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FINANCIAL STATEMENT POLICIES (Policies)
 6 Months Ended
Jun. 30, 2012
Basis Of Presentation

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 June 30, 2012, and the results of operations for the thirteen week periods ended June 30, 2012 (“Second Quarter”) and July 2, 2011 (“Prior Year Quarter”), respectively, and the twenty-six week periods ended June 30, 2012 (“Year To Date Period”) and July 2, 2011 (“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 December 31, 2011. Operating results for the thirteen and twenty-six week periods ended June 30, 2012 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 its most recent Annual Report on Form 10-K.
Business

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, shoes, soft accessories and clothing. In the watch and jewelry product categories, the Company has a diverse portfolio of globally recognized owned and licensed brand names under which its products are marketed. The Company’s products are distributed globally through various distribution channels, including wholesale in countries where it has a physical presence, direct to the consumer through its retail stores and commercial websites and through third-party distributors in countries where the Company does not maintain a physical presence. The Company’s products are offered at varying price points to meet the needs of its customers, whether they are value-conscious or luxury oriented. Based on its extensive range of accessory products, brands, distribution channels and price points, the Company is able to target style-conscious consumers across a wide age spectrum on a global basis.
Foreign Currency Hedging Instruments

Foreign Currency Hedging Instruments. The Company’s foreign subsidiaries periodically enter into foreign exchange forward contracts to hedge the future payment of intercompany inventory transactions denominated in U.S. dollars. If the Company’s foreign subsidiaries were to settle their contracts designated as cash flow hedges that were denominated in Euros, British Pounds, Mexican Pesos, Australian Dollars, Canadian Dollars and Japanese Yen, the net result would have been a gain of approximately $5.9 million, net of taxes, as of June 30, 2012. Refer to Note 8—Derivatives and Risk Management for additional disclosures about the Company’s use of forward contracts. The tax expense of changes in fair value of hedging activities for the Second Quarter and Year To Date Period was $2.3 million and $0.8 million, respectively. The tax benefit of changes in fair value of hedging activities for the Prior Year Quarter and Prior Year YTD Period was $0.6 million and $0.2 million, respectively.
Fair Value Measurements

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 in the Company’s condensed consolidated balance sheets. The foreign exchange forward contracts are entered into by the Company’s foreign subsidiaries to hedge the future payment of intercompany inventory transactions denominated in U.S. dollars. 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 June 30, 2012 and December 31, 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.

 

The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a nonrecurring basis as of June 30, 2012 (in thousands):

 

            Fair Value Measurements Using         
     For the 26
Weeks Ended
June 30, 2012		      Level 1      Level 2      Level 3      Total
Losses		  

Assets:

      

Specific Company—owned stores—net

    $ 0       $ 0       $ 0       $ 0       $ (256 ) 

In accordance with the provisions of ASC 360, Property, Plant and Equipment, the Company recorded a write-down of $0.3 million related to the fair value of leasehold improvements and fixturing associated with certain Company-owned retail stores during the Year To Date Period. The fair values of assets related to the Company-owned retail stores were determined using Level 3 inputs. If undiscounted cash flows estimated to be generated through the operation of Company-owned retail stores are less than the carrying value of the underlying assets, impairment losses are recorded. Impairment expenses related to Company-owned retail stores is recorded in selling and distribution expense within the Direct to consumer segment.

The Company had no impairment losses for the Prior Year YTD Period.
Earnings Per Share ("EPS")

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  
     June 30,
2012		      July 2,
2011		      June 30,
2012		      July 2,
2011		  

Numerator:

            

Net income attributable to Fossil, Inc.

    $ 57,338       $ 51,361       $ 115,478       $ 107,182   
  

 

 

     

 

 

     

 

 

     

 

 

  

Denominator:

            

Basic EPS computation:

            

Basic weighted average common shares outstanding

      61,669         63,411         61,741         63,743   
  

 

 

     

 

 

     

 

 

     

 

 

  

Basic EPS

    $ 0.93       $ 0.81       $ 1.87       $ 1.68   
  

 

 

     

 

 

     

 

 

     

 

 

  

Diluted EPS computation:

            

Basic weighted average common shares outstanding

      61,669         63,411         61,741         63,743   

Stock options, stock appreciation rights and restricted stock units

      423         713         509         734   
  

 

 

     

 

 

     

 

 

     

 

 

  

Diluted weighted average common shares outstanding

      62,092         64,124         62,250         64,477   
  

 

 

     

 

 

     

 

 

     

 

 

  

Diluted EPS

    $ 0.92       $ 0.80       $ 1.86       $ 1.66   
  

 

 

     

 

 

     

 

 

     

 

 

  

Approximately 248,000, 248,000, and 2,000 shares issuable under stock-based awards were not included in the diluted EPS calculation at the end of the Second Quarter, Year To Date Period, and Prior Year YTD Period, respectively, because they were antidilutive. At the end of the Prior Year Quarter, all shares issuable under stock-based awards were included in the diluted EPS calculation.
Restricted Cash

Restricted Cash. As of June 30, 2012 and December 31, 2011, the Company had restricted cash of $6.0 million and $5.9 million, respectively, primarily pledged as collateral to secure bank guarantees on behalf of the Company for payments related to prospective value-added tax liabilities. This restricted cash is reported in prepaid expenses and other current assets in the Company’s condensed consolidated balance sheets as a component of current assets. The Company also had restricted cash of $1.4 million and $2.1 million as of June 30, 2012 and December 31, 2011, respectively, pledged as collateral to secure bank guarantees for the purpose of obtaining retail space. This restricted cash is reported in intangibles and other assets-net in the Company’s condensed consolidated balance sheets as a component of long-term assets.