NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
1. FINANCIAL STATEMENT POLICIES
Basis of Presentation.
The condensed consolidated financial statements include the accounts of Fossil Group, 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
October 1, 2016
, and the results of operations for the thirteen-week periods ended
October 1, 2016
(“
Third
Quarter”) and
October 3, 2015
(“Prior Year Quarter”), respectively, and the thirty-nine week periods ended
October 1, 2016
(“Year To Date Period”) and
October 3, 2015
(“Prior Year YTD Period”). 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 2, 2016
(the “
2015
Form 10-K”). Operating results for the
Third
Quarter and Year To Date Period 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 the
2015
Form 10-K.
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 and sunglasses. 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.
Hedging Instruments.
The Company is exposed to certain market risks relating to foreign exchange rates and interest rates. The Company actively monitors and attempts to manage these exposures using derivative instruments including
foreign exchange forward contracts
("
forward contracts
") and interest rate swaps. The Company’s foreign subsidiaries periodically enter into
forward contracts
to hedge the future payment of intercompany inventory transactions denominated in U.S. dollars. Additionally, during the first quarter of fiscal year 2016, the Company entered into forward contracts to manage fluctuations in Japanese yen exchange rates that will be used to settle future third-party inventory component purchases by a U.S. dollar functional currency subsidiary. If the Company was to settle its euro, British pound, Canadian dollar, Japanese yen, Mexican peso, Australian dollar and U.S dollar
forward contracts
as of
October 1, 2016
, the result would have been a net gain of approximately
$3.6 million
, net of taxes. This unrealized gain is recognized in other comprehensive income (loss), net of taxes on the Company's consolidated statements of income and comprehensive income. Additionally, to the extent that any of these contracts are not considered to be perfectly effective in offsetting the change in the value of the cash flows being hedged, any changes in fair value relating to the ineffective portion of these contracts would be recognized in other income (expense)-net on the Company's consolidated statements of income and comprehensive income. Also, the Company has entered into interest rate swap agreements to effectively convert portions of its variable rate debt obligations to fixed rates. Changes in the fair value of the interest rate swaps are recorded as a component of accumulated other comprehensive income (loss) within stockholders' equity, and are recognized in interest expense in the period in which the payment is settled. To reduce exposure to changes in currency exchange rates adversely affecting the Company’s investment in foreign currency-denominated subsidiaries, the Company periodically enters into forward contracts designated as net investment hedges. Both realized and unrealized gains and losses from net investment hedges are recognized in the cumulative translation adjustment component of other comprehensive income (loss), and will be reclassified into earnings in the event the Company's underlying investments are liquidated or disposed. The Company does not hold or issue derivative financial instruments for trading or speculative
purposes. See “Note 10—Derivatives and Risk Management” for additional disclosures about the Company’s use of derivatives.
Operating expenses.
Operating expenses include selling, general and administrative expenses (“SG&A”) and restructuring charges. SG&A expenses include selling and distribution expenses primarily consisting of sales and distribution labor costs, sales distribution center and warehouse facility costs, depreciation expense related to sales distribution and warehouse facilities, the four-wall operating costs of the Company’s retail stores, point-of-sale expenses, advertising expenses and art, design and product development labor costs. SG&A also includes general and administrative expenses primarily consisting of administrative support labor and “back office” or support costs such as treasury, legal, information services, accounting, internal audit, human resources, executive management costs and costs associated with stock-based compensation.
Restructuring charges include costs to reorganize, refine and optimize the Company’s infrastructure and store closures.
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 October 1, 2016
|
|
For the 13 Weeks Ended October 3, 2015
|
|
For the 39 Weeks Ended October 1, 2016
|
|
For the 39 Weeks Ended October 3, 2015
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Fossil Group, Inc.
|
$
|
17,356
|
|
|
$
|
57,534
|
|
|
$
|
29,170
|
|
|
$
|
150,252
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS computation:
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
48,130
|
|
|
48,153
|
|
|
48,127
|
|
|
49,027
|
|
Basic EPS
|
$
|
0.36
|
|
|
$
|
1.19
|
|
|
$
|
0.61
|
|
|
$
|
3.06
|
|
Diluted EPS computation:
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
48,130
|
|
|
48,153
|
|
|
48,127
|
|
|
49,027
|
|
Effect of stock options, stock appreciation rights, restricted stock units and performance restricted stock units
|
161
|
|
|
89
|
|
|
159
|
|
|
121
|
|
Diluted weighted average common shares outstanding
|
48,291
|
|
|
48,242
|
|
|
48,286
|
|
|
49,148
|
|
Diluted EPS
|
$
|
0.36
|
|
|
$
|
1.19
|
|
|
$
|
0.60
|
|
|
$
|
3.06
|
|
Approximately
1.6
million,
1.5 million
,
0.6 million
and
0.5 million
weighted 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. Approximately
1.1 million
weighted performance shares were not included in the diluted EPS calculation at the end of the Third Quarter and Year to Date Period as the performance targets were not met.
Recently Issued Accounting Standards.
In October 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-16,
Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory
(“ASU 2016-16”). ASU 2016-16 requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. ASU 2016-16 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. The Company is still evaluating the effect of adopting ASU 2016-16.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows
(Topic 230): Classification of Certain Cash Receipts and Cash Payments
(“ASU 2016-15”). ASU 2016-15 provides guidance on how certain cash receipts and cash payments should be presented and classified in the statement of cash flows with the objective of reducing existing diversity in practice with respect to these items. ASU 2016-05 is effective for annual periods, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted. This standard will not have a material impact on the Company’s consolidated results of operations or financial position.
In March 2016, the FASB issued ASU 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
(“ASU 2016-09”). ASU 2016-09 is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of
cash flows and forfeitures. ASU 2016-09 is effective for annual periods, and interim periods within those years, beginning after December 15, 2016. Early adoption is permitted. The Company is still evaluating the effect of adopting ASU 2016-09, but the adoption may create volatility in the Company's effective tax rate.
In March 2016, the FASB issued ASU 2016-04,
Liabilities—Extinguishments of Liabilities (Subtopic 405-20)- Recognition of Breakage for Certain Prepaid Stored-Value Products
(“ASU 2016-04”). ASU 2016-04 entitles a company to derecognize amounts related to expected breakage to the extent that it is probable a significant reversal of the recognized breakage amount will not subsequently occur. ASU 2016-04 is effective for annual periods, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted. The Company is still evaluating the effect of adopting ASU 2016-04.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842): Amendments to the FASB Accounting Standards Codification®
(“ASU 2016-02”), which supersedes the existing guidance for lease accounting,
Leases (Topic 840)
. ASU 2016-02 requires lessees to recognize leases on their balance sheets, and modifies accounting, presentation and disclosure for both lessors and lessees. ASU 2016-02 requires a modified retrospective approach for all leases existing at, or entered into after, the date of initial application, with an option to elect to use certain transition relief. ASU 2016-02 is effective for annual periods, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted. Many of the Company’s leases are considered operating leases and are not capitalized under ASC 840. Under ASC 842 the majority of these leases will qualify for capitalization and will result in the recognition of lease assets and lease liabilities once the new standard is adopted. The Company is in the process of reviewing lease contracts to determine the impact of adopting ASU 2016-02.
In July 2015, the FASB issued ASU 2015-11,
Inventory (Topic 330): Simplifying the Measurement of Inventory
(“ASU 2015-11”). ASU 2015-11 affects reporting entities that measure inventory using first-in, first-out or average cost. Specifically, ASU 2015-11 requires that inventory be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. ASU 2015-11 is effective for annual periods beginning after December 15, 2016, with early adoption permitted. This standard will not have a material impact on the Company’s consolidated results of operations or financial position.
In August 2014, the FASB issued ASU 2014-15,
Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern
(“ASU 2014-15”), to provide guidance on management’s responsibility to perform interim and annual assessments of an entity’s ability to continue as a going concern and to provide related disclosure. ASU 2014-15 applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. This standard will not have a material impact on the Company’s consolidated results of operations or financial position.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
(“ASU 2014-09”). ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets, unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date
(“ASU 2015-14”), deferring the effective date of ASU 2014-09. The new revenue standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017 and allows either a full retrospective adoption to all periods presented or a modified retrospective adoption approach with the cumulative effect of initial application of the revised guidance recognized at the date of initial application. In March 2016, the FASB issued ASU 2016-08,
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
(“ASU 2016-08”). ASU 2016-08 is intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing
(“ASU 2016-10”). ASU 2016-10
clarifies the implementation guidance on identifying performance obligations. Early adoption is permitted for periods beginning after December 15, 2016. In May 2016, the FASB issued ASU 2016-12,
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients
(“ASU 2016-12”). ASU 2016-12 clarifies three aspects of Topic 606, including the objective of the collectability criterion, the measurement date for noncash consideration and the requirements for a completed contract. ASU 2016-12 also includes a practical expedient for contract modifications. Additionally, the amendments allow an entity to exclude all sales taxes collected from customers from the transaction price. The Company expects to identify similar performance obligations under ASC 606 as compared to current guidance under ASC 605. As a result, we expect the timing of our revenue recognition to remain substantially unchanged.
Recently Adopted Accounting Standards.
In accordance with U.S. GAAP, the following provisions, which had no material impact on the Company’s financial position, results of operations or cash flows, were adopted effective the first quarter of fiscal year 2016:
•
ASU 2015-02,
Consolidation (Topic 810): Amendments to the Consolidation Analysis
|
|
•
|
ASU 2014-12,
Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period
|
2. ACQUISITIONS AND GOODWILL
Fossil Spain Acquisition.
On August 10, 2012, the Company’s joint venture company, Fossil, S.L. (“Fossil Spain”), entered into a Framework Agreement (the “Framework Agreement”) with several related and unrelated parties, including General De Relojeria, S.A. (“General De Relojeria”), the Company’s joint venture partner. Pursuant to the Framework Agreement, Fossil Spain was granted the right to acquire the outstanding
50%
of its shares owned by General De Relojeria upon the expiration of the joint venture agreement on December 31, 2015. The Company completed the acquisition of these shares in the second quarter of fiscal year 2016, at which time Fossil Spain became a wholly-owned subsidiary of the Company. During the second quarter of fiscal year 2016, the fixed and previously remaining variable components of the purchase price were settled in the amounts of
4.3 million
euros (approximately
$4.8 million
as of the settlement date) and
3.5 million
euros (approximately
$3.9 million
as of the settlement date), respectively. As of January 1, 2013, pursuant to the Framework Agreement, the Company assumed control over the board of directors and the day-to-day management of Fossil Spain, and began consolidating Fossil Spain, instead of treating it as an equity method investment.
Misfit, Inc. Acquisition.
On December 22, 2015, the Company acquired Misfit, Inc. ("Misfit"), an innovator and distributor of wearable technology and stylish connected devices. Misfit was a U.S.-based, privately held company. The primary purpose of the acquisition was to acquire a scalable technology platform that can be integrated across the Company's multi-brand portfolio, a native wearable technology brand and a pipeline of innovative products. Misfit’s position in the wearable technology space combined with their software and hardware engineering teams enables the Company to expand its addressable market with new distribution channels, products, brands and enterprise partnerships.
The purchase price was
$215.4 million
in cash, net of cash acquired and subject to working capital adjustments, and
$1.7 million
in replacement awards attributable to precombination service. At closing,
$12.5 million
of the cash payment was placed into an escrow fund for the Company for working capital adjustments and indemnification obligations of the seller incurred within 12 months from the closing date. The Company received
$0.8 million
from the escrow during the second quarter of fiscal year 2016 as a working capital settlement and has recorded a receivable for additional claims incurred. To fund the cash purchase price, the Company utilized cash on hand and approximately
$60 million
of availability under its
$1.05 billion
revolving line of credit. The results of Misfit's operations have been included in the Company’s consolidated financial statements since December 22, 2015.
Assets acquired and liabilities assumed in the transaction were recorded at their acquisition date fair values, while transaction costs of
$8.4 million
associated with the acquisition were expensed as incurred during the fourth quarter of fiscal year 2015. 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 December 22, 2015, the effective date of the acquisition (in thousands):
|
|
|
|
|
|
Cash paid, net of cash acquired
|
|
$
|
215,370
|
|
Replacement awards attributable to precombination service
|
|
1,709
|
|
Working capital and other adjustments
|
|
(3,788
|
)
|
Total transaction consideration
|
|
$
|
213,291
|
|
|
|
|
Inventories
|
|
$
|
7,011
|
|
Prepaid expenses and other current assets
|
|
25
|
|
Property, plant and equipment and other long-term assets
|
|
1,190
|
|
Goodwill
|
|
168,021
|
|
Amortizing Intangibles:
|
Useful Lives
|
|
Trade name
|
6 yrs.
|
15,700
|
|
Customer lists
|
5 yrs.
|
10,800
|
|
Developed technology
|
7 yrs.
|
36,100
|
|
Noncompete agreements
|
3 yrs.
|
700
|
|
Current liabilities
|
|
(17,019
|
)
|
Long-term liabilities
|
|
(9,237
|
)
|
Total net assets acquired
|
|
$
|
213,291
|
|
Purchase accounting adjustments during the Year To Date Period include a
$5.9 million
reduction to inventories,
$4.0 million
increase to current liabilities,
$3.8 million
reduction to total transaction consideration,
$3.7 million
reduction to long-term liabilities,
$3.6 million
increase to goodwill and a
$1.2 million
reduction to accounts receivable. 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. The goodwill recognized from the acquisition has an indefinite useful life and will be included in the Company’s annual impairment testing.
Goodwill.
The changes in the carrying amount of goodwill were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
Europe
|
|
Asia
|
|
Total
|
Balance at January 2, 2016
|
$
|
283,598
|
|
|
$
|
63,981
|
|
|
$
|
11,815
|
|
|
$
|
359,394
|
|
Segment allocation and acquisition adjustments (1)
|
(78,197
|
)
|
|
49,760
|
|
|
32,053
|
|
|
3,616
|
|
Currency
|
(166
|
)
|
|
1,742
|
|
|
61
|
|
|
1,637
|
|
Balance at October 1, 2016
|
$
|
205,235
|
|
|
$
|
115,483
|
|
|
$
|
43,929
|
|
|
$
|
364,647
|
|
__________________________________________________________________________________
(1) All goodwill resulting from the Misfit acquisition was recorded in the Americas segment as of January 2, 2016, on a preliminary basis. This line item includes an allocation of the goodwill across reporting segments and also purchase accounting adjustments made during the Year To Date Period.
3. INVENTORIES
Inventories consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
October 1, 2016
|
|
January 2, 2016
|
Components and parts
|
$
|
74,535
|
|
|
$
|
49,539
|
|
Work-in-process
|
10,353
|
|
|
12,213
|
|
Finished goods
|
614,760
|
|
|
563,592
|
|
Inventories
|
$
|
699,648
|
|
|
$
|
625,344
|
|
4. WARRANTY LIABILITIES
The Company’s warranty liability is recorded in accrued expenses-other in the Company’s condensed consolidated balance sheets. Warranty liability activity consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
For the 39 Weeks Ended October 1, 2016
|
|
For the 39 Weeks Ended October 3, 2015
|
Beginning balance
|
$
|
13,669
|
|
|
$
|
13,500
|
|
Settlements in cash or kind
|
(7,338
|
)
|
|
(6,627
|
)
|
Warranties issued and adjustments to preexisting warranties (1)
|
8,604
|
|
|
7,305
|
|
Liabilities assumed in acquisition
|
—
|
|
|
44
|
|
Ending balance
|
$
|
14,935
|
|
|
$
|
14,222
|
|
_______________________________________________
(1) Changes in cost estimates related to preexisting warranties are aggregated with accruals for new standard warranties issued and foreign currency changes.
5. INCOME TAXES
The Company’s income tax expense and related effective rates were as follows (in thousands, except percentage data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 13 Weeks Ended October 1, 2016
|
|
For the 13 Weeks Ended October 3, 2015
|
|
For the 39 Weeks Ended October 1, 2016
|
|
For the 39 Weeks Ended October 3, 2015
|
Income tax expense
|
$
|
6,451
|
|
|
$
|
17,303
|
|
|
$
|
13,230
|
|
|
$
|
58,721
|
|
Effective tax rate
|
25.0
|
%
|
|
22.3
|
%
|
|
27.5
|
%
|
|
27.1
|
%
|
The higher effective tax rate in the Third Quarter as compared to the Prior Year Quarter is primarily attributable to favorable differences between the income tax returns filed and the tax provisions made for those tax liabilities. These differences were recorded as discrete items in the Prior Year Quarter that more than offset the higher structural rate. The higher effective tax rate in the Year To Date Period as compared to the Prior Year YTD Period is primarily attributable to the recognition of income tax benefits due to the settlement of audits and favorable differences between the income tax returns filed and the tax provisions made for those tax liabilities in the Prior Year YTD Period that more than offset the higher structural rate. The lower projected structural rate for 2016 is largely due to the projected shift in earnings mix towards foreign income which is taxed at lower statutory rates.
As of
October 1, 2016
, the total amount of unrecognized tax benefits, excluding interest and penalties, was
$22.2 million
, of which
$19.5 million
would favorably impact the effective tax rate in future periods, if recognized. The Company is subject to examinations in various state and foreign jurisdictions for its 2009-2015 tax years, none of which the Company believes are significant, individually or in the aggregate. Tax audit outcomes and timing of tax audit settlements are subject to significant uncertainty.
The Company has classified uncertain tax positions as long-term income taxes payable, unless such amounts are expected to be paid within twelve months of the condensed consolidated balance sheet date. As of
October 1, 2016
, the Company had recorded
$0.5 million
of unrecognized tax benefits, excluding interest and penalties, for positions that are expected to be settled within the next twelve months. Consistent with its past practice, the Company recognizes interest and/or penalties related to income tax overpayments and income tax underpayments in income tax expense and income taxes receivable/payable. At
October 1, 2016
, the total amount of accrued income tax-related interest and penalties included in the condensed consolidated balance sheet was
$2.1 million
and
$1.4 million
, respectively. For the
Third
Quarter and Year To Date Period, the Company accrued income tax-related interest expense of
$0.2 million
and
$0.7 million
, respectively.
6. STOCKHOLDERS’ EQUITY
Common Stock Repurchase Programs.
Purchases of the Company’s common stock are made from time to time pursuant to its repurchase programs, subject to market conditions and at prevailing market prices, through the open market. Repurchased shares of common stock are recorded at cost and become authorized but unissued shares which may be issued in the future for general corporate or other purposes. The Company may terminate or limit its stock repurchase program at any time. In the event the repurchased shares are canceled, the Company accounts for retirements by allocating the repurchase price to common stock, additional paid-in capital and retained earnings. The repurchase price allocation is based upon the equity contribution associated with historical issuances. The repurchase programs are conducted pursuant to Rule 10b-18 of the Exchange Act.
During the Year to Date period, the Company effectively retired
0.1 million
shares of common stock repurchased under its repurchase programs. The effective retirement of repurchased common stock decreased common stock by
$1,100
, additional paid-in capital by
$0.2 million
, retained earnings by
$5.0 million
and treasury stock by
$5.2 million
. At
January 2, 2016
and
October 1, 2016
, all treasury stock had been effectively retired. As of
October 1, 2016
, the Company had
$824.2 million
of repurchase authorizations remaining under its combined repurchase programs. However, under the Company's First Amendment to the Amended and Restated Credit Agreement (the "First Amendment"), the Company is restricted from making open market repurchases of its common stock. See "Note 14—Debt Activity" for additional disclosures about the First Amendment.
The following tables reflect the Company’s common stock repurchase activity for the periods indicated (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 13 Weeks Ended October 1, 2016
|
|
For the 13 Weeks Ended October 3, 2015
|
Fiscal Year
Authorized
|
Dollar Value
Authorized
|
|
Termination Date
|
|
Number of
Shares
Repurchased
|
|
Dollar Value
Repurchased
|
|
Number of
Shares
Repurchased
|
|
Dollar Value
Repurchased
|
2014
|
$
|
1,000.0
|
|
|
December 2018
|
|
—
|
|
|
$
|
—
|
|
|
0.2
|
|
|
$
|
12.4
|
|
2012
|
$
|
1,000.0
|
|
|
December 2016 (1)
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
2010
|
$
|
30.0
|
|
|
None
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 39 Weeks Ended October 1, 2016
|
|
For the 39 Weeks Ended October 3, 2015
|
Fiscal Year
Authorized
|
Dollar Value
Authorized
|
|
Termination Date
|
|
Number of
Shares
Repurchased
|
|
Dollar Value
Repurchased
|
|
Number of
Shares
Repurchased
|
|
Dollar Value
Repurchased
|
2014
|
$
|
1,000.0
|
|
|
December 2018
|
|
0.1
|
|
|
$
|
5.2
|
|
|
2.4
|
|
|
$
|
200.7
|
|
2012
|
$
|
1,000.0
|
|
|
December 2016 (1)
|
|
—
|
|
|
$
|
—
|
|
|
0.3
|
|
|
$
|
28.8
|
|
2010
|
$
|
30.0
|
|
|
None
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
__________________________________________________________________________________
(1) In the first quarter of fiscal year 2015, the Company completed this repurchase plan.
Controlling and Noncontrolling Interest.
The following tables summarize the changes in equity attributable to controlling and noncontrolling interest (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fossil Group, Inc.
Stockholders’
Equity
|
|
Noncontrolling
Interest
|
|
Total
Stockholders’
Equity
|
Balance at January 2, 2016
|
$
|
921,388
|
|
|
$
|
11,155
|
|
|
$
|
932,543
|
|
Net income
|
29,170
|
|
|
5,646
|
|
|
34,816
|
|
Currency translation adjustment
|
9,383
|
|
|
—
|
|
|
9,383
|
|
Cash flow hedges - net change
|
(4,741
|
)
|
|
—
|
|
|
(4,741
|
)
|
Pension plan activity
|
1,714
|
|
|
—
|
|
|
1,714
|
|
Common stock issued upon exercise of stock options
|
57
|
|
|
—
|
|
|
57
|
|
Tax expense derived from stock-based compensation
|
(1,756
|
)
|
|
—
|
|
|
(1,756
|
)
|
Distribution of noncontrolling interest earnings
|
—
|
|
|
(4,543
|
)
|
|
(4,543
|
)
|
Acquisition of common stock
|
(6,448
|
)
|
|
—
|
|
|
(6,448
|
)
|
Stock-based compensation expense
|
23,894
|
|
|
—
|
|
|
23,894
|
|
Balance at October 1, 2016
|
$
|
972,661
|
|
|
$
|
12,258
|
|
|
$
|
984,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fossil Group, Inc.
Stockholders’
Equity
|
|
Noncontrolling
Interest
|
|
Total
Stockholders’
Equity
|
Balance at January 3, 2015
|
$
|
977,860
|
|
|
$
|
5,941
|
|
|
$
|
983,801
|
|
Net income
|
150,252
|
|
|
7,335
|
|
|
157,587
|
|
Currency translation adjustment
|
(35,382
|
)
|
|
—
|
|
|
(35,382
|
)
|
Cash flow hedges - net change
|
(5,443
|
)
|
|
—
|
|
|
(5,443
|
)
|
Common stock issued upon exercise of stock options
|
658
|
|
|
—
|
|
|
658
|
|
Tax expense derived from stock-based compensation
|
(930
|
)
|
|
—
|
|
|
(930
|
)
|
Distribution of noncontrolling interest earnings
|
—
|
|
|
(5,257
|
)
|
|
(5,257
|
)
|
Business acquisition
|
—
|
|
|
5,831
|
|
|
5,831
|
|
Acquisition of common stock
|
(231,220
|
)
|
|
—
|
|
|
(231,220
|
)
|
Stock-based compensation expense
|
13,997
|
|
|
—
|
|
|
13,997
|
|
Balance at October 3, 2015
|
$
|
869,792
|
|
|
$
|
13,850
|
|
|
$
|
883,642
|
|
7. EMPLOYEE BENEFIT PLANS
Stock-Based Compensation Plans.
The following table summarizes stock options and stock appreciation rights activity during the
Third
Quarter:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options and Stock Appreciation Rights
|
|
Shares
|
|
Weighted-
Average
Exercise Price
|
|
Weighted-
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
|
|
(in Thousands)
|
|
|
|
(in Years)
|
|
(in Thousands)
|
Outstanding at July 2, 2016
|
|
2,206
|
|
|
$
|
51.59
|
|
|
6.7
|
|
$
|
791
|
|
Granted
|
|
101
|
|
|
29.49
|
|
|
|
|
|
|
Exercised
|
|
—
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
(10
|
)
|
|
56.26
|
|
|
|
|
|
|
Outstanding at October 1, 2016
|
|
2,297
|
|
|
50.60
|
|
|
6.5
|
|
715
|
|
Exercisable at October 1, 2016
|
|
542
|
|
|
$
|
84.18
|
|
|
4.1
|
|
$
|
715
|
|
The aggregate intrinsic value shown in the table above is before income taxes and is based on (i) the exercise price for outstanding and exercisable options/rights at
October 1, 2016
and (ii) the fair market value of the Company’s common stock on the exercise date for options/rights that were exercised during the
Third
Quarter
.
Stock Options and Stock Appreciation Rights Outstanding and Exercisable.
The following tables summarize information with respect to stock options and stock appreciation rights outstanding and exercisable at
October 1, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options Outstanding
|
|
Stock Options Exercisable
|
Range of
Exercise Prices
|
|
Number of
Shares
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Remaining
Contractual
Term
|
|
Number of
Shares
|
|
Weighted-
Average
Exercise
Price
|
|
|
(in Thousands)
|
|
|
|
(in Years)
|
|
(in Thousands)
|
|
|
$13.65 - $29.49
|
|
41
|
|
|
$
|
14.40
|
|
|
2.4
|
|
41
|
|
|
$
|
14.40
|
|
$29.78 - $47.99
|
|
91
|
|
|
36.29
|
|
|
2.3
|
|
91
|
|
|
36.29
|
|
$55.04 - $83.83
|
|
92
|
|
|
80.80
|
|
|
4.5
|
|
92
|
|
|
80.80
|
|
$95.91 - $131.46
|
|
144
|
|
|
127.98
|
|
|
5.4
|
|
144
|
|
|
127.98
|
|
Total
|
|
368
|
|
|
$
|
80.95
|
|
|
4.1
|
|
368
|
|
|
$
|
80.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Appreciation Rights Outstanding
|
|
Stock Appreciation Rights Exercisable
|
Range of
Exercise Prices
|
|
Number of
Shares
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Remaining
Contractual
Term
|
|
Number of
Shares
|
|
Weighted-
Average
Exercise
Price
|
|
|
(in Thousands)
|
|
|
|
(in Years)
|
|
(in Thousands)
|
|
|
$13.65 - $29.49
|
|
113
|
|
|
$
|
27.72
|
|
|
7.0
|
|
13
|
|
|
$
|
13.65
|
|
$29.78 - $47.99
|
|
1,566
|
|
|
38.15
|
|
|
7.2
|
|
9
|
|
|
38.40
|
|
$55.04 - $83.83
|
|
141
|
|
|
79.03
|
|
|
5.8
|
|
64
|
|
|
80.18
|
|
$95.91 - $131.46
|
|
109
|
|
|
114.42
|
|
|
4.7
|
|
88
|
|
|
115.01
|
|
Total
|
|
1,929
|
|
|
$
|
44.82
|
|
|
7.0
|
|
174
|
|
|
$
|
90.99
|
|
Restricted Stock, Restricted Stock Units and Performance Restricted Stock Units.
The following table summarizes restricted stock, restricted stock unit and performance restricted stock unit activity during the
Third
Quarter:
|
|
|
|
|
|
|
|
|
Restricted Stock, Restricted Stock Units
and Performance Restricted Stock Units
|
|
Number of Shares
|
|
Weighted-Average
Grant Date Fair
Value Per Share
|
|
|
(in Thousands)
|
|
|
Nonvested at July 2, 2016
|
|
1,524
|
|
|
$
|
40.95
|
|
Granted
|
|
61
|
|
|
29.50
|
|
Vested
|
|
(5
|
)
|
|
84.82
|
|
Forfeited
|
|
(16
|
)
|
|
46.51
|
|
Nonvested at October 1, 2016
|
|
1,564
|
|
|
$
|
40.30
|
|
The total fair value of restricted stock and restricted stock units vested during the
Third
Quarter was approximately
$0.2 million
. Vesting of performance restricted stock units is based on achievement of sales growth and operating margin targets in relation to the performance of a certain identified peer group, particular sales growth in relation to a defined sales plan and achievement of succession plans for key talent.
8. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following tables illustrate changes in the balances of each component of accumulated other comprehensive income (loss), net of taxes (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 13 Weeks Ended October 1, 2016
|
|
Currency
Translation
Adjustments
|
|
Cash Flow Hedges
|
|
|
|
|
|
|
Forward
Contracts
|
|
Interest
Rate Swaps
|
|
Pension
Plan
|
|
Total
|
Beginning balance
|
$
|
(73,986
|
)
|
|
$
|
2,943
|
|
|
$
|
(1,623
|
)
|
|
$
|
(4,506
|
)
|
|
$
|
(77,172
|
)
|
Other comprehensive income (loss) before reclassifications
|
1,942
|
|
|
3,313
|
|
|
466
|
|
|
—
|
|
|
5,721
|
|
Tax (expense) benefit
|
(280
|
)
|
|
(605
|
)
|
|
(170
|
)
|
|
—
|
|
|
(1,055
|
)
|
Amounts reclassed from accumulated other comprehensive income
|
—
|
|
|
2,621
|
|
|
(413
|
)
|
|
—
|
|
|
2,208
|
|
Tax (expense) benefit
|
—
|
|
|
(714
|
)
|
|
150
|
|
|
—
|
|
|
(564
|
)
|
Total other comprehensive income (loss)
|
1,662
|
|
|
801
|
|
|
559
|
|
|
—
|
|
|
3,022
|
|
Ending balance
|
$
|
(72,324
|
)
|
|
$
|
3,744
|
|
|
$
|
(1,064
|
)
|
|
$
|
(4,506
|
)
|
|
$
|
(74,150
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 13 Weeks Ended October 3, 2015
|
|
Currency
Translation
Adjustments
|
|
Cash Flow Hedges
|
|
|
|
|
|
|
Forward
Contracts
|
|
Interest
Rate Swaps
|
|
Pension
Plan
|
|
Total
|
Beginning balance
|
$
|
(55,188
|
)
|
|
$
|
15,348
|
|
|
$
|
(1,055
|
)
|
|
$
|
(3,647
|
)
|
|
$
|
(44,542
|
)
|
Other comprehensive income (loss) before reclassifications
|
(7,435
|
)
|
|
3,825
|
|
|
(2,044
|
)
|
|
—
|
|
|
(5,654
|
)
|
Tax (expense) benefit
|
—
|
|
|
(1,177
|
)
|
|
745
|
|
|
—
|
|
|
(432
|
)
|
Amounts reclassed from accumulated other comprehensive income
|
—
|
|
|
10,553
|
|
|
(623
|
)
|
|
—
|
|
|
9,930
|
|
Tax (expense) benefit
|
—
|
|
|
(3,549
|
)
|
|
226
|
|
|
—
|
|
|
(3,323
|
)
|
Total other comprehensive income (loss)
|
(7,435
|
)
|
|
(4,356
|
)
|
|
(902
|
)
|
|
—
|
|
|
(12,693
|
)
|
Ending balance
|
$
|
(62,623
|
)
|
|
$
|
10,992
|
|
|
$
|
(1,957
|
)
|
|
$
|
(3,647
|
)
|
|
$
|
(57,235
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 39 Weeks Ended October 1, 2016
|
|
Currency
Translation
Adjustments
|
|
Cash Flow Hedges
|
|
|
|
|
|
|
Forward
Contracts
|
|
Interest
Rate Swaps
|
|
Pension
Plan
|
|
Total
|
Beginning balance
|
$
|
(81,707
|
)
|
|
$
|
8,114
|
|
|
$
|
(693
|
)
|
|
$
|
(6,220
|
)
|
|
$
|
(80,506
|
)
|
Other comprehensive income (loss) before reclassifications
|
9,767
|
|
|
2,055
|
|
|
(1,915
|
)
|
|
2,010
|
|
|
11,917
|
|
Tax (expense) benefit
|
(280
|
)
|
|
433
|
|
|
698
|
|
|
(296
|
)
|
|
555
|
|
Amounts reclassed from accumulated other comprehensive income
|
104
|
|
|
9,888
|
|
|
(1,331
|
)
|
|
—
|
|
|
8,661
|
|
Tax (expense) benefit
|
—
|
|
|
(3,030
|
)
|
|
485
|
|
|
—
|
|
|
(2,545
|
)
|
Total other comprehensive income (loss)
|
9,383
|
|
|
(4,370
|
)
|
|
(371
|
)
|
|
1,714
|
|
|
6,356
|
|
Ending balance
|
$
|
(72,324
|
)
|
|
$
|
3,744
|
|
|
$
|
(1,064
|
)
|
|
$
|
(4,506
|
)
|
|
$
|
(74,150
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 39 Weeks Ended October 3, 2015
|
|
Currency
Translation
Adjustments
|
|
Cash Flow Hedges
|
|
|
|
|
|
|
Forward
Contracts
|
|
Interest
Rate Swap
|
|
Pension
Plan
|
|
Total
|
Beginning balance
|
$
|
(27,241
|
)
|
|
$
|
14,980
|
|
|
$
|
(502
|
)
|
|
$
|
(3,647
|
)
|
|
$
|
(16,410
|
)
|
Other comprehensive income (loss) before reclassifications
|
(35,382
|
)
|
|
25,287
|
|
|
1,010
|
|
|
—
|
|
|
(9,085
|
)
|
Tax (expense) benefit
|
—
|
|
|
(7,142
|
)
|
|
(368
|
)
|
|
—
|
|
|
(7,510
|
)
|
Amounts reclassed from accumulated other comprehensive income
|
—
|
|
|
33,546
|
|
|
3,300
|
|
|
—
|
|
|
36,846
|
|
Tax (expense) benefit
|
—
|
|
|
(11,413
|
)
|
|
(1,203
|
)
|
|
—
|
|
|
(12,616
|
)
|
Total other comprehensive income (loss)
|
(35,382
|
)
|
|
(3,988
|
)
|
|
(1,455
|
)
|
|
—
|
|
|
(40,825
|
)
|
Ending balance
|
$
|
(62,623
|
)
|
|
$
|
10,992
|
|
|
$
|
(1,957
|
)
|
|
$
|
(3,647
|
)
|
|
$
|
(57,235
|
)
|
See “Note 10—Derivatives and Risk Management” for additional disclosures about the Company’s use of derivatives.
9. SEGMENT INFORMATION
The Company reports segment information based on the “management approach”. The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of the Company’s reportable segments.
The Company manages its business primarily on a geographic basis. The Company’s reportable operating segments are comprised of (i) Americas, (ii) Europe and (iii) Asia. Each reportable operating segment includes sales to wholesale and distributor customers, and sales through Company-owned retail stores and e-commerce activities based on the location of the selling entity. The Americas segment primarily includes sales to customers based in Canada, Latin America and the United States. The Europe segment primarily includes sales to customers based in European countries, the Middle East and Africa. The Asia segment primarily includes sales to customers based in Australia, China, India, Indonesia, Japan, Malaysia, New Zealand, Singapore, South Korea, Taiwan and Thailand. Each reportable operating segment provides similar products and services.
The Company evaluates the performance of its reportable segments based on net sales and operating income. Net sales for geographic segments are based on the location of the selling entity. Operating income for each segment includes net sales to third parties, related cost of sales and operating expenses directly attributable to the segment. Global strategic initiatives such as brand building and omni channel activities and general corporate expenses, including certain administrative, legal, accounting, technology support costs, equity compensation costs, payroll costs attributable to executive management, brand management, product development, art, creative/product design, marketing, strategy, compliance and back office supply chain expenses are not allocated to the various segments because they are managed at the corporate level internally. The Company does not include intercompany transfers between segments for management reporting purposes.
Summary information by operating segment was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 13 Weeks Ended October 1, 2016
|
|
For the 13 Weeks Ended October 3, 2015
|
|
Net Sales
|
|
Operating Income
|
|
Net Sales
|
|
Operating Income
|
Americas
|
$
|
361,226
|
|
|
$
|
56,455
|
|
|
$
|
391,201
|
|
|
$
|
84,353
|
|
Europe
|
243,139
|
|
|
49,013
|
|
|
260,263
|
|
|
58,577
|
|
Asia
|
133,625
|
|
|
23,654
|
|
|
119,839
|
|
|
14,173
|
|
Corporate
|
—
|
|
|
(97,947
|
)
|
|
—
|
|
|
(81,398
|
)
|
Consolidated
|
$
|
737,990
|
|
|
$
|
31,175
|
|
|
$
|
771,303
|
|
|
$
|
75,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 39 Weeks Ended October 1, 2016
|
|
For the 39 Weeks Ended October 3, 2015
|
|
Net Sales
|
|
Operating Income
|
|
Net Sales
|
|
Operating Income
|
Americas
|
$
|
1,042,223
|
|
|
$
|
168,352
|
|
|
$
|
1,143,885
|
|
|
$
|
246,886
|
|
Europe
|
669,076
|
|
|
109,193
|
|
|
722,442
|
|
|
137,729
|
|
Asia
|
371,907
|
|
|
60,519
|
|
|
370,036
|
|
|
55,223
|
|
Corporate
|
—
|
|
|
(277,034
|
)
|
|
—
|
|
|
(237,545
|
)
|
Consolidated
|
$
|
2,083,206
|
|
|
$
|
61,030
|
|
|
$
|
2,236,363
|
|
|
$
|
202,293
|
|
The following tables reflect net sales for each class of similar products in the periods presented (in thousands, except percentage data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 13 Weeks Ended October 1, 2016
|
|
For the 13 Weeks Ended October 3, 2015
|
|
Net Sales
|
|
Percentage of Total
|
|
Net Sales
|
|
Percentage of Total
|
Watches
|
$
|
567,148
|
|
|
76.9
|
%
|
|
$
|
581,069
|
|
|
75.3
|
%
|
Leathers
|
93,338
|
|
|
12.6
|
|
|
104,777
|
|
|
13.6
|
|
Jewelry
|
60,237
|
|
|
8.2
|
|
|
66,984
|
|
|
8.7
|
|
Other
|
17,267
|
|
|
2.3
|
|
|
18,473
|
|
|
2.4
|
|
Total
|
$
|
737,990
|
|
|
100.0
|
%
|
|
$
|
771,303
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 39 Weeks Ended October 1, 2016
|
|
For the 39 Weeks Ended October 3, 2015
|
|
Net Sales
|
|
Percentage of Total
|
|
Net Sales
|
|
Percentage of Total
|
Watches
|
$
|
1,581,233
|
|
|
75.9
|
%
|
|
$
|
1,708,730
|
|
|
76.4
|
%
|
Leathers
|
278,995
|
|
|
13.4
|
|
|
287,083
|
|
|
12.8
|
|
Jewelry
|
171,709
|
|
|
8.2
|
|
|
185,751
|
|
|
8.3
|
|
Other
|
51,269
|
|
|
2.5
|
|
|
54,799
|
|
|
2.5
|
|
Total
|
$
|
2,083,206
|
|
|
100.0
|
%
|
|
$
|
2,236,363
|
|
|
100.0
|
%
|
10. DERIVATIVES AND RISK MANAGEMENT
Cash Flow Hedges.
The primary risks managed by using derivative instruments are the fluctuations in global currencies that will ultimately be used by non-U.S. dollar functional currency subsidiaries to settle future payments of intercompany inventory transactions denominated in U.S. dollars. Specifically, the Company projects future intercompany purchases by its non-U.S. dollar functional currency subsidiaries generally over a period of up to
24 months
. The Company enters into
forward contracts
, generally for up to
85%
of the forecasted purchases, to manage fluctuations in global currencies that will ultimately be used to settle such U.S. dollar denominated inventory purchases. Additionally, during the first quarter of fiscal year 2016, the Company entered into forward contracts to manage fluctuations in Japanese yen exchange rates that will be used to settle future third-party inventory component purchases by a U.S. dollar functional currency subsidiary.
Forward contracts
represent agreements to exchange the currency of one country for the currency of another country at an agreed-upon settlement date and exchange rate. These
forward contracts
are designated as single cash flow hedges. Fluctuations in exchange rates will either increase or decrease the Company’s U.S. dollar equivalent cash flows from these inventory transactions, which will affect the Company’s U.S. dollar earnings. Gains or losses on the
forward contracts
are expected to offset these fluctuations to the extent the cash flows are hedged by the
forward contracts
.
These
forward contracts
meet the criteria for hedge accounting, which requires that they represent foreign currency-denominated forecasted transactions in which (i) the operating unit that has the foreign currency exposure is a party to the hedging instrument and (ii) the hedged transaction is denominated in a currency other than the hedging unit’s functional currency.
At the inception of each forward contract designated as a cash flow hedge, the hedging relationship is expected to be highly effective in achieving offsetting cash flows attributable to the hedged risk. The Company assesses hedge effectiveness under the critical terms matched method at inception and at least quarterly throughout the life of the hedging relationship. If the critical terms (i.e., amounts, currencies and settlement dates) of the forward contract match the terms of the forecasted transaction, the Company concludes that the hedge is effective.
For a derivative instrument that is designated and qualifies as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income (loss), net of taxes and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. Due to the high degree of effectiveness between the hedging instruments and the underlying exposures being hedged, the Company’s hedges resulted in no ineffectiveness in the condensed consolidated statements of income and comprehensive income, and there were no components excluded from the assessment of hedge effectiveness for the
Third
Quarter, Prior Year Quarter, Year To Date Period or Prior Year YTD Period.
All derivative instruments are recognized as either assets or liabilities at fair value in the condensed consolidated balance sheets. Derivatives designated as cash flow hedges are recorded at fair value at each balance sheet date and the change in fair value is recorded to accumulated other comprehensive income (loss) within the equity section of the Company’s condensed consolidated balance sheet until such derivative’s gains or losses become realized or the cash flow hedge relationship is terminated. If the cash flow hedge relationship is terminated, the derivative’s gains or losses that are recorded in accumulated other comprehensive income (loss) will be recognized in earnings when the hedged cash flows occur. However, for cash flow hedges that are terminated because the forecasted transaction is not expected to occur in the original specified time period, the derivative’s gains or losses are immediately recognized in earnings. There were no gains or losses reclassified into earnings as a result of the discontinuance of cash flow hedges in the
Third
Quarter, Prior Year Quarter, Year To Date Period or Prior Year YTD Period. Hedge accounting is discontinued if it is determined that the derivative is not highly effective. The Company records all forward contract hedge assets and liabilities on a gross basis as they do not meet the balance sheet netting criteria because the Company does not have master netting agreements established with the derivative counterparties that would allow for net settlement.
As of
October 1, 2016
, the Company had the following outstanding
forward contracts
designated as cash flow hedges that were entered into to hedge the future payments of inventory transactions (in millions):
|
|
|
|
|
|
|
|
|
|
Functional Currency
|
|
Contract Currency
|
Type
|
|
Amount
|
|
Type
|
|
Amount
|
Euro
|
|
255.8
|
|
|
U.S. dollar
|
|
290.6
|
|
British pound
|
|
52.9
|
|
|
U.S. dollar
|
|
77.0
|
|
Canadian dollar
|
|
84.2
|
|
|
U.S. dollar
|
|
64.1
|
|
Japanese yen
|
|
4,234.3
|
|
|
U.S. dollar
|
|
38.6
|
|
Mexican peso
|
|
339.8
|
|
|
U.S. dollar
|
|
18.0
|
|
Australian dollar
|
|
22.2
|
|
|
U.S. dollar
|
|
16.6
|
|
U.S. dollar
|
|
41.3
|
|
|
Japanese yen
|
|
4,250.0
|
|
The Company is also exposed to interest rate risk related to its outstanding debt. To manage the interest rate risk related to its
$231.3 million
U.S.-based term loan (as amended and restated on March 9, 2015, the "Term Loan”), the Company entered into an interest rate swap agreement on July 26, 2013 with a term of approximately
five years
. The objective of this hedge is to offset the variability of future payments associated with interest rates on the Term Loan. The interest rate swap agreement hedges the
1-month London Interbank Offer Rate ("LIBOR") based variable rate
debt obligations under the Term Loan. Under the terms of the swap, the Company pays a fixed interest rate of
1.288%
per annum to the swap counterparty plus the LIBOR rate applicable margin (which varies based upon the Company’s consolidated leverage ratio (the “Ratio”) from
1.50%
if the Ratio is less than
1.00
to
1.00
, to
2.75%
if the Ratio is greater than or equal to
3.00
to
1.00
). The notional amount amortizes over the remaining life of the Term Loan to coincide with repayments on the underlying loan. The Company receives interest from the swap counterparty at a variable rate based on 1-month LIBOR. This hedge is designated as a cash flow hedge.
Net Investment Hedges.
The Company is also exposed to risk that adverse changes in foreign currency exchange rates could impact its net investment in foreign operations. During the first quarter of fiscal year 2016, the Company entered into a forward contract designated as a net investment hedge to reduce exposure to changes in currency exchange rates on
45.0 million
euros of its total investment in a wholly-owned, euro-denominated foreign subsidiary. The hedge was settled during the second quarter of fiscal year 2016 resulting in a net gain of
$0.5 million
net of taxes that was recognized in the currency translation component of accumulated other comprehensive income (loss).
The effective portion of derivatives designated as net investment hedges are recorded at fair value at each balance sheet date and the change in fair value is recorded in the cumulative translation adjustment component of other comprehensive income (loss) in the Company’s condensed consolidated statements of income and comprehensive income. The Company uses the hypothetical derivative method to assess the ineffectiveness of net investment hedges. Should any portion of a net investment hedge become ineffective, the ineffective portion will be reclassified to other income (expense)-net on the Company’s condensed consolidated statements of income and comprehensive income. Gains and losses reported in accumulated other comprehensive income (loss) will not be reclassified into earnings until the Company’s underlying investment is liquidated or dissolved.
Non-designated Hedges.
The Company also periodically enters into
forward contracts
to manage exchange rate risks associated with certain intercompany transactions and for which the Company does not elect hedge accounting treatment. As of
October 1, 2016
, the Company had non-designated
forward contracts
of approximately
$2.0 million
on
28.0 million
rand associated with a South African rand-denominated foreign subsidiary. Changes in the fair value of derivatives, not designated as hedging instruments, are recognized in earnings when they occur.
The effective portion of gains and losses on cash flow hedges that were recognized in other comprehensive income (loss), net of taxes during the
Third
Quarter, Prior Year Quarter, Year To Date Period and Prior Year YTD Period are set forth below (in thousands):
|
|
|
|
|
|
|
|
|
|
For the 13 Weeks Ended October 1, 2016
|
|
For the 13 Weeks Ended October 3, 2015
|
Cash flow hedges:
|
|
|
|
|
|
Forward contracts
|
$
|
2,708
|
|
|
$
|
2,648
|
|
Interest rate swaps
|
296
|
|
|
(1,299
|
)
|
Total gain (loss) recognized in other comprehensive income (loss), net of taxes
|
$
|
3,004
|
|
|
$
|
1,349
|
|
|
|
|
|
|
|
|
|
|
|
For the 39 Weeks Ended October 1, 2016
|
|
For the 39 Weeks Ended October 3, 2015
|
Cash flow hedges:
|
|
|
|
|
|
Forward contracts
|
$
|
2,488
|
|
|
$
|
18,145
|
|
Interest rate swaps
|
(1,217
|
)
|
|
642
|
|
Total gain (loss) recognized in other comprehensive income (loss), net of taxes
|
$
|
1,271
|
|
|
$
|
18,787
|
|
The following table illustrates the effective portion of gains and losses on derivative instruments recorded in other comprehensive income (loss), net of taxes during the term of the hedging relationship and reclassified into earnings, and gains and losses on derivatives not designated as hedging instruments recorded directly to earnings during the
Third
Quarter, Prior Year Quarter, Year To Date Period and Prior Year YTD Period (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Instruments
|
|
Condensed Consolidated
Statements of Income
and Comprehensive
Income Location
|
|
Effect of Derivative
Instruments
|
|
For the 13 Weeks Ended October 1, 2016
|
|
For the 13 Weeks Ended October 3, 2015
|
Forward contracts designated as cash flow hedging instruments
|
|
Other income (expense)-net
|
|
Total gain (loss) reclassified from other comprehensive income (loss)
|
|
$
|
1,907
|
|
|
$
|
7,004
|
|
Forward contracts not designated as hedging instruments
|
|
Other income (expense)-net
|
|
Total gain (loss) recognized in income
|
|
$
|
75
|
|
|
$
|
(205
|
)
|
Interest rate swap designated as a cash flow hedging instrument
|
|
Interest expense
|
|
Total gain (loss) reclassified from other comprehensive income (loss)
|
|
$
|
(263
|
)
|
|
$
|
(397
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Instruments
|
|
Condensed Consolidated
Statements of Income
and Comprehensive
Income Location
|
|
Effect of Derivative
Instruments
|
|
For the 39 Weeks Ended October 1, 2016
|
|
For the 39 Weeks Ended October 3, 2015
|
Forward contracts designated as cash flow hedging instruments
|
|
Other income (expense)-net
|
|
Total gain (loss) reclassified from other comprehensive income (loss)
|
|
$
|
6,858
|
|
|
$
|
22,133
|
|
Forward contracts not designated as hedging instruments
|
|
Other income (expense)-net
|
|
Total gain (loss) recognized in income
|
|
$
|
(222
|
)
|
|
$
|
(125
|
)
|
Interest rate swap designated as a cash flow hedging instrument
|
|
Interest expense
|
|
Total gain (loss) reclassified from other comprehensive income (loss)
|
|
$
|
(846
|
)
|
|
$
|
(1,234
|
)
|
Interest rate swap designated as a cash flow hedging instrument
|
|
Other income (expense)-net
|
|
Total gain (loss) reclassified from other comprehensive income (loss)
|
|
$
|
—
|
|
|
$
|
3,331
|
|
The following table discloses the fair value amounts for the Company’s derivative instruments as separate asset and liability values, presents the fair value of derivative instruments on a gross basis, and identifies the line items in the condensed consolidated balance sheets in which the fair value amounts for these categories of derivative instruments are included (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
|
October 1, 2016
|
|
January 2, 2016
|
|
October 1, 2016
|
|
January 2, 2016
|
Derivative Instruments
|
|
Condensed
Consolidated
Balance Sheets
Location
|
|
Fair
Value
|
|
Condensed
Consolidated
Balance Sheets
Location
|
|
Fair
Value
|
|
Condensed
Consolidated
Balance Sheets
Location
|
|
Fair
Value
|
|
Condensed
Consolidated
Balance Sheets
Location
|
|
Fair
Value
|
Forward contracts designated as cash flow hedging instruments
|
|
Prepaid expenses and other current assets
|
|
$
|
9,867
|
|
|
Prepaid expenses and other current assets
|
|
$
|
13,184
|
|
|
Accrued expenses- other
|
|
$
|
5,459
|
|
|
Accrued expenses- other
|
|
$
|
477
|
|
Forward contracts not designated as cash flow hedging instruments
|
|
Prepaid expenses and other current assets
|
|
—
|
|
|
Prepaid expenses and other current assets
|
|
167
|
|
|
Accrued expenses- other
|
|
60
|
|
|
Accrued expenses- other
|
|
71
|
|
Interest rate swap designated as a cash flow hedging instrument
|
|
Prepaid expenses and other current assets
|
|
—
|
|
|
Prepaid expenses and other current assets
|
|
—
|
|
|
Accrued expenses- other
|
|
1,190
|
|
|
Accrued expenses- other
|
|
1,273
|
|
Forward contracts designated as cash flow hedging instruments
|
|
Intangible and other assets-net
|
|
2,083
|
|
|
Intangible and other assets-net
|
|
2,785
|
|
|
Other long-term liabilities
|
|
1,276
|
|
|
Other long-term liabilities
|
|
250
|
|
Interest rate swap designated as a cash flow hedging instrument
|
|
Intangible and other assets-net
|
|
—
|
|
|
Intangible and other assets-net
|
|
311
|
|
|
Other long-term liabilities
|
|
483
|
|
|
Other long-term liabilities
|
|
128
|
|
Total
|
|
|
|
$
|
11,950
|
|
|
|
|
$
|
16,447
|
|
|
|
|
$
|
8,468
|
|
|
|
|
$
|
2,199
|
|
At the end of the
Third
Quarter, the Company had
forward contracts
designated as cash flow hedges with maturities extending through September 2018. As of
October 1, 2016
, an estimated net gain of
$3.1 million
is expected to be reclassified into earnings within the next twelve months at prevailing foreign currency exchange rates. See “Note 1—Financial Statement Policies” for additional disclosures on foreign currency hedging instruments.
11. 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 Standards 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
October 1, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at October 1, 2016
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Forward contracts
|
$
|
—
|
|
|
$
|
11,950
|
|
|
$
|
—
|
|
|
$
|
11,950
|
|
Deferred compensation plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
Investment in publicly traded mutual funds
|
2,452
|
|
|
—
|
|
|
—
|
|
|
2,452
|
|
Total
|
$
|
2,452
|
|
|
$
|
11,950
|
|
|
$
|
—
|
|
|
$
|
14,402
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Forward contracts
|
$
|
—
|
|
|
$
|
6,795
|
|
|
—
|
|
|
$
|
6,795
|
|
Interest rate swap
|
—
|
|
|
1,673
|
|
|
—
|
|
|
1,673
|
|
Total
|
$
|
—
|
|
|
$
|
8,468
|
|
|
$
|
—
|
|
|
$
|
8,468
|
|
The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of
January 2, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at January 2, 2016
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Forward contracts
|
$
|
—
|
|
|
$
|
16,136
|
|
|
$
|
—
|
|
|
$
|
16,136
|
|
Deferred compensation plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
Investment in publicly traded mutual funds
|
2,406
|
|
|
—
|
|
|
—
|
|
|
2,406
|
|
Interest rate swap
|
—
|
|
|
311
|
|
|
—
|
|
|
311
|
|
Total
|
$
|
2,406
|
|
|
$
|
16,447
|
|
|
$
|
—
|
|
|
$
|
18,853
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,643
|
|
|
$
|
3,643
|
|
Forward contracts
|
—
|
|
|
798
|
|
|
—
|
|
|
798
|
|
Interest rate swap
|
—
|
|
|
1,401
|
|
|
—
|
|
|
1,401
|
|
Total
|
$
|
—
|
|
|
$
|
2,199
|
|
|
$
|
3,643
|
|
|
$
|
5,842
|
|
The fair values of the Company’s deferred compensation plan assets are based on quoted prices. The deferred compensation plan assets are recorded in intangible and other assets-net in the Company’s condensed consolidated balance sheets. The fair values of the Company’s
forward contracts
are based on published quotations of spot currency rates and forward points, which are converted into implied forward currency rates. The fair values of the interest rate swap assets and liabilities are determined using valuation models based on market observable inputs, including forward curves, mid-market price and volatility levels. See “Note 10—Derivatives and Risk Management” for additional disclosures about the interest rate swaps and
forward contracts
.
The Company has evaluated its short-term and long-term debt as of
October 1, 2016
and
January 2, 2016
and believes, based on the interest rates, related terms and maturities, that the fair values of such instruments approximated their carrying amounts. As of
October 1, 2016
and
January 2, 2016
, 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.
In accordance with the provisions of ASC 360,
Property, Plant and Equipment
, property, plant and equipment-net with a carrying amount of
$13.1 million
related to retail store leasehold improvements and fixturing was written down to a fair value of
$0.6 million
, and related key money in the amount of
$2.0 million
was deemed not recoverable, resulting in an impairment charge of
$14.5 million
during the Year To Date Period.
The fair values of assets related to Company-owned retail stores were determined using Level 3 inputs. Of the
$14.5 million
impairment expense,
$10.3 million
,
$1.6 million
and
$0.4 million
were recorded in restructuring charges in the Americas, Europe, and Asia segments, respectively, and
$2.2 million
was recorded in SG&A in the Europe segment.
12. INTANGIBLE AND OTHER ASSETS
The following table summarizes intangible and other assets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 1, 2016
|
|
January 2, 2016
|
|
|
Useful
|
|
Gross
|
|
Accumulated
|
|
Gross
|
|
Accumulated
|
|
|
Lives
|
|
Amount
|
|
Amortization
|
|
Amount
|
|
Amortization
|
Intangibles-subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
10 yrs.
|
|
$
|
4,310
|
|
|
$
|
3,382
|
|
|
$
|
4,175
|
|
|
$
|
3,195
|
|
Customer lists
|
|
5-10 yrs.
|
|
54,208
|
|
|
25,744
|
|
|
53,825
|
|
|
21,001
|
|
Patents
|
|
3-20 yrs.
|
|
2,325
|
|
|
2,091
|
|
|
2,273
|
|
|
2,064
|
|
Noncompete agreement
|
|
3-6 yrs.
|
|
2,527
|
|
|
1,545
|
|
|
2,515
|
|
|
1,134
|
|
Developed technology
|
|
7 yrs.
|
|
36,100
|
|
|
3,868
|
|
|
36,100
|
|
|
—
|
|
Trade name
|
|
6 yrs.
|
|
15,700
|
|
|
1,963
|
|
|
15,700
|
|
|
—
|
|
Other
|
|
7-20 yrs.
|
|
258
|
|
|
218
|
|
|
256
|
|
|
206
|
|
Total intangibles-subject to amortization
|
|
|
|
115,428
|
|
|
38,811
|
|
|
114,844
|
|
|
27,600
|
|
Intangibles-not subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names
|
|
|
|
74,506
|
|
|
|
|
|
74,493
|
|
|
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key money deposits
|
|
|
|
28,878
|
|
|
23,136
|
|
|
29,357
|
|
|
19,805
|
|
Other deposits
|
|
|
|
20,724
|
|
|
|
|
|
21,684
|
|
|
|
|
Deferred compensation plan assets
|
|
|
|
2,452
|
|
|
|
|
|
2,406
|
|
|
|
|
Deferred tax asset-net
|
|
|
|
21,283
|
|
|
|
|
|
18,602
|
|
|
|
|
Restricted cash
|
|
|
|
530
|
|
|
|
|
|
512
|
|
|
|
|
Shop-in-shop
|
|
|
|
9,267
|
|
|
7,917
|
|
|
9,985
|
|
|
8,262
|
|
Interest rate swap
|
|
|
|
—
|
|
|
|
|
|
311
|
|
|
|
|
Forward contracts
|
|
|
|
2,083
|
|
|
|
|
|
2,785
|
|
|
|
|
Investments
|
|
|
|
2,397
|
|
|
|
|
2,396
|
|
|
|
Other
|
|
|
|
4,902
|
|
|
|
|
|
5,519
|
|
|
|
|
Total other assets
|
|
|
|
92,516
|
|
|
31,053
|
|
|
93,557
|
|
|
28,067
|
|
Total intangible and other assets
|
|
|
|
$
|
282,450
|
|
|
$
|
69,864
|
|
|
$
|
282,894
|
|
|
$
|
55,667
|
|
Total intangible and other assets-net
|
|
|
|
|
|
|
$
|
212,586
|
|
|
|
|
|
$
|
227,227
|
|
Key money is the amount of funds paid to a landlord or tenant to acquire the rights of tenancy under a commercial property lease for a certain property. Key money represents the “right to lease” with an automatic right of renewal. This right can be subsequently sold by the Company or can be recovered should the landlord refuse to allow the automatic right of renewal to be exercised. Key money is amortized over the initial lease term, which ranges from approximately
four
to
18 years
.
Amortization expense for intangible assets was approximately
$3.7 million
and
$1.2 million
for the
Third
Quarter and Prior Year Quarter, respectively, and
$11.2 million
and
$3.7 million
for the Year To Date Period and Prior Year YTD Period, respectively. Estimated aggregate future amortization expense by fiscal year for intangible assets is as follows (in thousands):
|
|
|
|
|
|
Fiscal Year
|
|
Amortization
Expense
|
2016 (remaining)
|
|
$
|
3,751
|
|
2017
|
|
$
|
14,753
|
|
2018
|
|
$
|
14,398
|
|
2019
|
|
$
|
14,069
|
|
2020
|
|
$
|
13,556
|
|
2021
|
|
$
|
9,730
|
|
13. COMMITMENTS AND CONTINGENCIES
Litigation.
The Company is occasionally subject to litigation or other legal proceedings in the normal course of its business. The Company does not believe that the outcome of any currently pending legal matters, individually or collectively, will have a material effect on the business or financial condition of the Company.
Sale-leaseback.
During the Third Quarter, the Company entered into a sale-leaseback agreement for its approximately
518,000
square foot warehouse and distribution center in Dallas, Texas. The sales price was
$33.0 million
. The transaction resulted in a gain of
$6.7 million
net of taxes and fees in the Third Quarter and a deferred gain of
$13.2 million
to be amortized to rent expense over the initial lease term. The leaseback has a
10
-year term with
two
5
-year renewal options and is classified as an operating lease. As of October 1, 2016, the estimated future minimum lease payments under the lease were as follows (in thousands):
|
|
|
|
|
Fiscal Year
|
|
2016 remaining
|
$
|
485
|
|
2017
|
1,950
|
|
2018
|
1,989
|
|
2019
|
2,029
|
|
2020
|
2,070
|
|
Thereafter
|
12,726
|
|
Total
|
$
|
21,249
|
|
14. DEBT ACTIVITY
On August 8, 2016, the Company entered into the First Amendment. The First Amendment adds two new levels to the applicable margin pricing grid used to calculate the interest rate that is applicable to base rate loans and LIBOR rate loans under the Company’s credit facility and increases the applicable margin at each pricing level for LIBOR rate loans by
25
basis points and for base rate loans by
25
basis points. Additionally, the First Amendment provides for the net cash proceeds from certain debt issuances by the Company in excess of
$25.0 million
to be applied, first, to prepay the term loans under the Company’s credit facility and, for the excess, if any, to prepay the revolving credit loans under the Company’s credit facility with a corresponding reduction in the revolving credit commitment by the amount of such excess proceeds. The First Amendment also modifies the negative covenant on restricted payments set forth in the credit facility in such a manner as to prohibit the Company's ability to make open market repurchases of the Company's common stock. Furthermore, the First Amendment changes the consolidated total leverage ratio that the Company must comply with for fiscal quarters ending on or after June 30, 2016 from
2.50
:1.00 to
3.25
:1.00.
In connection with the First Amendment, the Company and certain of its material domestic subsidiaries entered into a Collateral Agreement in favor of Wells Fargo Bank, National Association, as administrative agent, pursuant to which the Company and such subsidiaries granted liens on all or substantially all of their assets in order to secure the Company’s obligations under the Amended and Restated Credit Agreement, dated March 9, 2015 (as amended, restated or otherwise modified, including pursuant to the First Amendment, the “Credit Agreement”) and the other loan documents (the “Obligations”). Additionally, certain of the Company’s domestic subsidiaries entered into a Guaranty Agreement in favor of Wells Fargo Bank, National Association, as administrative agent, pursuant to which such subsidiaries guarantee the payment and performance of the Obligations.
The Company made principal payments of
$6.3 million
and
$15.6 million
under its Term Loan during the
Third
Quarter and Year To Date Period, respectively. The Company also made net payments of
$3.0 million
and
$67.0 million
under its U.S. revolving line of credit (the "Revolving Credit Facility") during the
Third
Quarter and Year To Date Period, respectively. Borrowings were primarily used to fund capital expenditures, normal operating expenses and stock repurchases and were more than offset by payments on debt. Amounts available under the Revolving Credit Facility are reduced by any amounts outstanding under standby letters of credit. As of
October 1, 2016
, the Company had available borrowing capacity of
$299.7 million
under the Revolving Credit Facility, which was favorably impacted by a
$176.8 million
international cash balance. The Company incurred approximately
$1.7 million
and
$4.9 million
of interest expense related to the Term Loan during the
Third
Quarter and Year To Date Period, respectively, including the impact of the related interest rate swap. The Company incurred
approximately
$4.1 million
and
$11.5 million
of interest expense related to the Revolving Credit Facility during the
Third
Quarter and Year To Date Period, respectively. The Company incurred approximately
$0.6 million
and
$1.2 million
of interest expense related to the amortization of debt issuance costs during the
Third
Quarter and Year To Date Period, respectively.
15. RESTRUCTURING
The Company implemented a multi-year restructuring program in the Third Quarter to reinvent the Company, strengthen the foundation of the Company for the future and support long-term sales growth and profitability objectives. The program is intended to touch all aspects of the business, enhance operating capabilities, create greater efficiencies and take advantage of the Company's considerable scale. The Company will review and adjust its overall structure with the goal of streamlining the Company's ability to respond to the changing needs and demands of customers, and will examine and adjust its store fleet to reflect the evolving shopping habits of today's consumer. The Company is in the early phases of the program, although the Company estimates total restructuring charges of up to approximately
$150.0 million
will be recorded predominantly during fiscal years 2017 and 2018, with some charges recognized in the current fiscal year. The costs incurred in the Third Quarter include professional services and costs related to store closures. The following tables show a rollforward of the liability incurred for the Company’s restructuring plan (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 13 Weeks Ended October 1, 2016
|
|
Organizational
Realignment
|
|
Retail
Profitability
|
|
Total
|
Balance at July 2, 2016
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Charges to expense
|
1,950
|
|
|
12,523
|
|
|
14,473
|
|
Cash payments
|
(1,300
|
)
|
|
—
|
|
|
(1,300
|
)
|
Non-cash items
|
—
|
|
|
(12,523
|
)
|
|
(12,523
|
)
|
Balance at October 1, 2016
|
$
|
650
|
|
|
$
|
—
|
|
|
$
|
650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 13 Weeks Ended October 3, 2015
|
|
Organizational
Realignment
|
|
Retail
Profitability
|
|
Total
|
Balance at July 4, 2015
|
$
|
3,898
|
|
|
$
|
—
|
|
|
$
|
3,898
|
|
Charges to expense (1)
|
2,250
|
|
|
891
|
|
|
3,141
|
|
Cash payments
|
(4,961
|
)
|
|
(891
|
)
|
|
(5,852
|
)
|
Non-cash items
|
—
|
|
|
—
|
|
|
—
|
|
Balance at October 3, 2015
|
$
|
1,187
|
|
|
$
|
—
|
|
|
$
|
1,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 39 Weeks Ended October 1, 2016
|
|
Organizational
Realignment
|
|
Retail
Profitability
|
|
Total
|
Balance at January 2, 2016
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Charges to expense
|
1,950
|
|
|
12,523
|
|
|
14,473
|
|
Cash payments
|
(1,300
|
)
|
|
—
|
|
|
(1,300
|
)
|
Non-cash items
|
—
|
|
|
(12,523
|
)
|
|
(12,523
|
)
|
Balance at October 1, 2016
|
$
|
650
|
|
|
$
|
—
|
|
|
$
|
650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 39 Weeks Ended October 3, 2015
|
|
Organizational
Realignment
|
|
Retail
Profitability
|
|
Total
|
Balance at January 3, 2015
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Charges to expense (1)
|
14,567
|
|
|
7,133
|
|
|
21,700
|
|
Cash payments
|
(13,380
|
)
|
|
(4,752
|
)
|
|
(18,132
|
)
|
Non-cash items
|
—
|
|
|
(2,381
|
)
|
|
(2,381
|
)
|
Balance at October 3, 2015
|
$
|
1,187
|
|
|
$
|
—
|
|
|
$
|
1,187
|
|
_________________________________________________
(1) Charges to expense include changes in estimates.
Restructuring charges by operating segment were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
For the 13 Weeks Ended October 1, 2016
|
|
For the 13 Weeks Ended October 3, 2015
|
Americas
|
$
|
10,548
|
|
|
$
|
891
|
|
Europe
|
1,639
|
|
|
514
|
|
Asia
|
336
|
|
|
90
|
|
Corporate
|
1,950
|
|
|
1,646
|
|
Consolidated
|
$
|
14,473
|
|
|
$
|
3,141
|
|
|
|
|
|
|
|
|
|
|
|
For the 39 Weeks Ended October 1, 2016
|
|
For the 39 Weeks Ended October 3, 2015
|
Americas
|
$
|
10,548
|
|
|
$
|
7,133
|
|
Europe
|
1,639
|
|
|
3,149
|
|
Asia
|
336
|
|
|
210
|
|
Corporate
|
1,950
|
|
|
11,208
|
|
Consolidated
|
$
|
14,473
|
|
|
$
|
21,700
|
|