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Financial Statement Policies | 6 Months Ended
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Jul. 02, 2011
Financial Statement Policies |
Financial Statement Policies | 1. FINANCIAL STATEMENT POLICIES Basis of Presentation. The condensed consolidated financial statements include the accounts of Fossil, Inc., a Delaware corporation, and its wholly and majority-owned subsidiaries (the "Company"). The condensed consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary to present a fair statement of the Company's financial position as of July 2, 2011, and the results of operations for the thirteen week periods ended July 2, 2011 ("Second Quarter") and July 3, 2010 ("Prior Year Quarter"), respectively, and the twenty-six week periods ended July 2, 2011 ("Year To Date Period") and July 3, 2010 ("Prior Year YTD Period"), respectively. All adjustments are of a normal, recurring nature. These interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Annual Report on Form 10-K filed by the Company pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), for the fiscal year ended January 1, 2011. Operating results for the thirteen and twenty-six week periods ended July 2, 2011 are not necessarily indicative of the results to be achieved for the full 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 at the date of the condensed consolidated financial statements and 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 its most recent annual report. Business. The Company is a global design, marketing and distribution company that specializes in consumer fashion accessories. Its principal offerings include an extensive line of men's and women's fashion watches and jewelry, handbags, small leather goods, belts, sunglasses, soft accessories, shoes and clothing. In the watch and jewelry product category, 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 service the needs of its customers, whether they are value conscious or luxury oriented. Based on its extensive range of accessory products, brands, distribution channels and price points, the Company is able to target style-conscious consumers across a wide age spectrum on a global basis. Foreign Currency Hedging Instruments. The Company's foreign subsidiaries periodically enter into forward contracts principally to hedge the future payment of intercompany inventory transactions in U.S. dollars. If the Company's foreign subsidiaries were to settle their contracts designated as cash flow hedges that were denominated in European Euros, British Pounds, Mexican Pesos, Australian Dollars, Canadian Dollars and Japanese Yen, the net result would be a loss of approximately $13.7 million, net of taxes, as of July 2, 2011. Refer to Note 6—Derivatives and Risk Management in the condensed consolidated financial statements for additional disclosures about the Company's use of forward contracts. The tax benefit of changes in fair value of hedging activities for the Second Quarter and Year To Date Period were $0.6 million and $0.2 million, respectively. The tax expense of changes in fair value of hedging activities for the Prior Year Quarter and Prior Year YTD Period was $0.8 million and $0.7 million, respectively. 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 Standard 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 tables present the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis (in thousands):
|  | Fair Value at July 2, 2011 |
|  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Total |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Securities available for sale: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Investments in bonds |  | $ | 7,974 |  |  | $ | 0 |  |  | $ | 0 |  |  | $ | 7,974 |
Investment in publicly traded equity securities |  |  | 756 |  |  |  | 0 |  |  |  | 0 |  |  |  | 756 |
Foreign exchange forward contracts |  |  | 0 |  |  |  | 85 |  |  |  | 0 |  |  |  | 85 |
Deferred compensation plan assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Investment in publicly traded mutual funds |  |  | 3,414 |  |  |  | 0 |  |  |  | 0 |  |  |  | 3,414 |
Total |  | $ | 12,144 |  |  | $ | 85 |  |  | $ | 0 |  |  | $ | 12,229 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign exchange forward contracts |  | $ | 0 |  |  | $ | 16,475 |  |  | $ | 0 |  |  | $ | 16,475 |
Total |  | $ | 0 |  |  | $ | 16,475 |  |  | $ | 0 |  |  | $ | 16,475 |
|  | Fair Value at January 1, 2011 |
|  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Total |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Securities available for sale: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Investments in bonds |  | $ | 7,705 |  |  | $ | 0 |  |  | $ | 0 |  |  | $ | 7,705 |
Investment in publicly traded equity securities |  |  | 1,159 |  |  |  | 0 |  |  |  | 0 |  |  |  | 1,159 |
Foreign exchange forward contracts |  |  | 0 |  |  |  | 1,628 |  |  |  | 0 |  |  |  | 1,628 |
Deferred compensation plan assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Investment in publicly traded mutual funds |  |  | 3,295 |  |  |  | 0 |  |  |  | 0 |  |  |  | 3,295 |
Total |  | $ | 12,159 |  |  | $ | 1,628 |  |  | $ | 0 |  |  | $ | 13,787 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign exchange forward contracts |  | $ | 0 |  |  | $ | 10,222 |  |  | $ | 0 |  |  | $ | 10,222 |
Total |  | $ | 0 |  |  | $ | 10,222 |  |  | $ | 0 |  |  | $ | 10,222 |
The fair values of the Company's securities available for sale and deferred compensation plan assets are based on quoted prices. The deferred compensation plan assets are recorded within intangible and other assets – net. The foreign exchange forward contracts are entered into by the Company principally to hedge the future payment of intercompany inventory transactions by non-U.S. subsidiaries. The fair values of the Company's foreign exchange forward contracts are based on published quotations of spot currency rates and forward points, which are converted into implied forward currency rates. The Company has evaluated its short-term and long-term debt and believes, based on the interest rates, related terms and maturities, that the fair values of such instruments approximate their carrying amounts. As of July 2, 2011 and January 1, 2011, the carrying values of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximated their fair values due to the short-term maturities of these accounts. Earnings Per Share ("EPS"). Basic EPS is based on the weighted average number of common shares outstanding during each period. Diluted EPS adjusts basic EPS for the effects of dilutive common stock equivalents outstanding during each period using the treasury stock method. 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 |  |  | For the 26 Weeks Ended |
|  | July 2, 2011 |  |  | July 3, 2010 |  |  | July 2, 2011 |  |  | July 3, 2010 |
Numerator: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net income attributable to Fossil, Inc. |  | $ | 51,361 |  |  | $ | 54,485 |  |  | $ | 107,182 |  |  | $ | 90,392 |
Denominator: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Basic EPS computation: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Basic weighted average common shares outstanding |  |  | 63,411 |  |  |  | 67,446 |  |  |  | 63,743 |  |  |  | 67,235 |
Basic EPS |  | $ | 0.81 |  |  | $ | 0.81 |  |  | $ | 1.68 |  |  | $ | 1.34 |
Diluted EPS computation: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Basic weighted average common shares outstanding |  |  | 63,411 |  |  |  | 67,446 |  |  |  | 63,743 |  |  |  | 67,235 |
Stock options, stock appreciation rights and restricted stock units |  |  | 713 |  |  |  | 832 |  |  |  | 734 |  |  |  | 876 |
Diluted weighted average common shares outstanding |  |  | 64,124 |  |  |  | 68,278 |  |  |  | 64,477 |  |  |  | 68,111 |
Diluted EPS |  | $ | 0.80 |  |  | $ | 0.80 |  |  | $ | 1.66 |  |  | $ | 1.33 |
Approximately 49,000, 2,000 and 205,000 weighted average shares issuable under stock-based awards were not included in the diluted EPS calculation at the end of the Prior Year Quarter, Year To Date Period and Prior Year YTD Period, respectively, because they were antidilutive. These common share equivalents may be dilutive in future EPS calculations. All outstanding shares issuable under stock-based awards were dilutive during the Second Quarter. Goodwill. The changes in the carrying amount of goodwill, which is not subject to amortization, are as follows (in thousands):
|  | North America Wholesale |  |  | Europe Wholesale |  |  | Asia Pacific Wholesale |  |  | Direct to Consumer |  |  | Total |
Balance at January 1, 2011 |  | $ | 23,838 |  |  | $ | 18,120 |  |  | $ | 2,614 |  |  | $ | 0 |  |  | $ | 44,572 |
Foreign currency changes |  |  | 129 |  |  |  | 1,236 |  |  |  | 23 |  |  |  | 0 |  |  |  | 1,388 |
Balance at July 2, 2011 |  | $ | 23,967 |  |  | $ | 19,356 |  |  | $ | 2,637 |  |  | $ | 0 |  |  | $ | 45,960 |

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