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FINANCIAL STATEMENT POLICIES (Policies)
 9 Months Ended
Sep. 29, 2012
FINANCIAL STATEMENT POLICIES  
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 September 29, 2012, and the results of operations for the 13 week periods ended September 29, 2012 (“Third Quarter”) and October 1, 2011 (“Prior Year Quarter”), respectively, and the 39 week periods ended September 29, 2012 (“Year To Date Period”) and October 1, 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 13 and 39 week periods ended September 29, 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 $0.5 million, net of taxes, as of September 29, 2012. Refer to Note 8—Derivatives and Risk Management for additional disclosures about the Company’s use of forward contracts. The tax benefit of changes in fair value of hedging activities for the Third Quarter and Year To Date Period was $2.8 million and $2.0 million, respectively. The tax expense of changes in fair value of hedging activities for the Prior Year Quarter and Prior Year YTD Period was $1.6 million and $1.4 million, respectively.
Fair Value Measurements

 

 

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 table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of September 29, 2012 (in thousands):

 

 

 

Fair Value at September 29, 2012

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

Investments in publicly traded equity securities

 

$

181

 

$

0

 

$

0

 

$

181

 

Foreign exchange forward contracts

 

0

 

5,132

 

0

 

5,132

 

Deferred compensation plan assets:

 

 

 

 

 

 

 

 

 

Investment in publicly traded mutual funds

 

3,127

 

0

 

0

 

3,127

 

Total

 

$

3,308

 

$

5,132

 

$

0

 

$

8,440

 

Liabilities:

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

0

 

$

6,365

 

$

0

 

$

6,365

 

Foreign exchange forward contracts

 

0

 

4,340

 

0

 

4,340

 

Total

 

$

0

 

$

10,705

 

$

0

 

$

10,705

 

 

The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of December 31, 2011 (in thousands):

 

 

 

Fair Value at December 31, 2011

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

Investments in publicly traded equity securities

 

$

155

 

$

0

 

$

0

 

$

155

 

Foreign exchange forward contracts

 

0

 

10,614

 

0

 

10,614

 

Deferred compensation plan assets:

 

 

 

 

 

 

 

 

 

Investment in publicly traded mutual funds

 

2,897

 

0

 

0

 

2,897

 

Total

 

$

3,052

 

$

10,614

 

$

0

 

$

13,666

 

Liabilities:

 

 

 

 

 

 

 

 

 

Foreign exchange forward contracts

 

$

0

 

$

3,586

 

$

0

 

$

3,586

 

Total

 

$

0

 

$

3,586

 

$

0

 

$

3,586

 

 

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 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 September 29, 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 September 29, 2012 (in thousands):

 

 

 

For the 39
Weeks Ended

 

Fair Value Measurements Using

 

Total

 

 

 

September 29, 2012

 

Level 1

 

Level 2

 

Level 3

 

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 are 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 39 Weeks Ended

 

 

 

September
29, 2012

 

October 1,
2011

 

September
29, 2012

 

October 1,
2011

 

 

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income attributable to Fossil, Inc.

 

$

76,791

 

$

69,609

 

$

192,269

 

$

176,792

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Basic EPS computation:

 

 

 

 

 

 

 

 

 

Basic weighted average common shares outstanding

 

60,573

 

63,176

 

61,342

 

63,542

 

Basic EPS

 

$

1.27

 

$

1.10

 

$

3.13

 

$

2.78

 

 

 

 

 

 

 

 

 

 

 

Diluted EPS computation:

 

 

 

 

 

 

 

 

 

Basic weighted average common shares outstanding

 

60,573

 

63,176

 

61,342

 

63,542

 

Stock options, stock appreciation rights and restricted stock units

 

382

 

633

 

462

 

699

 

Diluted weighted average common shares outstanding

 

60,955

 

63,809

 

61,804

 

64,241

 

Diluted EPS

 

$

1.26

 

$

1.09

 

$

3.11

 

$

2.75

 

 

Approximately 370,000, 215,000, 40,000 and 40,000 shares issuable under stock-based awards were not included in the diluted EPS calculation at the end of the Third Quarter, Year To Date Period, Prior Year Quarter, and Prior Year YTD Period, respectively, because they were antidilutive.
Restricted Cash

 

 

Restricted Cash. As of September 29, 2012, the Company had short-term restricted cash balances of $0.2 million, primarily pledged as collateral to secure bank guarantees for the purpose of obtaining retail space.  As of December 31, 2011, the Company had restricted cash of  $5.9 million, 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 long-term restricted cash balances of $0.9 million and $2.1 million as of September 29, 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.