior Year Quarter. The translation impact of a stronger U.S. dollar decreased diluted earnings per share by approximately $0.02 year-over-year.$0.05 during the Second Quarter.
Fiscal Year To Date Periods Ended September 30, 2017July 4, 2020 and October 1, 2016June 29, 2019
Consolidated Net Sales. Net sales decreased $215.8$317.0 million or 10.4% (10.0%32.8% (31.7% in constant currency), for the Year To Date Period as compared to the Prior Year YTD Period. Global watch sales decreased $110.1 million or 7.0% (6.7% in constant currency) driven by declines in traditional watches partially offset by increases in connected watches. Our leathers category decreased $61.0 million or 21.9% (21.6% in constant currency) primarily as a result of the current product assortment not resonating well with consumers, and our jewelry product category decreased $31.8 million or 18.5% (17.8% in constant currency) duringDuring the Year To Date Period, watches decreased $260.1 million or 33.4% (32.2% in constant currency), our leathers business decreased $32.6 million or 30.6% (29.9% in constant currency) and our jewelry category decreased $13.5 million or 26.0% (24.9% in constant currency) as compared to the Prior Year YTD Period. Global comparable retailWe experienced sales decreased 9% fordeclines in all three geographic segments and major product categories. In the beginning of the first quarter of fiscal year 2020, sales results were positively impacted by increased off-price and liquidation sales of connected inventory. Due to the ongoing COVID-19 pandemic, sales began to slow in February in Asia and in March in the Americas and Europe as a result of store closures in our direct to consumer and wholesale channels. At various times throughout the Second Quarter, certain restrictions due to the COVID-19 pandemic were lifted or eased, allowing stores in our direct to consumer and wholesale channels to re-open. However, certain restrictions are still in place and traffic remains down in the Year To Date Period representing declinescompared to the Prior Year YTD Period. Comparable retail sales declined in all product categories and allthe low-twenties on a percentage basis during the Year To Date Period, driven by temporary store conceptsclosures due to the COVID-19 pandemic, but were partially offset by strong positive e-commerce comparable sales growth.retail sales.
Net sales information by product category is summarized as follows (dollars in millions):
| | | For the 39 Weeks Ended September 30, 2017 | | For the 39 Weeks Ended October 1, 2016 | | Growth (Decline) | For the 27 Weeks Ended July 4, 2020 | | For the 26 Weeks Ended June 29, 2019 | | Growth (Decline) |
| Net Sales | | Percentage of Total | | Net Sales | | Percentage of Total | | Dollars | | Percentage As Reported | | Percentage Constant Currency | Net Sales | | Percentage of Total | | Net Sales | | Percentage of Total | | Dollars | | Percentage As Reported | | Percentage Constant Currency |
Watches | $ | 1,471.1 |
| | 78.8 | % | | $ | 1,581.2 |
| | 75.9 | % | | $ | (110.1 | ) | | (7.0 | )% | | (6.7 | )% | $ | 519.4 |
| | 79.9 | % | | $ | 779.5 |
| | 80.6 | % | | $ | (260.1 | ) | | (33.4 | )% | | (32.2 | )% |
Leathers | 218.0 |
| | 11.7 |
| | 279.0 |
| | 13.4 |
| | (61.0 | ) | | (21.9 | ) | | (21.6 | ) | 73.9 |
| | 11.4 |
| | 106.5 |
| | 11.0 |
| | (32.6 | ) | | (30.6 | ) | | (29.9 | ) |
Jewelry | 139.9 |
| | 7.5 |
| | 171.7 |
| | 8.2 |
| | (31.8 | ) | | (18.5 | ) | | (17.8 | ) | 38.4 |
| | 5.9 |
| | 51.9 |
| | 5.4 |
| | (13.5 | ) | | (26.0 | ) | | (24.9 | ) |
Other | 38.4 |
| | 2.0 |
| | 51.3 |
| | 2.5 |
| | (12.9 | ) | | (25.1 | ) | | (24.8 | ) | 18.0 |
| | 2.8 |
| | 28.8 |
| | 3.0 |
| | (10.8 | ) | | (37.5 | ) | | (36.8 | ) |
Total | $ | 1,867.4 |
| | 100.0 | % | | $ | 2,083.2 |
| | 100.0 | % | | $ | (215.8 | ) | | (10.4 | )% | | (10.0 | )% | $ | 649.7 |
| | 100.0 | % | | $ | 966.7 |
| | 100.0 | % | | $ | (317.0 | ) | | (32.8 | )% | | (31.7 | )% |
In the Year To Date Period, the translation of foreign-based net sales into U.S. dollars decreased reported net sales by approximately $6.6$10.5 million, including unfavorable impacts of $5.5$5.1 million, $0.6$4.5 million, and $0.5$0.9 million in our Asia, Europe Americas and AsiaAmericas segments, respectively, compared to the Prior Year YTD Period.
The following table sets forth consolidated net sales by segment (dollars in millions):
| | | For the 39 Weeks Ended September 30, 2017 | | For the 39 Weeks Ended October 1, 2016 | | Growth (Decline) | For the 27 Weeks Ended July 4, 2020 | | For the 26 Weeks Ended June 29, 2019 | | Growth (Decline) |
| Net Sales | | Percentage of Total | | Net Sales | | Percentage of Total | | Dollars | | Percentage As Reported | | Percentage Constant Currency | Net Sales | | Percentage of Total | | Net Sales | | Percentage of Total | | Dollars | | Percentage As Reported | | Percentage Constant Currency |
Americas | $ | 874.5 |
| | 46.9 | % | | $ | 1,042.2 |
| | 50.0 | % | | $ | (167.7 | ) | | (16.1 | )% | | (16.0 | )% | $ | 258.7 |
| | 39.8 | % | | $ | 413.5 |
| | 42.8 | % | | $ | (154.8 | ) | | (37.4 | )% | | (37.2 | )% |
Europe | 637.6 |
| | 34.1 |
| | 669.1 |
| | 32.1 |
| | (31.5 | ) | | (4.7 | ) | | (3.9 | ) | 207.8 |
| | 31.9 |
| | 300.3 |
| | 31.0 |
| | (92.5 | ) | | (30.8 | ) | | (29.3 | ) |
Asia | 355.3 |
| | 19.0 |
| | 371.9 |
| | 17.9 |
| | (16.6 | ) | | (4.5 | ) | | (4.3 | ) | 175.4 |
| | 27.0 |
| | 243.2 |
| | 25.2 |
| | (67.8 | ) | | (27.9 | ) | | (25.8 | ) |
Corporate | | 7.8 |
| | 1.3 |
| | 9.7 |
| | 1.0 |
| | (1.9 | ) | | (19.6 | ) | | (19.6 | ) |
Total | $ | 1,867.4 |
| | 100.0 | % | | $ | 2,083.2 |
| | 100.0 | % | | $ | (215.8 | ) | | (10.4 | )% | | (10.0 | )% | $ | 649.7 |
| | 100.0 | % | | $ | 966.7 |
| | 100.0 | % | | $ | (317.0 | ) | | (32.8 | )% | | (31.7 | )% |
Americas Net Sales. For Americas net sales decreased $154.8 million or 37.4% (37.2% in constant currency) during the Year To Date Period Americas net sales decreased $167.7 million or 16.1% (16.0% in constant currency), comparedcomparison to the Prior Year YTD Period. During the Year To Date Period, watches decreased $103.0$129.7 million or 13.1% (13.0%38.9% (38.6% in constant currency). Our, our leathers and jewelry categories declined $41.5business decreased $19.0 million or 23.6% (23.6%29.5% (29.3% in constant currency) and $16.8our jewelry category declined $4.1 million or 26.3% (26.6%38.0% (39.8% in constant currency), respectively. Sales declined in the U.S. and Canada and were partially offset by sales increases in Mexico.. During the Year To Date Period, nearly allsales declined in most brands in our watch portfolio, with the portfoliolargest decreases in FOSSIL and MICHAEL KORS. Geographically, sales declined in the U.S., Mexico and Canada. Strong e-commerce sales growth partially offset retail store and wholesale sales decline. Comparable retail sales in the region decreased in the low-twenties on a percentage basis during the Year To Date Period, driven by decreases in traditional watches thattemporary store closures due to the COVID-19 pandemic, but were partially offset by increases in connected watches, with the strongest performance coming from MICHAEL KORS ACCESS and FOSSIL connected watches. Both wholesale andstrong positive e-commerce comparable retail sales declined at similar rates. Comparable retail sales declined moderately in the region with negative comparable store sales partially offset by moderate increases in comparable sales in our e-commerce business.sales.
The following table sets forth product net sales and the changes in product net sales on both a reported and constant-currency basis from period to period for the Americas segment on a reported and constant currency basis (dollars in millions):
| | | For the 39 Weeks Ended September 30, 2017 | | For the 39 Weeks Ended October 1, 2016 | | | | | | | For the 27 Weeks Ended July 4, 2020 | | For the 26 Weeks Ended June 29, 2019 | | | | | | |
Growth (Decline) | | Net Sales | | Net Sales | | Dollars | | Percentage As Reported | | Percentage Constant Currency | Net Sales | | Net Sales | | Dollars | | Percentage As Reported | | Percentage Constant Currency |
Watches | $ | 681.1 |
| | $ | 784.1 |
| | $ | (103.0 | ) | | (13.1 | )% | | (13.0 | )% | $ | 203.7 |
| | $ | 333.4 |
| | $ | (129.7 | ) | | (38.9 | )% | | (38.6 | )% |
Leathers | 134.5 |
| | 176.0 |
| | (41.5 | ) | | (23.6 | ) | | (23.6 | ) | 45.4 |
| | 64.4 |
| | (19.0 | ) | | (29.5 | ) | | (29.3 | ) |
Jewelry | 47.2 |
| | 64.0 |
| | (16.8 | ) | | (26.3 | ) | | (26.6 | ) | 6.7 |
| | 10.8 |
| | (4.1 | ) | | (38.0 | ) | | (39.8 | ) |
Other | 11.7 |
| | 18.1 |
| | (6.4 | ) | | (35.4 | ) | | (34.8 | ) | 2.9 |
| | 4.9 |
| | (2.0 | ) | | (40.8 | ) | | (38.8 | ) |
Total | $ | 874.5 |
| | $ | 1,042.2 |
| | $ | (167.7 | ) | | (16.1 | )% | | (16.0 | )% | $ | 258.7 |
| | $ | 413.5 |
| | $ | (154.8 | ) | | (37.4 | )% | | (37.2 | )% |
Europe Net Sales. For Europe net sales decreased $92.5 million or 30.8% (29.3% in constant currency) during the Year To Date Period Europe net sales decreased $31.5 million or 4.7% (3.9% in constant currency), comparedcomparison to the Prior Year YTD Period. Watches declined $4.7During the Year To Date Period, watches decreased $70.6 million or 1.0% (0.3%30.6% (29.1% in constant currency), our jewelry category declined $10.3 million or 26.3% (24.7% in constant currency), and our leathers and jewelry categories declined $9.9business decreased $6.1 million or 16.9% (15.7%29.6% (28.2% in constant currency) and $10.9 million or 11.1% (9.8% in constant currency), respectively.. During the Year To Date Period, most of the brands in the portfolio declined, driven mainly by decreasestemporary store closures in traditional watches thatour direct to consumer and wholesale channel due to the COVID-19 pandemic and reduced traffic as stores re-opened. Sales were down in all markets, most notably in Germany, the U.K. and Italy. Strong e-commerce sales growth partially offset by increases in connected watches. Growth in Spain and Poland were offset by declines in most other markets with the greatest decline in our Middle East business. Bothretail store and wholesale and retail channels decreased at similar rates.channels. Comparable retail sales were moderately negativein the region decreased in the low twenties on a percentage basis during the Year To Date Period, with negativedriven by temporary store closures due to the COVID-19 pandemic, but were partially offset by strong positive e-commerce comparable sales in the leathers and jewelry categories while comparable sales in our watch category were flat.retail sales.
The following table sets forth product net sales and the changes in product net sales on both a reported and constant-currency basis from period to period for the Europe segment on a reported and constant currency basis (dollars in millions):
| | | For the 39 Weeks Ended September 30, 2017 | | For the 39 Weeks Ended October 1, 2016 | | | | | | | For the 27 Weeks Ended July 4, 2020 | | For the 26 Weeks Ended June 29, 2019 | | | | | | |
Growth (Decline) | | Net Sales | | Net Sales | | Dollars | | Percentage As Reported | | Percentage Constant Currency | Net Sales | | Net Sales | | Dollars | | Percentage As Reported | | Percentage Constant Currency |
Watches | $ | 483.7 |
| | $ | 488.4 |
| | $ | (4.7 | ) | | (1.0 | )% | | (0.3 | )% | $ | 160.1 |
| | $ | 230.7 |
| | $ | (70.6 | ) | | (30.6 | )% | | (29.1 | )% |
Leathers | 48.8 |
| | 58.7 |
| | (9.9 | ) | | (16.9 | ) | | (15.7 | ) | 14.5 |
| | 20.6 |
| | (6.1 | ) | | (29.6 | ) | | (28.2 | ) |
Jewelry | 87.6 |
| | 98.5 |
| | (10.9 | ) | | (11.1 | ) | | (9.8 | ) | 28.9 |
| | 39.2 |
| | (10.3 | ) | | (26.3 | ) | | (24.7 | ) |
Other | 17.5 |
| | 23.5 |
| | (6.0 | ) | | (25.5 | ) | | (25.1 | ) | 4.3 |
| | 9.8 |
| | (5.5 | ) | | (56.1 | ) | | (55.1 | ) |
Total | $ | 637.6 |
| | $ | 669.1 |
| | $ | (31.5 | ) | | (4.7 | )% | | (3.9 | )% | $ | 207.8 |
| | $ | 300.3 |
| | $ | (92.5 | ) | | (30.8 | )% | | (29.3 | )% |
Asia Net Sales. Asia net sales decreased $67.8 million or 27.9% (25.8% in constant currency) during the Year To Date Period in comparison to the Prior Year YTD Period. During the Year To Date Period, watches decreased $59.6 million or 27.7% (25.6% in constant currency), our leathers business decreased $7.6 million or 35.2% (33.3% in constant currency) and our jewelry category increased $0.8 million or 40.0% (45.0% in constant currency). Sales of most brands declined in the Year To Date Period as compared to the Prior Year YTD Period, most notably in FOSSIL. Strong e-commerce sales growth partially offset retail store and wholesale sales declines. Within the region, we continued to have strong sales growth in mainland China, while all other major markets declined. For the Year To Date Period, Asia netcomparable retail sales decreased $16.6 million or 4.5% (4.3% in constant currency), comparedthe mid-thirties on a percentage basis driven by temporary store closures due to the Prior Year YTD Period. Leathers declined $9.7 million or 21.9% (21.7% in constant currency), jewelry declined $4.1 million or 44.6% (44.6% in constant currency) and watch sales decreased $2.2 million or 0.7% (0.6% in constant currency). Growth in India and China was offset by declines in Japan, Australia and most other markets. Comparable retail sales in the region decreased moderately with negative comparable sales in the leathers and jewelry categoriesCOVID-19 pandemic, but were partially offset by strong positive e-commerce comparable sales in our watch category for the Year To Date Period.retail sales.
The following table sets forth product net sales and the changes in product net sales on both a reported and constant-currency basis from period to period for the Asia segment on a reported and constant currency basis (dollars in millions):
| | | For the 39 Weeks Ended September 30, 2017 | | For the 39 Weeks Ended October 1, 2016 | | | | | | | For the 27 Weeks Ended July 4, 2020 | | For the 26 Weeks Ended June 29, 2019 | | | | | | |
Growth (Decline) | | Net Sales | | Net Sales | | Dollars | | Percentage As Reported | | Percentage Constant Currency | Net Sales | | Net Sales | | Dollars | | Percentage As Reported | | Percentage Constant Currency |
Watches | $ | 306.5 |
| | $ | 308.7 |
| | $ | (2.2 | ) | | (0.7 | )% | | (0.6 | )% | $ | 155.6 |
| | $ | 215.2 |
| | $ | (59.6 | ) | | (27.7 | )% | | (25.6 | )% |
Leathers | 34.6 |
| | 44.3 |
| | (9.7 | ) | | (21.9 | ) | | (21.7 | ) | 14.0 |
| | 21.6 |
| | (7.6 | ) | | (35.2 | ) | | (33.3 | ) |
Jewelry | 5.1 |
| | 9.2 |
| | (4.1 | ) | | (44.6 | ) | | (44.6 | ) | 2.8 |
| | 2.0 |
| | 0.8 |
| | 40.0 |
| | 45.0 |
|
Other | 9.1 |
| | 9.7 |
| | (0.6 | ) | | (6.2 | ) | | (4.1 | ) | 3.0 |
| | 4.4 |
| | (1.4 | ) | | (31.8 | ) | | (29.5 | ) |
Total | $ | 355.3 |
| | $ | 371.9 |
| | $ | (16.6 | ) | | (4.5 | )% | | (4.3 | )% | $ | 175.4 |
| | $ | 243.2 |
| | $ | (67.8 | ) | | (27.9 | )% | | (25.8 | )% |
Gross Profit. For Gross profit of $281.0 million in the Year To Date Period grossdecreased $232.1 million or 45.2% in comparison to $513.0 million in the Prior Year YTD Period primarily due to the decline in net sales. Gross profit margin rate decreased 350 basis points to 48.8%43.2% in the Year To Date Period compared to 52.3%53.1% in the Prior Year YTD Period. The decreased gross profit margin rate contracted primarily due to increased liquidation and inventory valuation adjustments of older generation connected products, primarily in the first quarter, and was primarily drivenpartially offset by a higher mix of e-commerce sales and favorable region and product mix. Currency favorably impacted the same factors impacting the Third Quarter. Changes in foreign currency rates negatively impacted gross profit margin rate by approximately 6010 basis points.
Operating Expenses. For the Year To Date Period, total operating expenses increaseddecreased to $1.4 billion$452.1 million compared to $1.0 billion in the Prior Year YTD Period, primarily due to intangible impairment charges recorded in the second quarter of fiscal 2017. During the second quarter of fiscal year 2017, interim impairment tests were performed on goodwill and trade names due to the sustained declines in our market capitalization and sales trends, resulting in impairment expenses of $359.5 million for goodwill and $47.6 million for trade names. For additional information, please refer to "Note 2 - Goodwill and Intangibles Impairment Charges" to the condensed consolidated financial statements. During the Year To Date Period, we incurred restructuring costs of $41.8 million under our NWF initiative compared with restructuring costs of $14.5$531.3 million in the Prior Year YTD Period. SG&A expenses were lower compared to the Prior Year YTD Period mainly due to lowercorporate and regional infrastructure reductions and lower store costs driven by NWF and reduced marketing expenses.as a result of store closures. During the Year To Date Period, we incurred restructuring costs of $19.9 million in comparison to restructuring costs of $17.5 million in the Prior Year YTD Period. We incurred non-cash intangible asset impairment charges of $2.5 million in the Year To Date Period. The translation of foreign-denominated expenses during the Year To Date Period decreased operating expenses by approximately $3.4$5.5 million as a result of the stronger U.S. dollar. As a percentage of net sales, SG&A expenses increased to 50.2%66.1% in the Year To Date Period as compared to 48.7%53.2% in the Prior Year YTD Period.
Consolidated Operating Income (Loss). Operating income (loss) decreased towas a loss of $475.5$171.1 million in the Year To Date Period as compared to incomea loss of $61.0$18.3 million in the Prior Year YTD Period. The $317.0 million decline in net sales from the Year To Date Period compared with the Prior Year YTD Period was predominately due to the COVID-19 pandemic. The gross margin rate primarily decreased due to increased liquidation and inventory valuation adjustments of older generation connected products and was partially offset by a higher mix of e-commerce sales and favorable region and product mix. Within operating expenses, SG&A expenses decreased $84.1 million driven by non-cash intangible impairment chargescorporate and regional infrastructure reductions and lower store costs due to store closures both as part of $407.1 millionour long term operating strategy and also by decreased sales and gross margin rate.as a response to the global COVID-19 pandemic. As a percentage of net sales, operating margin was (25.5)(26.3)% in the Year To Date Period as compared to 2.9%(1.9)% in the Prior Year YTD Period and was negatively impacted by approximately 7010 basis points due to changes in foreign currencies. During the Year To Date Period as compared to the Prior Year YTD Period, we faced continued retail pressure, most significantly in our traditional businesses in all segments. Additionally, the gross margin rate was negatively impacted by connected products, due to both lower connected margins as well as additional product valuation charges, and lower retail margins due to increased promotional activity in outlets and the e-commerce channel in all segments. Operating expenses increased significantly, primarily due to non-cash impairment charges recorded on our goodwill in the Americas, Europe and Asia segments and trade names in corporate. Increased restructuring charges were more than offset by savings in our infrastructure, store costs and marketing expenses.
Operating income (loss) by segment is summarized as follows (dollars in millions):
| | | For the 39 Weeks Ended September 30, 2017 | | For the 39 Weeks Ended October 1, 2016 | | Growth (Decline) | | Operating Margin % | For the 27 Weeks Ended July 4, 2020(1) | | For the 26 Weeks Ended June 29, 2019 | | Change | | Operating Margin % |
| | Dollars | | Percentage | | 2017 | | 2016 | | Dollars | | Percentage | | 2020 | | 2019 |
Americas | $ | (122.0 | ) | | $ | 168.3 |
| | $ | (290.3 | ) | | (172.5 | )% | | (13.9 | )% | | 16.2 | % | $ | (32.4 | ) | | $ | 40.5 |
| | $ | (72.9 | ) | | (180.0 | )% | | (12.5 | )% | | 9.8 | % |
Europe | (33.8 | ) | | 109.2 |
| | (143.0 | ) | | (131.0 | ) | | (5.3 | ) | | 16.3 |
| (13.2 | ) | | 26.7 |
| | (39.9 | ) | | (149.4 | ) | | (6.3 | ) | | 8.9 |
|
Asia | (2.7 | ) | | 60.5 |
| | (63.2 | ) | | (104.5 | ) | | (0.8 | ) | | 16.3 |
| 17.9 |
| | 48.0 |
| | (30.1 | ) | | (62.7 | ) | | 10.2 |
| | 19.7 |
|
Corporate | (317.0 | ) | | (277.0 | ) | | (40.0 | ) | | 14.4 |
| | | | | (143.4 | ) | | (133.5 | ) | | (9.9 | ) | | 7.4 |
| | | | |
Total operating income (loss) | $ | (475.5 | ) | | $ | 61.0 |
| | $ | (536.5 | ) | | (879.5 | )% | | (25.5 | )% | | 2.9 | % | $ | (171.1 | ) | | $ | (18.3 | ) | | $ | (152.8 | ) | | 835.0 | % | | (26.3 | )% | | (1.9 | )% |
_________________________________________________________________________________________________________________________________________________________________
(1)Subsequent to the issuance of our condensed consolidated financial statements for the 14 weeks ended April 4, 2020, we determined that Operating Loss for the Americas and Corporate segments for the 14 weeks ended April 4, 2020 was incorrectly presented as certain charges totaling $24.5 million were incorrectly attributed to the Americas segment rather than the Corporate segment. As a result, Operating Loss for the Americas and Corporate segments for the 27 week period ended July 4, 2020 has been corrected. We evaluated the materiality of the disclosure misstatement from a quantitative and qualitative perspective and concluded the misstatement was not material to the 14 weeks ended April 4, 2020.
Interest Expense. Interest expense increaseddecreased by $12.7$0.1 million during the Year To Date Period as a result of highera decreased interest rate spreads due to our amended credit facility.and was mostly offset by a larger borrowing base.
Other Income (Expense)-Net. During the Year To Date Period, other income (expense)-net increased by $5.1 million to $11.5was a net expense of $6.4 million in comparisonthe Year to Date Period compared to net income of $26.4 million in the Prior Year YTD Period. This change was largelyprimarily driven by favorable foreign currency activity compared toa $21.6 million gain on the sale of intellectual property in the Prior Year YTD Period, and net foreign currency losses during the Year To Date Period as compared to net gains in the Prior Year YTD Period.
Provision for Income Taxes. Income tax benefit for the Year To Date Period was $100.7$84.5 million, resulting in an effective income tax rate of 20.3%. For the Prior Year YTD Period, income tax expense was $13.2 million, resulting in an effective income tax rate of 27.5%43.8%. The tax benefit in the Year To Date Period was negatively impacted by the increased tax expense resulting from all of the foreign and some of the U.S. goodwill impairment charge being permanently nondeductible for tax purposes as compared to the Prior Year YTD Period combined with the impact of unfavorable discrete items, mostly due to the additional tax expense resulting from the adoption of ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.
Additionally, income taxes are provided for under the asset and liability method for temporary differences in the recognition of assets and liabilities recognized for income tax and GAAP purposes. Deferred tax assets are periodically assessed for the likelihood of whether they are more likely than not to be realized. We have previously established a valuation allowance in those jurisdictions where we believe recovery is not more likely than not, which generally increases tax expense in the period such determination is made. For those jurisdictions with deferred tax assets not currently subject to a valuation allowance, including the U.S., we have determined that the realization of deferred tax assets continues to be more likely than not.
Net Income (Loss) Attributable to Fossil Group, Inc. Year To Date Period net income (loss) attributable to Fossil Group, Inc. decreased to $(398.3) million, or $(8.22) per diluted share, in comparison to $29.2 million, or $0.60 per diluted share, in the Prior Year YTD Period, primarily due to a $(6.51) per diluted share impact of intangible impairment charges recorded during the Year To Date Period. Diluted earnings (loss) per share was negatively impacted by restructuring charges of $0.56 in the Year To Date Period and $0.22 in the Prior Year YTD Period. The tax benefit in the Year To Date Period was negatively impacted by the decreased effective tax rate in the Year To Date Period as compareddiffered from the Prior Year YTD Period primarily due to changes enacted in the CARES Act allowing a U.S. NOL carryback.
The Prior Year YTD Period effective tax rate was negative because income tax expense was accrued on certain foreign entities with positive taxable income and no benefit was recognized for losses in the U.S. and certain foreign jurisdictions.
Net Income (Loss) Attributable to Fossil Group, Inc. For the Year To Date Period, we had a net loss of $108.1 million, or $2.13 per diluted share, in comparison to a loss of $19.6 million, or $0.39 per diluted share, in the Prior Year YTD Period. A reduction in operating expenses partially offset the decline in gross margin. The Company also benefited from a $21.6 million gain on the sale of intellectual property in the Prior Year YTD Period. Diluted earnings per share in the Year To Date Period, as compared to the Prior Year YTD Period, decreased $0.11$0.09 per diluted share due to the currency impact of a stronger U.S. dollar.
Liquidity and Capital Resources
Our cash and cash equivalents balance at the end of the ThirdSecond Quarter was $166.9$277.6 million, including $165.8$211.2 million held in banks outside the U.S., in comparison to cash and cash equivalents of $236.0$226.6 million at the end of the Prior Year Quarter and $297.3$200.2 million at the end of fiscal year 2016.2019. Historically, our business operations have not required substantial cash during the first several months of our fiscal year. Generally, starting in the third quarter, our cash needs begin to increase, typically reaching a peak in the September-November time frame as we increase inventory levels in advance of the holiday season. Our quarterly cash requirements are also impacted by debt repayments, restructuring charges, strategic investments such as acquisitions and other capital expenditures and restructuring charges.expenditures. We believe cash flows from operating activities as well asoperations, including our current and planned cost savings measures, combined with existing cash on hand and amounts available under our U.S. credit facilities arewill be sufficient to meetfund our cash needs in the U.S. for the next 12twelve months. Although we believe we have adequate sources of liquidity in the short-term and long-term, the success of our operations, in light of the market volatility and uncertainty as a result of the COVID-19 pandemic, among other factors, could impact our business and liquidity.
We have taken various actions to mitigate the impact of the current economic crisis on our financial position, with a focus on financial liquidity enhancements, cost reduction measures, capital preservation and inventory management. In addition to these temporary savings, we plan to address permanent cost reductions under our NWF 2.0 program. We believe our cost reduction plans, if successfully executed, will result in adequate cash flows to support our ongoing operations.
For the Year To Date Period,Second Quarter, we generated operating cash flow of $60.2$11.6 million. This operating cash flow combined with cash on handA net loss of $108.4 million was utilized to fund net debt payments of $149.5 million and $17.2 million of capital expenditures. Net losses of $395.4 million weremore than offset by net non-cash items of $389.3 million and a net decreasean increase in working capital items of $66.2 million. Non-cash items primarily consisted of goodwill and trade name impairment charges of $407.1 million. The net decrease in working capital items primarily consisted of a decrease in accounts receivable of $85.1$17.2 million and annet non-cash items of $102.8 million. We had net debt borrowings of $69.3 million and capital expenditures of $5.6 million. We increased our borrowings under the Revolving Facility (as defined below) as a precautionary measure to increase our cash position, provide liquidity for a sustained period and to preserve financial flexibility in accounts payablelight of $80.1 million, partially offset by a net increasecurrent uncertainty in inventory of $116.0 million.the global markets resulting from the COVID-19 pandemic.
Accounts receivable, net of allowances, decreased by 3.2%36.3% to $310.9$130.1 million at the end of the ThirdSecond Quarter compared to $321.3$204.2 million at the end of the Prior Year Quarter.Quarter driven by reduced sales. Days sales outstanding for our wholesale businesses for the ThirdSecond Quarter increased to 5672 days compared to 5350 days in the Prior Year Quarter, primarily due to shifts in customer mixdriven by the COVID-19 pandemic related closures and timing of payments.
Accounts payable at the end of the Third Quarter was $248.8 million, which increased by 28.5% from the end of the Prior Year Quarter ending accounts payable balance of $193.6 million. The increase in accounts payable in the Third Quarter was largely due to our effective working capital management and timing of payments, some of which will have an offsetting effect in the fourth quarter of fiscal 2017.related negative impact on collections.
Inventory at the end of the ThirdSecond Quarter was $683.0$375.9 million, which decreased by 2.4%18.3% from the end of the Prior Year Quarter ending inventory balance of $699.6 million. We have reduced our traditional watch inventories significantly and we are working to clear the previous$460.3 million, largely reflecting accelerated inventory reduction actions, particularly of older generation connected products over the next few quarters.product, and proactive management of inbound receipts to align with reduced consumer demand.
At the end of the ThirdSecond Quarter, we had net working capital of $732.8$417.9 million compared to net working capital of $965.5$488.0 million at the end of the Prior Year Quarter. At the end of the ThirdSecond Quarter, we had approximately $40.2$25.2 million of short-term borrowings and $444.3$243.9 million in long-term debt.
On March 9, 2015, we entered into an Amended and Restated Credit Agreement (as amended, the “Credit Agreement”). The Credit Agreement provides for (i) revolving credit loans (the “Revolving Credit Facility”), with an up to $20.0 million subfacility for swingline loans (the “Swingline Loan”), and an up to $10.0 million subfacility for letters of credit, and (ii) a term loan in the amount of $231.3 million (the “Term Loan”). The Credit Agreement amended and restated that certain credit agreement, dated as of May 17, 2013, as amended (the “Prior Agreement”).
On March 10, 2017, we entered into the Second Amendment to the Amended and Restated Credit Agreement (the “Second Amendment”). The Second Amendment reduced the Revolving Credit Facility under the Credit Agreement from $1.05 billion to $850.0 million. The Second Amendment also removed the incremental term loan that was available under the Credit Agreement, extended the maturity date of the Credit Agreement to May 17, 2019 and removed our ability to make offers to the lenders to extend the maturity date of the Term Loan or the Revolving Credit Facility. The Second Amendment also amended the repayment schedule for the Term Loan and requires us to make monthly payments on the last business day of each month beginning April 30, 2018. On and after April 1, 2018, interest on the Term Loan that is based upon the base rate will be due and payable in arrears on the last business day of each calendar month, and interest on the Term Loan that is based upon the London Interbank Offer Rate ("LIBOR") will be due and payable on the last day of the applicable interest period; provided, that if such interest period extends for over one month, then interest will be due and payable at the end of each one month interval during such interest period. The Second Amendment also amended the mandatory prepayment provisions under the Credit Agreement and provides that to the extent there are excess proceeds remaining from the issuance of debt following the repayment in full of the Term Loan, we are required to repay the Revolving Credit Facility in the amount of such excess proceeds, with a corresponding permanent reduction in the Revolving Credit Facility in the amount of up to $50.0 million.
The Second Amendment amended the applicable margin used to calculate the interest rate that is applicable to base rate loans and LIBOR rate loans and provides that the interest rate margin for base rate loans is 2.50% per annum and the interest rate margin for LIBOR rate loans is 3.50% per annum. On October 1, 2017, the applicable margin on the Term Loan automatically increased to 2.75% per annum for base rate loans and 3.75% per annum for LIBOR rate loans. If the Term Loan has not been repaid in full on or prior to March 31, 2018, then on such date, the applicable margin will automatically increase to 3.25% per annum for base rate loans and 4.25% per annum for LIBOR rate loans. The Second Amendment also changed the commitment fee payable with respect to the Revolving Credit Facility to 0.50% per annum. We will incur an additional fee of 0.25% times the outstanding principal amount of the total credit exposure under the Credit Agreement if the Term Loan has not been repaid in full on or prior to March 31, 2018. Furthermore, the Second Amendment changed the consolidated total leverage ratio that we must comply with from 3.25 to 1.00 to the ratios as set forth below:
|
| | |
Period | | Maximum Ratio |
July 2, 2017 through and including September 30, 2017 | | 3.50 to 1.00 |
October 1, 2017 through and including March 31, 2018 | | 3.25 to 1.00 |
April 1, 2018 through and including September 29, 2018 | | 3.50 to 1.00 |
September 30, 2018 and thereafter | | 3.25 to 1.00 |
As of September 30, 2017, amounts outstanding under the Revolving Credit Facility and the Term Loan under the Credit Agreement bear interest, at our option, at (i) the base rate plus 2.50% or (ii) the LIBOR rate (defined as the quotient obtained by dividing (a) LIBOR by (b) 1.00 minus the Eurodollar reserve percentage) plus 3.50%.
Amounts outstanding under the Swingline Loan under the Credit Agreement or upon any drawing under a letter of credit bear interest at the base rate plus the applicable margin.
During the Year To Date Period, we made principal payments of $18.8 million under the Term Loan. Additionally, we had net principal payments of $131.3 million under the Revolving Credit Facility during the Year To Date Period at an average annual interest rate of 4.27%. As of September 30, 2017, we had $175.0 million and $309.7 million outstanding under the Term Loan and the Revolving Credit Facility, respectively. As of September 30, 2017, we also had unamortized debt issuance costs, which reduce the corresponding debt liability, of $6.7 million. In addition, we had $0.9 million of outstanding standby letters of credit at September 30, 2017. Amounts available under the Revolving Credit Facility are reduced by any amounts outstanding under standby letters of credit. As of September 30, 2017, we had available borrowing capacity of $270.5 million under the Revolving Credit Facility. Our domestic subsidiary receives short-term loans from certain of our foreign subsidiaries at the end of each fiscal quarter which are used to reduce our external borrowings. These intercompany loans are repaid at the beginning
of the following fiscal quarter. At the end of the Third Quarter, these intercompany loans totaled $411.8 million. Borrowings under the Revolving Credit Facility were mainly used to fund normal operating expenses and capital expenditures. At September 30, 2017, we were in compliance with all debt covenants related to all our credit facilities. We continue to focus on diversifying our capital structure beyond just our existing bank partners with longer tenors to support our long-term strategic objectives.
As part of our NWF initiative, we have adopted a disciplined approach to capital management. During the Year To Date Period, we took actions that will reduce costs and better position the organization to support our growth driving initiatives while focusing fewer resources on areas of the business that are not as high of a priority currently. For fiscal year 2017,2020, we expect total capital expenditures to be approximately $30 million.$9 million in order to maintain liquidity and in order to remain in compliance with financial covenants. Of this amount, we expect approximately 55%50% will be for retail store renovations and enhancements, approximately 40% will be for technology and facilities maintenance, and approximately 10% for strategic growth, including investments in omni-channel, global concessions and technology, approximately 20% will be for retail store expansion and renovation and approximately 25% will be for technology and facilities maintenance.technology. Our capital expenditure budget and allocation of it to the foregoing investments are estimates and are subject to change. We believe that cash flows from operations combined with existing cash on hand and amounts available under the Revolving Credit Facilityour credit facilities will be sufficient to fund our working capital needs and planned capital expenditures for the next twelve months.
On September 26, 2019, we and Fossil Partners, L.P. (together with the Company, the “U.S. Borrowers”), as the U.S. borrowers, and Fossil Group Europe GmbH (the “Swiss Borrower”), Fossil Asia Pacific Limited (the “Hong Kong Borrower”), Fossil (Europe) GmbH (the “German Borrower”), Fossil (UK) Limited (the “UK Borrower” and the UK Borrower, together with the Swiss Borrower and the German Borrower, the “European Borrowers”) and Fossil Canada Inc. (the “Canadian Borrower”), as the non-U.S. borrowers, certain other of our subsidiaries from time to time party thereto designated as borrowers (including Fossil France SA, the “French Borrower”, and the French Borrower, together with the U.S. Borrowers, the European Borrowers, the Hong Kong Borrower and the Canadian Borrower, the “ABL Borrowers”), and certain of our subsidiaries from time to time party thereto as guarantors, entered into an asset-based revolving credit agreement (as amended, the “Revolving Facility”) with JPMorgan Chase Bank, N.A. as administrative agent (the “ABL Agent”), J.P. Morgan AG, as French collateral agent, JPMorgan Chase Bank, N.A., Citizens Bank, N.A. and Wells Fargo Bank, National Association as joint bookrunners and joint lead arrangers, and Citizens Bank, N.A. and Wells Fargo Bank, National Association, as co-syndication agents and each of the lenders from time to time party thereto (the “ABL Lenders”). In addition, we, as borrower, entered into a term credit agreement (as amended to date, the “Term Credit Agreement”) with JPMorgan Chase Bank, N.A. as administrative agent (the “Term Agent”), JPMorgan Chase Bank, N.A., Citizens Bank, National Association and Wells Fargo Securities, LLC, as joint bookrunners and joint lead arrangers and the lenders party thereto (the “Term Loan Lenders”).
The Revolving Facility provides that the ABL Lenders may extend revolving loans in an aggregate principal amount not to exceed $275.0 million at any time outstanding (the “Revolving Credit Commitment”), of which up to $160.0 million is available under a U.S. facility, an aggregate of $70.0 million is available under a European facility, $30.0 million is available under a Hong Kong facility, $10.0 million is available under a French facility, and $5.0 million is available under a Canadian facility, in each case, subject to the borrowing base availability limitations described below. The Revolving Facility also includes an up to $45.0 million subfacility for the issuance of letters of credit (the “Letters of Credit”). The Revolving Facility expires and is due and payable on September 26, 2024. The French facility includes a $1.0 million subfacility for swingline loans, and the European facility includes a $7.0 million subfacility for swingline loans. The Revolving Facility is subject to a line cap (the “Line Cap”) equal to the lesser of the total Revolving Credit Commitment and the aggregate borrowing bases under the U.S. facility, the European facility, the Hong Kong facility, the French facility and the Canadian facility. Loans under the Revolving Facility may be made in U.S. dollars, Canadian dollars, euros, Hong Kong dollars or pounds sterling. On March 24, 2020, the U.S. Borrowers provided notice to the ABL Agent for an alternate base rate borrowing of $71.0 million under the Revolving Facility effective March 25, 2020, the Hong Kong Borrower provided notice to the ABL Agent for a Eurodollar borrowing of $10.0 million under the Revolving Facility effective March 30, 2020 and the European Borrowers provided notice to the ABL Agent for a Eurodollar borrowing of €19.0 million under the Revolving Facility effective March 30, 2020. We increased our borrowings under the Revolving Facility as a precautionary measure to increase our cash position, provide liquidity for a sustained period and to preserve financial flexibility in light of current uncertainty in the global markets resulting from the COVID-19 outbreak.
The Revolving Facility is an asset-based facility, in which borrowing availability is subject to a borrowing base equal to: (a) with respect to us, the sum of (i) the lesser of (x) 90% of the appraised net orderly liquidation value percentage of eligible U.S. finished goods inventory and (y) 65% of the lower of cost or market value of eligible U.S. finished goods inventory, plus (ii) 85% of the eligible U.S. accounts receivable, plus (iii) 90% of eligible U.S. credit card accounts receivable, minus (iv) the aggregate amount of reserves, if any, established by the ABL Agent; (b) with respect to each non-U.S. borrower (except for the French Borrower), the sum of (i) the lesser of (x) 90% of the appraised net orderly liquidation value of eligible foreign finished goods inventory of such non-U.S. borrower and (y) 65% of the lower of cost or market value of eligible foreign finished goods inventory of such non-U.S. borrower, plus (ii) 85% of the eligible foreign accounts receivable of such non-U.S. borrower, minus (iii) the aggregate amount of reserves, if any, established by the ABL Agent; and (c) with respect to the French Borrower, (i) 85% of eligible French accounts receivable minus (ii) the aggregate amount of reserves, if any, established by the ABL Agent. Not more than 60% of the aggregate borrowing base under the Revolving Facility may consist of the non-U.S. borrowing bases.
Eurodollar loans under the U.S. facility will continuebear interest at the adjusted LIBO rate plus the applicable rate, and Eurodollar loans under the Canadian facility, European facility, French facility and Hong Kong facility will bear interest at the LIBO rate plus the applicable rate. Base rate loans under the U.S. facility will bear interest at the alternate base rate plus the applicable rate. Under the Canadian facility, Canadian prime rate loans will bear interest at the Canadian prime rate plus the applicable rate, and Canadian dollar loans will bear interest at the CDOR rate plus the applicable rate. Under the Hong Kong facility, Hong Kong dollar loans will bear interest at the HIBOR rate plus the applicable rate. Each swingline loan shall bear interest at the overnight LIBO rate plus the applicable rate for overnight LIBO rate loans. The applicable rate varies from 1.25% to 1.75% for adjusted LIBO, CDOR and HIBOR rate loans and from 0.25% to 0.75% for alternate base rate and Canadian prime rate loans depending on our average daily excess availability under the Revolving Facility for the most recently ended fiscal quarter, which is an amount equal to (x)(1) the lesser of the total revolving commitments then in effect and (2) the aggregate borrowing base, minus (y) the total credit exposure of all ABL Lenders at such time.
The Revolving Facility also includes a commitment fee, payable quarterly in arrears, of 0.250% or 0.375% determined by reference to the average daily unused portion of the overall commitment under the Revolving Facility. The ABL Borrowers will pay the ABL Agent, on the account of the issuing ABL Lenders, an issuance fee of 0.125% for any issued letters of credit.
The ABL Borrowers are permitted to voluntarily prepay the revolving loans, in whole or in part, without premium or penalty. The ABL Borrowers may reduce the commitments at any time, in whole or in part, without premium or penalty, in a minimum aggregate principal amount of not less than $5.0 million or increments of $1.0 million in excess thereof. If the total amount of outstanding revolving loans and Letters of Credit exceeds the total commitment under the Revolving Facility, the ABL Borrowers must prepay the revolving loans in an amount equal to such excess.
During any periods (each, a “Covenant Period”) while availability under the Revolving Facility is less than the greater of (x) 15% of the Line Cap and (y) $30,000,000, we will be subject to a financial covenant which requires us to not permit the fixed charge coverage ratio to be focusedless than 1.00 to 1.00 on effortsthe first day of such Covenant Period or the last day of each fiscal quarter during such Covenant Period.
The ABL Borrowers have the right to minimizerequest an increase to the commitments under the Revolving Facility or any subfacility in an aggregate principal amount not to exceed $75.0 million in increments no less than $10.0 million, subject to certain terms and conditions as defined in the Revolving Facility, including that the Term Credit Agreement has been amended, restated or otherwise modified to permit any additional commitments.
The Revolving Facility is secured by guarantees by us and certain of our domestic subsidiaries. Additionally, we and our subsidiaries have granted liens on all or substantially all of our assets in order to secure the obligations under the Revolving Facility. In addition, the non-U.S. borrowers from time to time party to the Revolving Facility are required to enter into security instruments with respect to all or substantially all of their assets that can be pledged under applicable local law, and certain of their respective subsidiaries may guarantee the respective non-U.S. obligations under the Revolving Facility.
The Term Credit Agreement provides for term loans to us in the aggregate principal amount of $200 million. Proceeds from the Term Credit Agreement were reduced by a $12 million original issue discount, which is presented as a reduction of the Term Credit Agreement on our condensed consolidated balance sheet and will be amortized to interest expense over the life of the term loan. The term loans under the Term Credit Agreement bore interest at (a) the adjusted LIBO rate plus 8.50% for Eurodollar loans or (b) the alternate base rate plus 7.50% for alternate base rate loans as of July 4, 2020. The Term Credit Agreement amortized in quarterly installments in an aggregate amount equal (x) to 2.50% of its original principal amount until March 31, 2020 and, thereafter, (y) $5,000,000 on June 30, 2020, $8,000,000 on September 30, 2020, and $10,000,000 in each quarter thereafter until June 30, 2024. The Term Credit Agreement expires and is due and payable on September 26, 2024, subject to possible extensions.
We are permitted to voluntarily prepay the term loans, in whole or in part, without premium or penalty, and are required to prepay the term loans with the net cash needsproceeds of certain asset sales and improve our workingother dispositions, insurance and condemnation events, debt and equity issuances, and are also subject to an annual excess cash flow sweep. If we prepay the term loans (x) with the proceeds of any other financing, (y) to remove a non-consenting lender, or (z) upon the acceleration of the term loans or the term loans otherwise becoming due prior to their maturity date, each during the period from June 5, 2020 to September 4, 2022, we are required to pay a prepayment fee of 2.00% with respect to the principal amount prepaid prior to September 4, 2021 and 1.00% with respect to the principal amount prepaid between September 4, 2021 and September 4, 2022. Notwithstanding the above, we are not required to pay the prepayment fee for prepayments made prior to September 4, 2020 in connection with the issuance of financings that are not in connection with a change in control of the Company.
In connection with the amendment entered into on June 5, 2020, we were granted relief from compliance with the maximum total leverage ratio covenant until the third fiscal quarter of fiscal year 2021, after which the maximum total leverage ratio permitted under the covenant will be 1.50 to 1.00. Solely during such relief period, we will be subject to a covenant to maintain a consolidated EBITDA of negative $75,000,000 for the fiscal quarter ending April 3, 2021, negative $65,000,000 for the two fiscal quarter period ending July 3, 2021, and negative $30,000,000 for the three fiscal quarter period ending October 2, 2021. The amendment also added an additional covenant to restricted consolidated capital efficiency.expenditures of the Company to $10,000,00 for the fiscal year ended January 2, 2021, $20,000,000 for the fiscal year ended January 1, 2022, and $25,000,000 for the fiscal year ended December 31, 2022 and thereafter. The Term Credit Agreement also limits the amount of principal amount incurred under the Revolving Facility to the lesser of the borrowing base or $200.0 million. A payment default under the Revolving Facility triggers a cross default under the Term Credit Agreement.
The Term Credit Agreement is secured by guarantees by us and certain of our domestic subsidiaries. Additionally,we and such subsidiaries have granted liens on all or substantially all of their assets in order to secure the obligations under the Term Credit Agreement.
The Term Credit Agreement contains customary affirmative and negative covenants and events of default such as compliance with annual audited and quarterly unaudited financial statements disclosures. Upon an event of default, the Term Agent will have the right to declare the term loans and other obligations outstanding immediately due and payable and all commitments immediately terminated or reduced, subject to cure periods and grace periods set forth in the Term Credit Agreement.
The obligations under the Revolving Facility and the Term Credit Agreement are governed by a customary intercreditor agreement (the “Intercreditor Agreement”). The Intercreditor Agreement specifies that (i) the Term Credit Agreement is secured by (a) a perfected first priority security interest in U.S. fixed assets and (b) a perfected second priority security interest in the U.S. liquid assets and accounts receivable, and (ii) the Revolving Facility is secured by (a) a perfected first priority security interest in the U.S. liquid assets and accounts receivable and (b) a perfected second priority security interest in U.S. fixed assets.
We had net payments of $30.0 million during the Year To Date Period under the Term Credit Agreement at an average interest rate of 9.4%. We had net borrowings of $95.8 million under the Revolving Facility during the Year To Date Period at an average interest rate of 1.9%. As of July 4, 2020, we had $170.0 million outstanding under the Term Loan Facility and $123.8 million outstanding under the Revolving Credit Facility. We also had unamortized debt issuance costs of $21.5 million, which reduces the corresponding debt liability. In addition, we had $2.7 million of outstanding standby Letters of Credit at July 4, 2020. Amounts available under the Revolving Facility are reduced by any amounts outstanding under standby letters of credit. As of July 4, 2020, we had available borrowing capacity of $32.5 million under the Revolving Facility. At July 4, 2020, we were in compliance with all debt covenants related to all our credit facilities.
Off Balance Sheet Arrangements
As of September 30, 2017,July 4, 2020, there were no material changes to our off balance sheet arrangements as set forth in commitments and contingencies in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.28, 2019.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with 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 and warranty costs, hedge accounting, litigation reserves and stock-based compensation.costs. 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.
At the end of the fiscal year 2016, our market capitalization exceeded the carrying amount of our net assets by 23%. At the end of the first quarter of fiscal 2017, we experienced a decline in our market capitalization and, as a result of the decline, our market capitalization was 14% below the carrying amount of our net assets as of April 1, 2017. During the second quarter of fiscal 2017, the market capitalization continued to decline at which point we determined the decrease in stock price to be sustained and thus a strong indicator of impairment. Interim testing was performed as of June 15, 2017 for each reporting unit and trade name. Due to a change in key assumptions used in interim testing, including the decline in market capitalization and decline in sales projections, impairment was indicated for goodwill and trade names. Goodwill was fully impaired resulting in pre-tax impairment charges during the second quarter of fiscal 2017 of $202.3 million, $114.3 million and $42.9 million in the Americas, Europe and Asia segments, respectively. Also during the second quarter of fiscal 2017, the SKAGEN trade name with a carrying amount of $55.6 million was written down to its implied fair value of $27.3 million, resulting in a pre-tax impairment charge of $28.3 million; the MISFIT trade name with a carrying amount of $11.8 million was deemed not recoverable, resulting in a pre-tax impairment charge of $11.8 million and the MICHELE trade name with a carrying amount of $18.5 million was written down to its implied fair value of $10.9 million, resulting in a pre-tax impairment charge of $7.6 million.
Other than noted above and in "Note 1—Financial Statement Policies" to the condensed consolidated financial statements, thereThere 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 31, 2016.28, 2019.
Forward-Looking Statements
The statements contained and incorporated by reference in this Quarterly Report on Form 10-Q that are not historical facts, including, but not limited to, statements regarding our expected financial position, results of operations, business and financing plans found in this “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 3. Quantitative and Qualitative Disclosures About Market Risk,” constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and involve a number of risks and uncertainties. The words “may,” “believes,” “expects,” “plans,” “intends,” “estimates,” “anticipates” and similar expressions identify forward-looking statements. The actual results of the future events described in such forward-looking statements could differ materially from those stated in such forward-looking statements. Among the factors that could cause actual results to differ materially are: the effect of worldwide economic conditions; the impact of COVID-19; the length and severity of COVID-19; the pace of recovery following COVID-19; significant changes in consumer spending patterns or preferences; interruptions or delays in the supply of key components; acts of war or acts of terrorism; changes in foreign currency valuations in relation to the U.S. dollar; lower levels of consumer spending resulting from COVID-19, a general economic downturn or generally reduced shopping activity caused by public safety (including COVID-19) or consumer confidence concerns; the performance of our products within the prevailing retail environment; customer acceptance of both new designs and newly-introduced product lines, including risks related to the expanded launch of connected accessories; financial difficulties encountered by customers;customers and related bankruptcy and collection issues; the effects of vigorous competition in the markets in which we operate; the integration of the organizations and operations of any acquired businesses into our existing organization and operations; risks related to the success of NWF;our restructuring programs; the termination or non-renewal of material licenses, foreign operations and manufacturing; changes in the costs of materials, labor and advertising; government regulation;regulation and tariffs; our ability to secure and protect trademarks and other intellectual property rights; and the outcome of current and possible future litigation.
In addition to the factors listed above, our actual results may differ materially due to the other risks and uncertainties discussed in thisour Quarterly ReportReports on Form 10-Q and the risks and uncertainties set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.28, 2019. Accordingly, readers of this Quarterly Report on Form 10-Q should consider these facts in evaluating the information and are cautioned not to place undue reliance on the forward-looking statements contained herein. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
Item 3.Quantitative and Qualitative Disclosures about Market Risk
Foreign Currency Exchange Rate Risk
As a multinational enterprise, we are exposed to changes in foreign currency exchange rates. Our most significant foreign currency risk relates to the euro and, to a lesser extent, the Canadian dollar, British pound, Japanese yen, Mexican peso and Australian dollar as compared to the U.S. dollar. Due to our vertical nature whereby a significant portion of goods are sourced from our owned entities, we face foreign currency risks related to the necessary current settlement of intercompany inventory transactions. We employ a variety of operating practices to manage these market risks relative to foreign currency exchange rate changes and, where deemed appropriate, utilize forward contracts. These operating practices include, among others, our ability to convert foreign currency into U.S. dollars at spot rates and to maintain U.S. dollar pricing relative to sales of our products to certain distributors located outside the U.S. Additionally, we enter into forward contracts to manage fluctuations in Japanese yen exchange rates that will be used to settle future third-party inventory component purchases by a U.S. dollar functional currency subsidiary. The use of forward contracts allows us to offset exposure to rate fluctuations because the gains or losses incurred on the derivative instruments will offset, in whole or in part, losses or gains on the underlying foreign currency exposure. We use derivative instruments only for risk management purposes and do not use them for speculation or for trading. There were no significant changes in how we managed foreign currency transactional exposure in the ThirdSecond Quarter, and management does not anticipate any significant changes in such exposures or in the strategies we employ to manage such exposure in the near future.
The following table shows our outstanding forward contracts designated as cash flow hedges for inventory transactions (in millions) at September 30, 2017July 4, 2020 and their expiration dates.
| | Functional Currency | Functional Currency | | Contract Currency | | | Functional Currency | | Contract Currency | | |
Type | | Amount | | Type | | Amount | | Expiring Through | | Amount | | Type | | Amount | | Expiring Through |
Euro | | 253.4 |
| | U.S. dollar | | 291.0 |
| | August 2019 | | 76.3 |
| | U.S. dollar | | 87.4 |
| | June 2021 |
Canadian dollar | | 95.0 |
| | U.S. dollar | | 73.2 |
| | September 2019 | | 27.2 |
| | U.S. dollar | | 20.7 |
| | June 2021 |
British pound | | 43.5 |
| | U.S. dollar | | 58.1 |
| | September 2019 | | 9.3 |
| | U.S. dollar | | 12.1 |
| | June 2021 |
Japanese yen | | 4,636.4 |
| | U.S. dollar | | 42.8 |
| | September 2019 | | 935.6 |
| | U.S. dollar | | 8.8 |
| | June 2021 |
Mexican peso | | 378.6 |
| | U.S. dollar | | 20.3 |
| | June 2018 | | 52.7 |
| | U.S. dollar | | 2.7 |
| | September 2020 |
Australian dollar | | 21.2 |
| | U.S. dollar | | 16.5 |
| | June 2018 | | 1.7 |
| | U.S. dollar | | 1.2 |
| | September 2020 |
U.S. dollar | | 41.1 |
| | Japanese yen | | 4,470.0 |
| | November 2018 | | 13.4 |
| | Japanese yen | | 1,425.0 |
| | June 2021 |
If we were to settle our euro, Canadian dollar, British pound, Japanese yen, Mexican peso, Australian dollar and U.S. dollar based forward contracts hedging inventory transactions as of September 30, 2017,July 4, 2020, the net result would have been a net lossgain of approximately $12.1 million, net of taxes.$2.5 million. As of September 30, 2017,July 4, 2020, a 10% unfavorable change in the U.S. dollar strengthening against foreign currencies to which we have balance sheet transactional exposures would have decreased net pre-tax income by $27.0$ 17.4 million. The translation of the balance sheets of our foreign-based operations from their local currencies into U.S. dollars is also sensitive to changes in foreign currency exchange rates. As of September 30, 2017,July 4, 2020, a 10% unfavorable change in the exchange rate of the U.S. dollar strengthening against the foreign currencies to which we have exposure would have reduced consolidated stockholders' equity by approximately $66.0$42.0 million.
Interest Rate Risk
We are subject to interest rate volatility with regard to debt borrowings. Effective July 26, 2013, we entered into an interest rate swap agreement with a term of approximately five years to manage our exposure to interest rate fluctuations on our Term Loan. We will continue to evaluate our interest rate exposure and the use of interest rate swaps in future periods to mitigate our risk associated with adverse fluctuations in interest rates.
Based on our variable-rate debt outstanding as of September 30, 2017,July 4, 2020, a 100 basis point increase in interest rates would increase annual interest expense by approximately $3.1$2.7 million. This amount excludes the $168.3 million outstanding, net of debt issuance costs, under our Term Loan hedged with an interest rate swap agreement.
Item 4.Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We conducted an evaluation of the effectiveness of our “disclosure controls and procedures” (“Disclosure Controls”), as defined by Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 as amended (the “Exchange Act”), as of the end of the period covered by this Quarterly Report on Form 10-Q. The Disclosure Controls evaluation was done under the supervision and with the participation of management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”). There are inherent limitations to the effectiveness of any system of disclosure controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
Based upon this evaluation, our CEO and CFO have concluded that our Disclosure Controls were effective as of September 30, 2017.July 4, 2020.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the ThirdSecond Quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION
Item 1. Legal Proceedings
There are no legal proceedings to which we are a party or to which our properties are subject, other than routine litigation incidental to our business whichthat is not material to our consolidated financial condition, results of operations or cash flows.
Item 1A. Risk Factors
In addition to the other information set forth in this Quarterly Report, you should carefully consider the factors contained in Item 1A. “Risk Factors” in Part I of our Annual Report on Form 10-K for the fiscal year ended December 28, 2019, and in our Quarterly Report on Form 10-Q for the fiscal quarter ended April 4, 2020, which could materially affect our business, financial condition or future results. There have been no material changes from the risk factors disclosed in such Annual Report and such Quarterly Report. The risks described in such Annual Report and Quarterly Report and herein are not the only risks facing our company.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There were no shares of common stock repurchased under any of our repurchase programsprogram during the Third Quarter.Second Quarter or Year To Date Period.
Item 5. Other Information
None.
Item 6. Exhibits
(a)Exhibits
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Exhibit Number | | Document Description |
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3.1 | | |
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3.2 | | |
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3.3 | | |
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10.1(1)(2)10.1 | | |
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10.2(2) | | Addendum to Executive Severance Agreement, by and between, Fossil Partners, L.P., Fossil Group Europe GmbH, Fossil Asia Pacific Limited, Fossil (Europe) GmbH, Fossil (UK) Limited, Fossil Canada Inc., Fossil France S.A., the lenders party thereto and Dennis R. Secor, datedJPMorgan Chase Bank, N.A., as of August 31, 2017administrative agent (incorporated by reference to Exhibit 10.1 toof the Company's Current Report on Form 8-K filed on SeptemberApril 27, 2020). |
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10.2 | | |
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10.3 | | |
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31.1(1) | | |
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31.2(1) | | |
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32.1(3) | | |
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32.2(3) | | |
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101.INS(1)101.INS | | XBRL Instance Document.Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
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101.SCH(1)101.SCH | | Inline XBRL Taxonomy Extension Schema Document. |
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101.DEF(1)101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document. |
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101.CAL(1)101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
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101.LAB(1)101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document. |
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101.PRE(1)101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
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104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
(1)Filed herewith.
(2)Management contract or compensatory plan or arrangement.
(3)Furnished herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| FOSSIL GROUP, INC. |
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November 9, 2017August 13, 2020 | /S/ JEFFREY N. BOYER |
| Jeffrey N. Boyer |
| Executive Vice President,Chief Operating Officer, Chief Financial Officer and Treasurer (Principal financial and accounting officer duly authorized to sign on behalf of the Registrant) |