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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________________________________
FORM 10-Q
__________________________________________________________________
(Mark One)
| | | | | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: April 2, 2022
OR
| | | | | |
☐ | 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) 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 |
7.00% Senior notes due 2026 | | FOSLL | | 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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐
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):
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Large accelerated filer | ☐ | | Accelerated filer | ☒ |
| | | | |
Non-accelerated filer | ☐ | | Smaller reporting company | ☐ |
Emerging growth company | ☐ | | | |
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 ☐ No ☒
The number of shares of the registrant’s common stock outstanding as of May 4, 2022: 51,766,969
FOSSIL GROUP, INC.
FORM 10-Q
FOR THE FISCAL QUARTER ENDED APRIL 2, 2022
INDEX
Trademarks, service marks, trade names and copyrights
We use our FOSSIL, MICHELE, RELIC, SKAGEN and ZODIAC trademarks, as well as other trademarks, on certain watches and smartwatches, our FOSSIL and SKAGEN trademarks on jewelry, and our FOSSIL trademark on leather goods and other fashion accessories in the U.S. and in a significant number of foreign countries. We also use FOSSIL, SKAGEN, WATCH STATION INTERNATIONAL and WSI as trademarks on retail stores and FOSSIL, SKAGEN, WATCH STATION INTERNATIONAL, WSI, MISFIT, ZODIAC and MICHELE as trademarks on online e-commerce sites. This filing may also contain other trademarks, service marks, trade names and copyrights of ours or of other companies with whom we have, for example, licensing agreements to produce, market and distribute products. Solely for convenience, the trademarks, service marks, trade names and copyrights referred to or incorporated by reference into this prospectus supplement and the accompanying prospectus may be listed without the TM, SM, © and ® symbols, as applicable, but we will assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensors, if any, to these trademarks, service marks, trade names and copyrights.
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
FOSSIL GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED
IN THOUSANDS
| | | | | | | | | | | |
| April 2, 2022 | | January 1, 2022 |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 162,619 | | | $ | 250,844 | |
Accounts receivable - net of allowances for doubtful accounts of $16,637 and $16,388, respectively | 201,106 | | | 255,131 | |
Inventories | 385,831 | | | 346,850 | |
Prepaid expenses and other current assets | 187,663 | | | 169,930 | |
Total current assets | 937,219 | | | 1,022,755 | |
Property, plant and equipment - net of accumulated depreciation of $434,682 and $436,663, respectively | 85,558 | | | 89,767 | |
Operating lease right-of-use assets | 166,231 | | | 177,597 | |
| | | |
Intangible and other assets-net | 76,314 | | | 78,600 | |
Total long-term assets | 328,103 | | | 345,964 | |
Total assets | $ | 1,265,322 | | | $ | 1,368,719 | |
Liabilities and Stockholders’ Equity | | | |
Current liabilities: | | | |
Accounts payable | $ | 198,527 | | | $ | 229,877 | |
Short-term and current portion of long-term debt | 619 | | | 554 | |
Accrued expenses: | | | |
Current operating lease liabilities | 52,739 | | | 58,721 | |
Compensation | 45,473 | | | 73,595 | |
Royalties | 16,863 | | | 38,714 | |
Customer liabilities | 39,227 | | | 40,886 | |
Transaction taxes | 7,162 | | | 17,147 | |
Other | 45,769 | | | 46,675 | |
Income taxes payable | 26,300 | | | 29,478 | |
Total current liabilities | 432,679 | | | 535,647 | |
Long-term income taxes payable | 22,603 | | | 20,452 | |
Deferred income tax liabilities | 502 | | | 504 | |
Long-term debt | 183,852 | | | 141,354 | |
Long-term operating lease liabilities | 164,588 | | | 174,520 | |
Other long-term liabilities | 31,634 | | | 30,884 | |
Total long-term liabilities | 403,179 | | | 367,714 | |
Commitments and contingencies (Note 13) | | | |
Stockholders’ equity: | | | |
Common stock, 51,157 and 52,146 shares issued and outstanding at April 2, 2022 and January 1, 2022, respectively | 511 | | | 521 | |
Additional paid-in capital | 302,583 | | | 300,848 | |
Retained earnings | 198,134 | | | 229,132 | |
Accumulated other comprehensive income (loss) | (74,062) | | | (67,275) | |
Total Fossil Group, Inc. stockholders’ equity | 427,166 | | | 463,226 | |
Noncontrolling interests | 2,298 | | | 2,132 | |
Total stockholders’ equity | 429,464 | | | 465,358 | |
Total liabilities and stockholders’ equity | $ | 1,265,322 | | | $ | 1,368,719 | |
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 April 2, 2022 | | For the 13 Weeks Ended April 3, 2021 | | | | |
Net sales | $ | 375,853 | | | $ | 363,042 | | | | | |
Cost of sales | 191,540 | | | 180,453 | | | | | |
Gross profit | 184,313 | | | 182,589 | | | | | |
Operating expenses: | | | | | | | |
Selling, general and administrative expenses | 195,758 | | | 187,324 | | | | | |
| | | | | | | |
Other long-lived asset impairments | 286 | | | 4,500 | | | | | |
Restructuring charges | 2,551 | | | 7,520 | | | | | |
Total operating expenses | 198,595 | | | 199,344 | | | | | |
Operating income (loss) | (14,282) | | | (16,755) | | | | | |
Interest expense | 3,997 | | | 7,331 | | | | | |
Other income (expense) - net | 1,618 | | | 1,864 | | | | | |
Income (loss) before income taxes | (16,661) | | | (22,222) | | | | | |
Provision for income taxes | 4,687 | | | 2,117 | | | | | |
Net income (loss) | (21,348) | | | (24,339) | | | | | |
Less: Net income (loss) attributable to noncontrolling interests | 166 | | | 101 | | | | | |
Net income (loss) attributable to Fossil Group, Inc. | $ | (21,514) | | | $ | (24,440) | | | | | |
Other comprehensive income (loss), net of taxes: | | | | | | | |
Currency translation adjustment | $ | (7,885) | | | $ | (10,121) | | | | | |
Cash flow hedges - net change | 1,098 | | | 1,742 | | | | | |
| | | | | | | |
Total other comprehensive income (loss) | (6,787) | | | (8,379) | | | | | |
Total comprehensive income (loss) | (28,135) | | | (32,718) | | | | | |
Less: Comprehensive income (loss) attributable to noncontrolling interests | 166 | | | 101 | | | | | |
Comprehensive income (loss) attributable to Fossil Group, Inc. | $ | (28,301) | | | $ | (32,819) | | | | | |
Earnings (loss) per share: | | | | | | | |
Basic | $ | (0.41) | | | $ | (0.47) | | | | | |
Diluted | $ | (0.41) | | | $ | (0.47) | | | | | |
Weighted average common shares outstanding: | | | | | | | |
Basic | 51,999 | | | 51,519 | | | | | |
Diluted | 51,999 | | | 51,519 | | | | | |
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 April 2, 2022 |
| 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, January 1, 2022 | 52,146 | | | $ | 521 | | | $ | 300,848 | | | $ | — | | | $ | 229,132 | | | $ | (67,275) | | | $ | 463,226 | | | $ | 2,132 | | | $ | 465,358 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Acquisition of common stock | — | | | — | | | — | | | (10,000) | | | — | | | — | | | (10,000) | | | — | | | (10,000) | |
Retirement of common stock | (989) | | | (10) | | | (506) | | | 10,000 | | | (9,484) | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Stock-based compensation | — | | | — | | | 2,241 | | | — | | | — | | | — | | | 2,241 | | | — | | | 2,241 | |
Net income (loss) | — | | | — | | | — | | | — | | | (21,514) | | | — | | | (21,514) | | | 166 | | | (21,348) | |
Other comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | (6,787) | | | (6,787) | | | — | | | (6,787) | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Balance, April 2, 2022 | 51,157 | | | $ | 511 | | | $ | 302,583 | | | $ | — | | | $ | 198,134 | | | $ | (74,062) | | | $ | 427,166 | | | $ | 2,298 | | | $ | 429,464 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
For the 13 Weeks Ended April 3, 2021 |
| 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, January 2, 2021 | 51,474 | | | $ | 515 | | | $ | 293,777 | | | $ | — | | | $ | 203,698 | | | $ | (58,900) | | | $ | 439,090 | | | $ | 942 | | | $ | 440,032 | |
Common stock issued upon exercise of stock options, stock appreciation rights and restricted stock units | 77 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | |
Acquisition of common stock for employee tax withholding | — | | | — | | | — | | | (254) | | | — | | | — | | | (254) | | | — | | | (254) | |
Retirement of common stock | (25) | | | — | | | (254) | | | 254 | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Stock-based compensation | — | | | — | | | 1,764 | | | — | | | — | | | — | | | 1,764 | | | — | | | 1,764 | |
Net income (loss) | — | | | — | | | — | | | — | | | (24,440) | | | — | | | (24,440) | | | 101 | | | (24,339) | |
Other comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | (8,379) | | | (8,379) | | | — | | | (8,379) | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Balance, April 3, 2021 | 51,526 | | | $ | 515 | | | $ | 295,287 | | | $ | — | | | $ | 179,258 | | | $ | (67,279) | | | $ | 407,781 | | | $ | 1,043 | | | $ | 408,824 | |
See notes to the unaudited condensed consolidated financial statements.
FOSSIL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
IN THOUSANDS
| | | | | | | | | | | | | | |
| For the 13 Weeks Ended April 2, 2022 | | For the 13 Weeks Ended April 3, 2021 | |
Operating Activities: | | | | |
Net Income (loss) | $ | (21,348) | | | $ | (24,339) | | |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | | | | |
Depreciation, amortization and accretion | 6,185 | | | 8,933 | | |
Non-cash lease expense | 20,742 | | | 23,980 | | |
Stock-based compensation | 2,241 | | | 1,764 | | |
Decrease in allowance for returns and markdowns | (3,975) | | | (5,933) | | |
| | | | |
Property, plant and equipment and other long-lived asset impairment losses | 286 | | | 4,500 | | |
| | | | |
Non-cash restructuring charges | 92 | | | 221 | | |
Bad debt expense (recoveries) | 2,094 | | | (1,632) | | |
| | | | |
Other non-cash items | 2,111 | | | 247 | | |
| | | | |
| | | | |
Changes in operating assets and liabilities: | | | | |
Accounts receivable | 51,069 | | | 53,961 | | |
Inventories | (41,947) | | | (32,612) | | |
Prepaid expenses and other current assets | (18,963) | | | (9,237) | | |
Accounts payable | (30,097) | | | 24,717 | | |
Accrued expenses | (57,853) | | | (48,465) | | |
Income taxes | (927) | | | (5,214) | | |
Operating lease liabilities | (24,755) | | | (28,740) | | |
Net cash used in operating activities | (115,045) | | | (37,849) | | |
Investing Activities: | | | | |
Additions to property, plant and equipment | (2,530) | | | (2,136) | | |
Decrease in intangible and other assets | 251 | | | 6,267 | | |
Proceeds from the sale of property, plant and equipment and other | 4 | | | 10,925 | | |
| | | | |
Net cash (used in) provided by investing activities | (2,275) | | | 15,056 | | |
Financing Activities: | | | | |
Acquisition of common stock | (10,000) | | | (254) | | |
| | | | |
Debt borrowings | 46,167 | | | 55,008 | | |
Debt payments | (4,100) | | | (88,932) | | |
| | | | |
| | | | |
Net cash provided by (used in) financing activities | 32,067 | | | (34,178) | | |
Effect of exchange rate changes on cash, cash equivalents, and restricted cash | (3,502) | | | (6,550) | | |
Net decrease in cash, cash equivalents, and restricted cash | (88,755) | | | (63,521) | | |
Cash, cash equivalents, and restricted cash: | | | | |
Beginning of period | 264,572 | | | 324,246 | | |
End of period | $ | 175,817 | | | $ | 260,725 | | |
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 information presented herein includes the thirteen-week period ended April 2, 2022 (“First Quarter”) as compared to the thirteen-week period ended April 3, 2021 (“Prior Year Quarter”). 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 April 2, 2022, and the results of operations for the First Quarter and Prior Year Quarter. All adjustments are of a normal, recurring nature.
Effective during fiscal year 2021, the Company made a change to the presentation of product net sales to include third-party smartwatch bands within the smartwatch product type. Third-party smartwatch bands were previously reported within the jewelry product type. The Company's historical disclosures have been recast to be consistent with its current presentation.
These interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Annual Report on Form 10-K filed by the Company pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), for the fiscal year ended January 1, 2022 (the “2021 Form 10-K”). Operating results for the First Quarter are not necessarily indicative of the results to be achieved for the full fiscal year.
The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), which require the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the periods reported. 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, 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 2021 Form 10-K.
Business. The Company is a global design, marketing and distribution company that specializes in consumer fashion accessories. Its principal offerings include an extensive line of men's and women's fashion watches and jewelry, handbags, small leather goods, belts and sunglasses. In the watch and jewelry product categories, the Company has a diverse portfolio of globally recognized owned and licensed brand names under which its products are marketed. The Company's products are distributed globally through various distribution channels, including wholesale in countries where it has a physical presence, direct to the consumer through its retail stores and commercial websites and through third-party distributors in countries where the Company does not maintain a physical presence. The Company's products are offered at varying price points to meet the needs of its customers, whether they are value-conscious or luxury oriented. Based on its extensive range of accessory products, brands, distribution channels and price points, the Company is able to target style-conscious consumers across a wide age spectrum on a global basis.
Operating Expenses. Operating expenses include selling, general and administrative ("SG&A"), trade name impairments, other long-lived asset impairments 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, and design and product development labor costs. SG&A also includes general and administrative expenses primarily consisting of administrative support labor and support costs such as treasury, legal, information services, accounting, internal audit, human resources, executive management costs and costs associated with stock-based compensation. Restructuring charges include costs to reorganize, refine and optimize the Company’s infrastructure and store closures. See Note 16—Restructuring for additional information on the Company’s restructuring plan.
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 April 2, 2022 | | For the 13 Weeks Ended April 3, 2021 | | | | |
Numerator: | | | | | | | |
Net income (loss) attributable to Fossil Group, Inc. | $ | (21,514) | | | $ | (24,440) | | | | | |
Denominator: | | | | | | | |
Basic EPS computation: | | | | | | | |
Basic weighted average common shares outstanding | 51,999 | | | 51,519 | | | | | |
Basic EPS | $ | (0.41) | | | $ | (0.47) | | | | | |
Diluted EPS computation: | | | | | | | |
| | | | | | | |
Diluted weighted average common shares outstanding | 51,999 | | | 51,519 | | | | | |
Diluted EPS | $ | (0.41) | | | $ | (0.47) | | | | | |
At the end of the First Quarter, approximately 2.1 million weighted average shares issuable under stock-based awards were not included in the diluted EPS calculation because they were antidilutive. The total antidilutive weighted average shares included 0.3 million weighted average performance-based shares at the end of the First Quarter.
At the end of the Prior Year Quarter, 2.0 million weighted average shares issuable under stock-based awards were not included in the diluted EPS calculation because they were antidilutive. The total antidilutive weighted average shares included 0.3 million weighted average performance-based shares at the end of the Prior Year Quarter.
Cash, Cash Equivalents and Restricted Cash. Restricted cash included in intangible and other-assets net was comprised primarily of restricted cash balances for appealed tax assessments held in escrow and for pledged collateral to secure bank guarantees for the purpose of obtaining retail space. The following table provides a reconciliation of the cash, cash equivalents, and restricted cash balances as of April 2, 2022 and April 3, 2021 that are presented in the condensed consolidated statement of cash flows (in thousands):
| | | | | | | | | | | | | |
| April 2, 2022 | | April 3, 2021 | | |
Cash and cash equivalents | $ | 162,619 | | | $ | 246,694 | | | |
Restricted cash included in prepaid expenses and other current assets | 117 | | | 6,567 | | | |
Restricted cash included in intangible and other assets-net | 13,081 | | | 7,464 | | | |
Cash, cash equivalents and restricted cash | $ | 175,817 | | | $ | 260,725 | | | |
Recently Issued Accounting Standards
In November 2021, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance ("ASU 2021-10"). The new standard increases transparency of government assistance by focusing on the types of assistance given, an entity's accounting for the assistance, and the effect of the assistance on the entity's financial statements to allow for more comparable information for investors and other financial statement users. This standard is effective for financial statements issued for annual periods beginning after December 15, 2021, but early adoption is permitted. This standard will not have a material impact on the Company's consolidated financial statements or related disclosures.
In October 2021, FASB issued ASU 2021-08, Business Combinations – Accounting for Contract Assets and Contract Liabilities from Contracts with Customers ("ASU 2021-08"). The guidance is intended to improve the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice. The guidance requires an acquirer to recognize and measure contract assets and liabilities acquired in a business combination in accordance with Topic 606 as if they had originated the contracts, as opposed to at fair value on the acquisition date. The standard will be effective for business combinations that occur after January 1, 2023. Early adoption is permitted. The guidance will be applied prospectively to acquisitions occurring on or after the effective date. While the impact of this amendment is dependent on the nature of any future transactions, the Company currently does not expect this standard to have a material impact on the Company's consolidated financial statements or related disclosures.
In March 2020, FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting ("ASU 2020-04") and subsequent guidance that clarified the scope and application of its original guidance. ASU 2020-04 provides optional expedients and exceptions to the current guidance on contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this update apply only to contracts and hedging relationships that reference the London Interbank Offered Rate ("LIBOR") or another reference rate expected to be discontinued due to reference rate reform. The guidance was effective upon issuance and generally can be applied to applicable contract modifications through December 31, 2022. The Company will adopt these standards when LIBOR is discontinued and does not expect it to have a material impact on its consolidated financial statements or related disclosures.
Recently Adopted Accounting Standards
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes ("ASU 2019-12"). ASU 2019-12 simplifies the accounting for income taxes by removing certain exceptions to general principles in Income Taxes (Topic 740). It also clarifies and amends existing guidance to improve consistent application. The Company adopted ASU 2019-12 at the beginning of the First Quarter, and it did not have a material effect on the Company's condensed consolidated financial statements.
2. REVENUE
Disaggregation of Revenue. Due to changes in the Company’s product types as discussed in Note 1 to the Condensed Consolidated Financial Statements, product results for the Prior Year Quarter have been recast to present results on a comparable basis. The Company's revenue disaggregated by major product category and timing of revenue recognition was as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the 13 Weeks Ended April 2, 2022 |
| Americas | | Europe | | Asia | | Corporate | | Total |
Product type | | | | | | | | | |
Watches: | | | | | | | | | |
Traditional watches | $ | 115,902 | | | $ | 81,149 | | | $ | 64,363 | | | $ | 13 | | | 261,427 | |
Smartwatches | $ | 17,272 | | | $ | 12,686 | | | $ | 8,024 | | | $ | 2 | | | 37,984 | |
Total watches | $ | 133,174 | | | $ | 93,835 | | | $ | 72,387 | | | $ | 15 | | | $ | 299,411 | |
Leathers | 19,236 | | | 7,369 | | | 7,580 | | | — | | | 34,185 | |
Jewelry | 7,936 | | | 21,135 | | | 5,625 | | | — | | | 34,696 | |
Other | 1,581 | | | 2,212 | | | 1,176 | | | 2,592 | | | 7,561 | |
Consolidated | $ | 161,927 | | | $ | 124,551 | | | $ | 86,768 | | | $ | 2,607 | | | $ | 375,853 | |
| | | | | | | | | |
Timing of revenue recognition | | | | | | | | | |
Revenue recognized at a point in time | $ | 161,594 | | | $ | 124,300 | | | $ | 86,608 | | | $ | 1,164 | | | $ | 373,666 | |
Revenue recognized over time | 333 | | | 251 | | | 160 | | | 1,443 | | | 2,187 | |
Consolidated | $ | 161,927 | | | $ | 124,551 | | | $ | 86,768 | | | $ | 2,607 | | | $ | 375,853 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the 13 Weeks Ended April 3, 2021 |
| Americas | | Europe | | Asia | | Corporate | | Total |
Product type | | | | | | | | | |
Watches: | | | | | | | | | |
Traditional watches | $ | 95,336 | | | $ | 71,006 | | | $ | 76,088 | | | $ | — | | | $ | 242,430 | |
Smartwatches | $ | 29,224 | | | $ | 13,674 | | | $ | 10,017 | | | $ | 3 | | | $ | 52,918 | |
Total watches | $ | 124,560 | | | $ | 84,680 | | | $ | 86,105 | | | $ | 3 | | | $ | 295,348 | |
Leathers | 19,629 | | | 6,305 | | | 8,170 | | | — | | | 34,104 | |
Jewelry | 6,962 | | | 16,266 | | | 2,909 | | | — | | | 26,137 | |
Other | 1,355 | | | 1,983 | | | 1,456 | | | 2,659 | | | 7,453 | |
Consolidated | $ | 152,506 | | | $ | 109,234 | | | $ | 98,640 | | | $ | 2,662 | | | $ | 363,042 | |
| | | | | | | | | |
Timing of revenue recognition | | | | | | | | | |
Revenue recognized at a point in time | $ | 152,045 | | | $ | 108,887 | | | $ | 98,540 | | | $ | 907 | | | $ | 360,379 | |
Revenue recognized over time | 461 | | | 347 | | | 100 | | | 1,755 | | | 2,663 | |
Consolidated | $ | 152,506 | | | $ | 109,234 | | | $ | 98,640 | | | $ | 2,662 | | | $ | 363,042 | |
Contract Balances. As of April 2, 2022, the Company had no material contract assets on the Company's condensed consolidated balance sheets and no deferred contract costs. The Company had contract liabilities of (i) $5.8 million and $4.9 million as of April 2, 2022 and January 1, 2022, respectively, related to remaining performance obligations on licensing income, (ii) $3.0 million as of both April 2, 2022 and January 1, 2022, primarily related to remaining performance obligations on wearable technology products and (iii) $3.5 million and $3.6 million as of April 2, 2022 and January 1, 2022, respectively, related to gift cards issued.
3. INVENTORIES
Inventories consisted of the following (in thousands):
| | | | | | | | | | | |
| April 2, 2022 | | January 1, 2022 |
Components and parts | $ | 27,761 | | | $ | 23,668 | |
Work-in-process | 621 | | | 2 | |
Finished goods | 357,449 | | | 323,180 | |
Inventories | $ | 385,831 | | | $ | 346,850 | |
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 13 Weeks Ended April 2, 2022 | | For the 13 Weeks Ended April 3, 2021 |
Beginning balance | $ | 19,159 | | | $ | 21,916 | |
Settlements in cash or kind | (2,905) | | | (2,725) | |
Warranties issued and adjustments to preexisting warranties (1) | 1,652 | | | 1,589 | |
Ending balance | $ | 17,906 | | | $ | 20,780 | |
_______________________________________________
(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 April 2, 2022 | | For the 13 Weeks Ended April 3, 2021 | | | | |
Income tax (benefit) expense | $ | 4,687 | | | $ | 2,117 | | | | | |
Effective tax rate | (28.1) | % | | (9.5) | % | | | | |
The effective tax rate in the First Quarter was unfavorable as compared to the Prior Year Quarter due to the accrual of foreign income tax on a higher level of foreign profits coupled with no U.S. benefit on a higher level of U.S. net operating loss (“NOL”). The First Quarter tax rate is negative because foreign income tax expense is accrued on certain foreign entities with positive taxable income when the consolidated results are a loss. The overall tax rate is impacted by the Global Intangible Low-Taxed Income (“GILTI”) provision of the Tax Cuts and Jobs Act which requires the inclusion of certain foreign income in the tax return which absorbs all of the U.S. NOL. Foreign income taxes are also paid on this same foreign income, resulting in double taxation.
The effective tax rate can vary from quarter-to-quarter due to changes in the Company's global mix of earnings, the resolution of income tax audits and changes in tax law.
As of April 2, 2022, the Company's total amount of unrecognized tax benefits, excluding interest and penalties, was $29.2 million, of which $24.2 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 2012-2020 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 settled within twelve months of the condensed consolidated balance sheet date. As of April 2, 2022, the Company had recorded $12.3 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 April 2, 2022, the total amount of accrued income tax-related interest included in the condensed consolidated balance sheets was $8.5 million. There was no accrued tax-related penalties. For the First Quarter, the Company accrued income tax related interest expense of $0.3 million.
6. STOCKHOLDERS’ EQUITY
Common and Preferred Stock. The Company has 100,000,000 shares of common stock, par value $0.01 per share, authorized, with 51,156,552 and 52,145,738 shares issued and outstanding at April 2, 2022 and January 1, 2022, respectively.
The Company has 1,000,000 shares of preferred stock, par value $0.01 per share, authorized, with none issued or outstanding at April 2, 2022 or January 1, 2022. Rights, preferences and other terms of preferred stock will be determined by the Board of Directors at the time of issuance.
Common Stock Repurchase Programs. Purchases of the Company’s common stock are made from time to time pursuant to its repurchase programs, subject to market conditions and at prevailing market prices, through the open market. Repurchased shares of common stock are recorded at cost and become authorized but unissued shares which may be issued in the future for general corporate or other purposes. The Company may terminate or limit its stock repurchase program at any time. In the event the repurchased shares are cancelled, the Company accounts for retirements by allocating the repurchase price to common stock, additional paid-in capital and retained earnings.
The repurchase price allocation is based upon the equity contribution associated with historical issuances. The repurchase programs are conducted pursuant to Rule 10b-18 of the Exchange Act.
During the First Quarter, the Company effectively retired 1.0 million shares of common stock repurchased under its repurchase programs. The effective retirement of repurchased common stock decreased common stock by $10,000, additional paid-in capital by $0.5 million, retained earnings by $9.5 million and treasury stock by $10.0 million. At April 2, 2022 and January 1, 2022, all treasury stock had been effectively retired. As of April 2, 2022, the Company had $20.0 million of repurchase authorizations remaining under its repurchase program.
The following table reflects the Company's common stock repurchase activity for the periods indicated (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | For the 13 Weeks Ended April 2, 2022 | | For the 13 Weeks Ended April 3, 2021 |
Fiscal Year Authorized | Dollar Value Authorized | | Termination Date | | Number of Shares Repurchased | | Dollar Value Repurchased | | Number of Shares Repurchased | | Dollar Value Repurchased |
| | | | | | | | | | | |
2010 | $ | 30.0 | | | None | | 1.0 | | $ | 10.0 | | | — | | | $ | — | |
7. EMPLOYEE BENEFIT PLANS
Stock-Based Compensation Plans. The following table summarizes stock options and stock appreciation rights activity during the First 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 January 1, 2022 | | 282 | | | $ | 72.34 | | | 1.5 | | $ | — | |
Granted | | — | | | — | | | | | |
Exercised | | — | | | — | | | | | — | |
Forfeited or expired | | (76) | | | 123.20 | | | | | |
Outstanding at April 2, 2022 | | 206 | | | 53.67 | | | 1.7 | | — | |
Exercisable at April 2, 2022 | | 206 | | | $ | 53.67 | | | 1.7 | | $ | — | |
The aggregate intrinsic value shown in the table above is based on the exercise price for outstanding and exercisable options/rights at April 2, 2022.
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 April 2, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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) | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
$131.46 - $131.46 | | 5 | | | $ | 131.46 | | | 0.04 | | 5 | | | $ | 131.46 | |
Total | | 5 | | | $ | 131.46 | | | 0.04 | | 5 | | | $ | 131.46 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 | | 146 | | | $ | 40.92 | | | 2.04 | | 146 | | | $ | 40.92 | |
$55.04 - $82.55 | | 48 | | | |