Company Quick10K Filing
Quick10K
Fossil Group
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$16.96 49 $839
10-Q 2018-09-29 Quarter: 2018-09-29
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-30 Annual: 2017-12-30
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-07-01 Quarter: 2017-07-01
10-Q 2017-04-01 Quarter: 2017-04-01
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-10-01 Quarter: 2016-10-01
10-Q 2016-07-02 Quarter: 2016-07-02
10-Q 2016-04-02 Quarter: 2016-04-02
10-K 2016-01-02 Annual: 2016-01-02
8-K 2019-02-13 Earnings, Exhibits
8-K 2018-11-07 Earnings, Exhibits
8-K 2018-09-27 Regulation FD, Exhibits
8-K 2018-08-07 Earnings, Exhibits
8-K 2018-05-23 Shareholder Vote, Other Events
8-K 2018-05-08 Earnings, Exhibits
8-K 2018-02-13 Earnings, Exhibits
8-K 2018-01-29 Enter Agreement, Off-BS Arrangement, Exhibits
TIF Tiffany & Co.
CENT Central Garden & Pet
SIG Signet Jewelers
MOV Movado Group
NHTC Natural Health Trends
EDUC Educational Development
LEVB Level Brands
CTHR Charles & Colvard
BGI Birks Group
DGSE DGSE Companies
FOSL 2018-09-29
Part I-Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part Ii-Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 5. Other Information
Item 6. Exhibits
EX-31.1 fosl-q39292018xex311.htm
EX-31.2 fosl-q39292018xex312.htm
EX-32.1 fosl-q39292018xex321.htm
EX-32.2 fosl-q39292018xex322.htm

Fossil Group Earnings 2018-09-29

FOSL 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 fosl-q39292018.htm 10-Q Document


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 29, 2018
 
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 
__________________________________________________________________ 
logo2a01.gif
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) 
__________________________________________________________________ 
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 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 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 filer o
 
Accelerated filer x
 
 
 
Non-accelerated filer o
 
Smaller reporting company o
Emerging growth company o
 
 




 
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 1, 2018: 49,455,528




FOSSIL GROUP, INC.
FORM 10-Q
FOR THE FISCAL QUARTER ENDED SEPTEMBER 29, 2018
INDEX





PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

FOSSIL GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED
IN THOUSANDS
 
September 29, 2018
 
December 30, 2017
Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
236,103

 
$
231,244

Accounts receivable - net of allowances of $28,171 and $88,128, respectively
261,678

 
367,013

Inventories
521,311

 
573,788

Prepaid expenses and other current assets
129,410

 
118,943

Total current assets
1,148,502

 
1,290,988

Property, plant and equipment - net of accumulated depreciation of $453,465 and $431,914, respectively
190,644

 
219,742

Intangible and other assets-net
130,385

 
147,642

Total long-term assets
321,029

 
367,384

Total assets
$
1,469,531

 
$
1,658,372

Liabilities and Stockholders’ Equity
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
159,401

 
$
204,981

Short-term and current portion of long-term debt
127,977

 
2,144

Accrued expenses:
 

 
 

Compensation
72,653

 
70,725

Royalties
26,921

 
39,874

Customer liabilities
52,111

 
27,946

Transaction taxes
28,489

 
36,547

Other
76,101

 
109,211

Income taxes payable
27,525

 
17,660

Total current liabilities
571,178

 
509,088

Long-term income taxes payable
29,163

 
47,093

Deferred income tax liabilities
2,450

 
1,096

Long-term debt
269,134

 
443,942

Other long-term liabilities
68,025

 
76,206

Total long-term liabilities
368,772

 
568,337

Commitments and contingencies (Note 13)


 


Stockholders’ equity:
 

 
 

Common stock, 49,393 and 48,643 shares issued and outstanding at September 29, 2018 and December 30, 2017, respectively
494

 
486

Additional paid-in capital
262,755

 
242,263

Retained earnings
332,044

 
409,653

Accumulated other comprehensive income (loss)
(68,508
)
 
(76,269
)
Total Fossil Group, Inc. stockholders’ equity
526,785

 
576,133

Noncontrolling interests
2,796

 
4,814

Total stockholders’ equity
529,581

 
580,947

Total liabilities and stockholders’ equity
$
1,469,531

 
$
1,658,372

 
See notes to the unaudited condensed consolidated financial statements.

4



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 29, 2018
 
For the 13 Weeks Ended September 30, 2017
 
For the 39 Weeks Ended September 29, 2018
 
For the 39 Weeks Ended September 30, 2017
Net sales
$
608,827

 
$
688,722

 
$
1,754,566

 
$
1,867,358

Cost of sales
282,295

 
368,829

 
831,333

 
956,600

Gross profit
326,532

 
319,893

 
923,233

 
910,758

Operating expenses:
 

 
 

 
 
 
 
Selling, general and administrative expenses
297,804

 
314,623

 
879,694

 
937,330

Goodwill and trade name impairments

 

 
6,212

 
407,128

Restructuring charges
6,075

 
5,769

 
41,942

 
41,818

Total operating expenses
303,879

 
320,392

 
927,848

 
1,386,276

Operating income (loss)
22,653

 
(499
)
 
(4,615
)
 
(475,518
)
Interest expense
9,899

 
12,070

 
31,658

 
32,096

Other income (expense) - net
(2,895
)
 
3,860

 
(5,338
)
 
11,501

Income (loss) before income taxes
9,859

 
(8,709
)
 
(41,611
)
 
(496,113
)
Provision for income taxes
3,937

 
(3,230
)
 
7,209

 
(100,746
)
Net income (loss)
5,922

 
(5,479
)
 
(48,820
)
 
(395,367
)
Less: Net income (loss) attributable to noncontrolling interests
916

 
(80
)
 
2,247

 
2,931

Net income (loss) attributable to Fossil Group, Inc.
$
5,006

 
$
(5,399
)
 
$
(51,067
)
 
$
(398,298
)
Other comprehensive income (loss), net of taxes:
 

 
 

 
 
 
 
Currency translation adjustment
$
(1,380
)
 
$
5,222

 
$
(8,136
)
 
$
32,078

Cash flow hedges - net change
2,704

 
(9,771
)
 
15,897

 
(21,364
)
Total other comprehensive income (loss)
1,324

 
(4,549
)
 
7,761

 
10,714

Total comprehensive income (loss)
7,246

 
(10,028
)
 
(41,059
)
 
(384,653
)
Less: Comprehensive income attributable to noncontrolling interests
916

 
(80
)
 
2,247

 
2,931

Comprehensive income (loss) attributable to Fossil Group, Inc.
$
6,330

 
$
(9,948
)
 
$
(43,306
)
 
$
(387,584
)
Earnings (loss) per share:
 

 
 

 
 
 
 
Basic
$
0.10

 
$
(0.11
)
 
$
(1.04
)
 
$
(8.22
)
Diluted
$
0.10

 
$
(0.11
)
 
$
(1.04
)
 
$
(8.22
)
Weighted average common shares outstanding:
 

 
 

 
 
 
 
Basic
49,381

 
48,521

 
49,107

 
48,439

Diluted
50,659

 
48,521

 
49,107

 
48,439

 
See notes to the unaudited condensed consolidated financial statements.

5



FOSSIL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
IN THOUSANDS
 
For the 39 Weeks Ended September 29, 2018
 
For the 39 Weeks Ended September 30, 2017
Operating Activities:
 

 
 

Net Income (loss)
$
(48,820
)
 
$
(395,367
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 

 
 

Depreciation, amortization and accretion
47,154

 
61,526

Stock-based compensation
17,240

 
22,384

Decrease in allowance for returns and markdowns
(28,034
)
 
(6,129
)
Loss on disposal of assets
776

 
1,686

Property, plant and equipment and other long-lived asset impairment losses
1,757

 
2,726

Goodwill and trade name impairment losses
6,212

 
407,128

Non-cash restructuring charges
7,410

 
7,031

Increase in allowance for doubtful accounts
4,867

 
4,161

Loss on extinguishment of debt
718

 

Deferred income taxes and other
10,809

 
(111,177
)
Contingent consideration remeasurement
(1,257
)
 

Changes in operating assets and liabilities, net of effect of acquisitions:
 

 
 

Accounts receivable
143,955

 
85,078

Inventories
13,113

 
(116,002
)
Prepaid expenses and other current assets
(2,620
)
 
(5,620
)
Accounts payable
(46,805
)
 
80,146

Accrued expenses
(45,986
)
 
20,863

Income taxes payable
(8,077
)
 
1,734

Net cash provided by operating activities
72,412

 
60,168

Investing Activities:
 

 
 

Additions to property, plant and equipment
(10,188
)
 
(17,239
)
(Increase) decrease in intangible and other assets
(488
)
 
337

Proceeds from the sale of property, plant and equipment
182

 
533

Net cash used in investing activities
(10,494
)
 
(16,369
)
Financing Activities:
 

 
 

Proceeds from exercise of stock options
186

 

Net settlement of restricted grants, restricted stock units and preferred stock units
(2,493
)
 
(947
)
Distribution of noncontrolling interest earnings
(4,224
)
 
(428
)
Debt borrowings
809,524

 
1,162,074

Debt payments
(854,240
)
 
(1,311,597
)
Payment for shares of Fossil Accessories South Africa Pty. Ltd.
(1,678
)
 

Debt issuance costs
(7,434
)
 
(5,579
)
Net cash used in financing activities
(60,359
)
 
(156,477
)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
4,588

 
(17,855
)
Net increase (decrease) in cash, cash equivalents, and restricted cash
6,147

 
(130,533
)
Cash, cash equivalents, and restricted cash:
 

 
 

Beginning of period
231,655

 
297,862

End of period
$
237,802

 
$
167,329


See notes to the unaudited condensed consolidated financial statements.

6



FOSSIL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
 
1. FINANCIAL STATEMENT POLICIES
Basis of Presentation. The condensed consolidated financial statements include the accounts of Fossil Group, Inc., a Delaware corporation, and its wholly and majority-owned subsidiaries (the “Company”).
The condensed consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary to present a fair statement of the Company’s financial position as of September 29, 2018, and the results of operations for the thirteen-week periods ended September 29, 2018 (“Third Quarter”) and September 30, 2017 (“Prior Year Quarter”), respectively, and the 39 week periods ended September 29, 2018 (“Year To Date Period”) and September 30, 2017 (“Prior Year YTD 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 30, 2017 (the “2017 Form 10-K”). Operating results for the Third Quarter are not necessarily indicative of the results to be achieved for the full fiscal year.
The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), which require the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the periods reported. Actual results could differ from those estimates. The Company has not made any changes in its significant accounting policies from those disclosed in the 2017 Form 10-K, other than the adoption of Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09").
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.
Hedging Instruments. The Company is exposed to certain market risks relating to foreign exchange rates and interest rates. The Company actively monitors and attempts to mitigate, but does not eliminate, these exposures using derivative instruments, including foreign exchange forward contracts ("forward contracts"). The Company’s foreign subsidiaries periodically enter into forward contracts to hedge the future payment 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. If the Company was to settle its euro, Canadian dollar, British pound, Japanese yen, Mexican peso, Australian dollar and U.S dollar forward contracts as of September 29, 2018, the result would have been a net gain of approximately $6.2 million, net of taxes. This unrealized gain is recognized in other comprehensive income (loss), net of taxes on the Company's consolidated statements of income (loss) and comprehensive income (loss). Additionally, to the extent that any of these contracts are not considered to be perfectly effective in offsetting the change in the value of the cash flows being hedged, any changes in fair value relating to the ineffective portion of these contracts would be recognized in other income (expense)-net on the Company's consolidated statements of income (loss) and comprehensive income (loss). 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 investments are liquidated or disposed. The Company does not enter into 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.

7



Operating Expenses. Operating expenses include selling, general and administrative expenses (“SG&A”), goodwill and trade name impairment 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. During the second quarter of fiscal 2018, the SKAGEN® trade name with a carrying amount of $27.3 million was written down to its implied fair value of $21.1 million, resulting in a pre-tax impairment charges of $6.2 million. In the second quarter of fiscal 2017, the Company fully impaired goodwill and recognized pre-tax impairment charge in operations of $202.3 million, $114.3 million and $42.9 million in the Americas, Europe and Asia segments, respectively. Also in the second quarter of fiscal 2017, the Company recognized pre-tax impairment charges in operations of $28.3 million, $11.8 million, and $7.6 million related to the SKAGEN, MISFIT® and MICHELE® trade names, respectively.
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 September 29, 2018
 
For the 13 Weeks Ended September 30, 2017
 
For the 39 Weeks Ended September 29, 2018
 
For the 39 Weeks Ended September 30, 2017
Numerator:
 

 
 

 
 
 
 
Net income (loss) attributable to Fossil Group, Inc.
$
5,006

 
$
(5,399
)
 
$
(51,067
)
 
$
(398,298
)
Denominator:
 
 
 

 
 

 
 

Basic EPS computation:
 
 
 

 
 
 
 

Basic weighted average common shares outstanding
49,381

 
48,521

 
49,107

 
48,439

Basic EPS
$
0.10

 
$
(0.11
)
 
$
(1.04
)
 
$
(8.22
)
Diluted EPS computation:
 
 
 

 
 
 
 

Basic weighted average common shares outstanding
49,381

 
48,521

 
49,107

 
48,439

Effect of stock options, stock appreciation rights, restricted stock units and performance restricted stock units
1,278

 

 

 

Diluted weighted average common shares outstanding
50,659

 
48,521

 
49,107

 
48,439

Diluted EPS
$
0.10

 
$
(0.11
)
 
$
(1.04
)
 
$
(8.22
)
At the end of the Third Quarter and Year To Date Period, 1.9 million and 5.1 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 0.7 million and 1.2 million weighted average performance-based shares at the end of the Third Quarter and Year To Date Period, respectively. Additionally, 0.5 million weighted average performance-based shares were not included in the diluted EPS calculation at the end of the Third Quarter because the performance targets were not met.
At the end of the Prior Year Quarter and Prior Year YTD Period, 5.1 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 1.2 million weighted average performance-based shares at the end of both the Prior Year Quarter and Prior Year YTD Period.
Recently Issued Accounting Standards
In August 2018, the Securities and Exchange Commission ("SEC") adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certain disclosure requirements that were redundant, duplicative,

8



overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders' equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders' equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. This final rule is effective on November 5, 2018. The Company is in the process of evaluating the impact of the final rule on its consolidated financial statements and the Company plans to include the additional interim disclosures for the first interim period in fiscal year 2019.

In August 2018, the Financial Accounting Standards Board ("FASB") issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40) ("ASU 2018-15"). ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The guidance is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company does not expect this standard to have a material impact on the Company's consolidated results of operations or financial position.
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 guidance is effective for fiscal years ending after December 15, 2020. The Company does not expect this standard to have a material impact on the Company's consolidated results of operations or financial position.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement ("ASU 2018-13"). ASU 2018-13 eliminates certain disclosure requirements related to the fair value hierarchy, adds new disclosure requirements related to the changes in unrealized gains and losses for recurring Level 3 fair value measurements and disclosing the range and weighted average of significant observable inputs used to develop Level 3 fair value measurements and modifies certain disclosure requirements related to measurement uncertainty for fair value measurements. The guidance is effective for annual reporting periods and interim periods within those annual periods beginning after December 15, 2019. The Company does not expect this standard to have a material impact on the Company's consolidated results of operations or financial position.
In February 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income ("ASU 2018-02"). The current standard, ASC Topic 740 - Income Taxes, requires deferred tax liabilities and assets to be adjusted for the effect of a change in tax laws or rates with the effect included in income from continuing operations in the reporting period that includes the enactment date. This includes the tax effects of items in accumulated other comprehensive income ("AOCI") that were originally recognized in other comprehensive income, subsequently creating stranded tax effects. ASU 2018-02 allows a reclassification from AOCI to retained earnings for stranded tax effects specifically resulting from the Tax Cuts and Jobs Act. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those periods. Early adoption is permitted. The Company does not expect this standard to have a material impact on the Company's consolidated results of operations or financial position.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities ("ASU 2017-12"). ASU 2017-12 amends and simplifies hedge accounting guidance in order to enable entities to better portray the economics of their risk management activities. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those periods. Early adoption is permitted. The Company does not expect this standard to 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. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases which updates narrow aspects of the guidance issued in ASU 2016-02. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements ("ASU 2018-11") which allows entities to initially apply the new standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. 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

9



capitalization and will result in the recognition of lease assets and lease liabilities once the new standard is adopted. The Company has substantially completed evaluating its population of leases and is in the process of implementing a new lease accounting system to capture, track and account for lease data. The Company is also in the process of identifying changes to its business processes and controls to support adoption of the new standard. The Company plans to adopt the standard using the optional transition method presented in ASU 2018-11 and expects the standard to result in a significant increase to the Company's condensed consolidated balance sheets for lease liabilities and right-of-use assets.
Recently Adopted Accounting Standards
In May 2014, the FASB issued ASU 2014-09 and subsequently issued guidance that amended 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. 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 Company adopted ASU 2014-09 on December 31, 2017, the first day of fiscal 2018, using the modified retrospective approach. Under this method of adoption, guidance in ASU 2014-09 was applied to open contracts as of December 30, 2017, the end of fiscal 2017. The cumulative effect of initially applying the new revenue standard was a reduction to opening retained earnings, with the impact primarily related to the accelerated recognition of markdowns. Results from reporting periods beginning on December 31, 2017 are presented under ASU 2014-09, while prior period amounts are not adjusted. See “Note 2—Revenue” for additional disclosures about the Company’s revenue recognition policy and the impact of adoption.
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. ASU 2016-18 was effective for the Company beginning fiscal year 2018 and changed the presentation of the condensed consolidated statements of cash flows to now include restricted cash and cash equivalents as well as previously reported cash and cash equivalents in reconciling the period change. The Company adopted ASU 2016-18 using a retrospective transition method. The following table provides a reconciliation of the cash, cash equivalents, and restricted cash balances as of September 29, 2018 and September 30, 2017 that are presented in the condensed consolidated statement of cash flows (in thousands):
 
September 29, 2018
 
September 30, 2017
 
December 30, 2017
Cash and cash equivalents
$
236,103

 
$
166,922

 
$
231,244

Restricted cash included in prepaid expenses and other current assets
31

 
34

 
34

Restricted cash included in intangible and other assets-net
1,668

 
373

 
377

Cash, cash equivalents and restricted cash
$
237,802

 
$
167,329

 
$
231,655


The following provisions, which had no material impact on the Company’s financial position, results of operations or cash flows, were also adopted effective the first quarter of fiscal year 2018:
ASU 2018-03, Technical Corrections and Improvements to Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting
ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business
ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory
ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
ASU 2016-04, Liabilities—Extinguishments of Liabilities (Subtopic 405-20)- Recognition of Breakage for Certain Prepaid Stored-Value Products


10



2. REVENUE
The Company’s revenue consists of sales of finished products to customers through wholesale and retail channels. Revenue from the sale of products, including those that are subject to inventory consignment agreements, is recognized when control of the product is transferred to the customer and in an amount that reflects the consideration the Company expects to be entitled in exchange for the product. The Company generally considers control to transfer either when products ship or when products are delivered depending on the shipping terms in the agreement or purchase order. The Company considers control to have transferred upon shipment or delivery because the Company has a present right to payment, the customer has legal title to the product, the Company has transferred physical possession of the product, and the customer has the significant risks and rewards of the product. Taxes imposed by governmental authorities on the Company's revenue-producing activities with customers, such as sales taxes and value added taxes, are excluded from net sales.
The following tables summarize the impact of adopting ASU 2014-09 on the Company's condensed consolidated balance sheets as of September 29, 2018 and the Company's condensed consolidated statements of income (loss) and comprehensive income (loss) for the Third Quarter and Year To Date Period (in thousands):
 
September 29, 2018
 
As Reported
 
Without Adoption of ASU 2014-09
 
Impact of Adoption of ASU 2014-09
Assets
 
 
 
 
 
Accounts receivable
$
261,678

 
$
240,178

 
$
21,500

Inventories
521,311

 
538,810

 
(17,499
)
Prepaid expenses and other current assets
129,410

 
112,332

 
17,078

Liabilities
 
 
 
 
 
Customer liabilities
$
52,111

 
$
14,850

 
$
37,261

 
For the 13 Weeks Ended September 29, 2018
 
As Reported
 
Without Adoption of ASU 2014-09
 
Impact of Adoption of ASU 2014-09
Net sales
$
608,827

 
$
614,357

 
$
(5,530
)
Cost of sales
282,295

 
281,990

 
305

 
For the 39 Weeks Ended September 29, 2018
 
As Reported
 
Without Adoption of ASU 2014-09
 
Impact of Adoption of ASU 2014-09
Net sales
$
1,754,566

 
$
1,750,513

 
$
4,053

Cost of sales
831,333

 
830,912

 
421

Retained Earnings Adjustments. The following table presents the changes in the retained earnings balance including the cumulative effect of adopting ASU 2014-09, net of taxes (in thousands):
 
Retained Earnings
Balance at December 30, 2017
$
409,653

Net income (loss) attributable to Fossil Group, Inc.
(51,067
)
Markdowns adjustment, net of taxes
(27,325
)
Sales adjustment, net of taxes
783

Balance at September 29, 2018
$
332,044

Markdowns. The Company provides markdowns to certain customers in order to facilitate sales of select styles. Markdowns are estimated at the time of sale using historical data and are recorded as a reduction to revenue. Prior to the

11



adoption of ASU 2014-09, markdowns were not recorded until agreed upon with the customer. The Company's policy is to record its markdown allowance as a reduction of accounts receivable.
Returns. The Company accepts limited returns and may request that a customer return a product if the customer has an excess of any style that the Company has identified as being a poor performer for that customer or geographic location. The Company continually monitors returns and maintains a provision for estimated returns based upon historical experience and any specific issues identified. Product returns are accounted for as reductions to revenue, cost of sales, customer liabilities and an increase to other current assets to the extent the returned product is resalable. While returns have historically been within management's expectations and the provisions established, future return rates may differ from those experienced in the past. In the event that the Company's products are performing poorly in the retail market and/or it experiences product damages or defects at a rate significantly higher than the historical rate, the resulting returns could have an adverse impact on the operating results for the period or periods in which such returns occur.
Cooperative Advertising. The Company participates in cooperative advertising programs with its major retail customers, whereby the Company shares the cost of certain of their advertising and promotional expenses. Certain advertising expenses that were previously recorded in SG&A are now recorded as a sales discount due to the requirement under ASU 2014-09 that the service be considered distinct to qualify as a separate performance obligation. All other cooperative advertising expenses continue to be recorded in SG&A.
Multiple Performance Obligations. The Company enters into contracts with customers for its wearable technology that includes multiple performance obligations. Each distinct performance obligation was determined by whether the customer could benefit from the good or service on its own or together with readily available resources. The Company allocates revenue to each performance obligation based on its relative standalone selling price. The Company’s process for determining standalone selling price considers multiple factors including the Company’s internal pricing model and market trends that may vary depending upon the facts and circumstances related to each performance obligation. Revenue allocated to the hardware and software essential to the functionality of the product represents the majority of the arrangement consideration and is recognized at the time of product delivery, provided the other conditions for revenue recognition have been met. Revenue allocated to free software services provided through the Company's online dashboard and mobile apps as well as revenue allocated to the right to receive future unspecified software updates is deferred and recognized on a straight-line basis over the product's estimated usage period of two years.
Disaggregation of Revenue. The Company's revenue disaggregated by major product category and timing of revenue recognition was as follows (in thousands):
 
For the 13 Weeks Ended September 29, 2018
 
Americas
 
Europe
 
Asia
 
Total
Product type
 
 
 
 
 
 
 
Watches
$
213,365

 
$
157,877

 
$
115,296

 
$
486,538

Leathers
38,645

 
15,452

 
11,939

 
66,036

Jewelry
11,495

 
28,495

 
1,810

 
41,800

Other
5,559

 
5,709

 
3,185

 
14,453

Consolidated
$
269,064

 
$
207,533

 
$
132,230

 
$
608,827

 
 
 
 
 
 
 
 
Timing of revenue recognition
 
 
 
 
 
 
 
Revenue recognized at a point in time
$
268,485

 
$
207,247

 
$
132,098

 
$
607,830

Revenue recognized over time
579

 
286

 
132

 
997

Consolidated
$
269,064

 
$
207,533

 
$
132,230

 
$
608,827


12



 
For the 39 Weeks Ended September 29, 2018
 
Americas
 
Europe
 
Asia
 
Total
Product type
 
 
 
 
 
 
 
Watches
$
630,678

 
$
445,433

 
$
321,032

 
$
1,397,143

Leathers
119,732

 
46,405

 
37,078

 
203,215

Jewelry
33,973

 
78,152

 
4,584

 
116,709

Other
13,013

 
15,698

 
8,788

 
37,499

Consolidated
$
797,396

 
$
585,688

 
$
371,482

 
$
1,754,566

 
 
 
 
 
 
 
 
Timing of revenue recognition
 
 
 
 
 
 
 
Revenue recognized at a point in time
$
795,824

 
$
584,930

 
$
371,126

 
$
1,751,880

Revenue recognized over time
1,572

 
758

 
356

 
2,686

Consolidated
$
797,396

 
$
585,688

 
$
371,482

 
$
1,754,566

Practical Expedients and Contract Balances. As of September 29, 2018, 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 $5.9 million and $4.6 million as of September 29, 2018 and December 30, 2017, respectively, primarily related to remaining performance obligations on wearable technology products. Additionally, the Company had contract liabilities of $3.7 million and $7.2 million as of September 29, 2018 and December 30, 2017, respectively, related to gift cards issued. The Company does not disclose remaining performance obligations related to contracts with durations of one year or less as allowed by the practical expedient applicable to such contracts. These remaining performance obligations primarily relate to unfilled customer orders that will be satisfied in less than one year. This includes confirmed orders and orders that the Company believes will be confirmed by delivery of a formal purchase order. The amount of unfilled customer orders is affected by a number of factors, including seasonality and the scheduling of the manufacture and shipment of products. The Company has also elected to adopt the practical expedient related to shipping and handling fees which allows the Company to account for shipping and handling activities that occur after control of the related good transfers as fulfillment activities instead of assessing such activities as performance obligations.

3. INVENTORIES
Inventories consisted of the following (in thousands):
 
September 29, 2018
 
December 30, 2017
Components and parts
$
32,014

 
$
52,837

Work-in-process
5,924

 
15,983

Finished goods
483,373

 
504,968

Inventories
$
521,311

 
$
573,788



13



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 29, 2018
 
For the 39 Weeks Ended September 30, 2017
Beginning balance
$
19,405

 
$
15,421

Settlements in cash or kind
(11,963
)
 
(11,608
)
Warranties issued and adjustments to preexisting warranties (1)
13,837

 
14,984

Ending balance
$
21,279

 
$
18,797

_______________________________________________
(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 September 29, 2018
 
For the 13 Weeks Ended September 30, 2017
 
For the 39 Weeks Ended September 29, 2018
 
For the 39 Weeks Ended September 30, 2017
Income tax (benefit) expense
$
3,937

 
$
(3,230
)
 
$
7,209

 
$
(100,746
)
Effective tax rate
39.9
%
 
37.1
%
 
(17.3
)%
 
20.3
%
The higher effective tax rate in the Third Quarter as compared to the Prior Year Quarter was primarily due to the fact that there was no tax benefit accrued on the deferred tax assets and net operating losses ("NOLs") of the U.S. and certain foreign entities due to the uncertainty of future income being generated to utilize the NOLs and the negative impact of the Global Intangible Low-Taxed Income (“GILTI”) provision of the Tax Cuts and Jobs Act signed into law last year, whereby certain foreign income inclusions absorb the U.S. NOL, effectively resulting in no tax benefit derived on the loss. For entities in a loss position, the Company has accrued valuation allowances on the deferred tax assets and the NOLs, whereas in the Prior Year Quarter, the Company accrued a tax benefit on most deferred tax assets and NOLs. These negative impacts were partially offset by the recognition of an income tax benefit related to a reduction in the 2017 federal income tax liability over the amount previously accrued.
The Year to Date Period tax rate is negative due to the accrual of income tax expense on entities with positive taxable income against a consolidated year to date loss combined with the impact of the GILTI provision. This negative impact was partially offset by net favorable discrete adjustments relating to the 2017 income tax provision. The Company made reasonable estimates and recorded provisional amounts in its financial statements for fiscal year 2017 as permitted under Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act. The Third Quarter and Year to Date Period tax rates reflect a refinement in the repatriation tax calculations and implementation of the proposed regulations issued by the U.S. Department of Treasury and the Internal Revenue Service during the third quarter relating to Section 965 of the Internal Revenue Code, as amended by the Tax Cuts and Jobs Act, which was enacted on December 22, 2017.
As of September 29, 2018, the Company's total amount of unrecognized tax benefits, excluding interest and penalties, was $34.7 million, which 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 2011-2017 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 September 29, 2018, the Company had recorded $11.7 million of unrecognized tax benefits, excluding interest and penalties, for positions that are expected to be settled within the next twelve months. Consistent with its past practice, the Company recognizes interest and/or penalties related to income tax overpayments and income tax underpayments in income tax expense and income taxes receivable/payable. At September 29, 2018, the total amount of accrued income tax-related interest and penalties included in the

14



condensed consolidated balance sheets was $3.8 million and $1.0 million, respectively. For the Third Quarter and Year To Date Period, the Company accrued income tax related interest expense of $0.5 million and $1.0 million, respectively.

6. STOCKHOLDERS’ EQUITY
Common Stock Repurchase Programs. Purchases of the Company’s common stock are made from time to time pursuant to its repurchase programs, subject to market conditions and at prevailing market prices, through the open market. Repurchased shares of common stock are recorded at cost and become authorized but unissued shares which may be issued in the future for general corporate or other purposes. The Company may terminate or limit its stock repurchase program at any time. In the event the repurchased shares are canceled, the Company accounts for retirements by allocating the repurchase price to common stock, additional paid-in capital and retained earnings. The repurchase price allocation is based upon the equity contribution associated with historical issuances. The repurchase programs are conducted pursuant to Rule 10b-18 of the Securities Exchange Act of 1934.
At December 30, 2017 and September 29, 2018, all treasury stock had been effectively retired. As of September 29, 2018, the Company had $824.2 million of repurchase authorizations remaining under its combined repurchase programs. The Company is currently prohibited by the terms of its Credit Agreement (as defined in Note 14) from repurchasing additional shares of common stock and did not repurchase any common stock under its authorized stock repurchase plans during the Third Quarter, Prior Year Quarter, Year To Date Period or Prior Year YTD Period.
Controlling and Noncontrolling Interests. The following tables summarize the changes in equity attributable to controlling and noncontrolling interests (in thousands):
 
Fossil Group, Inc.
Stockholders’
Equity
 
Noncontrolling
Interests
 
Total
Stockholders’
Equity
Balance at December 30, 2017
$
576,133

 
$
4,814

 
$
580,947

Net income (loss)
(51,067
)
 
2,247

 
(48,820
)
Cumulative effect of change in accounting principle, net of tax of $1.1 million (See Note 2—Revenue)
(26,542
)
 

 
(26,542
)
Currency translation adjustment
(8,136
)
 

 
(8,136
)
Cash flow hedges - net change
15,897

 

 
15,897

Distribution of noncontrolling interest earnings and other
109

 
(4,265
)
 
(4,156
)
Stock options exercised
186

 

 
186

Net settlement of restricted grants, restricted stock units, and preferred stock units to satisfy employee tax withholding upon vesting
(2,493
)
 

 
(2,493
)
Stock-based compensation expense
22,698

 

 
22,698

Balance at September 29, 2018
$
526,785

 
$
2,796

 
$
529,581

 
Fossil Group, Inc.
Stockholders’
Equity
 
Noncontrolling
Interests
 
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
)
Net settlement of restricted grants, restricted stock units, and preferred stock units to satisfy employee tax withholding upon vesting
(947
)
 

 
(947
)
Stock-based compensation expense
23,588

 

 
23,588

Balance at September 30, 2017
$
641,293

 
$
11,705

 
$
652,998

The Company has entered into an agreement to purchase the outstanding minority interest shares in Fossil Accessories South Africa Pty. Ltd. (‘‘Fossil South Africa’’), representing the entire noncontrolling interest in the subsidiary. The purchase price is based on variable payments through fiscal year 2021, assuming the put option is exercised by the seller each year. The

15



Company made payments of $1.7 million during the Year To Date Period towards the purchase price. The present value of the remaining purchase price is $4.3 million as of September 29, 2018. The transaction was accounted for as an equity transaction. The Company recorded $1.7 million of the variable consideration in accrued expenses-other and $2.6 million in other long-term liabilities in the consolidated balance sheets at September 29, 2018.
 
7. EMPLOYEE BENEFIT PLANS
Stock-Based Compensation Plans. The following table summarizes stock options and stock appreciation rights activity during the Third 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 June 30, 2018
 
2,003

 
$
50.44

 
1.8
 
$
307

Granted
 

 

 
 
 
 
Exercised
 

 

 
 
 

Forfeited or expired
 
(57
)
 
86.66

 
 
 
 
Outstanding at September 29, 2018
 
1,946

 
49.37

 
1.7
 
212

Exercisable at September 29, 2018
 
1,377

 
$
54.25

 
1.7
 
$
212

 
The aggregate intrinsic value shown in the table above is before income taxes and is based on (i) the exercise price for outstanding and exercisable options/rights at September 29, 2018 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.
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 29, 2018:

Cash Stock Appreciation Rights Outstanding
 
Cash Stock Appreciation Rights Exercisable
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)
 
 
61

 
$
36.73

 
0.5
 
38

 
$
36.73


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
 
22

 
$
14.41

 
0.4
 
22

 
$
14.41

$36.73 - $70.12
 
40

 
38.40

 
1.4
 
40

 
38.40

$80.22 - $127.84
 
189

 
108.14

 
2.8
 
189

 
108.14

$128.29 - $131.46
 
6

 
130.80

 
3.4
 
6

 
130.80

Total
 
257

 
$
89.71

 
2.4
 
257

 
$
89.71



16



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
 
48

 
$
29.49

 
5.8
 
32

 
$
29.49

$36.73 - $70.12
 
1,419

 
38.11

 
1.1
 
889

 
38.26

$80.22 - $127.84
 
156

 
93.85

 
3.6
 
156

 
93.85

$128.29 - $131.46
 
5

 
128.29

 
0.8
 
5

 
128.29

Total
 
1,628

 
$
43.49

 
1.5
 
1,082

 
$
46.45

 
Restricted Stock Units and Performance Restricted Stock Units. The following table summarizes restricted stock unit and performance restricted stock unit activity during the Third Quarter:
Restricted Stock Units
and Performance Restricted Stock Units
 
Number of Shares
 
Weighted-Average
Grant Date Fair
Value Per Share
 
 
(in Thousands)
 
 
Nonvested at June 30, 2018
 
3,266

 
$
18.13

Granted
 
20

 
25.61

Vested
 
(76
)
 
14.07

Forfeited
 
(51
)
 
13.71

Nonvested at September 29, 2018
 
3,159

 
$
18.35

 
The total fair value of restricted stock units vested during the Third Quarter was approximately $1.9 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.
 

17



8. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following tables illustrate changes in the balances of each component of accumulated other comprehensive income (loss), net of taxes (in thousands):

 
For the 13 Weeks Ended September 29, 2018
 
Currency
Translation
Adjustments
 
Cash Flow Hedges
 
 
 
 
 
 
Forward
Contracts
 
Pension
Plan
 
Total
Beginning balance
$
(71,255
)
 
$
3,095

 
$
(1,672
)
 
$
(69,832
)
Other comprehensive income (loss) before reclassifications
(1,380
)
 
2,885

 

 
1,505

Tax (expense) benefit

 
212

 

 
212

Amounts reclassed from accumulated other comprehensive income (loss)

 
(33
)
 

 
(33
)
Tax (expense) benefit

 
426

 

 
426

Total other comprehensive income (loss)
(1,380
)
 
2,704

 

 
1,324

Ending balance
$
(72,635
)
 
$
5,799

 
$
(1,672
)
 
$
(68,508
)


 
For the 13 Weeks Ended September 30, 2017
 
Currency
Translation
Adjustments
 
Cash Flow Hedges
 
 
 
 
 
 
Forward
Contracts
 
Interest
Rate Swaps
 
Pension
Plan
 
Total
Beginning balance
$
(75,011
)
 
$
(1,284
)
 
$
41

 
$
(3,907
)
 
$
(80,161
)
Other comprehensive income (loss) before reclassifications
5,222

 
(16,776
)
 
5

 

 
(11,549
)
Tax (expense) benefit

 
2,853

 
(2
)
 

 
2,851

Amounts reclassed from accumulated other comprehensive income (loss)

 
(4,940
)
 
(25
)
 

 
(4,965
)
Tax (expense) benefit

 
807

 
9

 

 
816

Total other comprehensive income (loss)
5,222

 
(9,790
)
 
19

 

 
(4,549
)
Ending balance
$
(69,789
)
 
$
(11,074
)
 
$
60

 
$
(3,907
)
 
$
(84,710
)

 
For the 39 Weeks Ended September 29, 2018
 
Currency
Translation
Adjustments
 
Cash Flow Hedges
 
 
 
 
 
Forward
Contracts
 
Pension
Plan
 
Total
Beginning balance
$
(64,499
)
 
$
(10,098
)
 
$
(1,672
)
 
$
(76,269
)
Other comprehensive income (loss) before reclassifications
(8,136
)
 
10,116

 

 
1,980

Tax (expense) benefit

 
490

 

 
490

Amounts reclassed from accumulated other comprehensive income (loss)

 
(6,979
)
 

 
(6,979
)
Tax (expense) benefit

 
1,688

 

 
1,688

Total other comprehensive income (loss)
(8,136
)
 
15,897

 

 
7,761

Ending balance
$
(72,635
)
 
$
5,799

 
$
(1,672
)
 
$
(68,508
)

18



 
For the 39 Weeks Ended September 30, 2017
 
Currency
Translation
Adjustments
 
Cash Flow Hedges
 
 
 
 
 
 
Forward
Contracts
 
Interest
Rate Swaps
 
Pension
Plan
 
Total
Beginning balance
$
(101,867
)
 
$
10,693

 
$
(343
)
 
$
(3,907
)
 
$
(95,424
)
Other comprehensive income (loss) before reclassifications
32,078

 
(33,243
)
 
230

 

 
(935
)
Tax (expense) benefit

 
11,512

 
(84
)
 

 
11,428

Amounts reclassed from accumulated other comprehensive income (loss)

 
1,981

 
(404
)
 

 
1,577

Tax (expense) benefit

 
(1,945
)
 
147

 

 
(1,798
)
Total other comprehensive income (loss)
32,078

 
(21,767
)
 
403

 

 
10,714

Ending balance
$
(69,789
)
 
$
(11,074
)
 
$
60

 
$
(3,907
)
 
$
(84,710
)

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, 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 building and omni-channel activities 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 are not allocated to the various segments because they are managed at the corporate level. The Company does not include intercompany transfers between segments for management reporting purposes.

19



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

 
For the 13 Weeks Ended September 29, 2018
 
For the 13 Weeks Ended September 30, 2017
 
Net Sales
 
Operating Income (Loss)
 
Net Sales
 
Operating Income (Loss)
Americas
$
269,064

 
$
36,061

 
$
308,102

 
$
18,843

Europe
207,533

 
34,131

 
247,184

 
39,332

Asia
132,230

 
31,979

 
133,436

 
21,999

Corporate

 
(79,518
)
 

 
(80,673
)
Consolidated
$
608,827

 
$
22,653

 
$
688,722

 
$
(499
)
 
For the 39 Weeks Ended September 29, 2018
 
For the 39 Weeks Ended September 30, 2017
 
Net Sales
 
Operating Income (Loss)
 
Net Sales
 
Operating Income (Loss)
Americas
$
797,396

 
$
103,298

 
$
874,449

 
$
(121,976
)
Europe
585,688

 
76,490

 
637,566

 
(33,859
)
Asia
371,482

 
65,921

 
355,343

 
(2,702
)
Corporate

 
(250,324
)
 

 
(316,981
)
Consolidated
$
1,754,566

 
$
(4,615
)
 
$
1,867,358

 
$
(475,518
)


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 29, 2018
 
For the 13 Weeks Ended September 30, 2017
 
Net Sales
 
Percentage of Total
 
Net Sales
 
Percentage of Total
Watches
$
486,538

 
79.9
%
 
$
551,913

 
80.1
%
Leathers
66,036

 
10.8

 
75,660

 
11.0

Jewelry
41,800

 
6.9

 
47,729

 
6.9

Other
14,453

 
2.4

 
13,420

 
2.0

Total
$
608,827

 
100.0
%
 
$
688,722

 
100.0
%

 
For the 39 Weeks Ended September 29, 2018
 
For the 39 Weeks Ended September 30, 2017
 
Net Sales
 
Percentage of Total
 
Net Sales
 
Percentage of Total
Watches
$
1,397,143

 
79.6
%
 
$
1,471,144

 
78.8
%
Leathers
203,215

 
11.6

 
217,946

 
11.7

Jewelry
116,709

 
6.7

 
139,900

 
7.5

Other
37,499

 
2.1

 
38,368

 
2.0

Total
$
1,754,566

 
100.0
%
 
$
1,867,358

 
100.0
%

 

20



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. 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.
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 Third Quarter, Prior Year Quarter, Year To Date Period or Prior Year YTD Period.

21



As of September 29, 2018, 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
 
164.8

 
U.S. dollar
 
197.6

Canadian dollar
 
61.3

 
U.S. dollar
 
47.8

British pound
 
25.5

 
U.S. dollar
 
34.0

Japanese yen
 
2,406.2

 
U.S. dollar
 
22.2

Mexican peso
 
343.1

 
U.S. dollar
 
17.5

Australian dollar
 
13.8

 
U.S. dollar
 
10.1

U.S. dollar
 
22.6

 
Japanese yen
 
2,455.0

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 29, 2018, the Company had non-designated forward contracts of approximately $1.4 million on 20.0 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 Third Quarter, Prior Year Quarter, Year To Date Period and Prior Year YTD Period are set forth below (in thousands):
 
For the 13 Weeks Ended September 29, 2018
 
For the 13 Weeks Ended September 30, 2017
Cash flow hedges:
 

 
 

Forward contracts
$
3,097

 
$
(13,923
)
Interest rate swaps

 
3

Total gain (loss) recognized in other comprehensive income (loss), net of taxes
$
3,097

 
$
(13,920
)
 
For the 39 Weeks Ended September 29, 2018
 
For the 39 Weeks Ended September 30, 2017
Cash flow hedges:
 

 
 

Forward contracts
$
10,606

 
$
(21,731
)
Interest rate swaps

 
146

Total gain (loss) recognized in other comprehensive income (loss), net of taxes
$
10,606

 
$
(21,585
)

22





The following table illustrates 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 Third Quarter, 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 29, 2018
 
For the 13 Weeks Ended September 30, 2017
Forward contracts designated as cash flow hedging instruments
 
Other income (expense)-net
 
Total gain (loss) reclassified from accumulated other comprehensive income (loss)
 
$
393

 
$
(4,133
)
Forward contracts not designated as hedging instruments
 
Other income (expense)-net
 
Total gain (loss) recognized in income
 
$
(11
)
 
$
(12
)
Interest rate swap designated as a cash flow hedging instrument
 
Interest expense
 
Total gain (loss) reclassified from accumulated other comprehensive income (loss)
 
$

 
$
(16
)

Derivative Instruments
 
Condensed Consolidated
Statements of Income (Loss)
and Comprehensive
Income (Loss) Location
 
Effect of Derivative
Instruments
 
For the 39 Weeks Ended September 29, 2018
 
For the 39 Weeks Ended September 30, 2017
Forward contracts designated as cash flow hedging instruments
 
Other income (expense)-net
 
Total gain (loss) reclassified from other comprehensive income (loss)
 
$
(5,291
)
 
$
36

Forward contracts not designated as hedging instruments
 
Other income (expense)-net
 
Total gain (loss) recognized in income
 
$
(113
)
 
$
170

Interest rate swap designated as a cash flow hedging instrument
 
Interest expense
 
Total gain (loss) reclassified from other comprehensive income (loss)
 
$

 
$
(257
)
Interest rate swap not designated as a cash flow hedging instrument
 
Other income (expense)-net
 
Total gain (loss) recognized in income
 
$
67

 
$



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
 
 
September 29, 2018
 
December 30, 2017
 
September 29, 2018
 
December 30, 2017
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
Forward contracts designated as cash flow hedging instruments
 
Prepaid expenses and other current assets
 
$
5,826

 
Prepaid expenses and other current assets
 
$
2,291

 
Accrued expenses- other
 
$
3,012

 
Accrued expenses- other
 
$
14,798

Forward contracts not designated as cash flow hedging instruments
 
Prepaid expenses and other current assets
 
1

 
Prepaid expenses and other current assets
 

 
Accrued expenses- other
 

 
Accrued expenses- other
 
362

Interest rate swap not designated as a cash flow hedging instrument
 
Prepaid expenses and other current assets
 

 
Prepaid expenses and other current assets
 
195

 
Accrued expenses- other
 

 
Accrued expenses- other
 

Forward contracts designated as cash flow hedging instruments
 
Intangible and other assets-net
 
594

 
Intangible and other assets-net
 
147

 
Other long-term liabilities
 
80

 
Other long-term liabilities
 
2,725

Total
 
 
 
$
6,421

 
 
 
$
2,633

 
 
 
$
3,092

 
 
 
$
17,885

 


23



At the end of the Third Quarter, the Company had forward contracts designated as cash flow hedges with maturities extending through March 2020. As of September 29, 2018, an estimated net gain of $5.7 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") 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 29, 2018 (in thousands):
 
Fair Value at September 29, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 

 
 

 
 

 
 

Forward contracts
$

 
$
6,421

 
$

 
$
6,421

Deferred compensation plan assets:
 

 
 

 
 

 
 

Investment in publicly traded mutual funds
5,068

 

 

 
5,068

Total
$
5,068

 
$
6,421

 
$

 
$
11,489

Liabilities:
 

 
 

 
 

 
 

Contingent consideration
$

 
$

 
$
4,309

 
$
4,309

Forward contracts

 
3,092

 

 
3,092

Total
$

 
$
3,092

 
$
4,309

 
$
7,401

The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of December 30, 2017 (in thousands):
 
Fair Value at December 30, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 

 
 

 
 

 
 

Forward contracts
$

 
$
2,438

 
$

 
$
2,438

Deferred compensation plan assets:
 

 
 

 
 

 
 

Investment in publicly traded mutual funds
4,806

 

 

 
4,806

Interest rate swap

 
195

 

 
195

Total
$
4,806

 
$
2,633

 
$

 
$
7,439

Liabilities:
 

 
 

 
 

 
 

Contingent consideration
$

 
$

 
$
6,452

 
$
6,452

Forward contracts

 
17,885