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ACQUISITIONS AND GOODWILL
 6 Months Ended
Jun. 30, 2012
ACQUISITIONS AND GOODWILL

2. ACQUISITIONS AND GOODWILL

Skagen Designs, Ltd. Acquisition. On April 2, 2012, the Company acquired Skagen Designs, Ltd. and certain of its international affiliates (“Skagen Designs”). Skagen Designs was a privately held Nevada-based company that markets and distributes contemporary Danish design accessories including watches, clocks, jewelry and sunglasses globally. The primary purpose of the acquisition was to add an attractive brand to the Company’s portfolio that the Company can grow using established distribution channels. The purchase price was $231.7 million in cash and 150,000 shares of the Company’s common stock valued at $19.9 million based on the mean between the highest and lowest sales price of the Company’s common stock on NASDAQ on April 2, 2012. In addition, the sellers may receive up to 100,000 additional shares of the Company’s common stock if the Company’s net sales of SKAGEN® branded products exceed certain thresholds over a defined period of time (the “Earnout”).

Upon closing, the Company recorded a $1.8 million tax-related indemnification asset, which is reflected in the Company’s condensed consolidated balance sheets in intangible and other assets-net. The Company also recorded liabilities of $1.6 million to long-term income taxes payable and $0.2 million to accrued expenses-other in the Company’s condensed consolidated balance sheets related to the indemnification asset. The Company also recorded a contingent consideration liability in accrued expenses-other in the Company’s condensed consolidated balance sheets of approximately $10.0 million as of the acquisition date related to the Earnout. As of June 30, 2012, the contingent consideration liability was remeasured and reduced to $5.6 million, which resulted in a $4.4 million reduction to operating expenses. This reduction was due entirely to the decrease in the value of the Company’s common stock from the acquisition date to the end of the Second Quarter. The results of Skagen Designs’ operations have been included in the Company’s condensed consolidated financial statements since April 2, 2012.

Prior to closing the Skagen Designs acquisition, the Company incurred approximately $600,000 of acquisition-related expenses for legal, accounting and valuation services during the fiscal year ended December 31, 2011 and the 13 weeks ended March 31, 2012. The Company incurred additional acquisition and integration related costs of approximately $5.6 million during the Second Quarter. Acquisition and integration costs are reflected in general and administrative operating expenses and other income (expense)-net on the condensed consolidated statements of comprehensive income.

Our condensed consolidated statement of operations for the 13 weeks ended June 30, 2012 includes $25.2 million of net sales and $1.0 million of operating income related to the results of operations of Skagen Designs from the date of its acquisition on April 2, 2012.

Assets acquired and liabilities assumed in the transaction were recorded at their acquisition date fair values, while transaction costs associated with the acquisition were expensed as incurred. Because the total purchase price exceeded the fair values of the tangible and intangible assets acquired, goodwill was recorded equal to the difference. The element of goodwill that is not separable into identifiable intangible assets represents expected synergies. The following table summarizes the allocation of the purchase price to the preliminary estimated fair value of the assets acquired and the liabilities assumed as of April 2, 2012, the effective date of the acquisition (in thousands):

 

Cash paid, net of cash acquired

    $  229,003   

Value of common stock issued

      19,899   

Contingent consideration

      9,950   
  

 

 

  

Total transaction consideration:

    $ 258,852   
  

 

 

  

Accounts receivable—net of allowances

    $ 16,791   

Inventories

      22,092   

Prepaid expenses and other current assets

      3,520   

Property, plant & equipment and other long-term assets

      4,256   

Goodwill

      137,393   

Tradename

      64,700   

Customer lists

      24,400   

Patents

      1,500   

Noncompete agreement

      1,900   

Other long-term assets

      2,974   

Current liabilities

      (19,726 ) 

Long-term liabilities

      (948 ) 
  

 

 

  

Total net assets acquired

    $ 258,852   
  

 

 

  

The amounts shown above may change in the near term as management continues to assess the fair value of acquired assets and liabilities. A change in this valuation may also impact the income tax related accounts and goodwill. Additionally, the working capital adjustment included in the purchase price has not been finalized. The goodwill and tradename assets recognized from the acquisition have indefinite useful lives and will be tested annually for impairment. The amortization periods for the acquired customer lists, patents and noncompete agreements have amortization periods of 5-9 years, 3 years and 6 years, respectively.

The following unaudited pro forma financial information presents the combined results of operations of Fossil, Inc. and Skagen Designs as if the acquisition had occurred at the beginning of each period presented below. The pro forma information is not necessarily indicative of what the financial position or results of operations actually would have been had the acquisition been completed at the beginning of each period presented below. In addition, the unaudited pro forma financial information is not indicative of, nor does it purport to project, the future financial position or operating results of Fossil, Inc. The unaudited pro forma financial information for the 13 and 26 weeks ended June 30, 2012 were adjusted to exclude acquisition and integration costs and does not give effect to any potential cost savings or other operating efficiencies that could result from the acquisition. These acquisition and integration costs were included in the proforma information for the 26 weeks ended July 2, 2011. The following table presents the unaudited pro forma financial information (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  

Net sales

    $ 636,104       $ 581,007       $ 1,256,081       $ 1,141,744   

Net income attributable to Fossil, Inc.

      61,211         53,364         120,245         108,181   

Earnings per share:

            

Basic

    $ 0.99       $ 0.84       $ 1.95       $ 1.70   

Diluted

    $ 0.99       $ 0.83       $ 1.93       $ 1.68   

Effective April 30, 2012, the Company acquired fifty-one percent of Swiss Technology Productions AG (“STP”) to support its Swiss-made watch production. The acquisition was completed for 255,000 Swiss francs, approximately $266,000. The Company recorded approximately $160,000 of goodwill related to the acquisition. The results of STP’s operations and related noncontrolling interest have been included in the Company’s condensed consolidated financial statements since the acquisition date.

 

Goodwill is the excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed. The changes in the carrying amount of goodwill, which is not subject to amortization, were as follows (in thousands):

 

     North
America
wholesale		      Europe
wholesale		     Asia
Pacific
wholesale		      Direct to
consumer		      Total  

Balance at December 31, 2011

    $ 23,605       $ 17,891      $ 2,558       $ 0       $ 44,054   

Acquisitions

      84,745         43,996        8,812         0         137,553   

Foreign currency changes

      63         (260 )      25         0         (172 ) 
  

 

 

     

 

 

    

 

 

     

 

 

     

 

 

  

Balance at June 30, 2012

    $ 108,413       $ 61,627      $ 11,395       $ 0       $ 181,435