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ACQUISITIONS AND GOODWILL | 9 Months Ended
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Sep. 29, 2012
ACQUISITIONS AND GOODWILL |
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 marketed and distributed 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”). As of September 29, 2012, the Company has recorded a $0.8 million tax-related indemnification asset, which is reflected in the Company’s condensed consolidated balance sheets in intangible and other assets-net. The purchase agreement imposes a liability to the seller for all taxes that are due with respect to tax returns for periods ending on or before the acquisitions date. The Company also recorded liabilities of $0.6 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 income tax liabilities were accrued in accordance with ASC 740, Income Taxes, and the non-income tax liabilities in accordance with ASC 450, Contingencies. 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 September 29, 2012, the contingent consideration liability was remeasured to $6.4 million, which resulted in an increase in operating expenses of $0.8 million during the Third Quarter and a decrease in operating expenses of $3.6 million during the Year To Date Period. 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 $6.8 million since April 2, 2012, which includes $1.2 million during the Third Quarter. Acquisition and integration costs are reflected in general and administrative operating expenses on the condensed consolidated statements of comprehensive income. The Company’s condensed consolidated statement of comprehensive income for the 13 and 39 weeks ended September 29, 2012 includes $25.2 million and $50.3 million of net sales and $1.8 million and $1.4 million of operating losses, respectively, related to the results of operations of Skagen Designs since April 2, 2012. Excluding nonrecurring acquisition and integration costs, Skagen Designs operations contributed $0.8 million and $2.4 million to operating income in the Third Quarter and Year To Date periods, respectively. 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 |  | $ | 229,012 |
Value of common stock issued |  | 19,899 |
Contingent consideration |  | 9,950 |
Total transaction consideration: |  | $ | 258,861 |
Accounts receivable - net of allowances |  | $ | 16,595 |
Inventories |  | 22,638 |
Prepaid expenses and other current assets |  | 3,306 |
Property, plant & equipment and other long-term assets |  | 4,232 |
Goodwill |  | 138,050 |
Trade name |  | 64,700 |
Customer lists |  | 24,400 |
Patents |  | 1,500 |
Noncompete agreement |  | 1,900 |
Other long-term assets |  | 2,972 |
Current liabilities |  | (20,484 | )
Long-term liabilities |  | (948 | )
Total net assets acquired |  | $ | 258,861 |
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 trade name 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. Approximately $129.8 million of the goodwill recognized in the acquisition is expected to be deductible for tax purposes. 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 39 weeks ended September 29, 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 pro forma information for the 39 weeks ended October 1, 2011. The following table presents the unaudited pro forma financial information (in thousands, except per share data):
|  | For the 13 Weeks Ended |  | For the 39 Weeks Ended |
|  | September 29, 2012 |  | October 1, 2011 |  | September 29, 2012 |  | October 1, 2011 |
Net sales |  | $ | 684,170 |  | $ | 674,936 |  | $ | 1,940,251 |  | $ | 1,816,680 |
Net income attributable to Fossil, Inc. |  | 77,617 |  | 73,763 |  | 197,861 |  | 181,178 |
Earnings per share: |  |  |  |  |  |  |  |  |
Basic |  | $ | 1.28 |  | $ | 1.17 |  | $ | 3.23 |  | $ | 2.85 |
Diluted |  | $ | 1.27 |  | $ | 1.16 |  | $ | 3.20 |  | $ | 2.82 |
Effective April 30, 2012, the Company acquired 51% 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. On August 10, 2012, the Company’s joint venture company in Spain, Fossil, S.L. (“Fossil Spain”) entered into a Framework Agreement with several related and unrelated parties, including General De Relojeria, S.A., the Company’s joint venture partner, pursuant to which, among other things, Fossil Spain was granted the right to acquire the outstanding 50% of its shares owned by General De Relojeria, S.A. upon the expiration of the joint venture agreement on December 31, 2015. The purchase price has a fixed and variable component. The fixed price will be determined based on 50% of the net book value of Fossil Spain as of December 31, 2012 (the net book value was approximately 14.5 million Euros as of September 29, 2012). The variable price will be determined based on Fossil Spain’s aggregated results of operations less dividends distributed by Fossil Spain to General De Relojeria for the calendar years 2013, 2014 and 2015, with a minimum variable price of 2.0 million Euros and a maximum variable price of 3.5 million Euros each respective year. 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 |  | 85,174 |  | 44,331 |  | 8,704 |  | 0 |  | 138,209 |
Foreign currency changes |  | 156 |  | 208 |  | 54 |  | 0 |  | 418 |
Balance at September 29, 2012 |  | $ | 108,935 |  | $ | 62,430 |  | $ | 11,316 |  | $ | 0 |  | $ | 182,681 |

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- Definition The entire disclosure for a business combination (or series of individually immaterial business combinations) completed during the period, including background, timing, and recognized assets and liabilities. The disclosure may include leverage buyout transactions (as applicable). + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=7659399&loc=d3e1392-128463 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 20 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6910749&loc=d3e4845-128472 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 20 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=6910749&loc=d3e4926-128472 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=7659399&loc=d3e1490-128463 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 30 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=7488404&loc=d3e6927-128479 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 30 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=7488404&loc=d3e7008-128479 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 30 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=7488404&loc=d3e7000-128479 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 7 -URI http://asc.fasb.org/extlink&oid=7659399&loc=d3e1524-128463 Reference 9: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=7659399&loc=d3e1383-128463 Reference 10: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=7659399&loc=d3e1486-128463 Reference 11: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 6 -URI http://asc.fasb.org/extlink&oid=7659399&loc=d3e1500-128463 Reference 12: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 141R -Paragraph 67-73 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. 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