•identify suitable markets for new stores and available store locations;
•negotiate acceptable lease terms for new locations or renewal terms for existing locations;
•manage and expand our infrastructure to accommodate growth;
•hire and train qualified sales associates;
•develop new merchandise and manage inventory effectively to meet the needs of new and existing stores on a timely basis;
•foster current relationships and develop new relationships with vendors that are capable of supplying a greater volume of merchandise; and
•avoid construction delays and cost overruns in connection with the build-out of new stores.
Our plans to expand our store base may not be successful and the implementation of these plans may not result in an increase in our net sales even though they increase our costs. Additionally, implementing our plans to expand our store base will place increased demands on our operational, managerial and administrative resources. The increased demands of operating additional stores could cause us to operate less effectively, which could cause the performance of our existing stores and our wholesale operations to suffer materially. Any of these outcomes of our attempted expansion of our store base could have a material adverse effect on the amount of net sales we generate and on our financial condition and results of operations.
We have key facilities in the U.S. and overseas, the loss or shut down of any of which could harm our business.
Our administrative and distribution operations in the U.S. are conducted primarily from five separate facilities located in the Dallas, Texas area. Our operations internationally are conducted from various administrative, distribution and assembly facilities outside of the U.S., particularly in China, Germany, Hong Kong and Switzerland. The complete or temporary loss of use of all or part of these facilities could have a material adverse effect on our business.
OurCertain of our warehouse and distribution facilities in the Dallas,and Richardson,Texas area are operated in a special purpose sub-zone established by the U.S. Department of Commerce Foreign Trade Zone Board. Although the sub-zone allows us certain tax advantages, the sub-zone is highly regulated by the U.S. Customs Service. This level of regulation may cause disruptions or delays in the distribution of our products out of these facilities. Under some circumstances, the U.S. Customs Service has the right to shut down the entire sub-zone and, therefore, our entire warehouse and distribution facilities. During the time that the sub-zone is shut down, we may be unable to adequately meet the supply requests of our customers and ourcompany-ownedCompany-owned retail stores, which could have an adverse effect on our sales, relationships with our customers, and results of operations, especially if the shut down were to occur during our third or fourth quarter.Our ability to grow our sales is dependent upon the implementation of our growth strategy, which we may not be able to achieve.
Since our public offering in 1993, we have experienced substantial growth in net sales. Our ability to continue this growth is dependent on the successful implementation of our business strategy. This includes diversification of our product offerings, expansion of our
company-ownedCompany-owned accessory locations and possibly strategic acquisitions. If we are not successful in the expansion of our product offerings or our new products are not profitable or do not generate sales comparable to those of our existingbusinesses, our results of operations could be negatively impacted. Another element of our business strategy is to place increased emphasis on growth in selected international markets. If our brand names and products do not achieve a high degree of consumer acceptance in these markets, our net sales could be adversely affected.
We also operate FOSSIL brand stores and other non-FOSSIL branded stores and have historically expanded our
company-ownedCompany-owned accessory and outlet locations to further strengthen our brand image. As of January2, 2010,1, 2011, we operated354364 stores worldwide. The costs associated with leasehold improvements to current stores and the costs associated with opening new stores could materially increase our costs of operation.We have recently expanded and intend to further expand the scope of our product offerings, and new products introduced by us may not achieve consumer acceptance comparable to that of our existing product lines.
We have recently expanded and intend to further expand the scope of our product offerings. As is typical with new products, market acceptance of new designs and products is subject to uncertainty. In addition, we generally make decisions regarding product designs several months in advance of the time when consumer
acceptance can be measured. If trends shift away from our products, or if we misjudge the market for our product lines, we may be faced with significant amounts of unsold inventory or other conditions which could have a material adverse effect on our financial condition and results of operations.
The failure of new product designs or new product lines to gain market acceptance could also adversely affect our business and the image of our brands. Achieving market acceptance for new products may also require substantial marketing efforts and expenditures to generate consumer demand. These requirements could strain our management, financial and operational resources. If we do not continue to develop innovative products that provide better design and performance attributes than the products of our competitors and that are accepted by consumers, or if our future product lines misjudge consumer demands, we may lose consumer loyalty, which could result in a decline in our sales and market share.
Our business could be harmed if we fail to maintain proper inventory levels.
We maintain an inventory of selected products that we anticipate will be in high demand. We may be unable to sell the products we have ordered in advance from manufacturers or that we have in our inventory. Inventory levels in excess of customer demand may result in inventory write-downs or the sale of excess inventory at prices below our standard levels. These events could significantly harm our operating results and impair the image of our brands. Conversely, if we underestimate consumer demand for our products or if our manufacturers fail to supply quality products in a timely manner, we may experience inventory shortages, which might result in unfilled orders, negatively impact customer relationships, diminish brand loyalty and result in lost revenues, any of which could harm our business.
Our license agreements may require minimum royalty commitments regardless of the level of product sales under these agreements.
With respect to our license agreements, we have in the past experienced, and could again in the future experience, instances where minimum royalty commitments under these agreements exceeded royalties payable based upon our sales of such licensed products. We incurred royalty expense of approximately $109.4 million, $73.9 million
$74.9 millionand$60.7$74.9 million in fiscal years 2010, 20092008and2007,2008, respectively. We also have agreements in effect at the end of fiscal year20092010 which expire on various dates from December20102012 through December20142015 that require us to pay royalties ranging from3%8% to 20% of defined net sales.Fluctuations in the price, availability and quality of raw materials could cause delays and increase costs.
Fluctuations in the price, availability and quality of the raw materials used in our products could have a material adverse effect on our cost of sales or ability to meet our
customers'customers’ demands. The price and availability of such raw materials may fluctuate significantly, depending on many factors, including natural resources, increased freight costs, increased labor costs, especially in China, and weather conditions. In the future, we may not be able to pass on, all or a portion of, such higher raw materials prices to our customers.We rely on third-party manufacturers and problems with, or loss of, our suppliers or raw materials could harm our business and results of operations.
All of our
apparel, footwear,clothing, shoes, sunglasses, handbags, small leather goods,andbelts,cold weathersoft accessories and certain of our watch and jewelry products are produced by independent manufacturers. We do not have long-term contracts with these manufacturers. In addition, we face the risk that these third-party manufacturers, with whom we contract to produce our products, may not produce and deliver our products on a timely basis, or at all. As a result, we cannot be certain that these manufacturers will continue to manufacture products for us or that we will not experience operational difficulties with our manufacturers, such as reductions in the availability of production capacity, errors in complying with product specifications, insufficient quality control, shortages of raw materials, failures to meet production deadlines or increases in manufacturing costs. The failure of any manufacturer to perform to our expectations could result in supply shortages for certain products and harm our business.Access to suppliers that are not Fossil subsidiaries is not guaranteed because we do not maintain long-term contracts but instead rely on long-standing business relationships, which may not continue in the future.
The majority of our watch products are currently assembled to our specifications by our majority owned entities in China with the remainder assembled by unrelated entities. Certain of our other products are currently manufactured to our specifications by independent manufacturers in international locations, including, but not limited to, China and Hong Kong, and to a lesser extent Italy, Mexico, South Korea,
Mexico,Switzerland and Taiwan. We have no long-term contracts with these independent manufacturing sources and compete with other companies for production facilities. All transactions between us and our independent manufacturing sources are conducted on the basis of purchase orders. Our future success will depend upon our ability to maintain close relationships with our current suppliers and to develop long-term relationships with other suppliers that satisfy our requirements for price, quality and production flexibility. Our ability to establish new manufacturing relationships involves numerous uncertainties, including those relating to payment terms, costs of manufacturing, adequacy of manufacturing capacity, quality control and timeliness of delivery. Any failure by us to maintain long-term relationships with our current suppliers or to develop relationships with other suppliers could have a material adverse effect on our ability to manufacture and distribute our products.If an independent manufacturer or license partner of ours fails to use acceptable labor practices, our business could suffer.
We have no control over the ultimate actions or labor practices of our independent manufacturers. The violation of labor or other laws by one of our independent manufacturers, or by one of our license partners, or the divergence of an independent
manufacturer'smanufacturer’s or licensepartner'spartner’s labor practices from those generally accepted as ethical in the U.S. or other countries in which the violation or divergence occurred, could interrupt or otherwise disrupt the shipment of finished products to us or damage our reputation. Any of these, in turn, could have a material adverse effect on our financial condition andresults of operations. As a result, should one of our independent manufacturers or licensors be found in violation of state or international labor laws, we could suffer financial or other unforeseen consequences.
We extend unsecured credit to our customers and are therefore vulnerable to any financial difficulties they may face.
We sell our merchandise primarily to department stores and specialty retail stores worldwide. We extend credit based on an evaluation of each
customer'scustomer’s financial condition, usually without requiring collateral. Should any of our larger customers experience financial difficulties, we could curtail business with such customers or assume more credit risk relating to suchcustomers'customers’ receivables. Our inability to collect on our trade accounts receivable relating to such customers could have a material adverse effect on the amount of sales revenue that we receive and our financial condition and results of operations.We do not maintain long-term contracts with our customers and are unable to control their purchasing decisions.
We do not maintain long-term purchasing contracts with our customers and therefore have no contractual leverage over their purchasing decisions. A decision by a major department store or other significant customer to decrease the amount of merchandise purchased from us or to cease carrying our products could have a material adverse effect on our net sales and operating strategy.
Our
directDirect toconsumerConsumer business segment operates in the highly competitive specialty retail, e-commerce and catalog industry and the size and resources of some of our competitors are substantially greater than ours, which may allow them to compete more effectively.We face intense competition in the specialty retail, e-commerce and catalog industry. We compete primarily with specialty retailers, department stores, catalog retailers and internet businesses that engage in the retail sale
of watches, accessories and
apparel.clothing. We believe that the principal basis upon which we compete is the quality and design of merchandise and the quality of customer service. We also believe that price is an important factor in ourcustomers'customers’ decision-making processes. Many of our competitors are, and many of our potential competitors may be, larger and have greater financial, marketing and other resources than we have and therefore may be able to adapt to changes in customer requirements more quickly, devote greater resources to the marketing and sale of their products and generate greater national brand recognition than we can. This intense competition and greater size and resources of some of our competitors could have a material adverse effect on the amount of net sales we generate and on our results of operations.We could be negatively impacted if we fail to successfully integrate the businesses we acquire.
As part of our growth strategy, we have made certain acquisitions, domestically and internationally, including acquisitions of FOSSIL stores previously operated under license agreements, acquisitions of certain watch brands and acquisitions of independent distributors of our products. The integration of these and future acquisitions may not be successful or generate sales increases. When we have acquired businesses, we have acquired businesses that we believe could enhance our business opportunities and our growth prospects. All acquisitions involve risks that could materially adversely affect our business, financial condition and operating results. These risks include:
•distraction of management from our business operations;
•loss of key personnel and other employees;
•costs, delays, and inefficiencies associated with integrating acquired operations and personnel;
•the impairment of acquired assets and goodwill; and
•- acquiring the contingent and other liabilities of the businesses we acquire.
In addition, acquired businesses may not provide us with increased business opportunities or result in the growth that we anticipate. Furthermore, integrating acquired operations is a complex, time-consuming and expensive process. Combining acquired operations with
usour current operations may result in lower overall operating margins, greater stock price volatility and quarterly earnings fluctuations. Cultural incompatibilities, career uncertainties and other factors associated with such acquisitions may also result in the loss of employees. Failure to acquire and successfully integrate complementary practices, or failure to achieve the business synergies or other anticipated benefits, could materially adversely affect our business, our financial condition and results of operations.Our competitors are established companies that may have greater experience than us in a number of crucial areas, including design and distribution.
There is intense competition in each of the businesses in which we compete. In all of our businesses, we compete with numerous manufacturers, importers and distributors who may have significantly greater financial, distribution, advertising and marketing resources than us. Our competitors include distributors that import watches, accessories and
apparelclothing from abroad, U.S. companies that have established foreign manufacturing relationships and companies that produce accessories andapparelclothing domestically. Our results of operations and market position may be adversely affected by our competitors and their competitive pressures in the watch, fashion accessory andapparelclothing industries.Our implementation of a new enterprise resource planning system could disrupt our computer system and divert management time.
In 2003, we began implementing an enterprise resource planning system from SAP AG, a German software company. We implemented the new enterprise resource planning system in our U.S., Germany, France, Italy and
ItalyUnited Kingdom locations in 2003, 2004, 2005, 2008 and2008,2010, respectively. We intend to replace our existingenterprise resource planning systems and other principal financial systems in certain other subsidiaries located in Europe with software systems provided by SAP AG. We have implemented Navision as our standard system throughout most of our Far East distribution subsidiary operations. During 2007, we implemented this system in our principal Hong Kong office and China assembly facilities. Our current expansion plans may place significant strain on our management, working capital, financial and management control systems and staff. The failure to maintain or upgrade financial and management control systems, to recruit additional staff or to respond effectively to difficulties encountered during expansion could have a material adverse effect on our ability to respond to trends in our target markets, market our products and meet our
customers'customers’ requirements. The sustained disruption or failure of our systems due to force majeure or as part of an upgrade, conversion or other systems maintenance could result in the same adverse effects.Changes in the mix of product sales demand could negatively impact our gross profit margins.
Our gross profit margins are impacted by our sales mix. Sales from our
directDirect toconsumerConsumer segment and international and licensed watch businesses generally provide gross margins in excess of our historical consolidated gross profit margin, while accessory products generally provide gross profit margins below our historical consolidated gross profit margin. If future sales from ourdirectDirect toconsumerConsumer segment and international and licensed watch businesses do not increase at a faster rate than our U.S. accessory business, our gross profit margins may grow at a slower pace, cease to grow, or decrease relative to our historical consolidated gross profit margin. We also distribute private label product to the mass market channel at gross profit margins significantly lower than our historical consolidated gross profit margin. Future growth in this channel at rates in excess of our consolidated net sales growth rate could negatively impact our consolidated gross profit margins.Our industry is subject to pricing pressures that may adversely impact our financial performance.
We assemble or source many of our products offshore because they generally cost less to make overseas, due primarily to lower labor costs. Many of our competitors also source their product requirements offshore to achieve lower costs, possibly in locations with lower costs than our offshore operations, and those competitors may use these cost savings to reduce prices. To remain competitive, we must adjust our prices from time to time in response to these industry-wide pricing pressures. Our financial performance may be negatively affected by these pricing pressures if we are forced to reduce our prices and we cannot reduce our production costs or our production costs increase and we cannot increase our prices.
The loss of our intellectual property rights may harm our business.
Our trademarks, patents and other intellectual property rights are important to our success and competitive position. We are devoted to the establishment and protection of our trademarks, patents and other intellectual property rights in those countries where we believe it is important to our ability to sell our products. However, we cannot be certain that the actions we have taken will result in enforceable rights, will be adequate to protect our products in every country where we may want to sell our products, will be adequate to prevent imitation of our products by others or will be adequate to prevent others from seeking to prevent sales of our products as a violation of the trademarks, patents or other intellectual property rights of others. Additionally, we rely on the patent, trademark and other intellectual property laws of the U.S. and other countries to protect our proprietary rights. Even if we are successful in obtaining appropriate trademark, patent and other intellectual property rights, we may be unable to prevent
third partiesthird-parties from using our intellectual property without our authorization, particularly in those countries where the laws do not protect our proprietary rights as fully as in the U.S. Because we sell our products internationally and are dependent on foreign manufacturing in China, we are significantly dependent on foreign countries to protect our intellectual property rights. The use of our intellectual property or similar intellectual property by others could reduce or eliminate any competitive advantage we have developed, causing us to lose sales or otherwise harm our business. Further, if it became necessary for us to resort to litigation to protect our intellectual property rights, any proceedings could be burdensome and costly and we may not prevail. The failure to obtain or maintain trademark, patent or other intellectual property rights could materially harm our business.Our products may infringe the intellectual property rights of others, which may cause us to incur unexpected costs or prevent us from selling our products.
We cannot be certain that our products do not and will not infringe upon the intellectual property rights of others. We may be subject to legal proceedings and claims in the ordinary course of our business, including claims of alleged infringement of the intellectual property rights of
third partiesthird-parties by us or our customers in connection with their use of our products. Any such claims, whether or not meritorious, could result in costly litigation and divert the efforts of our personnel. Moreover, should we be found liable for infringement, we may be required to enter into licensing agreements (if available on acceptable terms or at all) or to pay damages and cease making or selling certain products. Moreover, we may need to redesign or rename some of our products to avoid future infringement liability. Any of the foregoing could cause us to incur significant costs and prevent us from manufacturing or selling our products.An increase in product returns could negatively impact our operating results.
We accept limited returns and will request that a customer return a product if we feel the customer has an excess of any style that we have identified as being a poor performer for that customer or geographic location. We continually monitor returns and maintain a provision for estimated returns based upon historical experience and any specific issues identified. While returns have historically been
within our expectations and the provisions established, future return rates may differ from those experienced in the past. In the event that our products are performing poorly in the retail market and/or we experience product damages or defects at a rate significantly higher than our historical rate, the resulting credit returns could have an adverse impact on the operating results for the period or periods in which such returns occur.
There are inherent limitations in all control systems, and misstatements due to error or fraud may occur and not be detected.
We are subject to the ongoing internal control provisions of Section 404 of the Sarbanes-Oxley Act of 2002. These provisions provide for the identification of material weaknesses in internal control over financial reporting, which is a process to provide reasonable assurance regarding the reliability of financial reporting for external purposes in accordance with accounting principles generally accepted in the United States of America. Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our internal controls and disclosure controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. In addition, the design of a control system must reflect the fact that there are resource constraints and the benefit of controls must be relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, in our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple errors or mistakes. Further, controls can be circumvented by individual acts of some persons, by collusion of two or more persons, or by management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, a control may be inadequate because of changes in conditions, such as growth of the company or increased transaction volume, or the degree of compliance with the policies or procedures may deteriorate. Because of inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
In addition, discovery and disclosure of a material weakness, by definition, could have a material adverse impact on our financial statements. Such an occurrence could discourage certain customers or suppliers from doing business with us, cause downgrades in our debt ratings leading to higher borrowing costs and affect how our stock trades. This could in turn negatively affect our ability to access public debt or equity markets for capital.
Factors Relating to Our International Operations
Factors affecting international commerce and our international operations may seriously harm our financial condition.
We generate a significant portion of our revenues from outside of the U.S., and we anticipate that revenue from our international operations could account for an increasingly larger portion of our net sales in the future. Our international operations are directly related to, and dependent on, the volume of international trade and foreign market conditions. International commerce and our international operations are subject to many risks, some of which are discussed in more detail below, including:
•recessions in foreign economies;
•the adoption and expansion of trade restrictions;
•limitations on repatriation of earnings;
•- difficulties in protecting our intellectual property or enforcing our intellectual property rights under the laws of other countries;
•longer receivables collection periods and greater difficulty in collecting accounts receivable;
•difficulties in managing foreign operations;
•social, political and economic instability;
•unexpected changes in regulatory requirements;
•our ability to finance foreign operations;
•tariffs and other trade barriers; and
•U.S. government licensing requirements for exports.
The occurrence or consequences of any of these risks may restrict our ability to operate in the affected regions and decrease the profitability of our international operations, which may seriously harm our financial condition.
Foreign currency fluctuations could adversely impact our financial condition.
We generally purchase our products in U.S. dollars. However, we source a significant amount of our products overseas and, as such, the cost of these products may be affected by changes in the value of the currencies, including the Australian Dollar, British Pound, Canadian Dollar, Chinese Yuan, Danish Krone, Euro, Hong Kong Dollar, Indian Rupee, Japanese Yen, Korean Won, Malaysian Ringgit, Mexican Peso, Norwegian Kroner, Singapore Dollar, Swedish Krona, Swiss Franc and Taiwanese Dollar. Due to our dependence on manufacturing operations in China, changes in the value of the Chinese Yuan may have a material impact on our supply channels and manufacturing costs, including component and assembly costs. Changes in the currency exchange rates may also affect the relative prices at which we and our foreign competitors sell products in the same market. Although we utilize forward contracts to mitigate foreign currency risks (mostly relating to the Euro,
and theBritish Pound, Japanese Yen, Mexican Peso, Canadian Dollar and Australian Dollar), if we are unsuccessful in mitigating these risks, foreign currency fluctuations may have a material adverse impact on our financial condition and results of operations.We depend on independent distributors to sell our products in certain international markets.
Our products are sold in certain international markets through independent distributors. If a distributor fails to meet annual sales goals, it may be difficult and costly to locate an acceptable substitute distributor. If a change in our distributors becomes necessary, we may experience increased costs, as well as a substantial disruption in, and a resulting loss of, sales and profits.
Because we are dependent on foreign manufacturing, we are vulnerable to changes in economic and social conditions in Asia and disruptions in international travel and shipping.
Because a substantial portion of our watches and certain of our handbags, sunglasses and other products are assembled or manufactured in China, our success will depend to a significant extent upon future economic and social conditions existing in China. If the factories in China were disrupted for any reason, we would need to arrange for the manufacture and shipment of products by alternative sources. Because the establishment of new manufacturing relationships involves numerous uncertainties, including those relating to payment terms, costs of manufacturing, adequacy of manufacturing capacity, quality control and timeliness of delivery, we are unable to predict whether such new relationships would be on terms that we regard as satisfactory. Any significant disruption in our relationships with our manufacturing sources located in China would have a material adverse effect on our ability to
manufacture and distribute our products. Restrictions on travel to and from this and other regions, similar to those imposed during the outbreak of Severe Acute Respiratory Syndrome in 2003, commonly known as SARS, and any delays or cancellations of customer orders or the manufacture or shipment of our products on account of SARS or other syndromes could have a material adverse effect on our ability to meet customer deadlines and timely distribute our products in order to match consumer tastes.
Risks associated with foreign government regulations and U.S. trade policy may affect our foreign operations and sourcing.
Our businesses are subject to risks generally associated with doing business abroad, such as foreign governmental regulation in the countries in which our manufacturing sources are located, primarily China. While we have not experienced any material issues with foreign governmental regulations that would impact our arrangements with our foreign manufacturing sources, we believe that this issue is of particular concern with regard to China due to the less mature nature of the Chinese market economy and the historical involvement of the Chinese government in industry. If regulation were to render the conduct of business in a particular country undesirable or impracticable, or if our current foreign manufacturing sources were for any other reason to cease doing business with us, such a development could have a material adverse effect on our product sales and on our supply, manufacturing and distribution channels.
Our business is also subject to the risks associated with U.S. and foreign legislation and regulations relating to imports, including quotas, duties, tariffs or taxes, and other charges or restrictions on imports, which could adversely affect our operations and our ability to import products at current or increased levels. We cannot predict whether additional U.S. and foreign customs quotas, duties (including antidumping or countervailing duties), tariffs, taxes or other charges or restrictions, requirements as to where raw materials must be purchased, additional workplace regulations or other restrictions on our imports will be imposed upon the importation of our products in the future or adversely modified, or what effect such actions would have on our costs of operations. For example, our products imported to the U.S. are subject to U.S. customs duties and, in the ordinary course of our business we may from time to time be subject to claims by the U.S. Customs Service for duties and other charges. Factors that may influence the modification or imposition of these restrictions include the determination by the U.S. Trade Representative that a country has denied adequate intellectual property rights or fair and equitable market access to U.S. firms that rely on intellectual property, trade disputes between the U.S. and a country that leads to withdrawal of
"most“most favorednation"nation” status for that country and economic and political changes within a country that are viewed unfavorably by the U.S. government. Future quotas, duties or tariffs may have a material adverse effect on our business, financial condition and results of operations. Future trade agreements could also provide our competitors with an advantage over us, or increase our costs, either of which could have a material adverse effect on our business, financial condition and results of operations and financial condition. Substantially all of our import operations are subject to:•quotas imposed by bilateral textile agreements between the countries where our
apparel-producingclothing-producing facilities are located and foreign countries; and•customs duties imposed by the governments where our
apparel-producingclothing-producing facilities are located on imported products, including raw materials.Our
apparelclothing business is also subject to the effects of international trade agreements and regulations such as the North American Free Trade Agreement, and the activities and regulations of the World Trade Organization, referred to as the WTO. Generally, such trade agreements benefit ourapparelclothing business by reducing or eliminating the duties and/or quotas assessed on products manufactured in a particular country. However, trade agreements can also impose requirements thatnegatively impact our
apparelclothing business, such as limiting the countries from which we can purchase raw materials and setting quotas on products that may be imported into the U.S. from a particular country. In addition, the WTO may commence a new round of trade negotiations that liberalize textile trade. This increased competition could have a material adverse effect on our business, results of operations and financial condition.Risks Relating to Our Common Stock
Many factors may cause our net sales, operating results and cash flows to fluctuate and possibly decline, which may result in declines in our stock price.
Our net sales, operating results and cash flows may fluctuate significantly because of a number of factors, many of which are outside of our control. These factors may include, but may not be limited to, the following:
•fluctuations in market demand for our products;
•increased competition and pricing pressures;
•our ability to anticipate changing customer demands and preferences;
•our failure to efficiently manage our inventory levels;
•our inability to manage and maintain our debt obligations;
•seasonality in our business;
•changes in our, and our
competitors'competitors’, business strategy or pricing;•the successful expansion of our owned retail stores;
•the timing of certain general and administrative expenses;
•completing acquisitions and the costs of integrating acquired operations;
•international currency fluctuations, operating challenges and trade regulations;
•acts of terrorism or acts of war; and
•government regulation.
One or more of the foregoing factors, as well as any other risk factors discussed in this Annual Report on Form 10-K, may cause our operating expenses to be unexpectedly high or result in a decrease in our net sales during any given period. If these or any other variables or unknowns were to cause a shortfall in revenues or earnings, an increase in our operating costs or otherwise cause a failure to meet public market expectations, our stock price may decline and our business could be adversely affected.
Two principal stockholders own a significant amount of our outstanding common stock.
Mr. Kosta Kartsotis, our CEO, and Mr. Tom Kartsotis, founder of the
Chairman of our Board of Directors,Company, each own a substantial amount of our common stock. As a result, they are in a position to significantly influence the outcome of elections of our directors, the adoption, amendment or repeal of our bylaws and any other actions requiring the vote or consent of our stockholders, and to otherwise influence our affairs.Because the interests of Messrs. Kartsotis may not coincide with the interests of other shareholders, Messrs. Kartsotis may influence the Company to enter into transactions or agreements that other shareholders would not approve or make decisions with which other shareholders may disagree.
Our organizational documents contain anti-takeover provisions that could discourage a proposal for a takeover.
Our certificate of incorporation and bylaws, as well as the General Corporation Law of the State of Delaware, contain provisions that may have the effect of discouraging a proposal for a takeover. These include a provision in our certificate of incorporation authorizing the issuance of
"blank check"“blank check” preferred stock;the division of our Board of Directors into three classes to be elected on a staggered basis, one class each year;provisions in our bylaws establishing advance notice procedures with respect to certain stockholder proposals; and a provision stating that directors may be removed by the stockholders only for cause. Our bylaws may be amended by a vote of 80% of the Board of Directors, subject to repeal by a vote of 80% of the stockholders. In addition, Delaware law limits the ability of a Delaware corporation to engage in certain business combinations with interested stockholders. Finally, Messrs. Kartsotis have the ability, by virtue of their stock ownership, to significantly influence a vote regarding a change in control.Future sales of our common stock in the public market could adversely affect our stock price.
Mr. Kosta Kartsotis and Mr. Tom Kartsotis each own a substantial amount of our common stock. The shares beneficially owned by Mr. Kosta Kartsotis and Mr. Tom Kartsotis may be sold in the open market in the future, subject to any volume restrictions and other limitations under the Securities Act of 1933 and Rule 144 thereunder. We may also decide to file a registration statement enabling Messrs. Kartsotis to sell additional shares. Any sales by Messrs. Kartsotis of substantial amounts of our common stock in the open market, or the availability of their shares for sale, could adversely affect the price of our common stock. The market price of our common stock could decline as a result of sales of substantial amounts of our common stock in the public market, or the perception that those sales could occur. These sales or the possibility that they may occur also could make it more difficult for us to raise funds in any equity offering in the future at a time and price that we deem appropriate.
Item 1B. Unresolved Staff CommentsUnresolved Staff Comments None.
None.Item 2. Properties Company Facilities. As of the end of fiscal year
2009,2010, we owned or leased the following material facilities in connection with our U.S. and international operations:Location
Use
Square Footage Owned / Leased
Dallas, Texas
Office, warehouse and distribution
517,500 Owned Eggstätt, Germany
Office, warehouse and distribution
230,000 Owned Richardson, Texas
Corporate headquarters
190,000 Owned Richardson, Texas
Warehouse and distribution
138,000 Owned Richardson, Texas
Office
131,541 Owned Grabenstatt, Germany Basel, SwitzerlandOffice92,160 Owned Basel, Switzerland European headquarters
36,113 Owned Hong Kong Garland, TexasOffice, warehouse and distributionWarehouse191,986Lease expiring in 2014 Garland, Texas Warehouse
150,000 Lease expiring in 2014 China
Manufacturing
110,231 Lease expiring in 2013 Hong KongOffice, warehouse and distribution102,517Lease expiring in 2010New York, New York
General office and showroom
26,552 Lease expiring in 2016 We have entered into an Agreement of Purchase and Sale to sell three of our facilities. In a related transaction, we expect to enter into a lease agreement for approximately 535,731 square feet of office space. The buildings to be sold consist of two home office buildings in the Richardson, Texas area comprising approximately 190,000 and 132,000 square feet, respectively, and one of our warehouses comprising approximately 138,000 square feet in Richardson, Texas. We plan to consolidate all of our home office employees into a new leased building. The distribution facility to be sold is adjacent to one of our current home office buildings. We will be able to move the operations of this distribution facility into an existing 150,000 square foot distribution facility in the Dallas, Texas area that we currently have under lease. The proposed new home office lease is expected to commence, and the sale of the buildings described above is expected to close, late in the second quarter of fiscal year 2011.
We also lease certain other manufacturing and/or office, warehouse and/or distribution facilities in Atlanta, Georgia; Chicago, Illinois; Los Angeles, California; Miami, Florida; Australia; Austria; Canada; China; Denmark; France; Hong Kong; India; Italy; Japan;
Korea;Malaysia; Mexico; the Netherlands; New Zealand; Norway; Singapore; South Korea; Sweden; Switzerland; Taiwan and the United Kingdom.U.S.-based
Apparel RetailClothing StoreFacilities.Facilities. As of the end of fiscal year2009,2010, we had3328 lease agreements for retail space at prime locations in the U.S. for the sale of ourapparelclothing line and certain of our accessory products. The leases, including renewal options, expire at various times from20102011 to 2020. The leases provide for minimum annual rentals and, in certain cases, for the payment of additional rent when sales exceed specified net sales amounts. We are also required to pay our pro rata share of the common area maintenance costs, including real estate taxes, insurance, maintenance expenses and utilities.U.S.-based Accessory Retail Store
Facilities.Facilities. As of the end of fiscal year2009,2010, we had9593 lease agreements for retail space at prime locations in the U.S. for the sale of our full assortment of accessory products and the operation of certain of our Watch Station stores. The leases, including renewal options, expire at various times from20102011 to2020.2021. The leases provide for minimum annual rentals and, in certain cases, for the payment of additional rent when sales exceed specified net sales amounts. We are also required to pay our pro rata share of the common area maintenance costs, including real estate taxes, insurance, maintenance expenses and utilities.U.S.-based Outlet Store
Facilities.Facilities. We lease retail space at selected outlet centers throughout the U.S. for the sale of ourproducts.products and for the operation of certain of our multi-brand Watch Station outlet stores. As of the end of fiscal year2009,2010, we had7470 such leases. The leases, including renewal options, expire at various times from20102011 to20202021 and provide for minimum annual rentals and for the payment of additional rent based on a percentage of sales above specified net sales amounts. We are also required to pay our pro rata share of the common area maintenance costs at each outlet center, including real estate taxes, insurance, maintenance expenses and utilities.InternationalInternational-based Accessory Retail and Clothing Store Facilities. As of the end of fiscal year2009,2010, we had138158 lease agreements for retail stores located outside the U.S., including leases for12eight stores that are scheduled to open in fiscal year2010.2011. The leases, including renewal options, expire at various times from20102011 to2022.2021. The leases provide for minimum annual rentals and, in certain cases, for the payment of additional rent when sales exceed specified net sales amounts. We are also required to pay our pro rata share of the common area maintenance costs, including real estate taxes, insurance, maintenance expenses and utilities.InternationalInternational-based Outlet Store Facilities. We lease retail space at selected outlet centers located outside the U.S. for the sale of our products. As of the end of fiscal year2009,2010, we had1623 such leases. The leases, including renewal options, expire at various times from20102011 to20202021 and provide for minimum annual rentals and for the payment of additional rent based on a percentage of sales above specified net sales amounts. We are also required to pay our pro rata share of the common area maintenance costs at each outlet center, including real estate taxes, insurance, maintenance expenses and utilities.We believe that our material existing facilities are well maintained, in good operating condition, and are adequate for our needs.
Item 3. Legal Proceedings Three shareholder derivative lawsuits have been filed in the United States District Court for the Northern District of Texas, Dallas Division, naming us as a nominal defendant and naming all of our then current directors and certain of our current and former officers and directors as defendants. The first suit, captionedCity of Pontiac
Policeman'sPoliceman’s andFireman'sFireman’s Retirement System, derivatively on behalf of Fossil, Inc. v. Tom Kartsotis, Kosta N. Kartsotis, Michael L. Kovar, Michael W. Barnes, Mark D. Quick, Randy S. Kercho, Jal S. Shroff, Randy S. Hyne, Thomas R. Tunnel, Richard H. Gundy, Kenneth W. Anderson, Andrea Camerana, Alan J. Gold, Michael Steinberg, Donald J. Stone and Cadence Wang(Cause(Cause No. 3-06CV1672-P), was filed on September 13, 2006. The second suit, captionedRobert B. Minich, derivatively on behalf of Fossil, Inc. v. Tom Karstotis, Kosta N. Kartsotis, Michael L. Kovar, Michael W. Barnes, Mark D. Quick, Randy S. Kercho, Jal S. Shroff, Randy S. Hyne, Thomas R. Tunnel, Richard H. Gundy, Kenneth W. Anderson, Andrea Camerana, Alan J. Gold, Michael Steinberg, Donald J. Stone andCadence Wang
(Cause(Cause No. 3-06CV1977-M), was filed on October 26, 2006. The third suit, captionedRobert Neel, derivatively on behalf of Fossil, Inc. v. Michael W. Barnes, Richard H. Gundy, Randy S. Kercho, Mark D. Quick, Tom Kartsotis, Kosta N. Kartsotis, Jal S. Shroff, T. R. Tunnell, Michael L. Kovar, Donald J. Stone, Kenneth W. Anderson, Alan J. Gold, Michael Steinberg, and Fossil, Inc.(Cause(Cause No. 3-06CV2264-G), was filed on December 8, 2006. The complaints allege purported violations of federal securities laws and state law claims for breach of fiduciary duty, abuse of control, constructive fraud, corporate waste, unjust enrichment and gross mismanagement in connection with certain stock option grants made by us. Plaintiffs seek (i) monetary damages for all losses and damages suffered as a result of the acts alleged in the complaint; (ii) for defendants to account for all damages caused by them and all profits and special benefits obtained as a result of the alleged unlawful conduct; (iii) actions to reform and improve Company corporate governance and internal control procedures; (iv) the ordering of the imposition of a constructive trust over thedefendants'defendants’ stock options and proceeds derived therefrom; and (v) punitive damages. The ultimate liability with respect to these claims cannot be determined at this time; however, we do not expect these matters to have a material impact on our financial position, operations or liquidity.There are no other legal proceedings to which we are a party or to which our properties are subject, other than routine litigation incident to our business, which is not material to our consolidated financial condition, cash flows or results of operations.
Item 4. [Removed and Reserved] Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesItem 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities General. Our common stock is listed on the NASDAQ Global Select Market under the symbol
"FOSL."“FOSL.” The following table sets forth the range of quarterly high and low sales prices per share of our common stock on the NASDAQ Global Select Market for the fiscal years ended January2, 20101, 2011 and January3, 2009.2, 2010.High Low Fiscal year ended January 2, 2010:
First quarter
$ 17.87 $ 11.00 Second quarter
24.97 16.12 Third quarter
30.00 21.09 Fourth quarter
34.18 26.14 Fiscal year ended January 3, 2009:
First quarter
$ 38.24 $ 28.18 Second quarter
37.98 27.42 Third quarter
32.96 22.26 Fourth quarter
25.98 11.51 High Low Fiscal year ended January 1, 2011:
First quarter
$ 39.60 $ 31.31 Second quarter
43.42 33.00 Third quarter
54.76 35.49 Fourth quarter
74.34 51.03 Fiscal year ended January 2, 2010:
First quarter
$ 17.87 $ 11.00 Second quarter
24.97 16.12 Third quarter
30.00 21.09 Fourth quarter
34.18 26.14 As of February
26, 2010,25, 2011, there were136125 holders of record of our shares of common stock, although we believe that the number of beneficial owners is much higher.Cash Dividend Policy. We did not pay any cash dividends in fiscal 2010, 2009
2008or2007.2008. We expect that we will retain all available earnings generated by our operations for the development and growth of our business. Any future determination as to a cash dividend policy will be made at the discretion of our Board of Directors and will depend on a number of factors, including our future earnings, capital requirements, financial condition, future prospects and such other factors as our Board of Directors may deem relevant.Common Stock Performance Graph
The following performance graph compares the cumulative return of
theour shares of common stock over the preceding five year periods with that of the broad market (CRSP Total Return Index of the NASDAQ Global Select Market (US)) and the NASDAQ Retail Trades Group. Each Index assumes $100 invested at December 31,20042005 and is calculated assuming quarterly reinvestment of dividends and quarterly weighting by market capitalization.20092010 COMPARATIVE TOTAL RETURNSFossil, Inc., NASDAQ Global Select Market and
NASDAQ Market Retail Trades Group
(Performance Results through 12/31/
09)10)
12/31/04 12/31/05 12/31/06 12/31/07 12/31/08 12/31/09 Fossil, Inc.
100.00 83.89 88.07 163.73 65.13 130.89 NASDAQ Global Select Market
100.00 102.13 112.19 121.68 58.64 84.28 NASDAQ Retail Trades
100.00 100.95 110.24 100.31 69.99 97.21 Purchases of Equity Securities by the Issuer and Affiliated Purchasers
On February 16,During 2010, weannounced thatcompleted a $20 million share buyback approved by our Board of Directorshad authorized usin December 2009 by investing approximately $8.8 million to repurchaseup to $20,000,000approximately 235,000 shares of our common stock.To date,Additionally, wehave not made any repurchases under this authorization.entered into 10b5-1 repurchase plans in August 2010 and November 2010 for the purpose of purchasing $130 million and $100 million, respectively, of our outstanding common stock. These repurchase plans were entered into pursuant to an August 2010 authorization by our Board of Directors of a $750 million common stock repurchase program expiring in December 2013. Wemaycompleted the repurchase of all $130 million of common stock, representing 2.4 million shares, as of November 9, 2010. From November 23, 2010 through January 1, 2011, we repurchased an additional $49 million of our common stockthrough open market purchases or privately negotiated transactions, all in accordance with the provisions of Rule 10b-18 promulgated by the Securities and Exchange Commissionunder theSecurities Exchange Act$100 million 10b5-1 plan, representing approximately 694,000 shares of1934.our common stock.ISSUER PURCHASES OF EQUITY SECURITIES (1)
Period Total Number
of Shares
PurchasedAverage
Price Paid
per ShareTotal Number
of Shares
Purchased as
Part of
Publicly
Announced
PlanApproximate Dollar
Value of Shares
that
May Yet Be
Purchased Under
the PlansOctober 3, 2010-October 30, 2010
1,011,000 $ 54.78 1,011,000 $ 667,483,904 October 31, 2010-November 27, 2010
376,842 $ 62.10 376,842 $ 644,080,708 November 28, 2010-January 1, 2011
608,412 $ 71.17 608,412 $ 600,777,804 Total
1,996,254 1,996,254 (1) The table reflects purchases made during our fiscal fourth quarter based on the settlement date of
the stock purchase. In our previous reports on Form 10-K, we reported purchases in this table based on the trade date of the stock purchase, rather than the settlement date. The settlement date is generally three trading days following the trade date.ContentsItem 6. Selected Financial Data Item 6. Selected Financial DataThe following information should be read in conjunction with our consolidated financial statements and notes thereto contained in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form
10-K.10-K (in thousands, except for per share data).FINANCIAL HIGHLIGHTS
Fiscal Year2009 2008 2007 2006 2005 IN THOUSANDS, EXCEPT PER SHARE DATA Net sales
$ 1,548,093 $ 1,583,242 $ 1,432,984 $ 1,213,965 $ 1,043,120 Gross profit
844,850 851,151 742,031 608,919 535,140 Operating income
211,627 205,770 186,485 123,325 108,988 Income before taxes attributable to Fossil, Inc.
213,776 189,429 187,526 118,795 102,948 Net income attributable to Fossil, Inc.
139,188 138,097 (1) 123,261 (2) 77,582 75,670 (3) Earnings per share:
Basic
2.09 2.05 (1) 1.81 (2) 1.15 1.07 (3) Diluted
2.07 2.02 (1) 1.75 (2) 1.13 1.04 (3) Weighted average common shares and common equivalent shares outstanding:
Basic
66,684 67,525 68,213 67,177 70,476 Diluted
67,153 68,323 70,333 68,817 72,424 Working capital
$ 701,193 $ 556,497 $ 546,410 $ 357,608 $ 326,502 Total assets
1,276,483 1,087,296 1,122,628 852,597 745,142 Total long-term liabilities
62,791 74,964 66,432 22,914 35,628 Stockholders' equity attributable to Fossil, Inc.
962,781 802,144 771,662 602,201 526,317 Return on average stockholders' equity attributable to Fossil, Inc.
16.2 % 17.8 % 18.3 % 14.2 % 14.0 % (1)Includes $7.3 million in expenses, net of tax, related to the write-down of certain other than temporary investment, fixed asset and intangible asset impairments and a $20.8 million benefit in income tax expense related to the reduction of certain current and long-term tax liabilities in connection with completion of prior year income tax audits.(2)Includes $8.6 million in expenses, net of tax, relating to our voluntary evaluation of our accounting for equity-based compensation, including the appropriateness of accounting measurement dates used to determine the amounts of compensation charges and related tax effects which have been previously disclosed in filings with the SEC.(3)Includes a tax benefit of $12 million related to the repatriation of subsidiary earnings which were not considered permanently invested pursuant to the American Jobs Creation Act of 2004.
Fiscal Year
2010 2009 2008 2007 2006 Net sales
$ 2,030,690 $ 1,548,093 $ 1,583,242 $ 1,432,984 $ 1,213,965 Gross profit
1,155,164 844,850 851,151 742,031 608,919 Operating income
376,414 211,627 205,770 186,485 123,325 Income before taxes attributable to Fossil, Inc.
372,448 213,776 189,429 187,526 118,795 Net income attributable to Fossil, Inc.
255,205 139,188 138,097 (1) 123,261 (2) 77,582 Earnings per share:
Basic
3.83 2.09 2.05 (1) 1.81 (2) 1.15 Diluted
3.77 2.07 2.02 (1) 1.75 (2) 1.13 Weighted average common shares and common equivalent shares outstanding:
Basic
66,701 66,684 67,525 68,213 67,177 Diluted
67,687 67,153 68,323 70,333 68,817 Working capital
$ 801,329 $ 701,193 $ 556,497 $ 546,410 $ 357,608 Total assets
1,467,573 1,276,483 1,087,296 1,122,628 852,597 Total long-term liabilities
76,377 62,791 74,964 66,432 22,914 Stockholders' equity attributable to Fossil, Inc.
1,044,118 962,781 802,144 771,662 602,201 Return on average stockholders' equity attributable to Fossil, Inc.
25.0 % 16.2 % 17.8 % 18.3 % 14.2 % (1) Includes a $20.8 million benefit in income tax expense related to the reduction of certain current and long-term tax liabilities in connection with completion of prior year income tax audits. (2) Includes $8.6 million in expenses, net of tax, relating to our voluntary evaluation of our accounting for equity-based compensation, including the appropriateness of accounting measurement dates used to determine the amounts of compensation charges and related tax effects which have been previously disclosed in filings with the Securities and Exchange Commission. FINANCIAL HIGHLIGHTSItem 7. Management's Discussion and Analysis of Financial Condition and Results of OperationsItem 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Summary
We are a global design, marketing and distribution company that specializes in consumer fashion accessories. Our principal offerings include an extensive line of
men'smen’s andwomen'swomen’s fashion watches and jewelry, handbags, small leather goods, belts, sunglasses,cold weathersoft accessories,footwearshoes andapparel.clothing. In the watch and jewelry product category, we have a diverse portfolio of globally recognized owned and licensed brand names under which our products are marketed. Our products are distributed globally through various distribution channels including wholesale in countries where we have a physical presence, direct to the consumer through our retail stores and commercial websites and through third-party distributors in countries where we do not maintain a physical presence. Our products are offered at varying price points to service the needs of our customers, whether they are value conscious or luxury oriented. Based on our extensive range of accessory products, brands, distribution channels and price points, we are able to target style-conscious consumers across a wide age spectrum on a global basis.Domestically, we sell our products through a diversified distribution network that includes department stores, specialty retail locations, specialty watch and jewelry stores, owned retail and factory outlet stores, mass market stores and through our
FOSSIL®FOSSIL catalogs and website. Our wholesale customer base includes, among others, Neiman Marcus, Nordstrom, Saks Fifth Avenue,Macy's, Dillard's,Macy’s, Dillard’s, JCPenney,Kohl's,Kohl’s, Sears, Wal-Mart and Target. We also sell our products in theU.S.United States through a network ofcompany-ownedCompany-owned stores that included127121 retail stores located in premier retail sites and7470 outlet stores located in major outlet malls as of January2, 2010.1, 2011. In addition, we offer an extensive collection of our FOSSIL brand products through our catalogs and on our website,www.fossil.com, as well as proprietary and licensed watch and jewelry brands through other managed and affiliated websites.Internationally, our products are sold to department stores, specialty retail stores and specialty watch and jewelry stores in over
100120 countries worldwide through 23company-ownedCompany-owned foreign sales subsidiaries and through a network of59 independent distributors. During fiscal year 2009, approximately 8.2% of our net sales were generated from sales toover 60 independent distributors. Our products are distributed in Africa, Asia, Australia, Europe, Central and South America, Canada, the Caribbean, Mexico, and the Middle East. Our products are offered on airlines, cruise ships and in internationalcompany-ownedCompany-owned retail stores, which included126 accessory150 retail stores11 multi-brand storesand1623 outlet stores in select international markets as of January2, 2010.1, 2011. Our products are also sold through licensed and franchised FOSSIL retail stores, retail concessions operated by us and kiosks in certain international markets. In addition, we offer an extensive collection of our FOSSIL brand products on our websites inAustralia,www.fossilaustralia.com.au, Germany,www.fossil.de, the United Kingdom,www.fossil.co.uk, and Singapore,www.fossilsingapore.com.sg.certain countries.Our business is subject to global economic cycles and retail industry conditions. Purchases of discretionary fashion accessories, such as our watches, handbags, sunglasses and other products, tend to decline during recessionary periods when disposable income is low and consumers are hesitant to use available credit.
The global economic environment began to deteriorateBeginning in the second half of fiscal year2008. The2008, declining values in real estate, reducedcreditlending by banks, solvency concerns of major financial institutions, increases in unemployment levels and significant declines and volatility in the global financial marketshavenegatively impacted the level of consumer spending for discretionary items.This has affected our business, as it is dependent on consumer demand for our products.In North America, beginning in the fourth quarter of fiscal year 2008 and continuing through most of fiscal year 2009,wethe discretionary consumer segment experienced a significant slowdown in customer traffic and a highly promotional environment. These same conditions spreadtoacross many international markets during 2009.WhileThese factors negatively affected our business, as it is dependent on consumer demand for our products. However, during fiscal year 2010, wehaveexperienced aslightpronounced recovery in ourNorth American market duringwatch and jewelry businesses in many of thefourth quarter of 2009,markets we service which has led to double-digit net sales and net income increases. However, if economic conditionsdo not improve in certain international markets,worsen or if theNorth American marketsglobal or regional economies slip back into a recession, our revenues and earnings for fiscal year20102011 or beyond could be negatively impacted.Future sales and earnings growth is also contingent upon our ability to anticipate and respond to changing fashion trends and consumer preferences in a timely manner while continuing to develop innovative products in the respective markets in which we compete. As is typical with new products, market acceptance of new designs and products we may introduce is subject to uncertainty. In addition, we generally make decisions regarding product designs several months in advance of the time when consumer acceptance can be measured.The majority of our products are sold at price points ranging from $50 to
$500.$600. Although the current economic environment continues tonegatively impactweigh on consumer discretionary spendingand, ultimately, our net sales,levels, we believe that the price/value relationship and the differentiation and innovation of our products, in comparison to those of our competitors, will allow us to maintain or grow our market share in those markets in which we compete. Historically, during recessionary periods, the strength of our balance sheet, our strong operating cash flow and the relative size of our business with our wholesale customers, in comparison to that of our competitors, have allowed us to weather recessionary periods for longer periods of time and generally resulted in market share gains to us.Future sales and earnings growth are also contingent upon our ability to anticipate and respond to changing fashion trends and consumer preferences in a timely manner while continuing to develop innovative products to distribute in the respective markets in which we compete. As is typical with new products, market acceptance of new designs and products that we may introduce is subject to uncertainty. In addition, we generally make decisions regarding product designs several months in advance of the time when consumer acceptance can be measured. We believe the double-digit net sales growth we have experienced over the last five fiscal quarters is attributable to our ability to design innovative products incorporating a number of new materials that not only differentiate us from our competition but also continues to provide a solid value proposition to consumers across all of our brands and product categories.
Our international operations are subject to many risks, including foreign currency. Generally, the strengthening of the U.S. dollar against currencies of other countries in which we operate will reduce the translated amounts of sales and operating expenses of our subsidiaries, which results in a reduction of our consolidated operating income. We manage these currency risks by using derivative instruments. The primary risk managed by using derivative instruments is the future payments of intercompany inventory transactions, denominated in U.S. dollars, by non-U.S. subsidiaries. We enter into forward contracts to manage fluctuations in global currencies that will ultimately be used to settle such U.S. dollar denominated inventory purchases.
Effective January 3, 2010, we made changes to the presentation of reportable segments to reflect changes in the way our chief operating decision maker evaluates the performance of our operations, develops strategy and allocates capital resources. Prior to January 3, 2010, our reportable segments consisted of the following: United States Wholesale, Europe Wholesale, Other International Wholesale and Direct to Consumer. Effective January 3, 2010, our reportable segments consist of the following: North America Wholesale, Europe Wholesale, Asia Pacific Wholesale and Direct to Consumer. These changes include the reclassification of our wholesale operations in Canada and Mexico and our U.S. export business, all of which were previously recorded within our Other International Wholesale segment, to the North America Wholesale segment. Our U.S. domestic wholesale operations previously recorded within the United States Wholesale segment, have also been reclassified to the North America Wholesale segment. Our Asia Pacific Wholesale operations, previously recorded within the Other International Wholesale segment, have been reclassified to the Asia Pacific Wholesale segment. Our operations related to our joint venture with Fossil, Spain S.A., previously recorded within the Other International Wholesale segment, have been reclassified to the Europe Wholesale segment. For comparison purposes our historical segment disclosures have been recast to be consistent with the current presentation.
This discussion should be read in conjunction with the consolidated financial statements and the related notes included therewith.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us 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 financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, we evaluate our estimates and judgments, including those related to product returns,
allowance forbad debt, inventories, long-lived asset impairment, impairment of goodwill and trade names, income taxes, warrantycost,costs, hedge accounting, litigation reserves and stock-based compensation. We base our estimates and judgments on historical experience and on various other factors that we believeareto be reasonable under the circumstances. Our estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies require the most significant estimates and judgments.Product Returns. We accept limited returns and
willmay request that a customer return a product if we feel the customer has an excess of any style that we have identified as being a poor performer for that customer or geographic location. We continually monitor returns and maintain a provision for estimated returns based upon historical experience and any specific issues identified. While returns have historically been within our expectations and the provisions established, future return rates may differ from those experienced in the past. In the event that our products are performing poorly in the retail market and/or we experience product damages or defects at a rate significantly higher than our historical rate, the resultingcreditreturns could have an adverse impact on the operating results for the period or periods in which such returns occur.Bad Debt. We perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history and the
customer'scustomer’s current credit worthiness, as determined by a review of their current credit information. We continuously monitor collections and payments from our customers and maintain a provision forestimated credit losses based upon historical experience and any specific customer collection issues identified. Additionally, we secure credit insurance policies in certain countries. While such credit losses have historically been within our expectations and the provisions established, future credit losses may differ from those experienced in the past.
Inventories. Inventories are stated at the lower of average cost, including any applicable duty and freight charges, or market. We
reserveaccount for estimated obsolescence or unmarketable inventory equal to the difference between the average cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual future demand or market conditions are less favorable than those projected by management,increasedadditional inventoryreservesvaluation reductions may be required.Long-lived Asset Impairment. We test for asset impairment of property, plant and equipment and intangibles other than trade names whenever events or changes in circumstances indicate that the carrying value of an asset might not be recoverable from estimated future cash flows. We apply
Statement of Financial Accounting Standards ("SFAS") No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets(now codified withinAccounting Standards Codification("ASC"(“ASC”) 360Property, Plant and Equipment("(“ASC360"360”), in order to determine whether or not an asset is impaired. In evaluating long-lived assets for recoverability, we use our best estimate of future cash flows expected to result from the use of the asset and its eventual disposition. When undiscounted cash flows estimated to be generated through the operations of our Company-owned full price retail stores are less than the carrying value of the underlying assets, impairment losses are recorded in selling and distribution expenses. In addition, impairment losses resulting from property, plant and equipment in our corporate costs area are recorded in general and administrative expenses. Should actual results or market conditions differ from those anticipated, additional losses may be recorded. We recorded impairment losses of $5.6 million, $2.5 million$1.9 millionand$0.2$1.9 million in fiscal years 2010, 20092008and2007,2008, respectively.Impairment of Goodwill and Trade Names. We evaluate goodwill for impairment annually as of the end of the fiscal year by comparing the fair value of the reporting unit to its recorded value. We have three reporting units under which we evaluate goodwill for impairment, North America Wholesale, Europe Wholesale and Asia Pacific Wholesale. The fair value of
oureach reportingunitsunit is estimated using market comparable information. Based on the analysis, if the estimated fair value of a reporting unit exceeds its recorded value, no impairment loss is recognized. As of January 1, 2011, the fair values of each of our three operating segments containing goodwill substantially exceeded the respective carrying values.Judgments and assumptions are inherent in our estimate of future cash flows used to determine the estimate of the reporting unit’s fair value. The most significant assumptions associated with the fair value calculations include net sales growth rates and discount rates. If the actual future sales results do not meet the assumed growth rates, future impairments of goodwill may be incurred.
We evaluate trade names annually as of the end of the fiscal year by comparing the fair value of the asset to its recorded value. The fair value of the asset is estimated using discounted cash flow methodologies.
In the fourth quarterThe MICHELE trade name represented approximately 97.7% and 88.9% of our total trade name balances as of fiscalyearsyear end 2010 and 2009,and 2008, werespectively. We performed the required annual impairmentteststest anddetermined that no goodwill impairment existed. Werecorded impairment losses of $1.8 million in fiscal year 2010 related to the ZODIAC and OYZTERBAY trade names, $2.7 million in fiscal year 2009 related toour ZODIAC®the ZODIAC andOYZTERBAY®OYZTERBAY trade names and $7.9 million in fiscal year 2008 related toour MICHELE®the MICHELE and ZODIAC trade names.NoAs of January 1, 2011, the fair value of the MICHELE trade name exceeded its carrying value by approximately 72.0%. The ZODIAC trade name carrying value was written down to its fair value and the OYZTERBAY trade name carrying value was written down to zero. Due to the inherent uncertainties involved in making the estimates and assumptions used in the fair valueanalysis, actual results may differ which could alter the fair value of the trade names and possibly cause impairment
losses were recordedcharges to occur in2007.
Income Taxes. We record valuation allowances against our deferred tax assets, when necessary, in accordance with
SFAS No. 109,Accounting for Income Taxes(now codified withinASC 740,Income Taxes). Realization of deferred tax assets (such as net operating loss carryforwards) is dependent on future taxable earnings and is therefore uncertain. At least quarterly, we assess the likelihood that our deferred tax asset balance will be recovered from future taxable income. To the extent we believe that recovery is not likely, we establish a valuation allowance against our deferred tax asset, increasing our income tax expense in the period such determination is made. In addition, we have not recorded U.S. income tax expense for foreign earnings that we have determined to be indefinitely reinvested. On an interim basis, we estimate what our effective tax rate will be for the full fiscal year. The estimated annual effective tax rate is then applied to the year-to-date pre-tax income excluding unusual or infrequently occurring items, to determine the year-to-date tax expense. The income tax effects of infrequent or unusual items are recognized in the interim period in which they occur. As the fiscal year progresses, we continually refine our estimate based upon actual events and earnings by jurisdiction during the year. This continual estimation process periodically results in a change to our expected effective tax rate for the fiscal year. When this occurs, we adjust the income tax provision during thequarter in which the change in estimate occurs so that the year-to-date provision equals the expected annual rate excluding the impact of infrequent or unusual items.
Warranty Costs. Our FOSSIL watch products sold in the U.S. are covered by a limited warranty against defects in materials or workmanship for a period of 11 years from the date of purchase.
RELIC®RELIC watch products sold in the U.S. are covered by a comparable 12 yearwarranty while alllimited warranty. All other watch brands sold in the U.S.are covered by a comparable two year limited warranty. Generally,as well as generally, all of our watch products sold in Canada, Europe and Asia are covered by a comparable two year limited warranty.The Company determines itsWe determine our warranty liability using historical warranty repair experience. As changes occur in sales volumes and warrantycosts are experienced,experience, the warranty accrual is adjusted as necessary. The warranty liability recorded for fiscal years 2010, 2009 and 2008and 2007was $8.5 million, $6.4 million$4.6 millionand$3.5$4.6 million, respectively.Hedge Accounting. We operate in foreign countries, which exposes us to market risk associated with foreign currency exchange rate fluctuations. We have entered into certain forward contracts to hedge the risk of foreign currency rate fluctuations. We have elected to apply the hedge accounting rules as required by
SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities(now codified withinASC 815Derivatives and Hedging),for these hedges. Our objective is to hedge the variability in forecasted cash flows due to the foreign currency risk primarily associated with certain anticipated inventory purchases. Changes in the fair value of forward contracts designated as cash flow hedges are recorded as a component of accumulated other comprehensive income withinstockholders'stockholders’ equity, and are recognized in other income (expense)—net in the period which approximates the time the hedgedmerchandiseinventory is sold.Litigation Reserves. Estimated amounts for claims that are probable and can be reasonably estimated are recorded as liabilities in our consolidated balance sheet. The likelihood of a material change in these estimated reserves would be dependent on new claims
as theythat may arise,andchanges in theexpectedcircumstances used to estimate amounts for prior period claims and favorable or unfavorableoutcomefinal settlements ofeach claim.prior period claims. As additional information becomes available, we assess the potential liability related to new claims and existing claims and revise estimates as appropriate. As new claims arise or circumstances change relative to prior claim assessments, revisions in estimates of the potential liability could materially impact the results of operations and financial position.Stock-Based Compensation. We account for stock-based compensation in accordance with the
fair value recognitionprovisions ofSFAS No. 123(R),Share-Based Payment(now codified withinASC 718,Compensation—Compensation — StockCompensation)Compensation (“ASC 718”). We utilize the Black-Scholes modelwhichto determine the fair value of stock options and stock appreciation rights on the date of grant. The model requiresthe input of subjective assumptions. Theseus to make assumptionsinclude estimatingconcerning (a) the length of time employees will retain their vested stock options before exercising them("(“expectedterm"term”), (b) the volatility ofthe Company'sour common stock price over the expected term, and (c) the number of options that will be forfeited. Changes in these assumptions can materially affect the estimate of fair value ofstock-based compensation and, consequently, the related expense amounts recognized on the consolidated statements of operations.
Newly
IssuedAdopted Accounting Standard Codification UpdatesIn
FebruaryJanuary 2010, the Financial Accounting Standards Board("FASB"(“FASB”) issuedASU 2010-9Subsequent Events (Topic 855) Amendments to Certain Recognition and Disclosure Requirements("ASU 2010-9"). ASU 2010-9 amends disclosure requirements within Subtopic 855-10. An entity that is an SEC filer is not required to disclose the date through which subsequent events have been evaluated. This change alleviates potential conflicts between Subtopic 855-10 and the SEC's requirements. ASU 2010-9 is effective for interim and annual periods ending after June 15, 2010. We do not expect the adoption of ASU 2010-09 to have a material impact on our consolidated results of operations or financial position.In January 2010, FASB issuedAccountingStandardStandards Update("ASU"(“ASU”) 2010-6Improving Disclosures about Fair Value Measurements (Topic 820)("(“ASU2010-6"2010-6”). ASU 2010-6 provides amendments tosubtopicSubtopic 820-10 that require separate disclosure of significant transfers in and out of Level 1 and Level 2 fair value measurements and the presentation of separate information regarding purchases, sales, issuances and settlements for Level 3 fair value measurements. Additionally, ASU 2010-6 provides amendments tosubtopicSubtopic 820-10 that clarify existing disclosures about the level of disaggregation and inputs and valuation techniques.ASU 2010-6 isThe new disclosure requirements became effective for financial statements issued for interim and annual periodsendingbeginning after December 15, 2009, except for the disclosure about purchases, sales, issuances, and settlements in Level 3 fair value measurements, which become effective for fiscal years beginning after December 15, 2010.We do not expect theThe adoption of ASU2010-06 to2010-6 did not have a material impact on our consolidated results of operations or financial position.In January 2010, the FASB issued ASU 2010-2
ConsolidationConsolidations (Topic 810) Accounting and Reporting for Decreases in Ownership of a Subsidiary—a Scope Clarification("(“ASU2010-2"2010-2”). ASU 2010-2 addresses implementation issues related to the changes in ownership provisions in the Consolidation—Overall Subtopic(Subtopic 810-10)(“Subtopic 810-10”) of the ASCoriginally issued as FASB Statement No. 160,Noncontrolling Interests in Consolidated Financial Statements.. Subtopic 810-10 establishes the accounting and reporting guidance for noncontrolling interests and changes in ownership interests of a subsidiary. An entity is required to deconsolidate a subsidiary when the entity ceases to have a controlling financial interest in the subsidiary. Upon deconsolidation of a subsidiary, an entity recognizes a gain or loss on the transaction and measures any retained investment in the subsidiary at fair value. The gain or loss includes any gain or loss associated with the difference between the fair value of the retained investment in the subsidiary and its carrying amount at the date the subsidiary is deconsolidated. In contrast, an entity is required to account for a decrease in ownership interest of a subsidiary that does not result in a change of control of the subsidiary as an equity transaction. ASU 2010-2isbecame effective forthe Companyus starting January 3, 2010.We do not expect theThe adoption of ASU 2010-2todid not have a material impact on our consolidated results of operations or financial position.In December 2009, the FASB issued ASU 2009-17Consolidations (Topic 810) Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities
("(“ASU2009-17"2009-17”). ASU 2009-17 amends theFASBASC for the issuance of FASB Statement No. 167,Amendments to FASB Interpretation No. 46(R). The amendments in ASU 2009-17 replace the quantitative-based risks and rewards calculation for determining which enterprise, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity that most significantly impact theentity'sentity’s economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. ASU 2009-17 also requires additional disclosures about anenterprise'senterprise’s involvement in variable interest entities. ASU 2009-17iswas effective forthe Companyus starting January 3, 2010.We do not expect theThe adoption of ASU 2009-17todid not havea materialan impact on our consolidated results of operations or financialposition.position as we had no variable interest entities.In December 2009, the FASB issued ASU 2009-16Transfers and Servicing (Topic 860) Accounting for Transfers of Financial Assets
("(“ASU2009-16"2009-16”). ASU 2009-16 amends the ASC for the issuance of FASB Statement No. 166,Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140. The amendments in ASU 2009-16 eliminate the exceptions for qualifyingspecial-purposespecial purpose entities from the consolidation guidance and the exception that permittedsalesales accounting for certain mortgage securitizations when a transferor has not surrendered control over the transferred financial assets. In addition, the amendments require enhanced disclosures about the risks that a transferor continues to be exposed to because of its continuing involvement in transferred financial assets. ASU 2009-16iswas effective forthe Companyus starting January 3, 2010.We do not expect theThe adoption of ASU 2009-16todid not havea materialan impact on our consolidated results of operations or financialposition.position as we had no mortgage securitizations.Newly Adopted Accounting Standard CodificationIn August 2009, FASB issued ASU 2009-5Fair Value Measurements and Disclosures (Topic 820) Measuring Liabilities at Fair Value("ASU 2009-5"). ASU 2009-5 amends Subtopic 820-10,Fair Value Measurements and Disclosures—Overall, related to the fair value measurement of liabilities. ASU 2009-5 clarifies that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value. ASU 2009-5 was effective for the Company for interim and annual periods ending after October 3, 2009. The adoption of ASU 2009-5 did not have a material impact on our consolidated results of operations or financial position.In August 2009, FASB issued ASU 2009-4Accounting for Redeemable Equity Instruments—an Amendment to Section 480-10-S99("ASU 2009-4"). ASU 2009-4 represents an SEC update to Section 480-10-S99,Distinguishing Liabilities from Equity. The adoption of this guidance within ASU 2009-4 did not have a material impact on our consolidated results of operations or financial position.In June 2009, FASB issued SFAS No. 168,The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles—A Replacement of FASB Statement No. 162, (now codified within ASC 105,Generally Accepted Accounting Principles("ASC 105")). ASC 105 establishes the codification as the single source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. All guidance contained in the codification carries an equal level of authority. Following this statement, FASB will not issue new standards in the form of statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates, which will serve only to: (1) update the codification; (2) provide background information about the guidance; and (3) provide the bases for conclusions on the change(s) in the codification. ASC 105 was effective for financial statements issued for interim and annual periods ending after September 15, 2009. The codification supersedes all existing non-SEC accounting and reporting standards. The adoption of ASC 105 did not have a material impact on our consolidated results of operations or financial position.In May 2009, FASB issued SFAS No. 165,Subsequent Events(now codified within ASC 855,Subsequent Events("ASC 855")). This portion of ASC 855 establishes the general standards of accounting for, and disclosure of, events that occur after the balance sheet date but before financial statements are issued or are available to be issued. ASC 855 was effective for the Company on April 5, 2009. The adoption of ASC 855 did not have a material impact on our consolidated results of operations or financial position.In April 2009, FASB issued Staff Position ("FSP") No. 115-2 and FSP 124-2,Recognition and Presentation of Other-Than-Temporary Impairments(now codified within ASC 320,Investments—Debt and Equity Securities("ASC 320")). This portion of ASC 320 provides greater clarity about the credit and noncredit components of an other-than-temporary impairment event and more effectively communicates when an other-than-temporary impairment event has occurred. ASC 320 amends the other-than-temporary impairment model for debt securities. The impairment model for equity securities was not affected. Under ASC 320, an other-than-temporary impairment must be recognized through earnings if an investor has the intent to sell the debt security or if it is more likely than not that the investor will be required to sell the debt security before recovery of its amortized cost basis. ASC 320 was effective for interim periods ending after June 15, 2009. The adoption of ASC 320 did not have a material impact on our consolidated results of operations or financial position.In April 2009, FASB issued FSP 157-4,Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly(now codified within ASC 820,Fair Value Measurements and Disclosures("ASC 820")). This portion of ASC 820 provides guidelines for making fair value measurements more consistent and provides additional authoritative guidance in determining whether a market is active or inactive and whether a transaction is distressed. ASC 820 is applied to all assets and liabilities (i.e., financial andnon-financial) and requires enhanced disclosures. This standard was effective for periods ending after June 15, 2009. The adoption of ASC 820 did not have a material impact on our consolidated results of operations or financial position.In April 2009, FASB issued FSP 107-1 and Accounting Principles Board 28-1,Interim Disclosures about Fair Value of Financial Instruments(now codified within ASC 825,Financial Instruments("ASC 825")). This portion of ASC 825 requires disclosures about fair value of financial instruments in interim financial statements as well as in annual financial statements. ASC 825 was effective for interim periods ending after June 15, 2009. The adoption of ASC 825 did not have a material impact on our consolidated results of operations or financial position.In June 2008, FASB issued Staff Position—Emerging Issues Task Force 03-6-1,Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities(now codified within ASC 260,Earnings Per Share("ASC 260")). Under this portion of ASC 260, unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. ASC 260 was effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years and requires retrospective application. The adoption of ASC 260 did not have a material impact on our earnings per share calculations.In April 2008, FASB issued FSP 142-3,Determination of the Useful Life of Intangible Assets(now codified within ASC 350,Intangibles—Goodwill and Other("ASC 350")). This portion of ASC 350 provides guidance for determining the useful life of a recognized intangible asset and requires enhanced disclosures so that users of financial statements are able to assess the extent to which the expected future cash flows associated with the asset are affected by our intent and/or ability to renew or extend the arrangement. ASC 350 was effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. The adoption of ASC 350 did not have a material impact on our consolidated results of operations or financial position.In March 2008, FASB issued SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activities(now codified within ASC 815,Derivatives and Hedging("ASC 815")). This portion of ASC 815 requires enhanced disclosures about an entity's derivative and hedging activities aimed at improving the transparency of financial reporting. ASC 815 was effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The adoption of ASC 815 did not have a material impact on our consolidated results of operations or financial position. Refer to Note 7, Derivatives and Risk Management, of this Form 10-K for the enhanced disclosures required by the adoption of ASC 815.In December 2007, FASB issued SFAS No. 141(R),Business Combinations(now codified within ASC 805,Business Combinations("ASC 805")). This portion of ASC 805 establishes principles and requirements for how the acquirer in a business combination recognizes and measures in its financial statements the fair value of identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at the acquisition date. ASC 805 significantly changes the accounting for business combinations in a number of areas, including the treatment of contingent consideration, preacquisition contingencies, transaction costs and restructuring costs. In addition, under ASC 805, changes in an acquired entity's deferred tax assets and uncertain tax positions after the measurement period will impact income tax expense. ASC 805 will apply to any acquisitions we complete on or after December 15, 2008. The adoption of ASC 805 did not have a material impact on the Company's consolidated results of operations or financial position.In December 2007, FASB issued SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51(now codified within ASC 810, Consolidation("ASC 810")). This portion of ASC 810 changes the accounting and reporting for minority interests, which are recharacterized as noncontrolling interests and classified as a component of equity. This new consolidation method significantly changes the accounting for transactions with minority interest holders. The provisions of ASC 810 were applied to all noncontrolling interests prospectively, except for the presentation and disclosure requirements, which were applied retrospectively to all periods presented and have been disclosed as such in our condensed consolidated financial statements herein. ASC 810 became effective for fiscal years beginning on or after December 15, 2008. The Company adopted ASC 810 effective January 4, 2009. Upon adoption of ASC 810, the Company has recognized noncontrolling interests as equity in the consolidated balance sheets and has reflected net income attributable to noncontrolling interests in consolidated net income.In September 2006, FASB issued SFAS No. 157,Fair Value Measurements(now codified within ASC 820). This portion of ASC 820 provides guidance for using fair value to measure assets and liabilities. Under ASC 820, fair value refers to 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. This guidance within ASC 820 became effective for financial statements issued for fiscal years beginning after November 15, 2007; however, the FASB provided a one year deferral for implementation of the standard for non-recurring, non-financial assets and liabilities. Our adoption of this guidance for non-financial assets and non-financial liabilities on January 4, 2009 did not have a material effect on our consolidated results of operations or financial position.Results of Operations
The following table sets forth, for the periods indicated, (i) the percentages of our net sales represented by certain line items from our consolidated statements of income and comprehensive income and (ii) the percentage changes in these line items between the fiscal years
indicated:Fiscal Year2009 Percentage
Change from
20082008 Percentage
Change from
20072007 Net sales
100.0 % (2.2 )% 100.0 % 10.5 % 100.0 % Cost of sales
45.4 (3.9 ) 46.2 6.0 48.2 Gross profit
54.6 (0.7 ) 53.8 14.7 51.8 Operating expenses
40.9
(1.9
)
40.8
16.2
38.8Operating income
13.7 2.8 13.0 10.3 13.0 Interest expense
0.0 (57.7 ) 0.0 (37.6 ) 0.0 Other income (expense)—net
0.5 * (0.7 ) * 0.6 Income before income taxes
14.2 13.2 12.3 0.1 13.6 Income taxes
4.9 44.4 3.3 (20.0 ) 4.6 Net income
9.3 1.7 9.0 10.4 9.0 Less: Net income attributable to noncontrolling interest
0.3 35.9 0.2 (28.1 ) 0.4 Net income attributable to Fossil, Inc.
9.0 % 0.8 8.8 % 12.0 8.6 % *not meaningful
Table of Contentsindicated.Fiscal Year
2010 Percentage
Change from
20092009 Percentage
Change from
20082008 Net sales
100.0 % 31.2 % 100.0 % (2.2 )% 100.0 % Cost of sales
43.1 24.5 45.4 (3.9 ) 46.2 Gross profit
56.9 36.7 54.6 (0.7 ) 53.8 Operating expenses
38.3 23.0 40.9 (1.9 ) 40.8 Operating income
18.6 77.9 13.7 2.8 13.0 Interest expense
0.1 376.2 0.0 (57.7 ) 0.0 Other income (expense) - net
0.4 4.8 0.5 (177.3 ) (0.7 ) Income before income taxes
18.9 74.7 14.2 13.2 12.3 Provision for income taxes
5.9 57.8 4.9 44.4 3.3 Net income
13.0 83.6 9.3 1.7 9.0 Net income attributable to noncontrolling interest, net of taxes
0.4 89.7 0.3 35.9 0.2 Net income attributable to Fossil, Inc.
12.6 % 83.4 9.0 % 0.8 8.8 % Net Sales.The following table sets forth
ourconsolidated net sales by segment andcomponents of certain segments, andthe percentage relationship of each segment to consolidated net salesrelated to each respective segment, and components of certain segments,for the fiscal yearsindicated:indicated (in millions, except percentage data):Amounts in Millions Percentage of Total Fiscal Year2009 2008 2007 2009 2008 2007 International wholesale:
Europe
$ 460.3 $ 530.0 $ 483.9 29.7 % 33.5 % 33.8 % Other
240.6 271.2 233.2 15.6 17.1 16.2 Total international wholesale
700.9 801.2 717.1 45.3 50.6 50.0 United States wholesale:
Watch products
276.0 265.4 251.4 17.8 16.8 17.6 Other products
195.1 207.3 209.2 12.6 13.1 14.6 Total United States wholesale
471.1 472.7 460.6 30.4 29.9 32.2 Direct to consumer
376.1
309.3
255.3
24.3
19.5
17.8Total net sales
$ 1,548.1 $ 1,583.2 $ 1,433.0 100.0 % 100.0 % 100.0 % Amounts Percentage of Total Fiscal Year
2010 2009 2008 2010 2009 2008 Wholesale
North America
$ 779.2 $ 551.1 $ 560.7 38.3 % 35.6 % 35.4 % Europe
547.4 467.1 551.4 27.0 30.2 34.9 Asia Pacific
220.8 153.8 161.8 10.9 9.9 10.2 Total Wholesale
1,547.4 1,172.0 1,273.9 76.2 75.7 80.5 Direct to Consumer
483.3 376.1 309.3 23.8 24.3 19.5 Consolidated
$ 2,030.7 $ 1,548.1 $ 1,583.2 100.0 % 100.0 % 100.0 % Fiscal
2009Year 2010 Compared to Fiscal2008Year 2009Net Sales. The following table illustrates by factor the total year-over-year percentage change in net sales by segment and on a consolidated basis:
Exchange
RatesOrganic
ChangeTotal
ChangeEurope wholesale
(3.7 )% (9.5 )% (13.2 )% Other international wholesale
(1.2 ) (10.1 ) (11.3 ) United States wholesale
— (0.3 ) (0.3 ) Direct to consumer
(1.1 ) 22.7 21.6 Consolidated
(1.6 )% (0.6 )% (2.2 )% Exchange Rates Organic Change Total Change North America Wholesale
0.7 % 40.7 % 41.4 % Europe Wholesale
(5.6 ) 22.8 17.2 Asia Pacific Wholesale
8.6 35.0 43.6 Direct to Consumer
(0.5 ) 29.0 28.5 Consolidated
(0.7 )% 31.9 % 31.2 % European Wholesale Net Sales.The following net sales discussion excludes the impact on sales growth attributable to foreign currency rate changes as noted in the above table.
The netNorth America Wholesale Net Sales. Net sales
declinein the North America Wholesale segment, which consists of ourEuropean wholesale segmentoperations in the U.S., Canada, Mexico and sales to third-party distributors in South America, increased 40.7%, or $224.4 million, during fiscal year 2010. We attribute this increase to consumers’ positive reactions to our innovative product offerings and an upward trend in the fashion watch category. These favorable watch sales trends have prompted retailers to place greater emphasis on the category by increasing staff to service the watch customer, increasing open-to-buy dollars and expanding marketing initiatives, thereby further accelerating net sales. The increased sell-through rates of our watch products at our retailers have also resulted in these customers restocking inventories during fiscal year 2010, after heavily destocking inventory levels in fiscal year 2009 due to the economic downturn. Additionally, our customers have been increasing the level of inventories in certain situations, including allocating additional retail space within their stores, to meet the increased demand for our watch products. As a result of the acceleration in sales in fiscal year 2010 in comparison to the destocking activity in fiscal year 2009, North American wholesale watch shipments increased by 60.9%, or $207.9 million, in fiscal year 2010. Licensed brands, FOSSIL and MICHELE represented the strongest net sales contributions, increasing by 113.9%, 35.4% and 49.7%, respectively. Licensed brand watch sales were primarily led by sales volume increases in MICHAEL KORS of 218.4% or $95.5 million and, to a lesser extent, increases in EMPORIO ARMANI of 48.8%, DIESEL of 61.0%, DKNY of 46.8% and MARC BY MARC JACOBS of 61.0%. In addition, our RELIC watch business increased 20.8% during the fiscal year. MICHAEL KORS sales volumes were principally driven by innovative designs, increased sell-through rates at retail and additional case space allocated by retailers in the department store channel.Our accessories business, which includes our men’s and women’s leather, jewelry, and other non-watch categories, also contributed to the growth in North America as net sales volumes increased 7.9%, or $16.5 million, in fiscal year 2010. This increase was primarily
thea result of sales volume growth in FOSSIL accessory jewelry, shoes, women’s small leathers, and sunglasses which had sales increases of 67.6%, 122.2%, 27.2% and 3.6%, respectively. Both our accessory jewelry and shoes categories were launched into the department store channel in the last two years and are still experiencing both door growth and, in some cases, assortment expansion. These increases were partially offset by sales volume declines of 2.6% and 3.8% in women’s bags and men’s leather products, respectively.Europe Wholesale Net Sales. Net sales in our
coreEurope Wholesale segment increased 22.8%, or $106.4 million, during fiscal year 2010. During fiscal year 2010 our Europe Wholesale segment benefited from a similar level of increased consumer response to new designs as we experienced in the North America segment. Additionally, net sales increases in fiscal year 2010 benefited from similar de-stocking activities to that experienced in our North America segment, primarily during the last nine months of fiscal year 2009. Watch sales experienced the most significant growth, increasing 23.3%, or $78.5 million. All major watch brands contributed to this growth with increases of 19.7% in FOSSIL, 24.3% in EMPORIO ARMANI, 101.3% in MICHAEL KORS, 26.6% in DIESEL and 18.2% in DKNY representing the strongest performances. During fiscal year 2010, our jewelrybusinessesand leather categories also delivered strong double-digit increases of9.4%21.0% and16.1%46.7%, respectively. We believe net sales increases in our jewelry category were positively impacted by trends similar to those thatweakening economies, and the resulting decrease in discretionary spending was the primary reason for our sales volume decreases in this segment. The declines had a bigger impact on our larger, more penetrated businesses. The decreasewe experienced in our watchbusiness was principally the result of FOSSIL and licensed brand watch sales volumes declining 6.7% and 9.3%, respectively, while the reduction in our jewelry sales volume was primarily led by a 21.1% decrease in Fossil jewelry. However, for brands and businesses recently introduced into our European wholesale segment and for those brands and businesses less penetrated, and thus continuing to expand into new doors, we experienced sales growth. For example, our recently-introduced FOSSIL leathers business increased 18.5% during fiscal year 2009, with solid growth in both the women's and men's categories.business. We believe theexpansiongrowth experienced in our leather products business in fiscal year 2010 was a result of ourleathers business is partly attributableinitiative to expand our leather offerings in our wholesale channel by leveraging thegrowthincreased brand awareness generated by the expansion of our FOSSIL accessory store concept inthisthe region over the last two years. In addition, shipments to third-party distributors increased 45.4% in fiscal year 2010, whichis continuingwe believe was principally related toimprove the brand awareness across all FOSSIL categories. Additionally, MICHAEL KORS®increased sell-through rates of our fashion watch offerings andBURBERRY® watch sales volumes rose 17.7% and 8.7%, respectively, primarily as a result of an increaseto our distributors replenishing inventory during fiscal year 2010 in comparison to destocking inventory in thepenetration level with existing customers and new door growth. Duringprior fiscalyear 2009, net sales were also favorably impacted by the introduction of DKNY® jewelry, launched during the third quarter of fiscal 2008. Although we believe the current economic environment in Europe willyear.negatively impact our ability to substantially grow our sales in the near-term, we believe we have maintained, if not increased, our market share and have positioned the Company to grow as the economic environment and discretionary spending improves.Other InternationalAsia Pacific Wholesale Net Sales.The following discussion excludes the impact on sales attributable to foreign currency rate changes as noted in the above table. Our other international wholesale segment includes sales from ourIn fiscal year 2010, Asia PacificMexico and Canada subsidiaries, export sales from the U.S. and sales to our Spain joint venture. Net sales in our other international wholesale segment decreased during fiscal year 2009, principallyWholesale shipments increased 35.0%, or $53.8 million, primarily a result of a$41.7 million decline39.6% increase inwholesale shipmentslicensed brand watch sales and, to a lesser extent,increases of 19.4% in FOSSIL watches and 55.2% in leather products. Licensed brand watch sales were led by increases of 43.0% in EMPORIO ARMANI, 127.8% in MARC BY MARC JACOBS and 54.0% in BURBERRY. In addition to consumers responding favorably to new designs, we believe the growth in our
third-party distributors and our Spain joint venture. We attribute these sales declineswatch business was due to thechallenging economic environment and credit restraints being experienced by a numbergrowth in our retail concession base across many of our markets within this segment, including the transition of our South Korean operations from a third-partydistributors. Excluding shipmentsdistributor tothird-party distributors,a Company-owned subsidiary during the 2010 fiscal year. The net salesfrom our Asia Pacific wholesale operations increased 12.8%, principally driven by further penetration in our newer markets of Korea, China and India as well as a 15.5% increase generated in our Australian wholesale business primarily related to sales volumegrowth inFOSSIL leather goods. Our wholesale operationsthe South Korea market represented 46.6% of the $53.8 million inCanada and Mexico also experienced solidnet salesvolume growth of 11.3% and 9.6%, respectively, duringthat we added within this segment in fiscal2009. We believe our Asia Pacific distribution business continues to represent our largest opportunity for wholesale expansion. We believe the productivity of our concession model in this region allows us to gain market shareyear 2010 in comparison to fiscal year 2009. The growth in the leather category in fiscal year 2010 was a result of ourcompetitorsinitiative to broaden distribution of the category byessentially operatingleveraging thespace within our customers' stores. This allows us to control merchandising, inventory levels, build-out and branding decisions, and more importantly, the interaction with the end consumer.
We believe our diverse global distribution network, including owned distribution in 23 countries, combined with our design and marketing capabilities, will allow us to continue to take shelf space from lesser known local and regional brands as we continue to increase brand awareness through the growth of our retail stores and introduction of new websites in many of the countries in which we operate. We also believe that the
recentexpansion of our businesses intonewthe newer markets will allow us to experience higher levels of growth in our international wholesale segments in comparison to ourU.S. wholesaleNorth America Wholesale segment.Direct to Consumer Net Sales. Direct to Consumer net sales increased 29.0%, or $108.9 million, during fiscal year 2010, principally the result of comparable store sales increases of 19.0% and a 5.9% increase in the average number of stores open during the fiscal year. Additionally, our Direct to Consumer segment was favorably impacted in fiscal year 2010 by growth of 50.2% in e-commerce sales primarily driven by our U.S. and Germany-based e-commerce businesses. During fiscal year 2010, comparable store sales related to our global full price accessory concept increased by 15.9%, while our global outlet stores experienced comparable store sales growth of 21.1%. We believe the growth in our Direct to Consumer business was attributable to consumers’ positive response to the focused point of view and imagery of the FOSSIL brand, the continuous introduction of new and innovative designs and materials, increased catalog mailings and expanded e-commerce marketing activities.
We ended fiscal year 2010 with 364 stores, including 230 full price accessory stores, 127 of which were outside of North America, 93 outlet locations, including 22 outside of North America, 31 clothing stores, including 3 outside of North America, and 10 full price multi-brand stores, including 9 outside of North America. This compares to 354 stores at the end of fiscal year 2009, including 218 full price accessory stores, 116 of which were outside of North America, 90 outlet locations, including 15 outside of North America, 33 clothing stores, all in North America, and 13 full price multi-brand stores, including 11 outside of North America. During fiscal year 2010, we opened 33 new stores and closed 23 stores. During fiscal year 2011, we anticipate opening approximately 80 to 85 additional retail stores and closing approximately 26 to 28 stores globally.
A store is included in comparable store sales in the thirteenth month of operation. Stores that experience a gross square footage increase of 10% or more due to an expansion and/or relocation are removed from the comparable store sales base, but are included in total sales. These stores are returned to the comparable store sales base in the thirteenth month following the expansion and/or relocation. During 2006, we entered into an agreement with the House of Fraser, a U.K.-based department store (“HOF”), which allows us to operate the watch department in certain HOF stores. Under this agreement, we own the inventory within the HOF store, provide the labor to operate the department and pay HOF a commission on the retail watch sales generated in the stores. Although we include the net sales derived from the HOF stores in our Direct to Consumer segment, we do not include the number of locations associated with this agreement in our retail store count or in our comparable store sales.
Gross Profit. Gross profit of $1.2 billion in fiscal year 2010 represented an increase of 36.7% in comparison to $844.9 million in the prior fiscal year. This increase was primarily a result of an increase in net sales and gross profit margin expansion. Gross profit margin increased 230 basis points to 56.9% in fiscal year 2010 compared to 54.6% in the prior fiscal year. The increase in gross profit margin was principally driven by an increase in the
mix of sales of higher margin watch products in comparison to leather products, including a greater mix of higher margin licensed watch brands, and higher gross margins experienced in outlet stores. Gross profit margin was also favorably impacted by a combination of decreased component costs associated with some of the new materials we incorporated into our watch designs and higher retail prices. These increases in gross profit margin were partially offset by a stronger U.S. dollar, which unfavorably impacted gross profit margin by approximately 20 basis points during fiscal year 2010, and increased input costs related to payroll as a result of wage increases across our China assembly operations and third-party component manufacturers.
Our consolidated gross profit margin is impacted by our diversified business model that includes but is not limited to: (i) a significant number of product categories we distribute, (ii) the multiple brands we offer within several product categories, (iii) the geographical presence of our businesses, and (iv) the different distribution channels we sell to or through. The components of this diversified business model produce varying ranges of gross profit margin. Generally, on a historical basis, our fashion branded watch, jewelry and sunglass offerings produce higher gross profit margins than our leather goods categories. In addition, in most product categories that we offer, brands with higher retail price points generally produce higher gross profit margins compared to those of lower retail priced brands. From a segment standpoint, our Direct to Consumer business generally produces the highest gross profit margin as a result of these sales being direct to the ultimate consumer. Gross profit margins related to sales in our international wholesale segments are historically lower than our Direct to Consumer segment, but historically higher than our North America Wholesale segment primarily due to the following factors: (i) premiums charged in comparison to retail prices on products sold in the U.S., (ii) the product sales mix in our international wholesale segments, in comparison to our North America Wholesale segment, are comprised more predominantly of watches and jewelry that generally produce higher gross profit margins than leather goods; and (iii) the watch sales mix in our international wholesale segments, in comparison to our North America Wholesale segment, are comprised more predominantly of higher priced licensed brands.
Operating Expenses. Total operating expenses increased $145.5 million to $778.8 million in fiscal year 2010. Expressed as a percentage of net sales, operating expenses decreased to 38.3% in fiscal year 2010 compared to 40.9% in the prior fiscal year and included a favorable impact of approximately $3.5 million related to the translation of foreign-based expenses due to a stronger U.S. dollar. On a constant dollar basis, operating expenses in our wholesale segments, Direct to Consumer segment and corporate cost areas increased by $78.9 million, $35.7 million and $34.4 million, respectively, in fiscal year 2010. Expense growth in the wholesale segments was principally a result of increased marketing expenses and compensation costs. Expense increases in the Direct to Consumer segment were primarily attributable to store growth, expansion of our catalog mailings and increased web-based marketing expenditures. Expense growth in the corporate cost area was primarily associated with increased compensation costs, including a $3.8 million increase in equity compensation expense, and a non-cash charge of approximately $3.7 million related to the write-down of an other than temporary fixed asset impairment.
The following table sets forth operating expenses on a segment basis and the relative percentage of operating expenses to net sales for each segment for the fiscal years indicated (in millions, except for percentage data):
Fiscal Year
2010 2009 Operating Expense % of Net Sales Operating Expense % of Net Sales North America Wholesale
$ 146.3 18.8 % $ 118.9 21.6 % Europe Wholesale
164.1 30.0 146.0 31.3 Asia Pacific Wholesale
96.1 43.5 66.9 43.5 Direct to Consumer
258.2 53.4 222.6 59.2 Corporate
114.1 0.0 78.8 0.0 Total
$ 778.8 38.3 % $ 633.2 40.9 % Operating Income. Operating income increased by 77.9% to $376.4 million in fiscal year 2010 compared to $211.6 million in fiscal year 2009. Operating income margin increased by 480 basis points to 18.5% of net sales in fiscal year 2010 compared to 13.7% in the prior fiscal year, principally as a result of increased net sales, gross profit margin expansion and a decrease in operating expenses as a percentage of sales. Operating income included approximately $6.8 million of net currency losses in fiscal year 2010 related to the translation of foreign-based sales and expenses into U.S. dollars.
Interest Expense. Interest expense increased by $884,000 as compared to fiscal year 2009, primarily driven by increased participation by our Asia Pacific subsidiaries in our notional cash pool at interest rates in excess of those earned on cash deposits by our European subsidiaries in the pool.
Other Income (Expense)—Net. Other income (expense)—net primarily reflects interest income from investments, foreign currency transaction gains or losses and equity in the earnings or losses of our non-consolidated joint venture in Spain. During fiscal year 2010, other income (expense)—net increased favorably by approximately $409,000 as compared to fiscal year 2009, primarily driven by increased equity earnings of our non-consolidated joint venture in Spain and increased interest income, partially offset by decreased net foreign currency transaction gains.
Provision for Income Taxes. Income tax expense for fiscal year 2010 was $119.3 million, resulting in an effective tax rate of 31.1%, compared to 34.4% in fiscal year 2009. Fiscal year 2010 income tax expense was favorably impacted by the recognition of previously unrecognized income tax benefits in connection with the completion of prior year income tax audits during the fiscal year. For fiscal year 2011, we estimate our effective tax rate will approximate our structural rate of 35%, excluding any discrete events.
Net Income Attributable to Noncontrolling Interest.Net income attributable to noncontrolling interest, which represents the minority interest portion of subsidiaries in which we own less than 100%, increased $4.6 million for fiscal year 2010. This increase is a result of increased net income related to our less than 100% wholly-owned subsidiaries with a substantial portion of this increase attributable to the net income related to one of our watch assembly facilities.
Net Income Attributable to Fossil, Inc. Fiscal year 2010 net income attributable to Fossil, Inc. increased 83.4% to $255.2 million, or $3.77 per diluted share, in comparison to $139.2 million, or $2.07 per diluted share, in the prior fiscal year. Fiscal year 2010 earnings per diluted share of $3.77 included an approximate $0.07 diluted earnings per share reduction related to foreign currency rate changes.
Fiscal Year 2009 Compared to Fiscal Year 2008
Net Sales. The following table illustrates by factor the total year-over-year percentage change in net sales by segment and on a consolidated basis:
Exchange Rates Organic Change Total Change North America Wholesale
(0.7 )% (1.0 )% (1.7 )% Europe Wholesale
(3.6 ) (11.7 ) (15.3 ) Asia Pacific Wholesale
0.6 (5.5 ) (4.9 ) Direct to Consumer
(1.1 ) 22.7 21.6 Consolidated
(1.6 )% (0.6 )% (2.2 )% The following net sales discussion excludes the impact on sales growth attributable to foreign currency rate changes as noted in the above table.
North America Wholesale Net Sales. We believe wholesale shipments of our watch and accessory offerings were negatively impacted by our wholesale partners significantly reducing their purchases during the first half of
fiscal year 2009. We believe this was the result of our wholesale partners carrying higher levels of inventory into the beginning of the year due to the downturn in consumer spending during the fourth quarter of fiscal year 2008. Nevertheless, net sales
from our U.S. wholesalein the North America Wholesale watch business increased4.0%1.9% during fiscal year 2009, primarily a result of sales volume growth in licensed brands, mass market, RELIC and MICHELE watches, partially offset by a sales volume decrease in FOSSIL watches. Licensed watch sales rose23.9%16.4%, principally driven byourMICHAEL KORS and to a lesser extentADIDAS®ADIDAS and MARC BY MARCJACOBS®JACOBS watches. MICHAEL KORS wholesale shipments increased101.6%104.4% during fiscal year 2009, which we believe is due to the innovative design that is represented by the assortment and the expansion of points of sale for the brand. Sales volume growth in ADIDAS and MARC BY MARC JACOBS was primarily attributable to the expansion of points of sale.OurDuring fiscal year 2009, our mass market watch shipments increased13.0%10.2% in comparison to the prior fiscal year, which we attribute primarily to further penetration of our private label program with Wal-Mart as well as consumers continuing to shop for value. RELIC watch sales rose12.9%12.0% during fiscal year 2009, as a result of increased penetration in existing customers and new door growth. MICHELE sales volumes increased5.5%9.6% during fiscal year 2009, which we attribute toconsumers'consumers’ positive response to innovative new styles.Domestic wholesaleNorth America Wholesale shipments of FOSSIL watches declined20.4%18.9% during fiscal year 2009, which we believe resulted from retailers managing their inventories conservatively. FOSSIL is the most penetrated watch business within our portfolio in theU.S. wholesaleNorth America Wholesale segment and thereby more significantly impacted by comparable stores sales within the department store channel. However, new FOSSIL styles introduced into department stores during the fourth quarter of fiscal year 2009 experiencedstrong sell through during the holiday season, resulting in the overall trend improving.
We believe this improving trend will result in increased wholesale shipments during the first half of fiscal 2010.Wholesale shipments from our accessories business in
the U.S.,North America, which primarily includes handbags, small leather goods, belts, sunglasses, jewelry and cold weather accessories, decreased5.9%5.4% during fiscal year 2009. This decreaseiswas principally attributable to sales volume declines in FOSSILwomen'swomen’s handbags, small leather goods, and eyewear, partially offset by sales volume increases in FOSSIL accessory jewelry and the launch of our FOSSILfootwearshoes line during fiscal year 2009. We primarily attribute the sales volume declines inwomen'swomen’s handbags, small leather goods and eyewear of10.4%11.0%, 17.8% and22.7%20.4%, respectively, to the challenging economic environment resulting in decreased consumer demand and our wholesale partners reducing inventory levels during the first nine months of fiscal year 2009. Additionally, eyewear sales volume was unfavorably impacted by certain of our customers consolidating vendors in their sunglass departments and discontinuing the RELICmen'smen’s eyewear line. FOSSIL accessory jewelry net sales increased26.1%22.4% in fiscal year 2009 as a result of retail door growth, while the launch of our FOSSILfootwearshoes line contributed$2.6$2.9 million to thedomestic wholesaleNorth America Wholesale business during fiscal year 2009.We significantly improved theEurope Wholesale Net Sales. The net sales
trenddecline in ourdomestic accessoriesEurope Wholesale segment during fiscal year 2009 was primarily the result of sales volume declines in our core watch and jewelry businesses of 11.5% and 19.7%, respectively. We believe that weakening economies and the resulting decrease in discretionary spending was the primary reason for our sales volume decreases in this segment. The declines had a bigger impact on our larger, more penetrated businesses. The decrease in our watch business was principally the result of FOSSIL and licensed brand watch sales volumes declining 8.5% and 11.7%, respectively, while the reduction in our jewelry sales volume was primarily led by a 22.9% decrease in FOSSIL jewelry. However, for brands and businesses recently introduced into our Europe Wholesale segment and for those brands and businesses less penetrated, and thus continuing to expand into new doors, we experienced sales growth. For example, our recently-introduced FOSSIL leathers business increased 19.9% during fiscal year 2009, with solid growth in both the women’s and men’s categories. We believe the expansion of our leathers business is partly attributable to the growth of our FOSSIL accessory store concept in this region, which is continuing to improve the brand awareness across all FOSSIL categories. Additionally, MICHAEL KORS and BURBERRY watch sales volumes rose 4.5% and 6.7%, respectively, in fiscal year 2009 primarily as a result of an increase in the penetration level with existing customers and new door growth. During fiscal year 2009, net sales were also favorably impacted by the introduction of DKNY jewelry, launched during thefourththird quarter of fiscal year 2008.Asia Pacific Wholesale Net Sales. Net sales in our Asia Pacific Wholesale segment decreased during fiscal year 2009, principally a result of a $19.5 million decline in wholesale shipments to our third-party distributors. We attribute these sales declines to the challenging economic environment and
expect this favorable momentumcredit restraints experienced by a number of our third-party distributors. Excluding shipments tocontinue into fiscal 2010.third-party distributors, sales from our Asia Pacific Wholesale operations increased 12.8%, principally driven by further penetration in our newer markets of China, India and South Korea as well as a 15.5% increase generated in our Australian wholesale business primarily related to sales volume growth in FOSSIL leather goods.Direct to Consumer Net Sales.
The following discussion excludes the impact on sales attributable to foreign currency rate changes as noted in the above table.Direct toconsumerConsumer net sales increased 22.7% during fiscal year 2009, principally the result of a 19.4% increase in the average number of stores open during the fiscal year and comparable store sales increases of 7.8%. OurdirectDirect toconsumerConsumer segment was also favorably impacted by 11.4% growth in e-commerce sales primarily driven by our U.S.-based e-commerce businesses. We believe this growthiswas partially attributable to system upgrades for our U.S. website during the second half of fiscal year 2009. Additionally, an increase in the number of catalogs mailed in fiscal year 2009 and an increase in the amount of spending during the fourth quarter of fiscal year 2009 in on-line search advertising also benefited e-commerce sales. These initiatives led to an increased number of visitors to the site resulting in higher levels of sales. Our e-commerce and catalog initiatives, in addition to the favorable consumer reaction to new product innovation, also benefited our comparable store sales in our U.S. retail stores. Comparable store sales related to our full price accessory concept, which is our growth engine in this segment, increased by 5.9% globally while our global outlet stores experienced comparable store sales growth of 9.7% during fiscal year 2009.We ended fiscal year 2009 with 354 stores, including 218 full price accessory stores, 126 of which are located outside the U.S., 90 outlet locations, including 16 outside the U.S., 33
apparelclothing stores and 13 multi-brand stores. This compares to 324 stores at the end of fiscal year 2008, which included 191 full price accessory stores, 104 located outside the U.S., 82 outlet locations, including 8 outside the U.S., 33apparelclothing stores and 18 multi-branded stores. During fiscal year 2009, we opened 42 new stores, including 29 full-price accessory stores, and closed 12 stores.During fiscal 2010, we plan to open approximately 50 stores, concentrating on our full price accessory concept outside of the U.S.A store is included in comparable store sales in the thirteenth month of operation. Stores that experience a gross square footage increase of 10% or more due to an expansion and/or relocation are removed from the comparable store sales base, but are included in total sales. These stores are returned to the comparable store sales base in the thirteenth month following the expansion and/or relocation.Gross Profit. Gross profit decreased by 0.7% to $844.9 million in fiscal year 2009, with gross profit margin expanding by 80 basis points to 54.6% compared to 53.8% in the prior fiscal year. The gross profit margin improvement was due primarily to an increase in the sales mix of
directDirect toconsumerConsumer segment sales and a reduction in sales mix of lower margin shipments tothird partythird-party distributors. The increase in gross profit margin was partially offset by a stronger U.S. dollar, which unfavorably impacted gross profit margin by approximately 80 basis points during fiscal year 2009 and areduction in the sales mix attributable to our
European wholesaleEurope Wholesale segment, which historically generates a gross profit margin in excess of our consolidated gross profit margin. In comparison to fiscal year 2008, our fiscal year 2009 gross profit margin was not impacted by any significant changes in component or labor costs related to the production of our watch and accessory offerings.Our consolidated gross profit margin is impacted by our diversified business model that includes but is not limited to: (i) a significant number of product categories we distribute, (ii) the multiple brands we offer within several product categories, (iii) the geographical presence of our businesses, and (iv) the different distribution channels we sell to or through. The components of this diversified business model produce varying ranges of gross profit margin. Generally, on an historical basis, our fashion branded watch, jewelry and sunglass offerings produce higher gross profit margins than our leather goods categories. In addition, in most product categories that we offer, brands with higher retail price points generally produce higher gross profit margins compared to those of lower retail priced brands. From a segment standpoint, our direct to consumer business generally produces the highest gross profit margin as a result of these sales being direct to the ultimate consumer. Gross profit margins related to sales in our international wholesale segment are historically lower than our direct to consumer segment, but historically higher than our U. S. wholesale segment primarily due to the following factors: (i) overall retail prices for comparable product sold in the U.S. are generally higher in our international businesses as a result of less competitive fashion and designer brands being offered in these markets; (ii) the product sales mix in our international wholesale segment, in comparison to our U. S. wholesale segment, is comprised more predominantly of watches and jewelry that generally produce higher gross profit margins than leather goods; and (iii) the watch sales mix in our international wholesale segment, in comparison to our U. S. wholesale segment, is comprised more predominantly of higher priced licensed brands.Operating Expenses. Total operating expenses decreased $12.2 million to $633.2 million in fiscal year 2009 in comparison to the prior fiscal year and as a percentage of net sales, increased 10 basis points to 40.9% compared to 40.8% in fiscal year 2008. Fiscal year 2009 included a reduction of approximately $11.5 million related to the translation impact of foreign-based expenses due to an average stronger U.S. dollar on a comparable year-over-year basis. On a constant dollar basis, operating expenses for fiscal year 2009 included net decreases in our wholesale segments and corporate costs of $43.1 million, partially offset by an increase of $42.5 million in our
directDirect toconsumerConsumer segment. The decrease in operating expenses associated with our wholesale segmentswerewas primarily related to lower compensation cost, as a result of a reduction of workforce in the first quarter of fiscal year 2009 and the freeze of merit increases and certain benefit costs. Additionally, fiscal year 2009 wholesale operating expenses benefited from reduced levels of advertising expense and a net reduction of approximately $5.2 million of non-cash charges related to the write-down of certain fixed asset and intangible asset impairments when compared to fiscal year 2008. Fiscal year 2009 operating expenses also benefited from reductions in certain variable expenses as a result of a reduction in wholesale sales. The increase in ourdirectDirect toconsumerConsumer operating expenses was primarily related to the impact of the direct operating costs associated with a net 30 new stores opened during fiscal year 2009 and expenses associated with the expansion of our e-commerce and catalog operations.For fiscal year 2010, we expect our operating expenses as a percentage of net sales to increase due to new retail door growth, the full year operating expense impact of the net 30 stores opened during fiscal year 2009 and the normalization of compensation and other expenses that had been reduced in response to the economic environment during fiscal year 2009.The following table sets forth
consolidatedoperating expensesbyon a segment basis andas athe relative percentage of operating expenses to net salesrelated tofor eachrespectivesegment for theperiods indicated.fiscal years indicated (in millions, except for percentage data):In Millions 2009 2008 Fiscal YearOperating
Expense% of Net
SalesOperating
Expense% of Net
SalesEurope wholesale
$ 146.0 32 % $ 170.5 32 % Other international wholesale
76.7 32 75.7 28 United States wholesale
109.1 23 134.2 28 Direct to consumer
222.6 59 183.4 59 Corporate
78.8 — 81.6 — Total
$ 633.2 41 % $ 645.4 41 % Fiscal Year
2009 2008 Operating Expense % of Net Sales Operating Expense % of Net Sales North America Wholesale
$ 118.9 21.6 % $ 144.9 25.8 % Europe Wholesale
146.0 31.3 170.3 30.9 Asia Pacific Wholesale
66.9 43.5 65.2 40.3 Direct to Consumer
222.6 59.2 183.4 59.3 Corporate
78.8 0.0 81.6 0.0 Total
$ 633.2 40.9 % $ 645.4 40.8 % Operating Income. Operating income increased by 2.8% to $211.6 million in fiscal year 2009 compared to $205.8 million in fiscal year 2008.
OperatingIn fiscal year 2009, operating income margin increased by 70 basis points to 13.7% of net sales compared to 13.0% in the prior fiscal year, principally as a result of gross margin expansion. Operating income included approximately $15.4 million of net currency losses in fiscal year 2009 related to the translation of foreign-based sales and expenses into U.S. dollars.Other Income (Expense)—Net. Other income (expense)—net primarily reflects interest income from investments, foreign currency transaction gains or losses and equity in the earnings or losses of our non-consolidated joint venture in Spain. During fiscal year 2009, other income (expense)—net
benefitedincreased by approximately $19.5 million as compared to fiscal year 2008, primarily driven by net foreign currency transaction gains in comparison to net losses in the prior fiscal year.Provision for Income Taxes. Our effective income tax rate was 34.4% during fiscal year 2009, compared to 27.0% in fiscal year 2008. The prior fiscal
year'syear’s income tax expense was favorably impacted by the recognition of previously unrecognized income tax benefits in connection with the completion of prior year income tax audits.For fiscal year 2010, we estimate our effective tax rate will approximate 36 to 37%, excluding any discrete events.Net
Income.Income Attributable to Fossil, Inc.Fiscal year 2009 net income attributable to Fossil, Inc. increased 0.8% to $139.2 million, or $2.07 per diluted share, in comparison to $138.1 million, or $2.02 per diluted share, in the prior fiscal year. Fiscal year 2009 earnings per diluted share of $2.07 included an approximate $0.07 diluted earnings per share benefit related tocurrency.foreign currency rate changes. Fiscal year 2008 diluted earnings per share included a benefit of approximately $0.20 per diluted share as a result of the reduction of certain tax reserves recorded in the fourth quarter of fiscal year 2008.Fiscal 2008 Compared to Fiscal 2007Net Sales.The following table illustrates by factor the total year-over-year percentage change in net sales by segment and on a consolidated basis:Exchange
RatesOrganic
GrowthTotal
ChangeEurope wholesale
2.7 % 6.8 % 9.5 % Other international wholesale
2.3 14.0 16.3 United States wholesale
— 2.6 2.6 Direct to consumer
(1.1 ) 22.3 21.2 Consolidated
1.1 % 9.4 % 10.5 % European Wholesale Net Sales.The following discussion excludes the impact on sales attributable to foreign currency rate changes as noted in the above table. Shipments from our European wholesale segment expanded in fiscal year 2008 as a result of sales volume growth in licensed brand watches, FOSSIL jewelry and watches, and to a lesser extent, leather goods and licensed brand jewelry. We experienced growth across most of our major licensed brand watch businesses, with EMPORIO ARMANI®, MICHAEL KORS and DIESEL® increasing 5.5%, 101.4% and 11.0% in fiscal year 2008, respectively. These sales increases were partially offset by a sales volume decline in DKNY watches of 8.6% that we attribute to a moderating consumer response to core styles within the assortment. Whereas EMPORIO ARMANI and DIESEL watches have been distributed in our European wholesale segment for some time, the growth in our MICHAEL KORS watch business was primarily related to the introduction of this brand in fiscal 2007 and continued door growth throughout fiscal 2008. FOSSIL jewelry, watch and leather sales rose 12.9%, 5.5% and 27.1% in fiscal year 2008, respectively. We believe this growth was the result of consumers' positive response to our repositioning of the brand towards a unique modern vintage styling and aspirational viewpoint as well as increased brand awareness generated by the accelerated growth in our European retail store base. The bulk of our leather business has historically been distributed through the U.S. department store channel. However, we were able to expand the presence of this business in Europe during fiscal 2008 through some of our wholesale partners based upon the visibility and success of this product category within our own retail stores. Licensed brand jewelry sales rose primarily as a result of the introduction of DKNY jewelry that commenced in the third quarter of fiscal 2008. DKNY jewelry contributed $4.6 million to sales during fiscal year 2008, which was partially offset by a planned decrease of 25.7% in ARMANI jewelry as we were updating the line to stainless steel.Other International Wholesale Net Sales.The following discussion excludes the impact on sales attributable to foreign currency rate changes as noted in the above table. The increase in wholesale shipments from our other international segment in fiscal year 2008 was the result of sales volume growth from our licensed brand and FOSSIL watches as well as increased penetration of our jewelry businesses. Increased licensed brand watch net sales were primarily attributable to EMPORIO ARMANI, DIESEL and MICHAEL KORS increasing 20.8%, 17.3% and 131.0%, respectively in fiscal year 2008, partially offset by a 10.1% decrease in DKNY. The decrease in our DKNY watch business was for similar reasons as explained above for our European wholesale segment. In fiscal 2008, the penetration levels of most of our businesses distributed in this region were much lower than those levels experienced in our U.S. and European wholesale markets. As a result, our growth in the other international segment in fiscal 2008 was primarily related to market share expansion in existing doors and growth in new doors as well as the recent expansion of our businesses into China, India and Korea. Additionally, introduction of new businesses, including MICHAEL KORS watches and OYZTERBAY, a regionally recognized jewelry brand in India acquired in the first half of fiscal 2008, and DKNY jewelry contributed a combined $8.3 million in net sales during fiscal year 2008.U.S. Wholesale Net Sales.During fiscal year 2008, the increase in wholesale watch shipments in the U.S. was primarily the result of sales volume growth in licensed brand and MICHELE watches, partially offset by a sales volume decrease in FOSSIL watches. Licensed brand watch sales included a 108.4% increase from MICHAEL KORS and a 33.9% increase from EMPORIO ARMANI. We attribute the increases for both of these businesses to further penetration of the lines in the department store channel and new doors being added for MICHAEL KORS. These increases were partially offset by DKNY watches, which experienced a 25.3% net sales volume decline. The decrease in our DKNY watch business was for similar reasons as explained above for our European wholesale segment. MICHELE watch sales volume rose 20.8% during fiscal year 2008, primarily as a result of a significant reduction in the level of returns experienced during the year as compared to the prior fiscal year. The increased level of returns in fiscal 2007 was primarily driven by an accommodation made to ship more new styles and by the manner in which product was shipped. Watch heads and straps were shipped assembled together as a complete watch rather than being shipped separately. As a result, end ofseason fashion watches had to be returned to change the straps to current fashion colors. During fiscal 2008, the FOSSIL watch business represented the highest penetration level of our fashion watch brands within the moderate department store environment. As a result, its growth was mostly predicated on the overall performance of the moderate department store channel. We believe the 6.1% net sales decline in FOSSIL watches to be representative of the deteriorating economic conditions in the U.S. throughout 2008, which resulted in lower traffic levels in department stores and an overall decline in department store sales during 2008.Wholesale shipments from our other products category in the U.S., decreased 0.9% during fiscal year 2008. This decrease is attributable to sales volume declines in FOSSIL men's and women's leather categories of 24.7% and 2.9%, respectively, and a decrease in RELIC eyewear net sales of 26.5%. These declines were mostly offset by a 28.4% increase in RELIC women's handbags and a 138.6% increase in FOSSIL accessory jewelry that was introduced in the fourth quarter of fiscal year 2007. The sales volume decreases in our FOSSIL men's and women's leather categories were indicative of a weak, highly promotional retail environment that resulted in increased levels of markdown contributions within the U.S. moderate department store channel that negatively impacted our sales. Sales volume decreases in RELIC eyewear were principally related to a reduction in market share due to a contraction in the number of displays within one of our major customers in fiscal year 2008 as compared to fiscal year 2007. However, our RELIC handbag line continued to be a top performer within its distribution channel in fiscal year 2008. We believe this business benefited from its relative value proposition and consumers selectively shopping for lower-priced goods as the economy softened throughout 2008.Direct to Consumer Net Sales.The following discussion excludes the impact on sales attributable to foreign currency rate changes as noted in the above table. Net sales from our direct to consumer segment increased 22.3% during fiscal year 2008, principally the result of a 28.5% increase in the average number of stores open during the year and comparable store sales increases of 2.3%. Additionally, contributing to our growth in the direct to consumer segment were our e-commerce businesses, which grew 22.9% during fiscal year 2008. This growth was attributable to increased sales from our German website that was launched during the second half of 2007, and to a lesser extent, a 6.5% increase in our U.S. based e-commerce business. Comparable store sales related to our full price accessory concept, which was our growth engine in this segment, increased by 2.1% globally while our global outlet stores experienced comparable store sales growth of 5.8% during fiscal year 2008.We ended fiscal year 2008 with 324 stores, including 191 full price accessory stores, 104 of which were located outside the U.S., 82 outlet locations, including 8 outside the U.S., 33 apparel stores and 18 multi-brand stores. This compares to 244 stores at the end of fiscal 2007, which included 113 full price accessory stores, 55 located outside the U.S., 80 outlet locations, including 6 outside the U.S., 33 apparel stores and 18 multi-branded stores. During fiscal year 2008, we opened 84 new stores, including 79 full-price accessory stores, and closed 4 stores.Gross Profit.Gross profit increased by 14.7% to $851.2 million in fiscal year 2008, with gross profit margin expanding by 200 basis points to 53.8% compared to 51.8% in the prior fiscal year. The gross profit margin improvement was principally the result of an increase in the sales mix of our higher margin direct to consumer and international wholesale segments and an approximate 40 basis point improvement relating to the average weaker U.S. dollar in comparison to fiscal year 2007. Gross profit margin also improved as a result of our internal initiative, begun in late 2007, to lower our product cost on newly developed styles.Operating Expenses.Total operating expenses of $645.4 million represented an increase of $89.8 million in comparison to the prior fiscal year and as a percentage of sales increased to 40.8% in fiscal year 2008 as compared to 38.8% in the prior fiscal year. Fiscal year 2008 operating expenses included approximately $7.3 million related to the translation impact of foreign-based expenses due toan average weaker U.S. dollar on a comparable year-over-year basis and approximately $10.6 million of non-cash charges related to the write-down of certain other than temporary investment, fixed asset, and intangible asset impairments. Fiscal year 2007 operating expenses included approximately $13.1 million related to our completed equity grant review. Additionally, the increase in operating expenses in fiscal year 2008 included an approximate $51 million increase in our direct to consumer segment and an approximate $36 million increase related to our wholesale businesses. The increase in our direct to consumer operating expenses primarily related to the impact of the direct operating costs associated with a net 80 new stores opened during fiscal year 2008, the expansion of our back office infrastructure to support a significantly higher number of stores opened globally and expenses associated with the expansion of our e-commerce and catalog operations. Operating expenses as a percentage of sales, excluding the impact of asset impairment charges and currency in fiscal year 2008 and expenses associated with our completed equity grant review in fiscal year 2007, increased 220 basis points compared to fiscal year 2007. Approximately $5 million, or 35 basis points, of this increase was due to the higher mix of direct to consumer expenses which partially offset the benefit of a higher gross margin resulting from increased direct to consumer sales. An additional $29.0 million in expenses, or 185 basis points, was related to our expenses growing at a slightly higher rate than sales, primarily due to lower fourth quarter sales than originally projected and the expansion of our retail back office infrastructure during fiscal year 2008.The following table sets forth consolidated operating expenses by segment and the percentage of net sales related to each respective segment for the periods indicated:In Millions 2008 2007 Fiscal YearOperating
Expense% of Net
SalesOperating
Expense% of Net
SalesEurope wholesale
$ 170.5 32 % $ 144.2 30 % Other international wholesale
75.7 28 64.4 28 United States wholesale
134.2 28 124.5 27 Direct to consumer
183.4 59 131.6 52 Corporate
81.6 — 90.8 — Total
$ 645.4 41 % $ 555.5 39 % Operating Income.Operating income increased 10.3% to $205.8 million in fiscal year 2008, compared to $186.5 million in fiscal year 2007. Operating income margin remained unchanged at 13.0% in fiscal year 2008 as compared to the prior fiscal year, as increased gross profit margin was offset by an increase in operating expenses as a percentage of net sales. Operating income included approximately $6.7 million of net currency gains in fiscal year 2008 related to the translation of foreign-based sales and expenses into U. S. dollars.Other Income (Expense)—Net.During fiscal year 2008, other income (expense)—net increased unfavorably by approximately $19.3 million as compared to fiscal year 2007, primarily driven by increased foreign currency transaction losses partially offset by forward contract gains. As the U.S. dollar strengthened during the second half of fiscal year 2008, we recognized currency losses related to foreign currency payable balances denominated in U.S. dollars.Income Taxes.Our effective income tax rate, attributable to Fossil, Inc. was 27.0% during fiscal year 2008 compared to 33.7% in fiscal year 2007. The lower effective tax rate in fiscal year 2008 was primarily attributable to the recognition of previously unrecognized income tax benefits in connection with the completion of prior year income tax audits.Net Income.Fiscal year 2008 net income attributable to Fossil, Inc. increased 12.0% to $138.1 million, or $2.02 per diluted share, in comparison to $123.3 million, or $1.75 per diluted share, in the prior year period. The fiscal year 2008 earnings per diluted share of $2.02 included an approximate $0.20 per diluted share benefit from a lower effective tax rate partially offset by an unfavorable $0.13 per diluted share impact related to currency and a $0.11 per diluted share charge for impairment. The fiscal year 2007 earnings per share of $1.75 included an approximate $0.13 per diluted share charge related to expenses associated with the Company's completed equity grant review.Effects of Inflation
We do not believe that inflation has had a material impact on our results of operations for the periods presented. Substantial increases in costs, however, could have an impact on us and the industry. We believe that, to the extent inflation affects our costs in the future, we could generally offset inflation by increasing prices if competitive conditions permit.
Liquidity and Capital Resources
Historically, our business operations have not required substantial cash during the first
quarterseveral months of our fiscal year. Generally, starting in the second quarter, our cash needs begin to increase, typically reaching a peak in the September-November time frame as we increase inventory levels in advance of the holiday season. Our quarterly cash requirements are also impacted by the number of new stores weopen.open, other capital expenditures, and the amount of any discretionary stock repurchases we make.OurNet cash provided by operating activities of $209.2 million in fiscal year 2010 was more than offset by cash used in investing and financing activities of $47.5 million and $170.6 million respectively, resulting in a $12.4 million decrease in cash and cash
equivalent balances as ofequivalents since the end of fiscal year20092009. During fiscal year 2010, net cash provided by operating activities consisted of net income of $264.9 million and favorable non-cash activities of $81.7 million, partially offset by unfavorable decreases in working capital of $137.4 million. During fiscal year 2010, cash used in investing activities were primarily driven by $46.5 million in capital expenditures. During fiscal year 2010, cash used in financing activities were principally comprised of $199.2 million of common stock repurchases, partially offset by a $23.4 million in proceeds relating to the exercise of stock options. Foreign exchange rate translations decreased cash and cash equivalents by $3.4 million during fiscal year 2010.Accounts receivable increased by 25.5% to
$405.2$263.2 million during fiscal year 2010 compared to $209.8 million at the end of the prior fiscal year, primarily due to an increase in wholesale shipments. Average days sales outstanding for our wholesale segments for fiscal year 2010 was 48 days in comparison to$172.054 days in the prior fiscal year.Inventory at the end of fiscal year 2010 was $371.9 million, representing an increase of 51.4% from the prior fiscal year inventory balance of $245.7 million. This increase was primarily attributable to the following three factors: (i) In the fourth quarter of fiscal year 2009, inventory levels decreased 16% while net sales increased 14%. Thus on a two fiscal year basis, inventory levels were much more consistent with the sales increases, (ii) Fiscal year 2010 ending inventory was impacted by a forward shift in the Chinese New Year which added approximately $30 million in inventory receipts and in-transit shipments to the fourth quarter 2010 fiscal year inventory levels. In comparison to the comparable period of fiscal year 2009, the deliveries related to the timing of Chinese New Year did not occur until the first quarter of fiscal year 2010, and (iii) Since the second quarter of fiscal year 2010, we have been implementing a “smoothing effort” to remove part of the peaks and valleys associated with the timing of production needs while still supplying us with inventory levels sufficient to service our sales and store growth.
During fiscal year 2009, our Board of Directors approved a stock repurchase program pursuant to which $20 million could be used to repurchase outstanding shares of our common stock. We did not repurchase any shares under this authorization during fiscal year 2009. During fiscal year 2010, we repurchased approximately 528,000 shares of common stock to complete this repurchase program. In fiscal year 2010, our Board of Directors approved two additional common stock repurchase programs pursuant to which up to $30 million and $750 million, respectively, could be used to repurchase outstanding shares of our common stock. The $750 million repurchase program has a termination date of December 2013 and the $30 million repurchase program has no termination date. We repurchased 3.1 million shares under the $750 million repurchase program during fiscal year 2010 at a cost of $179.2 million. Both of these repurchase programs were conducted pursuant to Rule 10b-18 of the Securities Exchange Act of 1934.
At the end of fiscal year 2010, we had working capital of $801.3 million compared to working capital of $701.2 million at the end of the prior fiscal year.
Of the $405.2 million of cash and cash equivalents at fiscal year end 2009, $270.4 million was held in banks outside the U.S. The increase in our cash holdings is primarily the result of $266.0 million of net cash generated from operating activities partially offset by $38.3 million of cash used in investing activities. Cash flows generated from operating activities were principally driven by net income of $144.3 million, non-cash items of approximately $57.6 million and $44.6 million related to decreased inventory balances. Cash used in investing activities was primarily related to fixed asset additions of $37.7 million.Accounts receivable at the end of fiscal year 2009 increased by 1.9% to $209.8 million compared to $206.0 million at the end of fiscal year 2008, primarily due to an increase in wholesale shipments during the fourth quarter of fiscal 2009 versus the comparable prior year period. Average day's sales outstanding for our wholesale segments decreased to 54 days in fiscal year 2009 from 58 days in the prior fiscal year, primarily driven by a reduction in sales mix of internationally-based sales that generally result in longer collection cycles than those experienced in the U.S. Inventory at fiscal year end 2009 was $245.7 million, representing a decrease of 15.8% from the 2008 fiscal year-end balance of $292.0 million. Our inventory decline for fiscal 2009 is well above our net sales decline of 2.2%At the end of fiscal year 2009,Additionally, we hadworking capital of $701.2 million compared to $556.5 million at the end of the prior fiscal year. We hadapproximately$8.1 million of total indebtedness at the end of fiscal 2009, consisting of $3.6 million of short-term borrowings and $4.5 million of long-term debt. This compares to total indebtedness of $10.0 million in fiscal 2008, consisting of$5.3 million of outstanding short-term borrowings and$4.7$4.5 millionofin long-term debt.The majorityOn December 17, 2010, we and certain of ourshort-termsubsidiaries entered into a Credit Agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association (“Wells Fargo”), as administrative agent, swingline lender and issuing lender, Wells Fargo Securities, LLC, as sole lead arranger and sole book manager and Bank of America, N.A., as lender. The Credit Agreement provides for revolving credit loans in the amount of $300 million (the “Revolver”), a swingline loan of $20 million, and the provision for letters of credit. The Revolver increased our borrowing capability from $100 million to $300 million as it replaced the Loan Agreement dated as of September 23, 2004, as amended by and between us and certain of our subsidiaries. We had no outstanding borrowingsare attributable to our Japan subsidiary, which ended fiscal 2009 with short-term borrowings of approximately $3.2 million, compared to $4.9 millionunder the Revolver at the end of fiscal2008. These borrowings areyear 2010. Amounts outstanding under the Revolver bear interest at our option of (i) the base rate (defined as the higher of (a) the prime rate publicly announced by Wells Fargo, (b) the federal funds rate plus 1.50% and (c) LIBOR plus 1.50%) plus the base rate applicable margin (which varies based upon our consolidated leverage ratio (the “Ratio”) from 0.25% if the Ratio is less than 1.00 to 1.00 to 1.00% if the Ratio isgreater than or equal to 2.00 to 1.00) or (ii) the LIBOR rate (defined as the quotient obtained by dividing (a) LIBOR by (b) 1.00 minus the Eurodollar reserve percentage) plus the LIBOR rate applicable margin (which varies based upon the Ratio from 1.25% if the Ratio is less than 1.00 to 1.00 to 2.00% if the Ratio is greater than or equal to 2.00 to 1.00). Amounts outstanding under the swingline loan under the Credit Agreement or upon any drawing under a letter of credit bear interest at the base rate plus the base rate applicable margin. We had $0.4 million of outstanding standby letters of credit at January 1, 2011 that reduce amounts available under the Revolver. In December 2010, our Japanese subsidiary, Fossil Japan, entered into a new 400 million Yen short-term credit facility agreement (the “Facility”). The Facility replaced two separate 150 million Yen short-term credit facilities
(approximately $3.2 million U.S. dollars based uponpreviously utilized for thefiscal year end 2009 Yen exchange rate to the U.S. dollar), one bearingworking capital needs of Fossil Japan. The Facility bears interest at the short-term prime rate (1.475% at fiscalyear-end 2009) and one bearing interest based upon the Tokyo Interbank Offer Rate (1.475% as of fiscal year-end 2009)year end 2010).Borrowings under these Japanese facilities are primarily related to working capital needs and are due in March 2010.At the end of fiscal year
2009,2010, we had approximately $4.9 million of outstanding borrowings under themajorityFacility which are included in short-term borrowings. At January 1, 2011, we were in compliance with all debt covenants related to our credit facilities.At the end of
ourfiscal year 2010, we had approximately $4.5 million of outstanding long-termdebt is attributableborrowings, of which $3.9 million was related to our wholly-owned subsidiary, Fossil Group Europe, Gmbh,("FGE"). FGE had outstanding long-term borrowingsin the form of a termnote of $3.6 million at the end of fiscal year 2009 compared to approximately $3.5 million at the end of fiscal year 2008.note. This note has a variable interest term with an interest rate at the end of fiscal year 2010 of 2.0%at year-end fiscal 2009with interest payments due quarterly. This note requires minimum principal payments of 100,000 Swiss Francs each year with no stated maturity and no penalties for early termination.At the end of fiscal year 2009, we had no outstanding borrowings under our $100 million U.S. Short-Term Revolving Credit Facility ("the Revolver") with Wells Fargo Bank, N.A. ("Wells Fargo"). Amounts outstanding under the Revolver bear interest at our option of (i) the lesser of (a) the higher of the prime rate (3.25% at fiscal year-end 2009) plus 1.5% or 3% or (b) the maximum rate allowed by law or (ii) the London Interbank Offer Rate, ("LIBOR"), base rate (0.23% at fiscal year-end 2009) plus one-half percent. The Revolver is secured by 65% of the issued and outstanding shares of certain of our subsidiaries pursuant to a Stock Pledge Agreement and requires the maintenance of net worth, quarterly income, working capital and certain financial ratios. The Revolver has an expiration date in November 2010 and allows for an increase from $100 million to $200 million upon our request and approval of Wells Fargo. Available borrowings under our Revolver are reduced by $32.2 million of open letters of credit and by amounts outstanding under foreign based borrowing arrangements. At the end of fiscal year 2009, we had available borrowings of approximately $67.8 million under the Revolver and we were in compliance with all debt covenants.During fiscal year
2010,2011, we anticipate total capital expenditures of approximately$55 million$100 million. This planned increase in capital expenditure levels is principally related to$65 million principally to supportaccelerating newcompany-owned retailstore openingsstore remodels, the costs associated with the continued roll-out of a SAP point of sale system forand increasing ourcompany-owned retail stores which began in fiscal 2009infrastructure capacity across our sales, distribution, supply chain andother general maintenance capital requirements.back office functions. We believe that cashflowflows from operations combined with existing cash on handand, if necessary, amounts available under our Revolverwill be sufficient to fund our working capital needs, common stock repurchases andplannedcapital expenditures plans for the next twelve months. We also have access to amounts available under our credit facilities should additional funds be required.Contractual Obligations
Total Less than
1 Year1-3
Years3-5
YearsMore than
5 Years(in thousands) Debt obligations(1)
$ 6,908 $ 3,321 $ 194 $ 194 $ 3,199 Minimum royalty payments(2)
224,029 60,363 107,881 55,785 — Capital lease obligations
1,277 308 598 371 — Operating lease obligations
398,090 63,712 108,839 88,318 137,221 Purchase obligations(3)
85,089 84,799 290 — — Uncertain tax positions(4)
17,018 17,018 — — — Total contractual cash obligations
$ 732,411 $ 229,521 $ 217,802 $ 144,668 $ 140,420 (1)ConsistsThe following table identifies contractual obligations as ofborrowings in Japan and Switzerland, excluding contractual interest payments that are variable in nature.(2)Consists primarily of exclusive licenses to manufacture watches and jewelry under trademarks not owned by us. Also includes amounts owed pursuant to various license and design service agreements under which we are obligated to pay the licensors a percentage of our net sales of these licensed products, subject to minimum scheduled royalty, design and advertising payments.
January 1, 2011 (in thousands).Total Less than
1 Year1-3
Years3-5
YearsMore than
5 yearsDebt obligations (1)
$ 8,886 $ 5,031 $ 206 $ 206 $ 3,443 Minimum royalty payments (2)
269,835 84,882 138,338 46,615 0 Capital lease obligations
968 292 585 91 0 Operating lease obligations
422,240 73,742 128,027 95,853 124,618 Purchase obligations (3)
123,969 123,969 0 0 0 Uncertain tax positions (4)
2,677 2,677 0 0 0 Total contractual cash obligations
$ 828,575 $ 290,593 $ 267,156 $ 142,765 $ 128,061 (3)Consists primarily of outstanding letters of credit, which represent inventory purchase commitments that typically mature in one to eight months and open non-cancelable purchase orders.(4)Management has only included its current ASC 740 liability in the table above. Long-term amounts of $17.0 million have been excluded because the payment timing cannot be reasonably estimated.
(1) Consists of borrowings in Japan and Switzerland, excluding contractual interest payments that are variable in nature. (2) Consists primarily of exclusive licenses to manufacture watches and jewelry under trademarks not owned by us. Also includes amounts owed pursuant to various license and design service agreements under which we are obligated to pay the licensors a percentage of our net sales of these licensed products, subject to minimum scheduled royalty, design and advertising payments. (3) Consists primarily of outstanding letters of credit, which represent inventory purchase commitments that typically mature in one to eight months and open non-cancelable purchase orders. (4) Management has only included its current ASC 740 liability in the table above. Long-term amounts of $8.2 million have been excluded because the payment timing cannot be reasonably estimated. Off Balance Sheet Arrangements
None.NoneSelected Quarterly Financial Data
The table below sets forth selected quarterly financial information. The information is derived from our unaudited consolidated financial statements and includes, in the opinion of management, all normal and recurring adjustments that management considers necessary for a fair statement of results for such periods. The operating results for any quarter are not necessarily indicative of results for any future period. Certain line items presented in the tables below, when aggregated, may not agree with the corresponding line items on
the Company'sour Consolidated Statements of Income and Comprehensive Income for fiscal years20092010 and20082009 due torounding.Fiscal Year 20091st Qtr 2nd Qtr 3rd Qtr 4th Qtr AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE DATANet sales
$ 323,027 $ 315,865 $ 381,362 $ 527,839 Gross profit
169,379 167,182 210,737 297,552 Operating expenses
145,576 144,706 153,373 189,568 Operating income
23,803 22,476 57,364 107,984 Income before income taxes
28,423 26,957 55,654 108,864 Provision for income taxes
9,927 9,709 19,109 36,859 Net income
18,496 17,248 36,545 72,005 Net income attributable to noncontrolling interest
1,176 625 1,270 2,034 Net income attributable to Fossil, Inc.
17,320 16,623 35,275 69,971 Earnings per share:
Basic
0.26 0.25 0.53 1.05 Diluted
0.26 0.25 0.52 1.03 Gross profit as a percentage of net sales
52.4 % 52.9 % 55.3 % 56.4 % Operating expenses as a percentage of net sales
45.1 % 45.8 % 40.2 % 35.9 % Operating income as a percentage of net sales
7.4 % 7.1 % 15.0 % 20.5 % Table of Contentsrounding (in thousands, except per share data).Fiscal Year 2010
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Net sales
$ 393,229 $ 412,560 $ 523,825 $ 701,076 Gross profit
219,419 236,885 298,743 400,118 Operating expenses
168,156 172,539 187,473 250,582 Operating income
51,263 64,346 111,270 149,536 Income before income taxes
53,739 64,524 111,257 154,690 Provision for income taxes
16,043 7,965 40,353 54,959 Net income
37,696 56,559 70,904 99,731 Net income attributable to noncontrolling interest
1,789 2,074 2,748 3,074 Net income attributable to Fossil, Inc.
35,907 54,485 68,156 96,657 Comprehensive income
25,496 43,323 88,705 92,324 Comprehensive income attributable to noncontrolling interest
1,780 2,062 2,764 3,084 Comprehensive income attributable to Fossil, Inc.
23,716 41,261 85,941 89,240 Earnings per share:
Basic
0.54 0.81 1.02 1.48 Diluted
0.53 0.80 1.00 1.46 Gross profit as a percentage of net sales
55.8 % 57.4 % 57.0 % 57.1 % Operating expenses as a percentage of net sales
42.8 % 41.8 % 35.8 % 35.7 % Operating income as a percentage of net sales
13.0 % 15.6 % 21.2 % 21.3 % Fiscal Year 2009
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Net sales
$ 323,027 $ 315,865 $ 381,362 $ 527,839 Gross profit
169,379 167,182 210,737 297,552 Operating expenses
145,576 144,706 153,373 189,568 Operating income
23,803 22,476 57,364 107,984 Income before income taxes
28,423 26,957 55,654 108,864 Provision for income taxes
9,927 9,709 19,109 36,859 Net income
18,496 17,248 36,545 72,005 Net income attributable to noncontrolling interest
1,176 625 1,270 2,034 Net income attributable to Fossil, Inc.
17,320 16,623 35,275 69,971 Comprehensive income
9,565 25,909 43,209 75,924 Comprehensive income attributable to noncontrolling interest
1,174 627 1,265 2,039 Comprehensive income attributable to Fossil, Inc.
8,391 25,282 41,944 73,885 Earnings per share:
Basic
0.26 0.25 0.53 1.05 Diluted
0.26 0.25 0.52 1.03 Gross profit as a percentage of net sales
52.4 % 52.9 % 55.3 % 56.4 % Operating expenses as a percentage of net sales
45.1 % 45.8 % 40.2 % 35.9 % Operating income as a percentage of net sales
7.4 % 7.1 % 15.0 % 20.5 % Fiscal Year 20081st Qtr 2nd Qtr 3rd Qtr 4th Qtr AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE DATANet sales
$ 356,184 $ 353,191 $ 409,760 $ 464,106 Gross profit
194,251 190,339 224,177 242,384 Operating expenses
145,136 155,378 160,439 184,427 Operating income
49,115 34,961 63,738 57,957 Income before income taxes
49,039 33,654 60,967 50,544 Provision for income taxes
17,888 7,147 23,447 3,869 Net income
31,151 26,507 37,520 46,675 Net income attributable to noncontrolling interest
934 1,370 1,049 403 Net income attributable to Fossil, Inc
30,217 25,137 36,471 46,272 Earnings per share:
Basic
0.44 0.37 0.54 0.70 Diluted
0.43 0.36 0.54 0.69 Gross profit as a percentage of net sales
54.5 % 53.9 % 54.7 % 52.2 % Operating expenses as a percentage of net sales
40.7 % 44.0 % 39.2 % 39.7 % Operating income as a percentage of net sales
13.8 % 9.9 % 15.6 % 12.5 % While the majority of our products are not seasonal in nature, a significant portion of our net sales and operating income is generally derived in the second half of the fiscal year. Our third and fourth quarters, which include the
"back“back toschool"school” and Christmas season, have historically generated a significant portion of our annualoperating income. The amount of net sales and operating income generated during the first quarter is affected by the levels of inventory held by retailers at the end of the Christmas season, as well as general economic conditions and other factors beyond our control. In general, lower levels of inventory held by retailers at the end of the Christmas season may have a positive impact on our net sales and operating income in the first quarter of the following fiscal year as a result of higher levels of restocking orders placed by retailers. We currently believe that our inventory levels
for certainat those of our largest customers in the U.S. which we have sufficient information to form an opinion were near their targeted inventory levels at the end of fiscal year2009 were below their targeted inventory levels.2010.As we
continue to growexpand our retail store base and e-commerce businesses, sales from ourdirectDirect toconsumerConsumer segment may increase as a percentage of the total salesmix, benefitingmix. Based upon theCompany'shistorical seasonality of sales in our Direct to Consumer segment, we believe this expansion could result in higher levels of profitability in the fourth quartergenerally at the expenseand lower levels of profitability in the first and second quarters when, due to seasonality, it is more difficult to leveragedirect to consumerfour wall operating costs and back office expenses againstdirect to consumer sales.a lower level of sales productivity. In addition, new product launches would generally augment the sales and operating expense levels in the quarter the product launch takes place. The results of operations for a particular quarter may also vary due to a number of factors, including retail, economic and monetary conditions, timing of orders or holidays and the mix of products sold by us.Item 7A. Quantitative and Qualitative Disclosures about Market Risk Item 7A. Quantitative and Qualitative Disclosures about Market RiskAs a multinational enterprise, we are exposed to changes in foreign currency exchange rates. Our most significant foreign currency risk relates to the Euro and, to a lesser extent, the British Pound, Australian Dollar, Canadian Dollar, Japanese Yen and Mexican Peso as compared to the U.S. dollar. Due to our vertical nature whereby a significant portion of goods are sourced from our owned facilities, the foreign currency risks relate primarily to the necessary current settlement of intercompany inventory transactions. We employ a variety of operating practices to manage these market risks relative to foreign currency exchange rate changes and, where deemed appropriate, utilize foreign currency forward contracts. These operating practices include, among others, our ability to convert foreign currency into U.S. dollars at spot rates and to maintain U.S. dollar pricing relative to sales of our products to certain distributors located outside the U.S. The use of foreign currency forward contracts allows us to offset exposure to rate fluctuations because the gains or losses incurred on the derivative
instruments will offset, in whole or in part, losses or gains on the underlying foreign currency exposure. We use derivative instruments only for risk management purposes and do not use them for speculation or for trading. There were no significant changes in how we managed foreign currency transactional exposure in fiscal year
20092010 and management does not anticipate any significant changes in such exposures or in the strategies we employ to manage such exposure in the near future.At January
2, 2010,1, 2011, we had outstanding foreign exchange contracts to sell84.796.9 million Euro for approximately$121.5$126.2 million, expiring throughDecember 2010, 2.0April 2012, 4.1 billion Japanese Yen for approximately$21.8$46.9 million, expiring through December 2012, 15.7 million British Pounds for approximately $25.0 million, expiring through April 2012, 22.3 million Australian Dollars for approximately $19.6 million, expiring through May 2012, 33.7 million Mexican Pesos for approximately $2.6 million, expiring through June 20113.0 million British Pounds for approximately $4.7 million, expiring through June 2010, 7.0 million Australian Dollars for approximately $5.8 million, expiring through June 2010, 31.4 million Mexican Pesos for approximately $2.4 million, expiring through June 2010and10.510.1 million Canadian Dollars for approximately$10.0$9.9 million, expiring throughJanuaryDecember 2011. If we were to settle our Euro, Japanese Yen, British Pound, Australian Dollar, Mexican Peso and Canadian Dollar based contracts at fiscalyear-end 2009,year end 2010, the net result would be a net loss of approximately$17,000,$6.1 million, net of taxes.At fiscal
year-end 2009,year end 2010, a 10% unfavorable change in the U.S. dollar strengthening against foreign currencies to which we have balance sheet transactional exposures would have reduced net pre-tax income by$9.6$13.4 million. The translation of the balance sheets of our foreign-based operations from their local currencies into U.S. dollars is also sensitive to changes in foreign currency exchange rates. At fiscalyear-end 2009,year end 2010, a 10% unfavorable change in the exchange rate of the U.S. dollar strengthening against the foreign currencies to which we have exposure would have reduced consolidatedstockholders'stockholders’ equity by approximately$38.5$34.9 million. In the view of management, these hypothetical losses resulting from these assumed changes in foreign currency exchange rates are not material to our consolidated financial position, results of operations or cash flows.Item 8. Financial Statements and Supplementary DataItem 8. Financial Statements and Supplementary Data REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Fossil, Inc.
Richardson, Texas
We have audited the accompanying consolidated balance sheets of Fossil, Inc. and subsidiaries (the
"Company"“Company”) as of January2, 20101, 2011 and January3, 2009,2, 2010, and the related consolidated statements of income,and comprehensive income, stockholders'stockholders’ equity, and cash flows for each of the three years in the period ended January2, 2010.1, 2011. Our audits also included the consolidated financial statement schedule listed in the Index at Item 15. These consolidated financial statements and consolidated financial statement schedule are the responsibility of theCompany'sCompany’s management. Our responsibility is to express an opinion on the consolidated financial statements and consolidated financial statement schedule based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(U.S.)(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Fossil, Inc. and subsidiaries as of January
2, 20101, 2011 and January3, 2009,2, 2010, and the results of their operations and their cash flows for each of the three years in the period ended January2, 2010,1, 2011, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, suchconsolidatedfinancial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for noncontrolling interest in accordance with Accounting Standard Codification 810,Consolidations(formerly Statement of Financial Accounting Standards No. 160Noncontrolling Interests in Consolidated Financial Statements) and retrospectively adjusted all periods presented in the consolidated financial statements.We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
Company'sCompany’s internal control over financial reporting as of January2, 2010,1, 2011, based on the criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our reportdated March 3, 2010,datedMarch 2, 2011 expressed an unqualified opinion on theCompany'sCompany’s internal control over financial reporting./s/
DELOITTEDELOITTE &TOUCHETOUCHE LLPDallas, Texas
March
3, 20102, 2011FOSSIL, INC.
CONSOLIDATED BALANCE SHEETSAMOUNTSIN THOUSANDS
Fiscal YearFiscal Year2009 2008 2010 2009 Assets
Assets
Current assets:
Current assets:
Cash and cash equivalents
$ 392,794 $ 405,175 Securities available for sale
8,864 7,995 Accounts receivable - net
263,218 209,784 Inventories
371,935 245,714 Deferred income tax assets - net
41,836 28,937 Prepaid expenses and other current assets
62,170 48,868 Cash and cash equivalents
$ 405,175 $ 172,012 Securities available for sale
7,995 6,436 Accounts receivable—net
209,784 205,973 Inventories—net
245,714 291,955 Deferred income tax assets—net
28,937 27,006 Prepaid expenses and other current assets
48,868 60,084 Total current assets
1,140,817 946,473 Total current assets
946,473 763,466 Investments
Investments
13,730 13,011 9,023 13,730 Property, plant and equipment—net
212,367 207,328 Property, plant and equipment - net
217,424 212,367 Goodwill
Goodwill
44,266 43,217 44,572 44,266 Intangible and other assets—net
59,647 60,274 Intangible and other assets - net
55,737 59,647 Total long-term assets
326,756 330,010 Total long-term assets
330,010 323,830 Total assets
$ 1,467,573 $ 1,276,483 Total assets
$ 1,276,483 $ 1,087,296 Liabilities and Stockholders' Equity
Liabilities and Stockholders' Equity
Current liabilities:
Current liabilities:
Accounts payable
$ 122,266 $ 103,591 Short-term debt
5,314 3,618 Accrued expenses:
Compensation
51,374 39,773 Royalties
39,731 16,774 Co-op advertising
23,101 18,498 Transaction taxes
18,894 11,151 Other
50,779 18,467 Income taxes payable
28,029 33,408 Short-term debt
$ 3,618 $ 5,271 Accounts payable
103,591 91,027 Accrued expenses:
Compensation
39,773 34,091 Royalties
16,774 17,078 Co-op advertising
18,498 21,869 Other
29,618 30,306 Income taxes payable
33,408 7,327 Total current liabilities
339,488 245,280 Total current liabilities
245,280 206,969 Long-term income taxes payable
Long-term income taxes payable
18,840 38,784 9,088 18,840 Deferred income tax liabilities
Deferred income tax liabilities
27,039 22,880 47,893 27,039 Long-term debt
Long-term debt
4,538 4,733 4,513 4,538 Other long-term liabilities
Other long-term liabilities
12,374 8,567 14,883 12,374 Total long-term liabilities
76,377 62,791 Commitments and contingencies (Note 13)
Total long-term liabilities
62,791 74,964 Stockholders' equity:
Stockholders' equity:
Common stock, 67,882 and 66,900 shares issued for 2010 and 2009, respectively
679 669 Treasury Stock, at cost, 3,206 shares in 2010
(183,014 ) 0 Additional paid-in capital
117,215 93,037 Retained earnings
1,089,820 834,615 Accumulated other comprehensive income
19,418 34,460 Noncontrolling interest
7,590 5,631 Common stock, 66,900 and 66,502 shares issued for 2009 and 2008, respectively
669 665 Total stockholders' equity
1,051,708 968,412 Additional paid-in capital
93,037 81,905 Total liabilities and stockholders' equity
$ 1,467,573 $ 1,276,483 Retained earnings
834,615 695,427 Accumulated other comprehensive income
34,460 24,147 Noncontrolling interest
5,631 3,219 Total stockholders' equity
968,412 805,363 Total liabilities and stockholders' equity
$ 1,276,483 $ 1,087,296 See notes to the consolidated financial statements.
FOSSIL, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOMEAMOUNTSIN THOUSANDS, EXCEPT PER SHARE DATA
Fiscal YearFiscal Year2009 2008 2007 2010 2009 2008 Net sales
Net sales
$ 1,548,093 $ 1,583,242 $ 1,432,984 $ 2,030,690 $ 1,548,093 $ 1,583,242 Cost of sales
Cost of sales
703,243 732,091 690,953 875,526 703,243 732,091 Gross profit
1,155,164 844,850 851,151 Gross profit
844,850 851,151 742,031 Operating expenses:
Operating expenses:
Selling and distribution
478,637 489,600 398,602 General and administrative
154,586 155,781 156,944 Selling and distribution
583,860 478,637 489,600 General and administrative
194,890 154,586 155,781 Total operating expenses
Total operating expenses
633,223 645,381 555,546 778,750 633,223 645,381 Operating income
Operating income
211,627 205,770 186,485 376,414 211,627 205,770 Interest expense
Interest expense
235 555 890 1,119 235 555 Other income (expense)—net
8,506 (11,011 ) 8,319 Other income (expense) - net
8,915 8,506 (11,011 ) Income before income taxes
Income before income taxes
219,898 194,204 193,914 384,210 219,898 194,204 Provision for income taxes
Provision for income taxes
75,604 52,351 65,426 119,320 75,604 52,351 Net income
144,294 141,853 128,488 Less: Net income attributable to noncontrolling interest
5,106 3,756 5,227 Net income
264,890 144,294 141,853 Less: Net income attributable to noncontrolling interest
9,685 5,106 3,756 Net income attributable to Fossil, Inc.
Net income attributable to Fossil, Inc.
$ 139,188 $ 138,097 $ 123,261 $ 255,205 $ 139,188 $ 138,097 Other comprehensive income (loss), net of taxes:
Currency translation adjustment
13,584 (18,790 ) 20,215 Other comprehensive (loss) income, net of taxes:
Currency translation adjustment
(9,909 ) 13,584 (18,790 ) Unrealized gain (loss) on securities available for sale
554 1,093 (749 ) Forward contracts hedging intercompany foreign currency payments - change in fair values
(5,687 ) (4,364 ) 7,213 Unrealized gain (loss) on securities available for sale
1,093 (749 ) (707 ) Total comprehensive income
249,848 154,607 129,527 Less: Comprehensive income attributable to noncontrolling interest
9,690 5,105 3,752 Forward contracts hedging intercompany foreign currency payments—change in fair values
(4,364 ) 7,213 (3,060 ) Total comprehensive income
154,607 129,527 144,936 Less: Comprehensive income attributable to noncontrolling interest
5,105 3,752 5,223 Comprehensive income attributable to Fossil, Inc.
$ 149,502 $ 125,775 $ 139,713 Comprehensive income attributable to Fossil, Inc.
$ 240,158 $ 149,502 $ 125,775 Earnings per share:
Earnings per share:
Basic
$ 3.83 $ 2.09 $ 2.05 Basic
$ 2.09 $ 2.05 $ 1.81 Diluted
$ 2.07 $ 2.02 $ 1.75 Diluted
$ 3.77 $ 2.07 $ 2.02 Weighted average common shares outstanding:
Weighted average common shares outstanding:
Basic
66,701 66,684 67,525 Basic
66,684 67,525 68,213 Diluted
67,687 67,153 68,323 Diluted
67,153 68,323 70,333 See notes to the consolidated financial statements.
Table of ContentsFOSSIL, INC.FOSSIL, INC.
CONSOLIDATED STATEMENTS OFSTOCKHOLDERS'STOCKHOLDERS’ EQUITYAMOUNTSIN THOUSANDS
Accumulated other
comprehensive income (loss)Common
stockUnrealized
gain (loss) on
securities available
for saleUnrealized
gain (loss)
on forward
contractsShares Par
valueAdditional
paid-in
capitalTreasury
stockRetained
earningsCumulative
translation
adjustmentNet
Parent
InvestmentNoncontrolling
InterestTotal
Stockholders'
EquityBalance, January 6, 2007
67,794 $ 678 $ 53,459 $ (1,337 ) $ 529,376 $ 20,344 $ 19 $ (338 ) $ 602,201 $ 4,102 $ 606,303 Common stock issued upon exercise of stock options and stock appreciation rights
2,330
23
28,414
623
—
—
—
—
29,060
—
29,060Tax benefit derived from stock-based compensation
— — 17,727 — — — — — 17,727 — 17,727 Repurchase and retirement of common stock
(498 ) (5 ) (18,783 ) 2,579 — — — — (16,209 ) — (16,209 ) Restricted stock issued in connection with deferred compensation plan
87 1 (1 ) — — — — — — — — Restricted stock forfeiture put to treasury
— — 1,035 (1,865 ) — — — — (830 ) — (830 ) Stock-based compensation expense
— — 6,149 — — — — — 6,149 — 6,149 FIN 48 adoption
— — — — (6,145 ) — — — (6,145 ) — (6,145 ) Net income
— — — — 123,261 — — — 123,261 5,227 128,488 Unrealized loss on securities available for sale
— — — — — — (707 ) — (707 ) — (707 ) Purchase of Noncontrolling Interest
— — — — — — — — — (989 ) (989 ) Currency translation adjustment
— — — — — 20,215 — — 20,215 (4 ) 20,211 Distribution of noncontrolling interest earnings
— — — — — — — — — (2,209 ) (2,209 ) Forward contracts hedging intercompany foreign currency payments—change in fair values
— — — — — — — (3,060 ) (3,060 ) — (3,060 ) Balance, January 5, 2008
69,713 697 88,000 — 646,492 40,559 (688 ) (3,398 ) 771,662 6,127 777,789 Common stock issued upon exercise of stock options and stock appreciation rights
326 3 4,142 764 — — — — 4,909 — 4,909 Tax expense derived from stock-based compensation
— — (447 ) — — — — — (447 ) — (447 ) Repurchase and retirement of common stock
(3,660 ) (36 ) (17,353 ) 678 (89,162 ) — — — (105,873 ) — (105,873 ) Restricted stock issued in connection with deferred compensation plan
123 1 (1 ) — — — — — — — — Restricted stock forfeiture put to treasury
— — 311 (1,442 ) — — — — (1,131 ) — (1,131 ) Stock-based compensation expense
— — 7,253 — — — — — 7,253 — 7,253 Net income
— — — — 138,097 — — — 138,097 3,756 141,853 Unrealized loss on securities available for sale
— — — — — — (749 ) — (749 ) — (749 ) Currency translation adjustment
— — — — — (18,790 ) — — (18,790 ) (4 ) (18,794 ) Distribution of noncontrolling interest earnings
— — — — — — — — — (6,660 ) (6,660 ) Forward contracts hedging intercompany foreign currency payments—change in fair values
— — — — — — — 7,213 7,213 — 7,213 Balance, January 3, 2009
66,502 665 81,905 — 695,427 21,769 (1,437 ) 3,815 802,144 3,219 805,363 Common stock issued upon exercise of stock options and stock appreciation rights
314 3 3,753 — — — — — 3,756 — 3,756 Tax benefit derived from stock-based compensation
— — 1,166 — — — — — 1,166 — 1,166 Repurchase and retirement of common stock
(45 ) — (785 ) 785 — — — — — — — Restricted stock issued in connection with deferred compensation plan
129 1 (1 ) — — — — — — — — Restricted stock forfeiture put to treasury
— — 212 (785 ) — — — — (573 ) — (573 ) Stock-based compensation expense
— — 6,787 — — — — — 6,787 — 6,787 Net income
— — — — 139,188 — — — 139,188 5,106 144,294 Unrealized gain on securities available for sale
— — — — — — 1,093 — 1,093 — 1,093 Currency translation adjustment
— — — — — 13,584 — — 13,584 (1 ) 13,583 Distribution of noncontrolling interest earnings
— — — — — — — — — (2,693 ) (2,693 ) Forward contracts hedging intercompany foreign currency payments—change in fair values
— — — — — — — (4,364 ) (4,364 ) — (4,364 ) Balance, January 2, 2010
66,900 $ 669 $ 93,037 $ — $ 834,615 $ 35,353 $ (344 ) $ (549 ) $ 962,781 $ 5,631 $ 968,412 Accumulated other
comprehensive income (loss)Common stock Additional
paid-in
capitalTreasury
StockRetained
earningsCumulative
translation
adjustmentUnrealized
gain (loss)
on securities
available
for saleUnrealized
gain (loss)
on forward
contractsStockholders’
Equity
Attributable
to Fossil, IncNoncontrolling
InterestTotal
Stockholders’
EquityShares Par
valueBalance, January 5, 2008
69,713 $ 697 $ 88,000 $ 0 $ 646,492 $ 40,559 $ (688 ) $ (3,398 ) $ 771,662 $ 6,127 $ 777,789 Common stock issued upon exercise of stock options and stock appreciation rights
`326 3 4,142 764 0 0 0 0 4,909 0 4,909 Tax expense derived from stock-based compensation
0 0 (447 ) 0 0 0 0 0 (447 ) 0 (447 ) Repurchase and retirement of common stock
(3,660 ) (36 ) (17,353 ) 678 (89,162 ) 0 0 0 (105,873 ) 0 (105,873 ) Restricted stock issued in connection with deferred compensation plan
123 1 (1 ) 0 0 0 0 0 0 0 0 Restricted stock forfeiture put to treasury
0 0 311 (1,442 ) 0 0 0 0 (1,131 ) 0 (1,131 ) Stock-based compensation expense
0 0 7,253 0 0 0 0 0 7,253 0 7,253 Net income
0 0 0 0 138,097 0 0 0 138,097 3,756 141,853 Unrealized loss on securities available for sale
0 0 0 0 0 0 (749 ) 0 (749 ) 0 (749 ) Currency translation adjustment
0 0 0 0 0 (18,790 ) 0 0 (18,790 ) (4 ) (18,794 ) Distribution of noncontrolling interest earnings
0 0 0 0 0 0 0 0 (6,660 ) (6,660 ) Forward contracts hedging intercompany foreign currency payments - change in fair values
0 0 0 0 0 0 0 7,213 7,213 0 7,213 Balance, January 3, 2009
66,502 $ 665 $ 81,905 $ 0 $ 695,427 $ 21,769 $ (1,437 ) $ 3,815 $ 802,144 $ 3,219 $ 805,363 Common stock issued upon exercise of stock options and stock appreciation rights
314 3 3,753 0 0 0 0 0 3,756 0 3,756 Tax benefit derived from stock-based compensation
0 0 1,166 0 0 0 0 0 1,166 1,166 Repurchase and retirement of common stock
(45 ) 0 (785 ) 785 0 0 0 0 0 0 0 Restricted stock issued in connection with deferred compensation plan
129 1 (1 ) 0 0 0 0 0 0 0 0 Restricted stock forfeiture put to treasury
0 0 212 (785 ) 0 0 0 0 (573 ) 0 (573 ) Stock-based compensation expense
0 0 6,787 0 0 0 0 0 6,787 0 6,787 Net income
0 0 0 0 139,188 0 0 0 139,188 5,106 144,294 Unrealized gain on securities available for sale
0 0 0 0 0 0 1,093 0 1,093 0 1,093 Currency translation adjustment
0 0 0 0 0 13,584 0 0 13,584 (1 ) 13,583 Distribution of noncontrolling interest earnings
0 0 0 0 0 0 0 0 (2,693 ) (2,693 ) Forward contracts hedging intercompany foreign currency payments - change in fair values
0 0 0 0 0 0 0 (4,364 ) (4,364 ) 0 (4,364 ) Balance, January 2, 2010
66,900 $ 669 $ 93,037 $ 0 $ 834,615 $ 35,353 $ (344 ) $ (549 ) $ 962,781 $ 5,631 $ 968,412 Common stock issued upon exercise of stock options and stock appreciation rights
1,382 14 23,396 0 0 0 0 0 23,410 0 23,410 Tax benefit derived from stock-based compensation
0 0 11,961 0 0 0 0 0 11,961 0 11,961 Repurchase of common stock
0 0 0 (199,222 ) 0 0 0 0 (199,222 ) 0 (199,222 ) Retirement of common stock
(563 ) (6 ) (21,746 ) 21,752 0 0 0 0 0 0 0 Restricted stock issued in connection with stock-based compensation plan
163 2 (2 ) 0 0 0 0 0 0 0 0 Common stock forfeitures put to treasury
0 0 727 (5,544 ) 0 0 0 0 (4,817 ) 0 (4,817 ) Stock-based compensation expense
0 0 10,553 0 0 0 0 0 10,553 0 10,553 Net income
0 0 0 0 255,205 0 0 0 255,205 9,685 264,890 Unrealized gain on securities available for sale
0 0 0 0 0 0 554 0 554 0 554 Currency translation adjustment
0 0 0 0 0 (9,909 ) 0 0 (9,909 ) 5 (9,904 ) Purchase of noncontrolling interest shares
0 0 (711 ) 0 0 0 0 (711 ) (144 ) (855 ) Distribution of noncontrolling interest earnings
0 0 0 0 0 0 0 0 0 (7,587 ) (7,587 ) Forward contracts hedging intercompany foreign currency payments - change in fair values
0 0 0 0 0 0 0 (5,687 ) (5,687 ) 0 (5,687 ) Balance, January 1, 2011
67,882 $ 679 $ 117,215 $ (183,014 ) $ 1,089,820 $ 25,444 $ 210 $ (6,236 ) $ 1,044,118 $ 7,590 $ 1,051,708 See notes to consolidated financial statements
FOSSIL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWSAMOUNTS IN THOUSANDS
Fiscal YearFiscal Year2009 2008 2007 2010 2009 2008 Operating Activities:
Operating Activities:
Net income
Net income
$ 144,294 $ 141,853 $ 128,488 $ 264,890 $ 144,294 $ 141,853 Adjustments to reconcile net income to net cash provided by operating activities:
Adjustments to reconcile net income to net cash from operating activities:
Depreciation, amortization and accretion
40,560 41,334 37,642 Stock-based compensation
10,553 6,787 7,253 Increase (decrease) in allowance for returns - net of inventory in transit
15,558 (557 ) 2,406 Loss on disposal of assets
748 618 154 Impairment losses
7,429 5,232 10,570 Equity in income of joint venture
(1,072 ) (449 ) (1,562 ) Distribution from joint venture
4,726 0 955 Increase in allowance for doubtful accounts
3,921 2,599 3,441 Excess tax benefits from stock-based compensation
(11,961 ) (1,166 ) (574 ) Deferred income taxes and other
11,213 3,235 1,106 Depreciation, amortization and accretion
41,334 37,642 32,796 Changes in operating assets and liabilities:
Accounts receivable
(85,893 ) (4,180 ) 17,712 Inventories
(115,921 ) 44,569 (45,558 ) Prepaid expenses and other current assets
(14,298 ) 8,491 (1,497 ) Accounts payable
18,193 6,101 (18,756 ) Accrued expenses
63,331 1,777 (13,351 ) Income taxes payable
(2,800 ) 7,303 (32,840 ) Stock-based compensation
6,787 7,253 6,148 (Decrease) increase in allowance for returns—net of related inventory in transit
(557 ) 2,406 3,459 Loss (gain) on disposal of assets
618 154 (82 ) Impairment loss
5,232 10,570 170 Equity in income of joint venture
(449 ) (1,562 ) (2,202 ) Distribution from joint venture
— 955 — Increase in allowance for doubtful accounts
2,599 3,441 111 Excess tax benefits from stock based compensation
(1,166 ) (574 ) (17,727 ) Deferred income taxes
3,235 1,106 (3,952 ) Changes in operating assets and liabilities, net of effects of acquisitions:
Income taxes payable
7,303 (32,840 ) 38,123 Accrued expenses
1,777 (13,351 ) 34,895 Inventories
44,569 (45,558 ) (20,063 ) Prepaid expenses and other current assets
8,491 (1,497 ) (19,875 ) Accounts payable
6,101 (18,756 ) 27,650 Accounts receivable
(4,180 ) 17,712 (75,975 ) Net cash provided by operating activities
209,177 265,988 108,954 Net cash from operating activities
265,988 108,954 131,964 Investing Activities:
Investing Activities:
Additions to property, plant and equipment
(46,538 ) (37,687 ) (63,934 ) Increase in intangible and other assets
(274 ) (385 ) (23,664 ) Purchase of securities available for sale
(628 ) (1,237 ) (7,106 ) Sales/maturities of securities available for sale
314 938 12,386 Proceeds from sale of property, plant and equipment
448 76 791 Purchase of noncontrolling interest shares
(855 ) 0 0 Additions to property, plant and equipment
(37,687 ) (63,934 ) (40,246 ) Business acquisitions, net of cash acquired
— — (1,582 ) Increase in intangible and other assets
(385 ) (23,664 ) (6,834 ) Purchase of securities available for sale
(1,237 ) (7,106 ) (10,372 ) Sales/maturities of securities available for sale
938 12,386 4,508 Proceeds from sale of property, plant and equipment
76 791 1,984 Net cash used in investing activities
(47,533 ) (38,295 ) (81,527 ) Net cash used in investing activities
(38,295 ) (81,527 ) (52,542 ) Financing Activities:
Financing Activities:
Acquisition of common stock
(199,222 ) 0 (105,873 ) Distribution of noncontrolling interest earnings
(7,587 ) (2,693 ) (6,660 ) Excess tax benefits from stock based compensation
11,961 1,166 574 Borrowings on notes payable
1,243 5,111 114,462 Payments on notes payable
(389 ) (7,055 ) (120,216 ) Proceeds from exercise of stock options
23,410 3,756 4,909 Acquisition and retirement of common stock
— (105,873 ) (16,209 ) Distribution of noncontrolling interest earnings
(2,693 ) (6,660 ) (2,209 ) Excess tax benefits from stock based compensation
1,166 574 17,727 Borrowings on notes payable
5,111 114,462 1,361 Payments on notes payable
(7,055 ) (120,216 ) — Proceeds from exercise of stock options
3,756 4,909 29,060 Net cash (used in) provided by financing activities
(170,584 ) 285 (112,804 ) Net cash from (used in) financing activities
285 (112,804 ) 29,730 Effect of exchange rate changes on cash and cash equivalents
Effect of exchange rate changes on cash and cash equivalents
5,185 2,145 12,788 (3,441 ) 5,185 2,145 Net increase (decrease) in cash and cash equivalents
233,163 (83,232 ) 121,940 Net (decrease) increase in cash and cash equivalents
(12,381 ) 233,163 (83,232 ) Cash and cash equivalents:
Cash and cash equivalents:
Beginning of year
Beginning of year
172,012 255,244 133,304 405,175 172,012 255,244 End of year
End of year
$ 405,175 $ 172,012 $ 255,244 $ 392,794 $ 405,175 $ 172,012 See notes to the consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS1. Significant Accounting Policies
Consolidated Financial Statements include the accounts of Fossil, Inc., a Delaware corporation and its subsidiaries (the
"Company"“Company”). The Company reports on a fiscal year reflecting the retail-based calendar (containing 4-4-5 week calendar quarters). References to 2010, 20092008and20072008 are for the fiscal years ended January 1, 2011, January 2, 2010, and January 3, 2009,and January 5, 2008,respectively. All intercompany balances and transactions are eliminated in consolidation. The Company is a leader in the design, development, marketing and distribution of contemporary, high quality fashion accessories on a global basis. TheCompany'sCompany’s products are sold primarily through department stores, specialty retailers and Company-owned retail stores worldwide.Effective January 3, 2010, the Company made changes to the presentation of reportable segments to reflect changes in the way its chief operating decision maker evaluates the performance of its operations, develops strategy and allocates capital resources. The Company’s reportable segments consist of the following: North America Wholesale, Europe Wholesale, Asia Pacific Wholesale and Direct to Consumer. Prior to January 3, 2010, the Company’s reportable segments consisted of the following: United States Wholesale, Europe Wholesale, Other International Wholesale and Direct to Consumer.
These changes include the reclassification of the Company’s wholesale operations in Canada and Mexico and its U.S. export business, all of which were previously recorded within the Company’s Other International Wholesale segment, to the North America Wholesale segment. The Company’s U.S. domestic wholesale operations previously recorded within the United States Wholesale segment, have also been reclassified to the North America Wholesale segment. The Company’s Asia Pacific Wholesale operations, previously recorded within the Other International Wholesale segment, have been reclassified to the Asia Pacific Wholesale segment. The Company’s operations related to its joint venture with Fossil, Spain S.A., previously recorded within the Other International Wholesale segment, have been reclassified to the Europe Wholesale segment. The Company’s historical segment disclosures have been recast to be consistent with the current presentation.
Use of Estimates are required in the preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Management makes 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to product returns, allowance for bad debt, inventories, long-lived
asset impairment, impairment ofassets, goodwill and trade names, income taxes, warranty costs, hedge accounting, litigation, reserves and stock-based compensation. Management bases its estimates and judgments on historical experience and on various other factors that it believes are reasonable under the circumstances. Management estimates form the basis for making judgments about the carrying value of the assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates under different assumptions or conditions.Concentration of
Risk.FinancialRisk involves financial instruments that potentially expose the Company to concentration of credit risk consist primarily of cash investments and accounts receivable. The Company places its cash investments with high-credit quality financial institutions and currently invests primarily in corporate debt securities and money market funds with major banks and financial institutions. Accounts receivable are generally diversified due to the number of entities comprising theCompany'sCompany’s customer base and their dispersion across many geographic regions. The Company believes no significant concentration of credit risk exists with respect to these cash investments and accounts receivable.A significant portion of sales of the
Company'sCompany’s products are supplied bymanufacturesmanufacturers located outside of the U.S., primarily in Asia. While the Company is not dependent on any single manufacturer outside the U.S., the Company could be adversely affected by political or economic disruptions affecting the business or operations ofthird-party manufacturers located outside of the U.S.
In fiscal years
20092010 and2008,2009, three of theCompany'sCompany’s majority owned assembly factories represented more than50%70% of theCompany'sCompany’s total watch assembly and jewelry production.Cash Equivalents are considered all highly liquid investments with original maturities
at date of purchaseof three months orless.less from the date of purchase.Securities Available for Sale consists of debt securities with original maturities exceeding three months and mutual fund investments. By policy, the Company invests primarily in high-grade marketable securities. Unrealized holding gains (losses) are included in accumulated other comprehensive income (loss) as a component of
stockholders'stockholders’ equity. During fiscal year 2008, $800,000 of losses previously classified in accumulated other comprehensive income (loss) were reclassified intoNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)1. Significant Accounting Policies (Continued)earnings to recognize an other than temporary decline in fair value. No adjustments were recorded in fiscal years
20092010 or20072009 for other than temporary declines in fair value.Accounts Receivable are stated net of allowances of approximately
$40.0$62.7 million and$42.2$40.0 million for estimated customer returns and approximately$16.0$18.0 million and$13.4$16.0 million for doubtful accounts at thecloseend of fiscal years 2010 and 2009, respectively. The Company’s bad debt allowance has increased over the last three fiscal years due to the challenging global economic environment. As a result of the difficult economic environment, many of the Company’s customers both domestically and2008, respectively.internationally have experienced financial difficulties including bankruptcy. The Company increased its bad debt allowance to reserve for these bankruptcies, increased risks of non-payment and increased risk of customer charge-backs. The Company’s policy is to maintain the reserve balances for bankruptcies until such time as the bankruptcies are actually settled.Inventories are stated at the lower of market or average cost, including any applicable duty and freight
charges, or market.charges.Investments in which the Company has significant influence over the investee are accounted for utilizing the equity method. If the Company does not have significant influence over the investee, the cost method is utilized.
Property, Plant and Equipment is stated at cost less accumulated depreciation and amortization. Depreciation is provided using the straight-line method over the estimated useful lives of the assets of thirty years for buildings, five years for furniture and fixtures and three to seven years for computer equipment and software. Leasehold improvements are amortized over the shorter of the lease term or the
asset'sasset’s useful life.Property, plant and equipment and other long-lived assets are evaluated for impairment whenever events or conditions indicate that the carrying value of an asset may not be recoverable based on expected undiscounted cash flows related to the asset. Impairment losses related to under-performing Company-owned retail stores of approximately $1.8 million, $2.5 million and $1.9 million were recorded in 2010, 2009 and 2008, respectively, and are included in selling and distribution
expense.expenses. The Company also recorded a $3.7 million impairment loss related to a certain Company-owned office building in 2010, which was included in general and administrative expenses. No impairment losses were recorded on Company-owned office buildings in 2009 or 2008.Goodwill and Other Intangible Assets include the cost in excess of net tangible assets acquired (goodwill), trademarks, trade names, customer lists and patents. Trademarks, customer lists and patents are amortized using the straight-line method over the estimated useful lives of generally seven to twenty years. Goodwill and other indefinite-lived intangible assets such as trade names related to business combinations are
tested at leastevaluated for impairment annuallyfor impairmentas of the end of the fiscal year rather than amortized. Impairment testing compares the carrying amount of the asset with its fair value.Fair value is estimated based on the market approach and discounted cash flows.When the carrying amount of the asset exceeds its fair value, an impairment chargewouldis recorded.The Company has three reporting units under which it evaluates goodwill for impairment, North America Wholesale, Europe Wholesale and Asia Pacific Wholesale. The fair value of each reporting unit is estimated using market comparable information. Based on the analysis, if the estimated fair value of a reporting unit exceeds its recorded value, no impairment loss is recognized. As of January 1, 2011, the fair values of each of our three operating segments containing goodwill substantially exceeded the respective carrying values.
Judgments and assumptions are inherent in our estimate of future cash flows used to determine the estimate of the reporting unit’s fair value. The most significant assumptions associated with the fair value calculations include net sales growth rates and discount rates. If the actual future sales results do not meet the assumed growth rates, future impairments of goodwill may be
recorded.incurred.The Company estimates the fair value of its trade names using discounted cash flow methodologies. Due to the inherent uncertainties involved in making the estimates and assumptions used in the fair value analysis, actual results may differ which could alter the fair value of the trade names and possibly cause impairment charges to occur in future periods. The Company completed the required annual impairment testing for
impairmenttrade names for fiscalyear-endyears 2010, 2009 and 2008 and2007. Pre-taxrecorded pre-tax impairment charges of $1.8 million, $2.7 million and $7.9 millionwere recordedin fiscal years 2010, 2009 and 2008,respectively, for certain trade names. No impairment adjustments were made in fiscal year 2007.respectively. See Note6—7—Intangibles and Other Assets, for an expanded explanation of impairment to theCompany'sCompany’s trade names.Accrued Expenses Other includes liabilities relating to duty, deferred compensation, forward contracts, taxes, deferred rent, and other liabilities which are current in nature.
Warranty Liability is recorded using historical warranty repair experience. As changes in warranty costs are experienced, the warranty accrual is adjusted as necessary. The warranty liability recorded for fiscal years 2010, 2009 and 2008
and 2007was $8.5 million, $6.4 million$4.6 millionand$3.5$4.6 million, respectively.Cumulative Translation Adjustment is included as a component of other comprehensive income (loss) and reflects the adjustments resulting from translating the financial statements of foreign subsidiaries. The functional currency of the
Company'sCompany’s foreign subsidiaries is the currency of the primary economic environment in which the entity operates which is generally the local currency of the country. Accordingly, assets and liabilities of the foreign subsidiaries are translated to U.S. dollars atyear-endyear end exchange rates. Income and expense items are translated at the daily or average monthly rates. Changes in exchange rates that affect cash flows and the related receivables or payables areNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)1. Significant Accounting Policies (Continued)recognized as transaction gains and losses in the determination of net income. The Company incurred net foreign currency transaction gains, including gains and losses associated with the settlement of forward contracts of approximately $5.2 million and $5.8 million in fiscal years 2010 and 2009, respectively and losses of
approximately$16.9 millionand $826,000in fiscal year 2008,and 2007, respectively,which have been included in other income (expense)—net.Forward Contracts are entered into by the Company principally to hedge the future payment of intercompany inventory transactions by its non-U.S. subsidiaries. These cash flow hedges are stated at estimated fair value and changes in fair value are reported as a component of other comprehensive income (loss), net of taxes. If the Company were to settle its Euro, Canadian Dollar, Japanese Yen, British Pound, Australian Dollar, and Mexican Peso based contracts at fiscal
year-end 2009,year end 2010, the result would be a net loss of approximately$17,000,$6.1 million, net of taxes. This unrealized loss is recognized in other comprehensive income (loss), net of taxes. 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 included in the consolidated statements of income and comprehensive income. See Note7—8—Derivatives and Risk Management, for an expanded explanation of theCompany'sCompany’s use of forward contracts.Litigation Reserves are estimated amounts for claims that are probable and can be reasonably estimated and are recorded as liabilities in the consolidated balance sheet. The likelihood of a material change in these estimated reserves would be dependent on new claims
as theythat may arise,andchanges in theexpectedcircumstances used toestimate amounts for prior period claims and favorable or unfavorable
outcomefinal settlements ofeach claim.prior period claims. As additional information becomes available, the Company assesses the potential liability related to new claims and existing claims and revises estimates as appropriate. As new claims arise or circumstances change relative to prior claim assessments, revisions in estimates of the potential liability could materially impact theCompany'sCompany’s results of operations andourfinancial position.Stock-Based Compensation is accounted for in accordance with the
fair value recognitionprovisions ofStatement of Financial Accounting Standards ("SFAS") No. 123(R),Share-Based Payment(now codified withinAccounting Standards Codification("ASC"(“ASC”) 718,Compensation—Compensation — StockCompensation)Compensation (“ASC 718”). The Company utilizes the Black-Scholes modelwhichto determine the fair value of stock options and stock appreciation rights on the date of grant. The model requires theinput of subjective assumptions. TheseCompany to make assumptionsinclude estimatingconcerning (a) the length of time employees will retain their vested stock options before exercising them("(“expectedterm"term”), (b) the volatility of theCompany'sCompany’s common stock price over the expected term, and (c) the number of options that will be forfeited. Changes in these assumptions can materially affect the estimate of fair value of stock-based compensation and, consequently, the related expense amounts recognized on the consolidated statements of operations.Revenues are recognized at the point title and the risks and rewards of ownership have passed to the customer, based on the terms of sale. The Company accepts limited returns and may request that a customer return a product if the customer has an excess of any style that the Company has identified as being a poor performer for that customer or geographic location. The Company continually monitors returns and maintains a provision for estimated returns based upon historical experience and any specific issues identified. Product returns are accounted for as reductions to revenue, cost of sales, accounts receivable and an increase in inventory to the extent such product is resalable. While returns have historically been within
management'smanagement’s expectations and the provisions established, future return rates may differ from those experienced in the past. In the event that theCompany'sCompany’s products are performing poorly in the retail market and/or it experiences product damages or defects at a rate significantly higher than the historical rate, the resulting returns could have an adverse impact on theNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)1. Significant Accounting Policies (Continued)operating results for the period or periods in which such returns materialize. Taxes imposed by governmental authorities on the
Company'sCompany’s revenue-producing activities with customers, such as sales taxes and value added taxes, are excluded from net sales.Cost of Sales includes raw material costs, assembly labor, assembly overhead including depreciation expense, assembly warehousing costs and shipping and handling costs related to the movement of finished goods from assembly locations to sales distribution centers and from sales distribution centers to customer locations. Additionally, cost of sales includes customs duties, product packaging cost, royalty cost associated with sales of licensed products, the cost of molding and tooling and inventory shrinkage and damages.
Selling and Distribution Expenses include sales and distribution labor costs, sales distribution center and warehouse 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
advertising expenses.art, design and product development labor costs.General and Administrative Expenses include administrative support labor and
"back office"“back office” or support costs such as treasury, legal, information services, accounting, internal audit, human resources and executive management costs. General andAdministrative Expensesadministrative expenses also include costs associated with stock-based compensation.Advertising Costs for in-store and media advertising as well as co-op advertising, catalog costs, product displays, show/exhibit costs, advertising royalty related to the sales of licensed brands, internet costs associated with affiliation fees, printing costs and promotional allowances are expensed as incurred. Advertising
expensescosts were approximately $123.8 million, $85.6 million and $97.1 million for fiscal years 2010, 2009 and$88.7 million for 2009,2008,and 2007,respectively.Noncontrolling Interest, formerly defined as minority interest, is recognized as equity in the consolidated balance sheets, is reflected in net income attributable to noncontrolling interests in consolidated net income and
is captured within
athe summary of changes in equity attributable to controlling and noncontrolling interests. A noncontrolling interest emphasizes theCompany'sCompany’s substantive control over a subsidiary rather than a simple ownership percentage as with minority interest.Earnings Per Share
("EPS"(“EPS”). Basic EPS is based on the weighted average number of common shares outstanding during each period. Diluted EPSincludesadjusts Basic EPSplusfor the effects of dilutive common stock equivalents outstanding during each period using the treasury stock method.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)1. Significant Accounting Policies (Continued)The following table reconciles the numerators and denominators used in the computations of both basic and diluted
EPS:EPS (in thousands, except per share data):Fiscal Year2009 2008 2007 IN THOUSANDS, EXCEPT PER
SHARE DATANumerator:
Net income attributable to Fossil, Inc.
$ 139,188 $ 138,097 $ 123,261 Denominator:
Basic EPS computations:
Basic weighted average common shares outstanding
66,684 67,525 68,213 Basic EPS
$ 2.09 $ 2.05 $ 1.81 Diluted EPS computation:
Basic weighted average common shares outstanding
66,684 67,525 68,213 Stock options, stock appreciation rights and restricted stock units
469 798 2,120 Diluted weighted average common shares outstanding
67,153 68,323 70,333 Diluted EPS
$ 2.07 $ 2.02 $ 1.75 Fiscal Year
2010 2009 2008 Numerator:
Net income attributable to Fossil, Inc.
$ 255,205 $ 139,188 $ 138,097 Denominator:
Basic EPS computations:
Basic weighted average common shares outstanding
66,701 66,684 67,525 Basic EPS
$ 3.83 $ 2.09 $ 2.05 Diluted EPS computation:
Basic weighted average common shares outstanding
66,701 66,684 67,525 Stock options, stock appreciation rights and restricted stock units
986 469 798 Diluted weighted average common shares outstanding
67,687 67,153 68,323 Diluted EPS
$ 3.77 $ 2.07 $ 2.02 Approximately 812,000
392,000,and3,000392,000 weighted average shares issuable under stock-based awards were not included in the diluted EPS calculation in 20092008and2007,2008, respectively, because they were antidilutive.These common share equivalents may be dilutiveThere were no antidilutive shares infuture EPS calculations.2010.Income Taxes are provided for under the asset and liability method for temporary differences in the recognition of certain revenues and expenses for tax and financial reporting purposes.
Effective January 7, 2007, theThe Companyadoptedapplies the provisions ofFinancial Accounting Standards Board ("FASB") Interpretation No. 48,Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109(now codified withinASC 740Income Taxes("ASC 740"))which addresses how the benefit of tax positions taken or expected to be taken on a tax return should be recorded in the financial statements. Tax benefits associated with uncertain tax positions are recognized in the period in which one of the following conditions is satisfied: (1) the more likely than not recognition threshold is satisfied; (2) the position is ultimately settled through negotiation or litigation; or (3) the statute of limitations for the taxing authority to examine and challenge the position has expired. Tax benefits associated with an uncertain tax position are derecognized in the period in which the more likely than not recognition threshold is no longer satisfied.Newly
Issued Accounting StandardAdopted ASC UpdatesIn February 2010, FASB issued ASU 2010-9Subsequent Events (Topic 855) Amendments to Certain Recognition and Disclosure Requirements("ASU 2010-9"). ASU 2010-9 amends disclosure requirements within Subtopic 855-10. An entity that is an SEC filer is not required to disclose the date through which subsequent events have been evaluated. This change alleviates potential conflicts between Subtopic 855-10 and the SEC's requirements. ASU 2010-9 is effective for interim and annual periods ending after June 15, 2010. The Company does not expect the adoption of ASU 2010-09 to have a material impact on its consolidated results of operations or financial position.In January 2010, the FASB issued
ASUAccounting Standards Update (“ASU”) 2010-6Improving Disclosures about Fair Value Measurements (Topic 820)("(“ASU2010-6"2010-6”). ASU 2010-6 provides amendments tosubtopic 820-10Topic 820 that require separate disclosureNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)1. Significant Accounting Policies (Continued)of significant transfers in and out of Level 1 and Level 2 fair value measurements and the presentation of separate information regarding purchases, sales, issuances and settlements for Level 3 fair value measurements. Additionally, ASU 2010-6 provides amendments to
subtopic 820-10Topic 820 that clarify existing disclosures about the level of disaggregation and inputs and valuation techniques.ASU 2010-6 isThe new disclosure requirements became effective for financial statements issued for interim and annual periodsendingbeginning after December 15, 2009, except for the disclosure about purchases, sales, issuances and settlements in Level 3 fairvalue measurements, which become effective for fiscal years beginning after December 15, 2010. The
Company does not expect theadoption of ASU2010-06 to2010-6 did not have a material impact onitsthe Company’s consolidated results of operations or financial position.In January 2010, the FASB issued ASU 2010-2Consolidations (Topic 810) Accounting and Reporting for Decreases in Ownership of a
Subsidiary-Subsidiary - a Scope Clarification("(“ASU2010-2"2010-2”). ASU 2010-2 addresses implementation issues related to the changes in ownership provisions in the Consolidation—Overall Subtopic(Subtopic 810-10)(“Subtopic 810-10”) of theFASB Accounting Standards Codification, originally issued as FASB Statement No. 160,Noncontrolling Interests in Consolidated Financial Statements.ASC. Subtopic 810-10 establishes the accounting and reporting guidance for noncontrolling interests and changes in ownership interests of a subsidiary. An entity is required to deconsolidate a subsidiary when the entity ceases to have a controlling financial interest in the subsidiary. Upon deconsolidation of a subsidiary, an entity recognizes a gain or loss on the transaction and measures any retained investment in the subsidiary at fair value. The gain or loss includes any gain or loss associated with the difference between the fair value of the retained investment in the subsidiary and its carrying amount at the date the subsidiary is deconsolidated. In contrast, an entity is required to account for a decrease in ownership interest of a subsidiary that does not result in a change of control of the subsidiary as an equity transaction. ASU 2010-2isbecame effective for the Company starting January 3, 2010. TheCompany does not expect theadoption of ASU 2010-2todid not have a material impact on theCompany'sCompany’s consolidated results of operations or financial position.In December 2009, the FASB issued ASU 2009-17Consolidations (Topic 810) Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities
("(“ASU2009-17"2009-17”). ASU 2009-17 amends theFASBASC for the issuance of FASB Statement No. 167,Amendments to FASB Interpretation No. 46(R). The amendments in ASU 2009-17 replace the quantitative-based risks and rewards calculation for determining which enterprise, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity that most significantly impact theentity'sentity’s economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. ASU 2009-17 also requires additional disclosures about anenterprise'senterprise’s involvement in variable interest entities. ASU 2009-17iswas effectiveas offor thebeginning of each reporting entity's first annual reporting period that begins after November 15, 2009.Company starting January 3, 2010. TheCompany does not expect theadoption of ASU 2009-17todid not havea materialan impact onitsthe Company’s consolidated results of operations or financialposition.position as the Company had no variable interest entities.In December 2009, the FASB issued ASU 2009-16Transfers and Servicing (Topic 860) Accounting for Transfers of Financial Assets
("(“ASU2009-16"2009-16”). ASU 2009-16 amends theFASB Accounting Standards CodificationASC for the issuance of FASB Statement No. 166,Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140. The amendments in ASU 2009-16improve financial reporting by eliminatingeliminate the exceptions for qualifyingspecial-purposespecial purpose entities from the consolidation guidance and the exception that permittedsalesales accounting for certain mortgage securitizations when a transferor has not surrendered control over the transferred financial assets. In addition, the amendments require enhanced disclosures about the risks that a transferor continues to be exposed to because of its continuing involvement in transferred financial assets. ASU 2009-16is effective as of the beginning of each reporting entity's first annual reporting period that begins after November 15, 2009.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)1. Significant Accounting Policies (Continued)The Company does not expect the adoption of ASU 2009-16 to have a material impact on its consolidated results of operations or financial position.Newly Adopted Accounting Standard CodificationIn August 2009, FASB issued ASU 2009-5Fair Value Measurements and Disclosures (Topic 820) Measuring Liabilities at Fair Value("ASU 2009-5"). ASU 2009-5 provides amendments to Subtopic 820-10,Fair Value Measurements and Disclosures-Overall, for the fair value measurement of liabilities. ASU 2009-5 clarifies that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value. ASU 2009-5was effective for the Companyfor interim and annual periods ending after Octoberstarting January 3,2009.2010. The adoption of ASU2009-5 did not have a material impact on the Company's consolidated results of operations or financial position.In August 2009, FASB issued ASU 2009-4Accounting for Redeemable Equity Instruments—an Amendment to Section 480-10-S99("ASU 2009-4"). ASU 2009-4 represents a Securities and Exchange Commission ("SEC") update to Section 480-10-S99,Distinguishing Liabilities from Equity. The adoption of guidance within ASU 2009-42009-16 did not have an impact on theCompany'sCompany’s consolidated results of operations or financialposition.In June 2009, FASB issued SFAS No. 168,The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles—A Replacement of FASB Statement No. 162, (now codified within ASC 105,Generally Accepted Accounting Principles("ASC 105")). ASC 105 establishes the Codificationposition as thesingle source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. All guidance contained in the Codification carries an equal level of authority. Following this statement, FASB will not issue new standards in the form of statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates, which will serve only to: (1) update the Codification; (2) provide background information about the guidance; and (3) provide the bases for conclusions on the change(s) in the Codification. ASC 105 was effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Codification supersedes all existing non-SEC accounting and reporting standards. The adoption of ASC 105 did not have an impact on the Company's consolidated results of operations or financial position.In May 2009, FASB issued SFAS No. 165,Subsequent Events, (now codified within ASC 855,Subsequent Events("ASC 855")). ASC 855 establishes the general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. ASC 855 was effective for theCompanyon April 5, 2009. The adoption of ASC 855 did not have a material impact on the Company's consolidated results of operations or financial position.In April 2009, FASB issued Staff Position ("FSP") No. 115-2 and FSP 124-2,Recognition and Presentation of Other-Than-Temporary Impairments(now codified within ASC 320,Investments—Debt and Equity Securities("ASC 320")). ASC 320 provides greater clarity about the credit and noncredit component of an other-than-temporary impairment event and more effectively communicates when an other-than-temporary impairment event has occurred. ASC 320 amends the other-than-temporary impairment model for debt securities. The impairment model for equity securities was not affected. Under ASC 320, an other-than-temporary impairment must be recognized through earnings if an investor has the intent to sell the debt security or if it is more likely than not that the investor will beNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)1. Significant Accounting Policies (Continued)required to sell the debt security before recovery of its amortized cost basis. This standard was effective for interim periods ending after June 15, 2009. The adoption of ASC 320 did not have a material impact on the Company's consolidated results of operations or financial position.In April 2009, FASB issued FSP 157-4,Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly(now codified within ASC 820,Fair Value Measurements and Disclosures). ASC 820 provides guidelines for making fair value measurements more consistent and provides additional authoritative guidance in determining whether a market is active or inactive and whether a transaction is distressed. ASC 820 is applied to all assets and liabilities (i.e., financial and non-financial) and requires enhanced disclosures. This standard was effective for periods ending after June 15, 2009. The adoption of ASC 820 did not have a material impact on the Company's consolidated results of operations or financial position.In April 2009, FASB issued FSP 107-1 and Accounting Principles Board 28-1,Interim Disclosures about Fair Value of Financial Instruments(now codified within ASC 825,Financial Instruments("ASC 825")). ASC 825 requires disclosures about fair value of financial instruments in interim financial statements as well as in annual financial statements. ASC 825 was effective for interim periods ending after June 15, 2009. The adoption of ASC 825 did not have a material impact on the Company's consolidated results of operations or financial position.In June 2008, FASB issued Staff Position—Emerging Issues Task Force 03-6-1,Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities(now codified within ASC 260,Earnings Per Share("ASC 260")). Under ASC 260, unvested share based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. ASC 260 was effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years and requires retrospective application. The adoption of ASC 260 did not have a material impact on the Company's earnings per share calculations.In April 2008, FASB issued FSP 142-3,Determination of the Useful Life of Intangible Assets(now codified within ASC 350,Intangibles—Goodwill and Other("ASC 350")). ASC 350 provides guidance for determining the useful life of a recognized intangible asset and requires enhanced disclosures so that users of financial statements are able to assess the extent to which the expected future cash flows associated with the asset are affected by our intent and/or ability to renew or extend the arrangement. ASC 350 was effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. The adoption of ASC 350 on January 4, 2009 did not impact the Company's consolidated results of operations or financial position.In March 2008, FASB issued SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activities(now codified within ASC 815,Derivatives and Hedging("ASC 815")). ASC 815 requires enhanced disclosures about an entity's derivative and hedging activities aimed at improving the transparency of financial reporting. ASC 815 was effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The adoption of ASC 815 did not have any impact on the Company's consolidated results of operations or financial position. Refer to Note 7, Derivatives and Risk Management, of this Form 10-K for the enhanced disclosures required by the adoption of ASC 815.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)1. Significant Accounting Policies (Continued)In December 2007, FASB issued SFAS No. 141(R),Business Combinations(now codified within ASC 805,Business Combinations("ASC 805")). ASC 805 establishes principles and requirements for how the acquirer in a business combination recognizes and measures in its financial statements the fair value of identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at the acquisition date. ASC 805 significantly changes the accounting for business combinations in a number of areas, including the treatment of contingent consideration, preacquisition contingencies, transaction costs and restructuring costs. In addition, under ASC 805, changes in an acquired entity's deferred tax assets and uncertain tax positions after the measurement period will impact income tax expense. The provisions of this standard will apply to any acquisitions we complete on or after December 15, 2008. The adoption of ASC 805 did not have an impact on the Company's consolidated results of operations or financial position.In December 2007, FASB issued SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51(now codified within ASC 810, Consolidation("ASC 810")). ASC 810 changes the accounting and reporting for minority interests, which is recharacterized as noncontrolling interests and classified as a component of equity. This new consolidation method significantly changes the accounting for transactions with minority interest holders. The provisions of ASC 810 were applied to all noncontrolling interests prospectively, except for the presentation and disclosure requirements, which were applied retrospectively to all periods presented and have been disclosed as such in our consolidated financial statements herein. ASC 810 became effective for fiscal years beginning on or after December 15, 2008. The Company adopted ASC 810 effective January 4, 2009. Upon adoption of ASC 810, the Company has recognized noncontrolling interests as equity in the consolidated balance sheets and has reflected net income attributable to noncontrolling interests in consolidated net income.In September 2006, FASB issued SFAS No. 157,Fair Value Measurements(now codified within ASC 820). ASC 820 provides guidance for using fair value to measure assets and liabilities. Under ASC 820, fair value refers to 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. The guidance within ASC 820 became effective for financial statements issued for fiscal years beginning after November 15, 2007; however, the FASB provided a one year deferral for implementation of the standard for non-recurring, non-financial assets and liabilities. The Company adopted ASC 820 for non-financial assets and non-financial liabilities effective January 4, 2009, which did not have any effect on its consolidated results of operations or financial position.had no mortgage securitizations.2. Acquisitions and Goodwill
In
February 2006,August 2010, FossilInternational Holdings, Inc. ("FIH"),(East) Limited, a wholly owned subsidiary of the Company,contributedexercised its call option to purchase 370,500 shares in Fossil (Asia) Holdings Limited (“Fossil Taiwan”), representing the entire noncontrolling interest in Fossil Taiwan, for approximately$4.3 million$854,000. The Company’s ownership interest in Fossil Taiwan increased from 81% toFossil Mexico, Sociedad Anonima de Capital Variable ("Fossil Mexico"),100%. The transaction was accounted for as an equity transaction, resulting in anewly- formed entity that is 51% owned by FIH. On February 1, 2006, Fossil Mexico acquired certain fixed assets, intangible assets and inventory from Grupo Japme, S.A. de C.V. ("Grupo Japme"),decrease in theCompany's distributor in Mexico, for a cash purchase priceCompany’s additional paid-in capital of approximately$7.2 million. The terms of this transaction included an earnout payment to Grupo Japme in an amount of $1.3 million in the event that defined earnings objectives were achieved within the twelve months following the acquisition date. The acquisition was recorded as a purchase and resulted in goodwill of approximately $1.0 million. In 2007, the Company paid an additional $1.3 million in$711,000.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)2. Acquisitions (Continued)connection with the achievement of the earnout objectives and such amount was recorded as additional goodwill.The results of business combinations completed in fiscal 2007 and prior are included in the accompanying consolidated financial statements since the dates of their acquisition. The pro forma effects, as if transactions had occurred at the beginning of the years presented, are not significant.Goodwill. The changes in the carrying amount of goodwill, which is not subject to amortization, are as
follows:follows (in thousands):Fiscal YearUnited States—
WholesaleEurope—
WholesaleOther
International—
WholesaleDirect to
ConsumerTotal North
America
WholesaleEurope
WholesaleAsia Pacific
WholesaleDirect to
ConsumerTotal IN THOUSANDS Balance at January 5, 2008
$ 21,799 $ 18,908 $ 4,778 $ — $ 45,485 Currency
— (1,769 ) (499 ) — (2,268 ) Balance at January 3, 2009
21,799 17,139 4,279 — 43,217 $ 23,620 $ 17,139 $ 2,458 $ 0 $ 43,217 Currency
— 915 134 — 1,049 101 915 33 0 1,049 Balance at January 2, 2010
$ 21,799 $ 18,054 $ 4,413 $ — $ 44,266 23,721 18,054 2,491 0 44,266 Currency
117 66 123 0 306 Balance at January 1, 2011
$ 23,838 $ 18,120 $ 2,614 $ 0 $ 44,572 3. Inventories
��Inventories—netInventories consist of thefollowing:following (in thousands):Fiscal Year2009 2008 2010 2009 IN THOUSANDS Components and parts
$ 17,041 $ 22,354 $ 23,292 $ 14,715 Work-in-process
2,943 3,339 4,176 2,943 Inventory purchases in transit
35,012 30,056 47,455 35,012 Finished goods
201,515 252,523 297,012 193,044 Inventories
$ 371,935 $ 245,714 256,511 308,272 Inventory obsolescence reserve
(10,797 ) (16,317 ) Inventories—net
$ 245,714 $ 291,955 Table of Contents4. Prepaid and Other Current AssetsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Prepaid expenses and other current assets consist of the following (in thousands):Fiscal Year
2010 2009 Prepaid royalties
$ 20,639 $ 15,264 Prepaid taxes
12,699 8,085 Other receivables
9,606 6,706 Prepaid rent
7,097 6,922 Other
12,129 11,891 Prepaid expenses and other current assets
$ 62,170 $ 48,868 4.5. Property, Plant and EquipmentProperty, plant and equipment—net consist of the
following:following (in thousands):Fiscal Year2009 2008 2010 2009 IN THOUSANDS Land
$ 19,738 $ 18,113 $ 19,402 $ 19,738 Buildings
78,916 77,660 86,366 78,916 Furniture and fixtures
85,847 83,980 87,663 85,847 Computer equipment and software
101,187 90,726 111,699 101,187 Leasehold improvements
99,736 86,844 110,179 99,736 Construction in progress
9,271 6,763 7,427 9,271 394,695 364,086 422,736 394,695 Less accumulated depreciation and amortization
182,328 156,758 205,312 182,328 Property, plant and equipment—net
$ 212,367 $ 207,328 $ 217,424 $ 212,367 5.6. InvestmentsThe Company maintains a 50% equity interest in Fossil Spain, S.A.
("(“FossilSpain"Spain”) pursuant to a joint venture agreement with Sucesores de A. Cardarso for the marketing, distribution and sale of theCompany'sCompany’s products in Spain and Portugal. The Company has accounted for the investment based upon the equity method from the effective date of the transaction and, as of January2, 20101, 2011, the investment balance was approximately$13.7$9.0 million. TheCompany'sCompany’s equity in FossilSpain'sSpain’s net incomewas $1.1 million, $1.6 million and $2.2 million for 2009, 2008 and 2007, respectively, andisincludedrecorded in the Europe Wholesale segment in other income (expense)—net.net and was $1.4 million, $1.1 million and $1.6 million for fiscal years 2010, 2009 and 2008, respectively. Net sales to Fossil Spain by the Company for 2010, 2009, and 2008and 2007were $16.3 million, $8.0 million$19.9 millionand$18.1$19.9 million, respectively. The Company had receivable balances from Fossil Spain of$1.7$3.0 million and$1.5$1.7 million as of January2, 20101, 2011 and January3, 2009,2, 2010, respectively, which is included in accounts receivable—net.The Company periodically evaluates whether declines in fair value of its investments are other-than-temporary. This evaluation consists of several qualitative and quantitative factors regarding the severity and duration of the unrealized loss as well as the
Company'sCompany’s ability and intent to hold the investment. Factors considered include, if applicable, quoted market prices, recent financial results and operating trends, other publicly available information, implied values from any recent transactions or offers of investee securities, or other conditions that may affect the value of its investments.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)6.7. Intangibles and Other AssetsIntangiblesThe following table summarizes intangibles and otherassets—assets – netconsistas of thefollowing:fiscal years 2010 and 2009, respectively (in thousands):2009 2008 Fiscal YearUseful
LivesCarrying
AmountAccumulated
AmortizationCarrying
AmountAccumulated
AmortizationIN THOUSANDS Intangibles—subject to amortization:
Trademarks
10 yrs. $ 2,646 $ 1,612 $ 2,620 $ 1,459 Customer list
9 yrs. 7,786 5,745 7,656 4,578 Patents
14 - 20 yrs. 764 303 752 258 Other
7 - 20 yrs. 201 184 196 168 Total intangibles—subject to amortization
11,397 7,844 11,224 6,463 Intangibles—not subject to amortization:
Trade names
20,815 — 23,327 — Other assets:
Key money deposits
22,822 5,191 17,011 2,405 Other deposits
9,015 — 8,639 — Deferred compensation plan assets
2,847 — 2,101 — Other
6,379 593 7,131 291 Total other assets
41,063 5,784 34,882 2,696 Total intangibles and other assets
$ 73,275 $ 13,628 $ 69,433 $ 9,159 Net of amortization
$ 59,647 $ 60,274 2010 2009 Useful
LivesCarrying
AmountAccumulated
AmortizationCarrying
AmountAccumulated
AmortizationIntangibles - subject to amortization:
Trademarks
10 yrs. $ 2,666 $ 1,795 $ 2,646 $ 1,612 Customer list
9 yrs. 7,937 6,963 7,786 5,745 Patents
14-20 yrs. 775 349 764 303 Other
7-20 yrs. 194 187 201 184 Total intangibles - subject to amortization
11,572 9,294 11,397 7,844 Intangibles - not subject to amortization:
Tradenames
18,938 0 20,815 0 Other assets:
Key money deposits
22,973 7,720 22,822 5,191 Other deposits
11,991 0 9,015 0 Deferred compensation plan assets
3,295 0 2,847 0 Other
6,615 2,633 6,379 593 Total other assets
44,874 10,353 41,063 5,784 Total intangibles and other assets
$ 75,384 $ 19,647 $ 73,275 $ 13,628 Net of amortization
$ 55,737 $ 59,647 Amortization expense for intangible assets, key money deposits and other assets was approximately
$1.3$5.9 million, $4.4 million and $3.9 million for fiscal years 2010, 2009 and$1.4 million2008, respectively.Estimated aggregate future amortization expense for
each of 2008intangible assets, key money deposits and2007. Amortization expense related to existing intangiblesother assets is estimatedto be approximately $1.4 million for 2010, $0.8 million for 2011, $0.5 million for 2012 and $0.2 million for 2013.as follows (in thousands):Fiscal Year
Amortization Expense 2011
$ 3,885 2012
3,564 2013
3,131 2014
2,716 2015
2,271 As noted in Note 1,
during the fourth quarter of 2009,the Company performed its annual impairment test of certain trade names.TheDuring fiscal year 2010, the analysis resulted in net of tax impairment charges of$0.4 million$837,000 and$1.8 million$789,000 to the OYZTERBAY and ZODIAC trade names, respectively, representing the excess of the carrying cost of these indefinite-lived intangible assets over their estimated fair value. During fiscal year 2009, the analysis resulted in net of tax impairment charges of $0.4 million and $1.8 million to the OYZTERBAY and ZODIAC trade names, respectively. During fiscal year 2008, the analysis resulted in net of tax impairment charges of $3.5 million and $1.8 million to the MICHELE and ZODIAC trade names, respectively. The MICHELE trade name is reported within theCompany's U.S.Company’s North America Wholesale segment while the ZODIAC and OYZTERBAY trade names are reported within the Europe Wholesale segment.The Company includes trade name impairment charges in selling and distribution expenses. There were no impairment adjustments to trade names in 2007.7.8. Derivatives and Risk ManagementOn January 4, 2009, the Company adopted SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133, (now codified within ASC 815,Derivatives). ASC 815 requires enhanced disclosures about a company's derivative instruments and hedging activities.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)7. Derivatives and Risk Management (Continued)The Company is exposed to certain risks relating to its ongoing business operations, which it attempts to manage by using derivative instruments. The primary risks managed by using derivative instruments are the fluctuations in global currencies that will ultimately be used to settle future payments of intercompany inventory transactions, denominated in U.S. dollars, by non-U.S. dollar functional currency subsidiaries.
Forward contracts are entered into bySpecifically, the Company projects future intercompany purchases by its non-U.S. dollar functional currency subsidiaries generally over a period of up to eighteen months. The Company enters into foreign currency forward contracts (“forward contracts”) generally for up to 65% of the forecasted purchases to manage fluctuations in global currencies that will ultimately be used to settle such U.S. dollar denominated inventory purchases. Forward contracts represent agreements to exchange the currency of one country for the currency of another country at an agreed-upon settlement date. The majority of the Company’s 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 intercompany 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. The Company also periodically enters into forward contracts to manage exchange rate risks associated with certain non-inventory intercompany transactions and to which the Company does not elect hedge treatment under ASC 815,requires companies to recognize all derivativeDerivatives and Hedging (“ASC 815”). The Company did not have any outstanding forward contracts not designated as hedging instruments aseither assetsof fiscal years 2010 orliabilities at fair value2009.The Company’s forward contracts purchased to hedge exchange rate risk associated with intercompany inventory transactions meet the criteria for hedge eligibility noted in ASC 815-20-25-30 and ASC 815-20-25-43(b)(4), which requires that they represent foreign-currency-denominated forecasted intra-entity transactions in which (1) the
statementoperating unit that has the foreign currency exposure is a party to the hedging instrument and (2) the hedged transaction is denominated in a currency other than the hedging unit’s functional currency. At the inception offinancial position.the hedge, the hedging relationship is expected to be highly effective in achieving offsetting cash flows attributable to the hedged risk. In accordance with ASC 815, the Companydesignates allassesses 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 forwardcontracts ascurrency exchange contract match the terms of the forecasted transaction, the Company concludes that there is no hedge ineffectiveness. The Company’s cash flowhedges.hedges resulted in no ineffectiveness in the statements of income and comprehensive income for the fiscal years 2010, 2009 and 2008.The accounting for gains and losses that result from changes in the fair values of derivative instruments depends on whether the derivatives have been designated and qualify as hedging instruments. Changes in the fair value of derivatives not designated as hedging instruments are recognized in earnings when they occur per ASC 815-10-35-2. 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.
The Company designates only those contracts which closely matchDue to thetermshigh degree of effectiveness between the hedging instruments and the underlyingtransaction for hedge accounting treatment. Theseexposures being hedged, the Company’s hedges resulted in no ineffectiveness in the consolidated statements ofoperations,income and comprehensive income, and there were no components excluded from the assessment of hedge effectiveness for2009.the fiscal years 2010, 2009 and 2008.ASC 815 requires companies to recognize all derivative instruments as either assets or liabilities at fair value in the statement of financial position. Forward contracts designated as cash flow hedges are recorded at fair value at each balance sheet date and the change in fair value is recorded to other comprehensive income (loss) within the equity section of the balance sheet until such forward contract gains (losses) become realized or the cash flow hedge relationship is terminated. If the cash flow hedge relationship is terminated, the derivatives gains or losses that are deferred in 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 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 as of January 1, 2011 or as of January 2, 2010. Hedge accounting is discontinued if it is determined that the derivative is not highly effective. The Company records all cash flow hedge assets and liabilities on a gross basis as they do not meet theASC 210-20, Balance Sheet-Offsetting balance sheet netting criteria as the Company does not have master netting agreements established with the derivative counterparties that would allow for net settlement.
As of January
2, 2010,1, 2011, the Company had the following outstanding forward contracts that were entered into to hedge the future payments of intercompany inventorytransactions:transactions (in thousands):Functional Currency Contract Currency TypeAmount TypeAmount IN THOUSANDS IN THOUSANDS Euro
84,700 U.S. Dollar 121,472 British Pound
3,000 U.S. Dollar 4,742 Japanese Yen
1,977,000 U.S. Dollar 21,847 Mexican Peso
31,394 U.S. Dollar 2,400 Australian Dollar
7,000 U.S. Dollar 5,792 Canadian Dollar
10,500 U.S. Dollar 9,975 Functional Currency
Contract Currency
Type
Amount Type
Amount Euro
96,873 U.S. Dollar 126,235 British Pound
15,658 U.S. Dollar 25,000 Japanese Yen
4,063,900 U.S. Dollar 46,939 Mexican Peso
33,703 U.S. Dollar 2,620 Australian Dollar
22,300 U.S. Dollar 19,592 Canadian Dollar
10,140 U.S. Dollar 9,878 The effective portion of gains and
(losses)losses on derivative instrumentsdesignated and qualifying as cash flow hedgesthat was recognized inaccumulatedother comprehensive income (loss), net of taxes during20092010 and20082009 is set forthbelow:For the Year Ended
January 2, 2010For the Year Ended
January 3, 2009IN THOUSANDS IN THOUSANDS Foreign exchange contracts
$ (2,911 ) $ 7,486 Total (loss) gain recognized in other comprehensive (loss) income, net of taxes
$ (2,911 ) $ 7,486 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)7. Derivatives and Risk Management (Continued)below (in thousands):Derivatives Designated as Cash
Flow Hedges Under ASC 815:
For the
Year Ended
January 1, 2011For the
Year Ended
January 2, 2010Foreign exchange contracts
$ 1,016 $ (2,911 ) Total gain (loss) recognized in other comprehensive income (loss), net of taxes
$ 1,016 $ (2,911 ) The following table illustrates the effective portion of gains and losses on derivative instruments designated and qualifying as cash flow hedges recorded in accumulated other comprehensive income (loss)
, net of taxesduring the term of the hedging relationship and reclassified into earnings, and the gains and losses on derivatives not designated as hedging instruments recorded directly to earnings during fiscal years 2010 and 2009and 2008 is set forth below:(in thousands):Consolidated
Income Statement
LocationFor the
Year Ended
January 2, 2010Consolidated
Income Statement
LocationFor the
Year Ended
January 3, 2009IN THOUSANDS IN THOUSANDS Foreign exchange contracts
Other Income (Expense)—net $ 1,453 Other Income (Expense)—net $ 273 Total gain (loss) reclassified from other comprehensive income (loss) into income, net of taxes
$ 1,453 $ 273 Foreign Exchange Contracts
Under ASC 815:
Consolidated
Income Statement
LocationFor the
Year Ended
January 1, 2011For the
Year Ended
January 2, 2010Cash flow hedging instruments
Other income - net Total gain reclassified from other comprehensive income (loss), net of taxes into income, net of taxes
$ 6,703 $ 1,453 Not designated as hedging instruments
Other income - net Total loss recognized in income
(1,879 ) 0 Total
$ 4,824 $ 1,453 The table below discloses the
Company'sCompany’s fair value amounts as separate asset and liability values, presents the fair value of derivative instruments on a gross basis and identifies the lineitem(s)item in the balance sheet in which the fair value amounts for these categories of derivative instruments areincluded.included (in thousands).Asset Derivatives Liability Derivatives January 2, 2010 January 3, 2009 January 2, 2010 January 3, 2009 IN THOUSANDS IN THOUSANDS Consolidated
Balance
Sheet
LocationFair
ValueConsolidated
Balance
Sheet
LocationFair
ValueConsolidated
Balance
Sheet
LocationFair
ValueConsolidated
Balance
Sheet
LocationFair
ValueDerivatives designated as hedging instruments under ASC 815:
Foreign exchange contracts
Other Current Assets
$
2,122Other Current Assets
$
8,476Accounts Payable
$
2,116Other Current Assets
$
3,629Total derivatives designated as hedging instruments under ASC 815:
$
2,122
$
8,476
$
2,116
$
3,629Asset Derivatives
Liability Derivatives
January 1, 2011
January 2, 2010
January 1, 2011
January 2, 2010
Foreign
exchangecontracts under
ASC 815:
Consolidated
Balance Sheet
LocationFair
ValueConsolidated
Balance Sheet
LocationFair
ValueConsolidated
Balance Sheet
LocationFair
ValueConsolidated
Balance Sheet
LocationFair
ValueCash flow hedging instruments
Prepaid expenses and other current assets
$ 1,388 Prepaid expenses and other current assets
$ 2,122 Accrued expenses -other
$ 8,583 Accounts payable
$ 2,116 Cash flow hedging instruments
Intangible and other assets - net
240 Intangible and other assets - net
0 Other long-term liabilities
1,639 Other long-term liabilities
0 Total foreign exchange contracts under ASC 815:
$ 1,628 $ 2,122 $ 10,222 $ 2,116 At the end of fiscal year
2009,2010, the Company had foreign exchange contracts with maturities extending through2011.2012. The estimated net amount of the existing gains and losses at the reporting date that is expected to be reclassified into earnings within the next 12 months isapproximately $0.2a loss of $5.4 million.8.9. Fair Value MeasurementsThe Company
adopted SFAS No. 157,Fair Value Measurements("SFAS 157") (now codified within ASC 820,Fair Value Measurement and Disclosures("ASC 820")). ASC 820defines 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.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:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)8. Fair Value Measurements (Continued)•- Level 1—Quoted prices in active markets for identical assets or liabilities.
•Level 2—Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly.
•Level 3—Unobservable inputs based on the
Company'sCompany’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 January 1, 2011 (in thousands):
Fair Value at January 1, 2011 Level 1 Level 2 Level 3 Total Assets:
Securities available for sale:
Investments in bonds
$ 7,705 $ 0 $ 0 $ 7,705 Investment in publicly traded equity securities
1,159 0 0 1,159 Foreign exchange forward contracts
0 1,628 0 1,628 Deferred compensation plan assets:
Investment in publicly traded mutual funds
3,295 0 0 3,295 Total
$ 12,159 $ 1,628 $ 0 $ 13,787 Liabilities:
Foreign exchange forward contracts
$ 0 $ 10,222 $ 0 $ 10,222 Total
$ 0 $ 10,222 $ 0 $ 10,222 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,
2010:2010 (in thousands):Fair Value at January 2, 2010 Level 1 Level 2 Level 3 Total IN THOUSANDS Assets:
Investment in bonds
$ 7,453 $ — $ — $ 7,453 Investment in publicly traded equity securities
542 — — 542 Foreign exchange forward contracts
— 2,122 — 2,122 Deferred compensation plan assets
2,847 — — 2,847 Total
$ 10,842 $ 2,122 $ — $ 12,964 Liabilities:
Foreign exchange forward contracts
$ — $ 2,116 $ — $ 2,116 Total
$ — $ 2,116 $ — $ 2,116 Fair Value at January 2, 2010 Level 1 Level 2 Level 3 Total Assets:
Securities available for sale:
Investments in bonds
$ 7,453 $ 0 $ 0 $ 7,453 Investment in publicly traded equity securities
542 0 0 542 Foreign exchange forward contracts
0 2,122 0 2,122 Deferred compensation plan assets:
Investment in publicly traded mutual funds
2,847 0 0 2,847 Total
$ 10,842 $ 2,122 $ 0 $ 12,964 Liabilities:
Foreign exchange forward contracts
$ 0 $ 2,116 $ 0 $ 2,116 Total
$ 0 $ 2,116 $ 0 $ 2,116 The fair values of the
Company'sCompany’s available-for-sale securities and deferred compensation plan assets are based on quoted prices. The deferred compensation plan assets are recorded as intangible and other assets-net. The foreign exchange forward contracts are entered into by the Company principally to hedge the future payment of intercompany inventory purchases by non-U.S. subsidiaries. The fair values of theCompany'sCompany’s foreign exchange forward contracts are based on published quotations of spot currency rates and forwards points, which are converted into implied forward currencyrates and are recorded as an asset within prepaid expenses and other current assets or as a liability within accounts payable.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 January
2, 20101, 2011 and January3, 2009,2, 2010, the carrying values of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximated their values due to the short-term maturities of these accounts.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)8. Fair Value Measurements (Continued)The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a nonrecurring basis as of January
2, 2010:1, 2011 (in thousands):Fair Value at January 2, 2010 Year Ended
January 2, 2010Level 1 Level 2 Level 3 Total
Gains/LossesIN THOUSANDS Assets:
Specific Company-owned stores—net
$ — $ — $ — $ — $ (2,506 ) Specific trade names
2,315 — — 2,315 (2,726 ) Total
$ — $ — $ 2,315 $ (5,232 ) Fair Value Measurements Using For the Year Ended
January 1, 2011Level 1 Level 2 Level 3 Total
Gains/(Losses)Assets:
Specific Company-owned stores - net
$ 0 $ 0 $ 0 $ 0 $ (1,848 ) Specific Company-owned office - net
8,863 0 0 8,863 (3,738 ) Specific trade names
438 0 0 438 (1,843 ) Total
$ 0 $ 0 $ 9,301 $ (7,429 ) In accordance with the provisions of
SFAS No. 144, "Impairment of Long-Lived Assets",(now codified within subsections ofASC 360,Property, Plant andEquipment)Equipment, property, plant and equipment—net with a carrying amount of$214.9$2.1 million related to Company-owned retail store leasehold improvements, fixturing, computer software and computer hardware waswritten down to fair value of $212.4 million,deemed not recoverable, resulting in an impairment charge of$2.5$1.8 millionwhichafter estimated insurance proceeds of $0.3 million for fiscal year 2010. Property, plant and equipment—net with a carrying amount of $12.6 million associated with a Company-owned office building was written down to a fair value of $8.9 million, based on a third-party appraisal, resulting in an impairment charge of $3.7 million included in earnings for fiscal year 2010. Both theperiod. Thefairvaluevalues of the Company-owned retail storesisand the Company-owned office building were determined usinglevelLevel 3 inputs. If undiscounted cash flows estimated to be generated through theoperationsoperation of Company-owned retail stores are less than the carrying value of the underlying assets, impairment losses are recorded. Impairment expense and associated insurance recoveries related to Company-owned retail stores are recorded in selling and distributionexpenses.expenses within the Direct to Consumer segment. The impairment expense related to the Company-owned office building was recorded in general and administrative expenses within the corporate cost area.In accordance with the provisions
SFAS No. 142, "Goodwill and Other Intangible Assets" (now codified withinof ASC 350,Intangibles—Goodwill andOther)Other, intangible and other assets—net with a carrying amount of$62.3$2.2 million were written down to an implied fair value of$59.6$0.4 million, resulting in an impairment charge of$2.7$1.8 million, which was included in earnings during fiscal year2009.2010.9.10. DebtShort-Term:Short-Term U.S.-based: OnNovember 18, 2009,December 17, 2010, the Companyexecutedentered into arenewal of its LoanCredit Agreementand Revolving Line of Credit(the"Revolver"“Credit Agreement”)and decreased the commitment under the Revolver from $140 million to $100 millionwithits primary bank,Wells Fargo Bank,("National Association (“WellsFargo"Fargo”)., as administrative agent, swingline lender and issuing lender, Wells Fargo Securities, LLC, as sole lead arranger and sole book manager and Bank of America, N.A., as lender. TheRevolver allowsCredit Agreement provides foran increaserevolving credit loans in thecommitment from $100amount of $300 million,to $200a swingline loan of $20 million,uponand therequestprovision of letters of credit. The Credit Agreement expires andis due and payable on December 17, 2013. It is guaranteed by all direct and indirect material domestic subsidiaries of the Company, as provided in a subsidiary guaranty agreement, and
approvalsecured by 65% of the total outstanding voting capital stock and 100% of the non-voting Capital Stock of Fossil Europe B.V. and Swiss Technology Holding GmbH, foreign subsidiaries of the Company, pursuant to a pledge agreement. In connection with entering into the Credit Agreement, the Company paid upfront fees of approximately $1.2 million which will be amortized over the life of the Credit Agreement.Amounts outstanding under the revolving credit facility under the Credit Agreement (the “Revolver”) bear interest at the Company’s option of (i) the base rate (defined as the higher of (a) the prime rate publicly announced by Wells
Fargo.Fargo (3.50% at fiscal year end 2010), (b) the federal funds rate plus 1.50% and (c) the London Interbank Offer Rate (“LIBOR”) (1.51% at fiscal year end 2010) plus 1.50%) plus the base rate applicable margin (which varies based upon the Company’s consolidated leverage ratio (the “Ratio”) from 0.25% if the Ratio is less than 1.00 to 1.00 to 1.00% if the Ratio is greater than or equal to 2.00 to 1.00) or (ii) the LIBOR rate (defined as the quotient obtained by dividing (a) LIBOR by (b) 1.00 minus the Eurodollar reserve percentage) plus the LIBOR rate applicable margin (which varies based upon the Ratio from 1.25% if the Ratio is less than 1.00 to 1.00 to 2.00% if the Ratio is greater than or equal to 2.00 to 1.00). Amounts outstanding under the swingline loan under the Credit Agreement or upon any drawing under a letter of credit bear interest at the base rate plus the base rate applicable margin. Interest based upon the base rate is payable quarterly in arrears. Interest based upon the LIBOR rate is payable either monthly or quarterly in arrears, depending on the interest period selected by the Company. The Revolver also includes a commitment fee ranging from0.1%0.20% to0.2%0.35% for any amounts un-used under such Revolver.The
Revolver is securedCredit Agreement replaced that certain Loan Agreement dated as of September 23, 2004, as amended, by65%and between Fossil Partners, L.P. (“LP”), a subsidiary of theissuedCompany, as borrower, the Company, andoutstanding shares ofcertain subsidiaries of the Company,pursuantas guarantors, and Wells Fargo, which was scheduled toan Amended and Restated Stock Pledge Agreement entered into as of November 19, 2008. The Revolver requires the maintenance of net worth, quarterly income, working capital and certain financial ratios. Borrowingsmature on December 31, 2010 (the “Old Agreement”). No amounts were outstanding under theRevolver bear interestOld Agreement except for three letters of credit in the aggregate amount of $598,000. Upon termination of the Old Agreement, these letters of credit continued to be issued and outstanding under the Credit Agreement. No penalties or other early termination fees were incurred in connection with the termination of the Old Agreement.Loans under the Credit Agreement may be prepaid, in whole or in part, at the option of the Company,
(i) at the lesserin minimum principal amounts of(a) the higher$2.0 million or increments ofthe prime rate (3.25% at fiscal year-end 2009) plus 1.5% or 3% or (b) the maximum rate allowed by law or (ii) the London Interbank Offer Rate ("LIBOR")$1.0 million in excess thereof with respect to a base rate(0.23% at fiscal year-end 2009) plus 0.75%.loan, $5.0 million or increments of $1.0 million in excess thereof with respect to a LIBOR rate loan and $100,000 or increments of $100,000 in excess thereof with respect to a swingline loan. Loans under the Credit Agreement must be repaid, or letter of credit obligations cash collateralized with the net proceeds of certain asset sales, insurance and condemnation events. The Company mayprepaypermanently reduce theRevolverrevolving credit commitment at any time, in whole or in part, withoutpenalty.premium or penalty, in a minimum aggregate principal amount of not less than $3.0 million or increments of $1.0 million in excess thereof.Wells Fargo
maycan accelerate theRevolverrepayment obligation upon the occurrence of an event of default, including the failure tobe immediately due and payable if the Company fails topayany part of theprincipal or interest, a material inaccuracy ofthe Revolver,a representation orupon an Eventwarranty, violation ofDefault (as definedcovenants, cross-default, change inthe Revolver). If needed, the Company would use the proceeds primarily for working capital needs, potential acquisitionscontrol, bankruptcy events, failure of a loan document provision, certain ERISA events andfor general corporate purposes. The Revolver expires on November 17, 2010.material judgments. There were no outstanding borrowings as of the end of fiscalyear-end 2009.year 2010. Amounts available under the Revolver are reduced by any amounts outstanding underletters of credit orstand-by letters ofcredit and by amounts outstanding under foreign-based borrowing arrangements.credit. At the end of fiscal year2009,2010, the Company hadNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)9. Debt (Continued)available borrowings of approximately
$67.8$299.6 million under the Revolver.The Company's interest expense related to outstanding borrowings under the Revolver was $120,000 and $38,000 for 2008 and 2007, respectively.As a result of no outstanding borrowing during fiscalyearyears 2010 and 2009, the Company incurred no interest expense related to the Revolver or the Old Agreement during fiscal year 2010 and 2009. The Company’s interest expense related to outstanding borrowings under the Old Agreement was $120,000 for 2008.Financial covenants governing the Credit Agreement require the Company to maintain (i) a consolidated leverage ratio no greater than 2.50 to 1.00, (ii) consolidated tangible net worth no less than the sum of (a) $600 million plus (b) 25% of positive consolidated net income, (iii) consolidated net income that is not negative for
any two consecutive fiscal quarters, and (iv) maximum capital expenditures not in excess of $125 million in any fiscal year, subject to certain adjustments. The Credit Agreement contains representations, warranties, covenants, events of default and indemnities that are customary for agreements of this type. The Company is in compliance with all covenants related to the Revolver as of January
2, 2010.1, 2011.Short-Term:Short-Term Foreign-based: TheCompany'sCompany’s Japanese subsidiary, Fossil Japan,maintainsentered into a 400 million Yen short-term credit facility agreement (the “Facility”) on December 30, 2010. The Facility replaced two separate 150 million Yen short-term credit facilities that expired inJapan, one bearingfiscal year 2010. The Facility bears interest at the short-term prime rate (1.475% at fiscalyear-end 2009) and one bearing interest based upon the Tokyo Interbank Offer Rate ("TIBOR") (1.475% as of fiscal year-end 2009)year end 2010). Japan-based borrowings, in U.S. dollars, underthesethis facility were approximately $4.9 million at fiscal year end 2010. Japan-based borrowings, in U.S. dollars, under the two 150 million Yen facilities were approximately $3.2 millionand $4.9 millionat fiscalyear-end 2009 and 2008, respectively.year end 2009. Up to May 3, 2008, Fossil U.K. Ltd.("(“FossilUK"UK”) maintained a 4.0 million British Pound revolving credit facility with interest costs under this facility based upon the aggregate of the Margin, LIBOR and Mandatory Lending Agreement("MLA"(“MLA”) costs (7.11% on a combined basis at fiscalyear-endyear end 2008). On May 3, 2008, Fossil U.K. retired all outstanding borrowings under this facility and did not renew the facility upon expiration in 2008. The Company incurred approximately $61,000,$142,000$61,000 and$532,000$142,000 of interest expense related to Japan and UK borrowings for 2010, 20092008and2007,2008, respectively. The borrowings entered into by Fossil Japan and Fossil UK were primarily used for working capital purposes and the purchase of a new office/distribution center, respectively. Additionally, at the end of fiscal years 2010 and 2009, the Company had current capital lease obligations of $283,000 and $297,000, respectively. At the end of fiscal years 2010 and 2009, the Company had total outstanding short-term borrowings of $5.3 million and $3.6 million, respectively.Long-Term:Long-Term Foreign-based: On September 21, 2007, Fossil Group Europe, Gmbh("FGE"(“FGE”), a wholly owned subsidiary of the Company, entered into a long-term note payable with its primary bank (the"FGE Note"“FGE Note”) related to the purchase of a building in Basel, Switzerland. The FGE Note has a variable interest rate (2% at fiscalyear-end 2009)year end 2010) with interest payments due quarterly. This note requires minimum principal payments of 100,000 Swiss Francs (approximately$97,000$107,000 U.S. dollars at fiscalyear-end 2009)year end 2010), per year with no stated maturity and no penalties for early payment. The FGE Note requires FGE to submit an annual balance sheet and income statement and is secured by theCompany'sCompany’s building in Basel, Switzerland. The Company incurred approximately $76,000,$119,000,$76,000, and$31,000$119,000 of interest expense related to the FGE Note for2009, 2008, and 2007, respectively. At fiscal year-end2010, 2009, and 2008, respectively. At the end of fiscal years 2010 and 2009, amounts outstanding under the FGE Note were $3.9 million and $3.6 million, respectively. In addition, at the end of fiscal years 2010 and 2009, the Company had outstanding long-termnotes payablecapital lease obligations of$3.6$659,000 and $952,000, respectively. At the end of fiscal years 2010 and 2009, the Company had total outstanding long-term borrowings of $4.5 million and$3.5$4.5 million, respectively.Letters of Credit: On
May 13, 2009,January 15, 2010, FGE andFossil PartnersLP("LP")executed a renewal of their Letter of Credit Facility (the"Facility"“LC Facility”) with the Hongkong and Shanghai Banking Corporation Limited("HSBC"(“HSBC”). Fossil Asia Pacific Ltd. was added to the LC Facility as part of the renewal. The purpose of the LC Facility is to allow for up to $40 million of commercial and/or standby letters of credit. At the end of fiscalyear-endyears 2010 and 2009,and 2008,the Company had outstanding letters of credit of approximately$24.9$37.2 million and$18.8$24.9 million, respectively, and stand-by letters of credit of approximately$0.4 million$412,000 and$7.1 million,$412,000, respectively. Letters of credit and stand-by letters of credit are primarily issued to vendors for the purchase of merchandise. On February 7, 2011, the Company, LP, FGE and Fossil Asia Pacific Ltd. executed a new Letter of Credit Facility (the “New Facility”) with HSBC to allow for $60 million of commercial and/or standby letters of credit. The New Facility will replace the LC Facility.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)10.11. Other Income (Expense)—NetOther income (expense)—net consists of the
following:following (in thousands):Fiscal Year2009 2008 2007 IN THOUSANDS Interest income
$ 1,310 $ 4,209 $ 5,362 Equity in the earnings of joint venture, net of tax
1,146 1,562 2,202 Currency gains (losses)
5,779 (16,897 ) (826 ) Royalty income
478 453 447 Other (losses) gains
(207 ) (338 ) 1,134 Other income (expense)—net
$ 8,506 $ (11,011 ) $ 8,319 Fiscal Year
2010 2009 2008 Interest income
$ 1,503 $ 1,310 $ 4,209 Equity in the earnings of joint venture, net of tax
1,382 1,146 1,562 Currency gains (losses)
5,227 5,779 (16,897 ) Royalty income
462 478 453 Other gains (losses)
341 (207 ) (338 ) Other income (expense) - net
$ 8,915 $ 8,506 $ (11,011 ) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)11.12. TaxesIncome Taxes
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the consolidated deferred tax assets and liabilities
were:were (in thousands):Fiscal Year2009 2008 IN THOUSANDS Current deferred income tax assets (liabilities):
Bad debt allowance
$ 5,018 $ 4,522 Returns allowance
9,162 8,876 Inventory
7,442 5,689 Compensation
1,999 5,633 Accrued liabilities
4,021 3,096 In-transit returns inventory
(3,788 ) (4,112 ) Deferred rent
874 565 Loss carry-forwards
1,047 653 Other
5,657 3,403 Total current deferred tax assets
31,432 28,325 Valuation allowance
(2,495 ) (1,319 ) Net current deferred income tax assets
$ 28,937 $ 27,006 Long-term deferred income tax (liabilities) assets:
Unrealized exchange losses
(298 ) 843 State income tax and interest on tax contingencies
2,654 2,541 Fixed assets
(10,758 ) (9,564 ) Trade-names and customer list
(7,127 ) (7,390 ) Compensation
4,408 2,607 Deferred rent
3,252 3,220 Loss carry-forwards
3,516 3,644 Undistributed earnings of certain foreign subsidiaries
(18,141 ) (12,359 ) Tax deductible foreign reserves
(654 ) (515 ) Other
1,233 1,049 Total deferred income tax liabilities
(21,915 ) (15,924 ) Valuation allowance
(2,470 ) (3,572 ) Net long-term deferred income tax liabilities
$ (24,385 ) $ (19,496 ) Total long-term deferred income tax assets
2,654
$
3,384Total long-term deferred income tax liabilities
(27,039 ) (22,880 ) Net long-term deferred income tax liabilities
$ (24,385 ) $ (19,496 ) Fiscal Year
2010 2009 Current deferred income tax assets (liabilities):
Bad debt allowance
$ 7,028 $ 5,018 Returns allowance
15,468 9,162 Inventory
10,144 7,442 Warranty reserve
1,054 0 Compensation
2,894 1,999 Accrued liabilities
3,536 4,021 In-transit returns inventory
(6,024 ) (3,788 ) Deferred rent
789 874 Loss carry-forwards
1,596 1,047 Other
6,837 5,657 Total current deferred tax assets
43,322 31,432 Valuation allowance
(1,486 ) (2,495 ) Net current deferred income tax assets
$ 41,836 $ 28,937 Long-term deferred income tax (liabilities) assets:
Unrealized exchange losses
2,520 (298 ) State income tax and interest on tax contingencies
925 2,654 Fixed assets
(8,847 ) (10,758 ) Trade-names and customer list
(7,168 ) (7,127 ) Compensation
5,972 4,408 Deferred rent
3,264 3,252 Loss carry-forwards
2,375 3,516 Undistributed earnings of certain foreign subsidiaries
(44,122 ) (18,141 ) Tax deductible foreign reserves
(1,229 ) (654 ) Other
2,038 1,233 Total deferred income tax liabilities
(44,272 ) (21,915 ) Valuation allowance
(2,695 ) (2,470 ) Net long-term deferred income tax liabilities
$ (46,967 ) $ (24,385 ) Total long-term deferred income tax assets
926 2,654 Total deferred income tax liabilities
(47,893 ) (27,039 ) Net long-term deferred income tax liabilities
$ (46,967 ) $ (24,385 ) The deferred income tax asset for loss carry-forwards includes
$16.1$13.8 million of net operating losses of foreignsubsidiaries that expire at various dates for the years indicated below.subsidiaries. Valuation allowances have been recorded to reflect the estimated amount of deferred tax assets that may not be realized on these losses. The amounts and the fiscal year of expiration are indicated below (in thousands).Table of ContentsOperating loss carry-forwardsNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)Expires 2011
$ 49 Expires 2012
57 Expires 2013
0 Expires 2014
818 Expires 2015
2,224 Expires thereafter
10,630 Total loss carry-forwards
$ 13,778 11. Taxes (Continued)Gross operating loss carry-forwards:IN THOUSANDS Expires 2010
$ — Expires 2011
291 Expires 2012
52 Expires 2013
745 Expires 2014
564 Expires thereafter
14,448 Total gross loss carry-forwards
$ 16,100 The following table identifies
earningsincome before income taxes for theCompany'sCompany’s U.S. and non-U.S. based operations for the fiscal yearsindicated:indicated (in thousands):Fiscal Year2009 2008 2007 IN THOUSANDS U.S.
$ 94,543 $ 68,457 $ 34,947 Non-U.S.
125,355 125,747 158,967 Total
$ 219,898 $ 194,204 $ 193,914 Fiscal Year
2010 2009 2008 U.S.
$ 154,318 $ 94,543 $ 68,457 Non-U.S.
229,892 125,355 125,747 Total
$ 384,210 $ 219,898 $ 194,204 The
Company'sCompany’s provision for income taxes consists of the following for the fiscal yearsindicated:indicated (in thousands):Fiscal Year2009 2008 2007 IN THOUSANDS Current provision:
U.S. federal
$ 46,350 $ 27,732 $ 36,105 Non-U.S.
22,629 21,127 31,455 State and local
3,284 2,386 2,290 Total current
72,263 51,245 69,850 Deferred provision
U.S. federal
3,320 5,013 (4,958 ) Non-U.S.
(39 ) (3,850 ) 867 State and local
60 (57 ) (333 ) Total deferred
3,341 1,106 (4,424 ) Provision for income taxes
$
75,604
$
52,351
$
65,426Fiscal Year
2010 2009 2008 Current provision:
U.S. federal
$ 54,820 $ 46,350 $ 27,732 Non-U.S.
44,613 22,629 21,127 State and local
4,535 3,284 2,386 Total current
103,968 72,263 51,245 Deferred provision
U.S. federal
19,112 3,320 5,013 Non-U.S.
(3,188 ) (39 ) (3,850 ) State and local
(572 ) 60 (57 ) Total deferred
15,352 3,341 1,106 Provision for income taxes
$ 119,320 $ 75,604 $ 52,351 The expected cash payments for the current
federaldomestic income tax expense for 2010, 20092008and20072008 were reduced by approximately$2.1$12.5 million, $2.1 million and$17.7$2.1 million, respectively, as a result of tax deductions related to the exercise of non-qualified stock options and stock appreciation rights and the vesting of restricted stock and restricted stock units. The expected cash payments for current foreign tax expense were reduced by $1.7 million in 2010 and $0.5 million in 2009 as a result of tax deductions related to the exercise of stock options and the vesting of restricted stock granted to foreign employees. The income tax benefits resulting from these stock-based compensation plans have been recorded to additional paid in capital.TableTotal deferred income tax expense ofContents$15.4 million, $3.3 million and $1.1 million for fiscal years 2010, 2009 and 2008, respectively, are included in deferred income taxes and other on the consolidated statements of cash flows.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)11. Taxes (Continued)The Company was granted a 100% tax holiday for its watch assembly activities in Switzerland for tax years 2003 through 2007 and a 60% tax holiday for tax years 2008 through 2012. After 2012, the Company will pay the full Swiss tax rate on its watch assembly activities. This holiday had the effect of reducing current foreign income taxes by $240,000, $130,000,
$220,000,and$500,000$220,000 in fiscal years 2010, 20092008and2007,2008, respectively.A reconciliation of income tax computed at the U.S. federal statutory income tax rate of 35% to the provision for income taxes is as follows:
Fiscal Year2009 2008 2007 2010 2009 2008 Tax at statutory rate
35.0 % 35.0 % 35.0 % 35.0 % 35.0 % 35.0 % State, net of federal tax benefit
0.8 0.9 0.7 0.9 0.8 0.9 Foreign rate differential
(9.2 ) (13.8 ) (11.9 ) (11.1 ) (9.2 ) (13.8 ) U.S. tax on foreign income
8.7 12.6 8.0 9.8 8.7 12.6 Income tax contingencies
(0.4 ) (8.0 ) 1.2 (3.7 ) (0.4 ) (8.0 ) Other
(0.5 ) 0.3 0.7 0.2 (0.5 ) 0.3 Provision for income taxes
34.4 % 27.0 % 33.7 % 31.1 % 34.4 % 27.0 % Deferred U.S. federal income taxes and foreign withholding taxes are not provided on undistributed earnings of certain foreign subsidiaries where management plans to continue reinvesting these earnings outside the U.S. The amount of undistributed earnings that would be subject to tax if distributed is approximately
$223$267 million at January2, 2010.1, 2011. Determination of tax amounts that would be payable if earnings were distributed to the U.S. company is not practicable.The total amount of unrecognized tax benefits under ASC 740, excluding interest and penalties that would favorably impact the effective tax rate in future periods, if recognized is $8.1 million for fiscal year 2010, $7.8 million
as of January 2, 2010,for fiscal year 2009, and $8.9 millionasfor fiscal year 2008. During the second quarter ofJanuary 3, 2009 and $10.7 million asfiscal 2010, the examination phase ofJanuary 5, 2008. The Company's income tax returns are under audit bythe Internal Revenue Service (“IRS”) audit for tax years 2005 and2006.2006 was completed. The IRS proposed certain adjustments to the Company’s tax returns and the Company filed a protest. The protest is under review by the IRS Office of Appeals and may be resolved within the next twelve months. The Company is also subject to examinations in various state and foreign jurisdictions for the2004-20082005-2009 tax years, none of which the Company believes are individually significant. Audit outcomes andthetiming of 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 from January
2, 2010.1, 2011. As of January2, 2010,1, 2011, the Company has recorded$17$2.7 million of unrecognized tax benefits, excluding interest and penalties, for positions that could 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, respectively. The total amount of accrued income tax-related interest in the consolidated balance sheet was $1.3 million and $5.2 million at January 1, 2011 and January 2, 2010, respectively. The total amount of penalties included in thecondensedconsolidated balance sheet was$5.2 million and$0.3 millionrespectivelyat January 2,2010 and $5.5 million and $0.4 million, respectively2010. There were no penalties in the consolidated balance sheet at January3, 2009.1, 2011. The Company accrued interest expense of $0.8 million, $1.8 millionin 2009and $3.0 million in each of fiscal years20082010, 2009 and2007.2008.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)11. Taxes (Continued)The following is a tabular reconciliation of the total amounts of unrecognized tax benefits for the fiscal years
indicated:Fiscal Year2009 2008 2007 IN THOUSANDS Balance at beginning of year
$ 33,855 $ 57,195 $ 51,441 Gross increases—Tax positions in prior years
4,676 2,710 136 Gross decreases—Tax positions in prior period
(641 ) (21,473 ) (4,631 ) Gross increases—current year tax positions
2,428 3,869 9,831 Settlements
— (8,595 ) (206 ) Lapse in statute of limitations
(4,902 ) — — Increase due to currency revaluation
10 149 624 Balance at end of year
$ 35,426 $ 33,855 $ 57,195 Other Taxesindicated (in thousands):Subsequent to making a voluntary disclosure, the Company entered into a closing agreement with the IRS to pay the tax liability of its employees, including interest and penalties, arising under Section 409A relating to in-the-money stock options exercised by such employees subsequent to January 1, 2006 up to a certain date. The total payment including penalties was $0.2 million and was made in fiscal year 2009.The Company also entered into a closing agreement with the IRS pursuant to a voluntary correction program to settle payroll tax liabilities associated with certain equity grants previously awarded to employees as incentive stock options that should have been treated as non-qualified stock options. Due to different tax requirements associated with the exercise of an incentive stock option versus a non-qualified stock option, it was determined that certain employer and employee FICA taxes and employee withholding taxes were not properly withheld at the time such options were exercised. During fiscal year 2009, the Company paid $2.5 million in delinquent FICA taxes and federal income taxes, including both the employer and employee portions.Fiscal Year
2010 2009 2008 Balance at beginning of year
$ 35,426 $ 33,855 $ 57,195 Gross increases - Tax positions in prior years
2,680 4,676 2,710 Gross decreases - Tax positions in prior years
(27,799 ) (641 ) (21,473 ) Gross increases - current year tax positions
842 2,428 3,869 Settlements
(204 ) 0 (8,595 ) Lapse in statute of limitations
0 (4,902 ) 0 Increase due to currency revaluation
0 10 149 Balance at end of year
$ 10,945 $ 35,426 $ 33,855 12.13. Commitments and ContingenciesLicense Agreements. The Company has various license agreements to market watches bearing certain trademarks or patents owned by various
entities.third-parties. In accordance with these agreements, the Company incurred royalty expense of approximately $109.4 million, $73.9 million and $74.9 million in fiscal years 2010, 2009 and$60.7 million in 2009,2008,and 2007,respectively. These amounts are included in theCompany'sCompany’s cost of sales or if advertising related, selling and distribution expenses. The Company has various license agreements in effect at fiscalyear-end 2009year end 2010 which expire on dates between2009fiscal years 2011 and20142015 and such license agreements also require the Company to pay royalties ranging from3.0%3% to 20% of defined net sales.We are negotiating a new long-term contract for the license that expired at the end of 2009 and have the right to continue theNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)12. Commitments and Contingencies (Continued)business while negotiating.Future minimum royalty commitments under such license agreements, by fiscal year, are asfollows:follows (in thousands):IN THOUSANDS 2010
$ 60,363 2011
54,595 $ 84,882 2012
53,286 74,083 2013
43,240 64,255 2014
12,545 29,008 2015
17,607 Thereafter
— 0 $ 224,029 $ 269,835 Leases. The Company leases its retail and outlet store facilities as well as certain of its office and warehouse facilities and equipment under non-cancelable operating leases and capital leases. Most of the retail and outlet store leases provide for contingent rental payments based on operating results and require the payment of taxes, insurance and other costs applicable to the property. Generally, these leases include renewal options for various periods at stipulated rates. Rent expense under these agreements was approximately $88.6 million, $77.6 million and $62.7 million for fiscal years 2010, 2009 and
$45.6 million for 2009,2008,and 2007,respectively. Contingent rent expense was approximately$1.8$3.8 million,$1.7$1.8 million and $1.7 million for fiscal years 2010, 20092008and2007,2008, respectively. Future minimum rental commitments under such non-cancelable leases, by fiscal year, are asfollows:follows (in thousands):Operating Capital IN THOUSANDS 2010
$ 63,712 $ 308 2011
56,720 300 2012
52,119 298 2013
46,598 297 2014
41,720 74 Thereafter
137,221 — $ 398,090 $ 1,277 Less amounts representing interest
— (32 ) Capital lease obligations, included in short-term debt and in other long-term debt
$ 1,245 Operating Capital 2011
$ 73,742 $ 292 2012
69,178 292 2013
58,849 293 2014
51,585 90 2015
44,268 1 Thereafter
124,618 0 $ 422,240 $ 968 Less amount representing interest
(26 ) Capital lease obligations, included in short-term debt and in long-term debt
$ 942 The Company has entered into a sublease agreement with a
third partythird-party related to one of its former retail store locations, which expires in 2011. Future sublease income is expected to be approximately$1.2 million$623,000 for2010 and $0.6 million forfiscal year 2011.Purchase Obligations. As of January
2, 2010,1, 2011, the Company had purchase obligations totaling$85.1$124.0 million.Asset Retirement Obligations.
SFAS No. 143Accounting for Asset Retirement Obligations(now codified withinASC 410,Asset Retirement and Environmental Obligations("(“ASC410")410”) requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made and that the associated asset retirementNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)12. Commitments and Contingencies (Continued)costs be capitalized as part of the carrying amount of the long-lived asset. The
Company'sCompany’s asset retirement obligations relate to costs associated with the retirement of leasehold improvements under store and office leases within the EuropewholesaleWholesale segment and theOther International wholesaleAsia Pacific Wholesale segment and under retail store leases within the Direct to Consumer segment. The Company had asset retirement obligations of$2.9$3.4 million as of January2, 2010.1, 2011.Litigation. The Company is occasionally subject to litigation or other legal proceedings. Set forth below is a description of the
Company'sCompany’s significant pending legal matters. Although the estimated range of loss, if any, for the pending legal matters described below cannot be estimated at this time, the Company does not believe that the outcome of these, or any other pending legal matters, individually or collectively, will have a material adverse effect on the business or financial condition of the Company although such matters may have a material adverse effect on theCompany'sCompany’s results of operations or cash flows in a particular period.Three shareholder derivative lawsuits have been filed in the United States District Court for the Northern District of Texas, Dallas Division, naming the Company as a nominal defendant and naming all of the
Company'sCompany’s then current directors and certain of its current and former officers and directors as defendants. The complaints allege purported violations of federal securities laws and state law claims for breach of fiduciary duty, abuse of control, constructive fraud, corporate waste, unjust enrichment and gross mismanagement in connection with certain stock option grants made by the Company.13. Stockholders'14. Stockholders’ Equity and Benefit PlansCommon and Preferred Stock. The Company has 100,000,000 shares of common stock, par value $0.01 per share, authorized, with
66,899,73667,881,522 and66,501,88366,899,736 shares issued and outstanding at fiscal year end20092010 and2008,2009, respectively. The Company has 1,000,000 shares of preferred stock, par value $0.01 per share, authorized, with none issued or outstanding. Rights, preferences and other terms of preferred stock will be determined by the Board of Directors at the time of issuance.Common Stock Repurchase Programs.
During DecemberPurchases of2009,theCompany's BoardCompany’s common stock are made from time to time, subject to market conditions and at prevailing market prices, through the open market. Repurchased shares ofDirectors approved acommon stock are recorded at cost and become authorized but unissued shares which may be issued in the future for general corporate and other purposes. The Company may terminate or limit the stock repurchase programpursuantat any time. In the event the repurchased shares are cancelled, the Company accounts for retirements by allocating the repurchase price towhich $20 million could be used to purchase outstanding shares. No shares were purchased under this authorization duringcommon stock, additional paid-in-capital and retained earnings. The repurchase price allocation is based upon the equity contribution associated with historical issuances.During fiscal
year 2009. Duringyears 2008 and 2007, theCompany'sCompany’s Board of Directors approved two stock repurchase programs, pursuant to which up to2,000,0002.0 million shares of its common stock could be repurchased under each program. During fiscal years 2008 and 2007, the Company completed these two repurchase programs and retired 3.6 million and 0.4 million shares, respectively, of its common stock at a cost of approximately $105.9 million and $15.9 million, respectively. During fiscal year 2009, the Company’s Board of Directors approved a stock repurchase program pursuant to which $20 million could be used to repurchase outstanding shares of the Company’s common stock. The Company did not repurchase any shares under this authorization during fiscalyear 2009. During fiscal year 2010, the Company repurchased approximately 528,000 shares to complete this repurchase program. In fiscal year 2010, the Company’s Board of Directors approved two common share repurchase programs pursuant to which up to $30 million and $750 million, respectively, could be used to repurchase outstanding shares of the Company’s common stock. The $750 million repurchase program has a termination date of December 2013 and the $30 million repurchase program has no termination date. The Company repurchased 3.1 million shares under the $750 million repurchase program during fiscal year 2010, at a cost of $179.2 million. These repurchase programs were conducted pursuant to Rule 10b-18 of the Securities Exchange Act of 1934. At the end of fiscal year 2010 the Company had open authorizations to repurchase approximately $601 million of its common stock.
Noncontrolling Interest. The following table summarizes the effects of changes in the Company’s ownership interest in its subsidiaries on equity (in thousands):
For the 52 Weeks Ended January 1,
2011January 2,
2010Net income attributable to Fossil, Inc.
$ 255,205 $ 139,188 Transfers (to) from the noncontrolling interest
Decrease in Fossil, Inc.'s additional paid-in capital for purchases of 371 common shares of Fossil Taiwan
(711 ) 0 Net transfers to noncontrolling interest
(711 ) 0 Change from net income attributable to Fossil, Inc. and transfers to noncontrolling interest
$ 254,494 $ 139,188 Deferred Compensation and Savings Plans. The Company has a savings plan in the form of a defined contribution plan (the
"401(k) Plan"“401(k) Plan”) for substantially all U.S. based full-time employees of the Company. TheCompany'sCompany’s common stock is one of several investment alternatives available under the 401(k) Plan. The Company has a discretionary match for the 401(k) Plan. After one year of service (minimum of 1,000 hours worked), the Company matches 50% of employee contributions up to 3% of their compensation and 25% of employee contributions between 4% and 6% of their compensation. Matching contributions made by the Company to the 401(k) Plan totaled approximately $1.3 million, $186,000 and $1.2 million for 2010, 2009 and$970,000 for 2009,2008,and 2007,respectively. In March 2009, the Company eliminated the employer match portion of the 401(k) Plan and, effective January 2010, the CompanyNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)13. Stockholders' Equity and Benefit Plans (Continued)reinstated the employer match program. The Company also has the right to make certain additional matching contributions not to exceed 15% of employee compensation. The Company
hasdid notmademake any additional matching contributions during 2010, 20092008and2007.2008.In December 1998, the Company adopted the Fossil, Inc. and Affiliates Deferred Compensation Plan (the
"Deferred Plan"“Deferred Plan”). Eligible participants may elect to defer up to 50% of their salary or up to 100% of any bonuses paid pursuant to the terms and conditions of the Deferred Plan. In addition, the Company may make employer contributions to participants under the Deferred Plan from time to time. The Company made no contributions to the Deferred Plan during 2010, 20092008and2007.2008. The Company has made payments pursuant to the Deferred Plan into a Rabbi Trust. The funds held in the Rabbi Trust are directed to certain investments available through life insurance products and accounted for in accordance with Emerging Issues Task Force No. 97-14,Accounting for Deferred Compensation Arrangements Where Amounts Earned Are Held in a Rabbi Trust and Invested (now codified within ASC 710,Compensation—General("(“ASC710"710”)). As of January2, 2010,1, 2011, the Companyhas recordedhad an asset of$2.8$3.3 million related to theCompany'sCompany’s invested balances recorded in Intangibles and Other Assets—Net and a liability of$1.4$1.8 million related to theparticipants'participants’ investedbalances.balances recorded in Accrued Expenses Other.Stock-Based Compensation Plans.The Company
measuresaccounts for stock-based compensation in accordance with thecostprovisions ofservices received in exchange forASC 718, using the Black-Scholes option pricing model to determine the fair value of stock options andsimilar awards based onstock appreciation rights at thegrant-date fair valuedate ofthe awardgrant. The Company’s current stock-based compensation plans include: (a) stock options andrecognizes this cost in the income statement over the period during which an award recipient is required to provide service in exchangerestricted stock forthe award.its international employees, (b) stockoptions and restricted stock units for its non-employee directors and (c) stock appreciation rights, restricted stock and restricted stock units for its U.S.-based employees. As of January
2, 2010,1, 2011, there was approximately$17.5$19.9 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the incentive plans. This cost is expected to be recognized over a weighted-average period of approximately two years.Long-Term Incentive Plans. An aggregate of 4,685,030 shares of the Company’s common stock were
initiallyreserved for issuance pursuant to theCompany'sCompany’s 2008 Long-Term Incentive Plan("(“2008LTIP"LTIP”), adopted in March 2008. Designated employees of the Company, including officers and directors, certain contractors, and outside directors of the Company are eligible to receive (i) stock options, (ii) stock appreciation rights, (iii) restricted or non-restricted stock awards, (iv) restricted stock units, (v) cash awards, or (vi) any combination of the foregoing. The 2008 LTIP is administered by the Compensation Committee of theCompany'sCompany’s Board of Directors (the"Compensation Committee"“Compensation Committee”). Each award issued under the 2008 LTIP terminates at the time designated by the Compensation Committee, not to exceed ten years. The current stock options, stock appreciation rights, restricted stock and restricted stock units outstanding have original vesting periods that predominately range from three to five years. All stock appreciation rights and restricted stock units are settled in shares ofCompanythe Company’s common stock. Effective January 1, 2010, theCompany'sCompany’s Board of Directors approved a new equity compensation package for nonemployee directors. Each nonemployee director will receive restricted stock units valued at $100,000 on the date of the annualstockholders'stockholders’ meeting. These grants are scheduled to vestaton theearliestearlier of one year from the date of grant or the next annualstockholders'stockholders’ meeting date.An aggregate of 5,821,875 shares of common stockPrior to the Company establishing the 2008 LTIP, stock-based compensation awards werereserved for issuancemade to employees and nonemployee directors pursuant to theCompany'sCompany’s initialLong- TermLong-Term Incentive Plan("LTIP"(“LTIP”) and Nonemployee Director Stock Option Plan (“Nonemployee Plan”),adopted in April 1993. An additional 3,037,500 shares were reserved in each of fiscal years 1995, 1998, 2001 and 2003 for issuance under the LTIP. Designated employees of the Company, including officers and directors, were eligible to receive (i) stock options, (ii) stock appreciation rights, (iii) restricted or non-restricted stock awards, (iv) restricted stock units, (v) cash awards, or (vi) any combination of the foregoing. The LTIP was administered by the Compensation Committee.respectively. Each award issued under the LTIP terminates at the time designated by the Compensation Committee, not to exceed ten years. The current options, stockNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)13. Stockholders' Equity and Benefit Plans (Continued)appreciation rights, restricted stock and restricted stock units outstanding have original vesting periods that predominately range from three to five years. All stock appreciation rights and restricted stock units are settled in shares of
Companythe Company’s common stock.On March 26, 2008,The exercise prices of stock options granted under theCompany's BoardNonemployee Plan were not less than the fair market value ofDirectors elected to terminate this plan; however,thetermination will not impair outstanding awards representing 2,547,251 shares ofCompany’s common stockwhich will continue in accordance with their original terms.An aggregateat the date of506,250 shares of common stock were reserved for issuance pursuantgrant. Pursuant to the NonemployeeDirector Stock OptionPlan,adopted in April 1993. An additional 112,500 shares were reserved in fiscal year 2002 for issuance under this plan. During the first year individuals were elected as nonemployee directors of the Company, they received a grant of 5,000 nonqualified stock options. In addition, on the first day of each subsequent calendar year, each nonemployee director automatically received a grant of an additional 4,000 nonqualified stock options as long as the individual was serving as a nonemployee director. Pursuant to this plan,50% of the options granted became exercisable on the first anniversary of the date of grant and in two additional installments of 25% each on the second and third anniversaries.The exercise prices of stock options granted under this plan were not less than the fair market value of the Company's common stock at the date of grant.On March 26, 2008, theCompany'sCompany’s Board of Directors elected to terminatethis planthese prior plans and grants to employees and nonemployee directors since the termination date have been made under the 2008 LTIP. However, the termination of the LTIP and the NonemployeeDirector Stock Option Plan willplans did not impairtheoutstanding awards representing158,182932,418 shares and 83,750 shares, respectively, of the Company’s common stock whichwill continuecontinued in accordance with their original terms.Restricted Stock Plan. The 2002 Restricted Stock Plan of the Company was intended to advance the interests of the Company, its subsidiaries and its stockholders in order to attract, retain and motivate key employees by providing them with additional incentives through the award of shares of restricted stock. Shares awarded under the Restricted Stock Plan were funded with shares contributed to the Company from a significant stockholder. During 2006, 44,200 shares of stock were contributed to the Restricted Stock Plan by the stockholder and reissued by the Company to employees. At fiscal
year-end 2007, 55,850year end 2010, 22,250 shares issued to employees were forfeited and subsequently canceled and retired. There were no shares forfeited by employees under this plan in fiscal years 2009 or 2008. The restricted shares outstanding have original vesting periods that predominantly range from one to five years. These shares were accounted for at fair value at the date of grant. On August 29, 2007, theCompany'sCompany’s Board of Directors elected to terminate this plan. However, the terminationwilldid not impairtheoutstanding awards representing64,6908,390 shares of common stock, whichwill continuecontinued in accordance with their original terms.Stock Options and Stock Appreciation Rights. The fair value of stock options and stock appreciation rights granted under the
Company'sCompany’s stock-based compensation plans was estimated on the date of grant using the Black-Scholes option-pricing model. The table below outlines the weighted average assumptions for these award grants:2009 2008 2007 Risk-free interest rate
1.8 % 2.3 % 4.6 % Expected term (in years)
5.9 6.4 6.1 Expected volatility
53.2 % 52.0 % 55.8 % Expected dividend yield
— % — % — % Estimated fair value per options/stock appreciation right granted
$ 13.65 $ 14.96 $ 17.86 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)13. Stockholders' Equity and Benefit Plans (Continued)2010 2009 2008 Risk-free interest rate
1.4 % 1.8 % 2.3 % Expected term (in years)
5.8 5.9 6.4 Expected volatility
50.4 % 53.2 % 52.0 % Expected dividend yield
0.0 % 0.0 % 0.0 % Estimated fair value per options/stock appreciation right granted
$ 18.60 $ 13.65 $ 14.96 The expected term of the options represent the estimated period of time until exercise and is based on historical experience of similar awards. Expected stock price volatility is based on the historical volatility of the
Company'sCompany’s common stock. The risk-free interest rate is based on the implied yield available on U.S. Treasury issues with an equivalent remaining term.The Company receives a tax deduction for certain stock option exercises/restricted stock vestings when the options/restricted shares are exercised/vested. Generally for stock options, the tax deduction is related to the excess of the stock price at the time the stock options are sold over the exercise price of the stock options. For restricted shares, the tax deduction is the fair market value of the
Company'sCompany’s common stock on the date the restricted shares vest. Excess tax benefits from stock-based compensation on the consolidated statements of cash flows for fiscal years 2010, 20092008and20072008 amounted to approximately $12.0 million, $1.2 million$0.6 millionand$17.7$0.6 million, respectively.The following table summarizes stock option and stock appreciation rights activity:
Stock Options and Stock Appreciation RightsShares Weighted-
Average
Exercise PriceWeighted-
Average
Remaining
Contractual
Term (years)Aggregate
Intrinsic
ValueIN THOUSANDS IN THOUSANDS Outstanding at January 6, 2007
4,924 $ 14.28 5.0 $ 70,324 Granted
446 30.92 Exercised
(2,364 ) 12.44 $ 56,539 Forfeited or expired
(111 ) 19.38 Outstanding at January 5, 2008
2,895 19.18 5.7 $ 48,983 Granted
423 28.69 Exercised
(350 ) 14.01 $ 5,152 Forfeited or expired
(110 ) 25.48 Outstanding at January 3, 2009
2,858 21.09 5.7 $ 5,862 Granted
317 13.65 Exercised
(315 ) 12.03 $ 4,935 Forfeited or expired
(49 ) 24.13 Outstanding at January 2, 2010
2,811 21.21 5.3 $ 35,217 Exercisable at January 2, 2010
1,867 20.19 4.4 $ 25,347 Nonvested at January 2, 2010
944 23.24 7.2 $ 9,870 Expected to vest
879 $ 23.24 7.2 $ 9,203 Stock Options and Stock Appreciation Rights
Shares Weighted-
Average
Exercise PriceWeighted-
Average
Remaining
Contractual
Term (years)Aggregate
Intrinsic
ValueIN THOUSANDS IN THOUSANDS Outstanding at January 5, 2008
2,895 $ 19.18 5.7 $ 48,983 Granted
423 28.69 Exercised
(350 ) 14.01 5,152 Forfeited or expired
(110 ) 25.48 Outstanding at January 3, 2009
2,858 21.09 5.7 5,862 Granted
317 13.65 Exercised
(315 ) 12.03 4,935 Forfeited or expired
(49 ) 24.13 Outstanding at January 2, 2010
2,811 21.21 5.3 35,217 Granted
325 38.37 Exercised
(1,496 ) 19.98 47,073 Forfeited or expired
(240 ) 26.82 Outstanding at January 1, 2011
1,400 25.55 5.8 62,889 Exercisable at January 1, 2011
646 22.51 4.3 31,006 Nonvested at January 1, 2011
754 28.16 7.1 31,883 Expected to vest
700 $ 28.16 7.1 $ 29,610 The aggregate intrinsic value in the table above is before income taxes and is based on the exercise price for outstanding and exercisable options/rights at January
2, 20101, 2011 and based on the fair market value of theCompany'sCompany’s common stock on the exercise date for options/rights that have been exercised during the fiscal year.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)13. Stockholders' Equity and Benefit Plans (Continued)Stock Options and Stock Appreciation Rights Outstanding and Exercisable. The following table summarizes information with respect to options and stock appreciation rights outstanding and exercisable at January
2, 2010:1, 2011:Stock Options and Stock Appreciation Rights Outstanding Stock Options and Stock
Appreciation Rights
ExercisableRange of Exercise PricesNumber of
SharesWeighted-
Average
Exercise
PriceWeighted-
Average
Remaining
Contractual
Life (Yrs.)Number of
SharesWeighted-
Average
Exercise
PriceIN THOUSANDS IN THOUSANDS $ 4.39 - $ 8.78
132 $ 7.45 1.0 132 $ 7.45 $ 8.78 - $13.18
406 11.39 2.7 406 11.39 $13.18 - $17.57
395 14.02 7.9 56 14.97 $17.57 - $21.96
390 18.84 5.0 301 18.89 $21.96 - $26.35
811 24.16 4.9 734 24.19 $26.35 - $30.74
374 30.53 7.0 98 30.08 $30.74 - $35.14
250 31.46 6.7 101 31.52 $35.14 - $39.53
2 36.18 5.8 1 36.18 $39.53 - $43.92
51 43.10 8.0 38 43.10 2,811 $ 21.21 5.3 1,867 $ 20.19 Stock Options and Stock Appreciation Rights Outstanding
Stock Options and Stock Appreciation Rights
ExercisableRange of
Exercise Prices
Number of
SharesWeighted-
Average
Exercise
PriceWeighted-
Average
Remaining
Contractual
Term (Years)Number of
SharesWeighted-
Average
Exercise
PriceIN THOUSANDS IN THOUSANDS $6.95 - $13.91
347 $ 12.64 5.1 156 $ 11.41 $13.91 - $20.86
150 17.90 4.9 106 17.81 $20.86 - $27.81
267 24.31 4.1 235 24.29 $27.81 - $34.77
317 30.92 6.2 100 31.06 $34.77 - $41.72
276 38.21 8.2 6 35.05 $41.72 - $48.67
43 43.16 7.0 43 43.16 Total
1,400 $ 25.55 5.8 646 $ 22.51 The Company has elected to apply the long-form method to determine the hypothetical additional paid-in capital
("APIC"(“APIC”)pool.pool provided by ASC 718-740,Compensation — Stock Compensation — Income (“ASC 718-740”). The Company had determined that a hypothetical pool of excess tax benefits existed in APIC as of January 1, 2006, the date of adoption ofSFAS No. 123R (now codified withinASC718,Compensation—Stock Compensation("ASC 718"))718-740, related to historical stock option and stock appreciation right exercises. In future periods, excess tax benefits resulting from stock option and stock appreciation right exercises will be recognized as additions to APIC in the period the benefit is realized. In the event of a shortfall (that is, the tax benefit realized is less than the amount previously recognized through periodicstockstock-based compensation expense recognition and related deferred tax accounting), the shortfall would be charged against APIC to the extent of previous excess benefits, if any, including the amounts included in hypothetical APIC pool, and then to tax expense.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)13. Stockholders' Equity and Benefit Plans (Continued)Restricted Stock and Restricted Stock Units. The following table summarizes restricted stock and restricted stock unit activity:
Restricted Stock and Restricted Stock UnitsShares Weighted-
Average
Grant-Date Fair
ValueIN THOUSANDS Nonvested at January 6, 2007
435 $ 18.62 Granted
161 27.51 Vested
(93 ) 18.94 Forfeited
(60 ) 20.13 Nonvested at January 5, 2008
443 21.59 Granted
174 30.18 Vested
(110 ) 21.37 Forfeited
(12 ) 25.54 Nonvested at January 3, 2009
495 24.56 Granted
150 13.65 Vested
(142 ) 23.48 Forfeited
(10 ) 25.02 Nonvested at January 2, 2010
493 21.54 Expected to vest
451 $ 21.54 Restricted Stock and Restricted Stock Units
Number of
SharesWeighted-
Average
Grant-Date
Fair ValueIN THOUSANDS Nonvested at January 5, 2008
443 $ 21.59 Granted
174 30.18 Vested
(110 ) 21.37 Forfeited
(12 ) 25.54 Nonvested at January 3, 2009
495 24.56 Granted
150 13.65 Vested
(142 ) 23.48 Forfeited
(10 ) 25.02 Nonvested at January 2, 2010
493 21.54 Granted
215 38.83 Vested
(150 ) 21.66 Forfeited
(128 ) 25.35 Nonvested at January 1, 2011
430 29.03 Expected to vest
393 $ 29.03 The total fair value of shares/units vested during fiscal years 2010, 2009 and 2008
and 2007was $5.8 million, $2.4 million$3.5 millionand$3.4$3.5 million, respectively.14.15. Supplemental Cash Flow InformationThe following table summarizes the supplemental cash flow information (in thousands):
Fiscal Year2009 2008 2007 IN THOUSANDS Cash paid during the year for:
Interest
$ 443 $ 569 $ 755 Income taxes
$ 62,957 $ 77,240 $ 40,219 Supplemental disclosures of non-cash investing and financing activities:
Additions to property, plant and equipment included in accounts payable
$
4,349
$
3,614
$
3,045Retirement of treasury stock
$ 212 $ 110 $ 2,071 Fiscal Year
2010 2009 2008 Cash paid during the year for:
Interest
$ 1,026 $ 443 $ 569 Income taxes
$ 107,787 $ 62,957 $ 77,240 Supplemental disclosures of non-cash investing and financing activities:
Additions to property, plant and equipment included in accounts payable
$ 8,034 $ 4,349 $ 3,614 Retirement of treasury stock
$ 725 $ 212 $ 110 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)15.16. Supplemental Disclosure for Accumulated Other Comprehensive IncomeA summary of changes in accumulated other comprehensive income is as
follows:follows (in thousands):2009 2008 2007 2010 2009 2008 Unrealized gain (loss) on securities available for sale:
Balance at beginning of year
$ (344 ) $ (1,437 ) $ (688 ) Unrealized gain on marketable investments
554 1,093 51 Other than temporary impairment reclassified into earnings
0 0 (800 ) IN THOUSANDS Unrealized (loss) gain on securities available for sale:
Balance at end of year
210 (344 ) (1,437 ) Unrealized gain (loss) on cash flow hedges:
Balance at beginning of year
(549 ) 3,815 (3,398 ) Plus change in fair value associated with current period hedging activities, net of taxes of $2,482, ($23), ($1,031), respectively
1,016 (2,911 ) 3,816 Less reclassification into earnings, net of taxes of $25, $749, and ($56), respectively
6,703 1,453 (3,397 ) Balance at beginning of year
$ (1,437 ) $ (688 ) $ 19 Unrealized gain (loss) on marketable investments
1,093 51 (707 ) Other than temporary impairment reclassified into earnings
— (800 ) — Balance at end of year
(344 ) (1,437 ) (688 ) Unrealized gain (loss) on cash flow hedges:
Balance at beginning of year
3,815 (3,398 ) (338 ) Change in fair value associated with current period hedging activities, net of taxes of ($23), ($1,031), $56, respectively
(2,911 ) 3,816 (3,397 ) Reclassification of gains (losses) into earnings, net of taxes of $749, ($56), and ($28), respectively
1,453 (3,397 ) (337 ) Balance at end of year
$ (549 ) $ 3,815 $ (3,398 ) Balance at end of year
$ (6,236 ) $ (549 ) $ 3,815 Cumulative translation adjustment
Cumulative translation adjustment
$ 35,353 $ 21,769 $ 40,559 $ 25,444 $ 35,353 $ 21,769 Accumulated other comprehensive income
$ 19,418 $ 34,460 $ 24,147 Accumulated other comprehensive income
$ 34,460 $ 24,147 $ 36,473 16.17. Major Customer, Segment and Geographic InformationIn accordance with
SFAS No. 131,Disclosures about Segments of an Enterprise and Related Information(now codified withinASC 280, Segment Reporting("(“ASC280")280”) the Company reports segment information based on the"management"“management” approach. The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of theCompany'sCompany’s reportable segments.SEGMENT INFORMATION
The Company manages its business primarily on a geographic basis. The
Company'sCompany’s reportable operating segments are comprised ofthe U.S.—North America Wholesale,Europe—Europe Wholesale,Other International—Asia Pacific Wholesale and Direct toConsumer. The
U.S.—North America Wholesale,Europe—Europe Wholesale andOther International—Asia Pacific Wholesale reportable segments do not include activities related to the Direct to Consumer segment. TheEurope—North America Wholesale segment primarily includes sales to wholesale or distributor customers based in Canada, Mexico, the United States and countries in South America. The Europe Wholesale segment primarily includes sales to wholesale or distributor customers based in European countries,as well asthe Middle East and Africa. TheOther International—Asia Pacific Wholesale segment primarily includes sales to wholesale or distributor customers based in Australia,Canada,China (including theCompany'sCompany’s assembly and procurement operations), India, Indonesia, Japan,Korea,Malaysia,Mexico,New Zealand, Singapore, SouthAmericaKorea, Taiwan andTaiwan.Thailand. The Direct to Consumer segment includes Company-owned retail stores, e-commerce sales ande-commercecatalog activities. Each reportablegeographicoperating segment provides similar products andservices, and the accounting policies of the various segments are the same as those described in Note 1—Significant Accounting Policies.services.The Company evaluates the performance of its reportable segments based on net sales and operating income. Net sales for geographic segments are generally based on the location of the customers. Operating income for each segment includes net sales to
third parties,third-parties, related cost of sales and operating expenses directly attributable to the segment.Operating income for each segmentNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)16. Major Customer, Segment and Geographic Information (Continued)includes intercompany profits associated with the sale of products by one segment to another. However, in evaluating the performance of each segment, management considers the impact that such intercompany profits have on each reportable segment. CorporateGeneral corporate expenses,includeincluding certain administrative, legal, accounting, technology support costs, equity compensation costs, payroll costs attributable to executive management and amounts related to intercompany eliminationsandthat are not allocated to the various segments. Intercompany sales of products between segments are referred to as intersegment items.Corporate assets including cash, short-term investments and certain intangible assets are reported as corporate.Certain reclassifications have been made to prior fiscal year amounts to conform with current fiscal year presentation. Due to changes in the Company’s reportable segments as discussed in Note 1 to the consolidated financial statements, segment results for fiscal years 2009 and 2008 have been recast to present results on a comparable basis. These changes had no impact on
theconsolidated net sales or operating income. Summary information by operating segment is asfollows:follows (in thousands):Fiscal Year 2009 Net Sales Operating
IncomeLong-lived
AssetsTotal Assets IN THOUSANDS
United States—Wholesale:
$ 89,781 $ 441,838 External customers
$ 471,055 $ 84,310 — — Intersegment
196,732 — — — Direct to consumer
376,138 39,047 82,766 142,986 Europe—Wholesale:
104,813 430,921 External customers
460,254 89,273 — — Intersegment
43,037 — — — Other International—Wholesale:
22,077 206,410 External customers
240,646 78,491 — — Intersegment
349,896 — — — Intersegment items
(589,665 ) — — — Corporate
— (79,494 ) 30,573 54,328 Consolidated
$ 1,548,093 $ 211,627 $ 330,010 $ 1,276,483 Fiscal Year 2010 Net Sales Operating Income Depreciation and
AmortizationLong-lived Assets Total Assets North America Wholesale:
$ 3,547 $ 98,970 $ 585,616 External customers
$ 779,159 $ 188,155 Intersegment
151,304 Europe Wholesale:
3,954 85,048 383,301 External customers
547,428 154,729 Intersegment
100,661 Asia Pacific Wholesale:
2,291 17,193 188,459 External customers
220,777 82,037 Intersegment
592,403 Direct to Consumer
483,326 66,339 21,452 96,017 217,620 Intersegment items
(844,368 ) Corporate
(114,846 ) 9,058 29,528 92,577 Consolidated
$ 2,030,690 $ 376,414 $ 40,302 $ 326,756 $ 1,467,573 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)16. Major Customer, Segmentsimilar products for the fiscal years 2010, 2009 andGeographic Information (Continued)2008 (in thousands):Fiscal Year 2008 Net Sales Operating
IncomeLong-lived
AssetsTotal Assets IN THOUSANDS
United States—Wholesale:
$ 96,697 $ 359,430 External customers
$ 472,687 $ 30,905 — — Intersegment
268,975 — — — Direct to consumer
309,332 13,060 77,938 138,257 Europe—Wholesale:
110,228 381,772 External customers
530,002 137,753 — — Intersegment
36,313 — — — Other International—Wholesale:
18,958 159,627 External customers
271,221 105,646 — — Intersegment
456,290 — — — Intersegment items
(761,578 ) — — — Corporate
— (81,594 ) 20,009 48,210 Consolidated
$ 1,583,242 $ 205,770 $ 323,830 $ 1,087,296 Fiscal Year 2007 Net Sales Operating
IncomeLong-lived
AssetsTotal Assets IN THOUSANDS
United States—Wholesale:
$ 110,422 $ 467,017 External customers
$ 460,584 $ 24,626 — — Intersegment
230,389 — — — Direct to consumer
255,332 21,731 51,735 119,148 Europe—Wholesale:
100,765 349,488 External customers
483,897 123,815 — �� — Intersegment
39,475 — — — Other International—Wholesale:
16,239 139,613 External customers
233,171 107,179 — — Intersegment
406,759 — — — Intersegment items
(676,623 ) — — — Corporate
— (90,866 ) 18,650 47,362 Consolidated
$ 1,432,984 $ 186,485 $ 297,811 $ 1,122,628 Table of ContentsFiscal Year 2010 Fiscal Year 2009 Fiscal Year 2008 Watches
$ 1,419,205 $ 1,021,181 $ 1,059,085 Leathers
340,405 297,591 277,798 Jewelry
166,183 133,949 150,063 Other
104,897 95,372 96,296 Total
$ 2,030,690 $ 1,548,093 $ 1,583,242 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)16. Major Customer, Segment and Geographic Information (Continued)GEOGRAPHIC INFORMATION
Wholesale customers of the Company consist principally of major department stores and specialty retail stores located throughout the world. The Company does not have an individual customer that comprises 10% or more of the
Company'sCompany’s net sales. Geographic net sales information is generally based on the location of the customers. Net salesoperating incomeand long-lived assetsrelated to the Company's operations in the U.S., Europe and Other International marketsby geographic area are asfollows:follows (in thousands):Fiscal Year 2009 Net sales Operating
IncomeLong-lived
AssetsIN THOUSANDS
United States
$ 714,176 $ 32,957 $ 161,636 Europe
556,217 98,886 142,234 Other international
277,700 79,784 26,140 Consolidated
$ 1,548,093 $ 211,627 $ 330,010 Fiscal Year 2010 Net Sales Long-lived Assets United States
$ 1,028,840 $ 161,472 Europe
670,959 135,087 Asia Pacific
267,158 23,617 All other international
63,733 6,580 Consolidated
$ 2,030,690 $ 326,756 Fiscal Year 2009 Net Sales Long-lived Assets United States
$ 757,837 $ 161,636 Europe
563,061 142,234 Asia Pacific
183,599 19,418 All other international
43,596 6,722 Consolidated
$ 1,548,093 $ 330,010 Fiscal Year 2008 Net Sales Long-lived Assets United States
$ 741,600 $ 169,916 Europe
617,554 129,937 Asia Pacific
184,182 19,302 All other international
39,906 4,675 Consolidated
$ 1,583,242 $ 323,830 Fiscal Year 2008 Net sales Operating
IncomeLong-lived
AssetsIN THOUSANDS
United States
$ 690,342 $ (23,598 ) $ 169,916 Europe
596,104 123,611 129,937 Other international
296,796 105,757 23,977 Consolidated
$ 1,583,242 $ 205,770 $ 323,830 Fiscal Year 2007 Net sales Operating
IncomeLong-lived
AssetsIN THOUSANDS
United States
$ 659,079 $ (36,277 ) $ 168,229 Europe
522,727 113,994 110,097 Other international
251,178 108,768 19,485 Consolidated
$ 1,432,984 $ 186,485 $ 297,811 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)17.18. Selected Quarterly Financial Data (Unaudited)The following is a summary of the unaudited quarterly financial information for the fiscal years
20092010 and20082009 (in thousands, except per share data):Fiscal Year 20091st Qtr 2nd Qtr 3rd Qtr 4th Qtr Net sales
$ 323,027 $ 315,865 $ 381,362 $ 527,839 Gross profit
169,379 167,182 210,737 297,552 Operating expenses
145,576 144,706 153,373 189,568 Operating income
23,803 22,476 57,364 107,984 Income before income taxes
28,423 26,957 55,654 108,864 Provision for income taxes
9,927 9,709 19,109 36,859 Net income
18,496 17,248 36,545 72,005 Net income attributable to noncontrolling interest
1,176 625 1,270 2,034 Net income attributable to Fossil, Inc.
17,320 16,623 35,275 69,971 Earnings per share:
Basic
0.26 0.25 0.53 1.05 Diluted
0.26 0.25 0.52 1.03 Gross profit as a percentage of net sales
52.4 % 52.9 % 55.3 % 56.4 % Operating expenses as a percentage of net sales
45.1 % 45.8 % 40.2 % 35.9 % Operating income as a percentage of net sales
7.4 % 7.1 % 15.0 % 20.5 % Fiscal Year 20081st Qtr 2nd Qtr 3rd Qtr 4th Qtr Net Sales
$ 356,184 $ 353,191 $ 409,760 $ 464,106 Gross Profit
194,251 190,339 224,177 242,384 Operating expenses
145,136 155,378 160,439 184,427 Operating income
49,115 34,961 63,738 57,957 Income before income taxes
49,039 33,654 60,967 50,544 Provision for income taxes
17,888 7,147 23,447 3,869 Net income
31,151 26,507 37,520 46,675 Net income attributable to noncontrolling interest
934 1,370 1,049 403 Net income attributable to Fossil, Inc.
30,217 25,137 36,471 46,272 Earnings per share:
Basic
0.44 0.37 0.54 0.70 Diluted
0.43 0.36 0.54 0.69 Gross profit as a percentage of net sales
54.5 % 53.9 % 54.7 % 52.2 % Operating expenses as a percentage of net sales
40.7 % 44.0 % 39.2 % 39.7 % Operating income as a percentage of net sales
13.8 % 9.9 % 15.6 % 12.5 % Fiscal Year 2010
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Net sales
$ 393,229 $ 412,560 $ 523,825 $ 701,076 Gross profit
219,419 236,885 298,743 400,118 Operating expenses
168,156 172,539 187,473 250,582 Operating income
51,263 64,346 111,270 149,536 Income before income taxes
53,739 64,524 111,257 154,690 Provision for income taxes
16,043 7,965 40,353 54,959 Net income
37,696 56,559 70,904 99,731 Net income attributable to noncontrolling interest
1,789 2,074 2,748 3,074 Net income attributable to Fossil, Inc.
35,907 54,485 68,156 96,657 Comprehensive income
25,496 43,323 88,705 92,324 Comprehensive income attributable to noncontrolling interest
1,780 2,062 2,764 3,084 Comprehensive income attributable to Fossil, Inc.
23,716 41,261 85,941 89,240 Earnings per share:
Basic
0.54 0.81 1.02 1.48 Diluted
0.53 0.80 1.00 1.46 Gross profit as a percentage of net sales
55.8 % 57.4 % 57.0 % 57.1 % Operating expenses as a percentage of net sales
42.8 % 41.8 % 35.8 % 35.7 % Operating income as a percentage of net sales
13.0 % 15.6 % 21.2 % 21.3 % Fiscal Year 2009
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Net sales
$ 323,027 $ 315,865 $ 381,362 $ 527,839 Gross profit
169,379 167,182 210,737 297,552 Operating expenses
145,576 144,706 153,373 189,568 Operating income
23,803 22,476 57,364 107,984 Income before income taxes
28,423 26,957 55,654 108,864 Provision for income taxes
9,927 9,709 19,109 36,859 Net income
18,496 17,248 36,545 72,005 Net income attributable to noncontrolling interest
1,176 625 1,270 2,034 Net income attributable to Fossil, Inc.
17,320 16,623 35,275 69,971 Comprehensive income
9,565 25,909 43,209 75,924 Comprehensive income attributable to noncontrolling interest
1,174 627 1,265 2,039 Comprehensive income attributable to Fossil, Inc.
8,391 25,282 41,944 73,885 Earnings per share:
Basic
0.26 0.25 0.53 1.05 Diluted
0.26 0.25 0.52 1.03 Gross profit as a percentage of net sales
52.4 % 52.9 % 55.3 % 56.4 % Operating expenses as a percentage of net sales
45.1 % 45.8 % 40.2 % 35.9 % Operating income as a percentage of net sales
7.4 % 7.1 % 15.0 % 20.5 % Item 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureChanges in and Disagreements with Accountants on Accounting and Financial Disclosure None.
None.Item 9A. Controls and ProceduresItem 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures
We conducted an evaluation of the effectiveness of our
"disclosure“disclosure controls andprocedures" ("procedures” (“DisclosureControls"Controls”), as defined by Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the"Exchange Act"“Exchange Act”), as of January2, 2010,1, 2011, the end of the period covered by this Annual Report on Form 10-K. The Disclosure Controls evaluation was done under the supervision and with the participation of management, including our Chief Executive Officer("CEO"(“CEO”) and Chief Financial Officer("CFO"(“CFO”). There are inherent limitations to the effectiveness of any system of disclosure controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon this evaluation, our CEO and CFO have concluded that our Disclosure Controls were effective at the reasonable assurance level as of January2, 2010.1, 2011.Management'sManagement’s Report on Internal Control Over Financial ReportingManagement is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The
Company'sCompany’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements for external reporting purposes in accordance with generally accepted accounting principles.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness of internal control over financial reporting to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate over time.
Management, including our CEO and our CFO, assessed the effectiveness of the
Company'sCompany’s internal control over financial reporting as of January2, 2010.1, 2011. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission inInternal Control—Integrated Framework. Based on its assessment and those criteria, management has concluded that the Company maintained effective internal control over financial reporting as of January2, 2010.1, 2011.Deloitte & Touche LLP, the independent registered public accounting firm that audited the
Company'sCompany’s consolidated financial statements included in this Annual Report on Form 10-K, has issued an attestation report on theCompany'sCompany’s internal control over financial reporting, which is included herein.Changes in Internal Control over Financial Reporting
There have been no changesDuring the third quarter of fiscal year 2010, we implemented an enterprise resource planning system from SAP inthe Company's internal control over financial reporting during the quarter ended January 2, 2010our United Kingdom subsidiary thathavematerially affectedor are reasonably likely to materially affect, the Company'sour internal control over financial reporting.REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Fossil, Inc.
Richardson, Texas
We have audited the internal control over financial reporting of Fossil Inc. and subsidiaries (the
"Company"“Company”) as of January2, 2010,1, 2011, based oncriteria established inInternalControl—Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. TheCompany'sCompany’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanyingManagement'sManagement’s Report on Internal ControlOverover Financial Reporting. Our responsibility is to express an opinion on theCompany'sCompany’s internal control over financial reporting based on our audit.We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A
company'scompany’s internal control over financial reporting is a process designed by, or under the supervision of, thecompany'scompany’s principal executive and principal financial officers, or persons performing similar functions, and effected by thecompany'scompany’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Acompany'scompany’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of thecompany'scompany’s assets that could have a material effect on the financial statements.Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January
2, 2010,1, 2011, based on the criteria established inInternalControl—Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and
theconsolidated financial statement schedule as of and for the year ended January2, 20101, 2011 of the Company and our report dated March3, 20102, 2011 expressed an unqualified opinion on those consolidated financial statements and consolidated financial statementschedule and includes an explanatory paragraph regarding the Company's change in method of accounting for noncontrolling interest.schedule./
s/ DELOITTES/ DELOITTE &TOUCHE LLPTOUCHEDallas, Texas
March
3, 20102, 2011Item 9B. Other Information None.
Item 10. Directors, Executive Officers and Corporate Governance Item 10. Directors, Executive Officers and Corporate GovernanceThe information under the headings
"Directors“Directors and Nominees," "Executive” “Executive Officers," "Section” “Section 16(a) Beneficial Ownership ReportingCompliance"Compliance” and"Board“Board Committees andMeetings"Meetings” in our proxy statement to be filed with the SEC pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year covered by this report, is incorporated herein by reference.We have adopted a code of ethics that applies to all our directors and employees, including the principal executive officer, principal financial officer, principal accounting officer and controller. The full text of our Code of Conduct and Ethics is published on our Investor Relations website atwww.fossil.com. We intend to disclose future amendments to certain provisions of the Code of Conduct and Ethics, or waivers of such provisions granted to executive officers and directors, on this website within five business days following the date of such amendment or waiver.
Item 11. Executive Compensation Item 11. Executive CompensationThe information required in response to this Item is incorporated herein by reference to our proxy statement to be filed with the SEC pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year covered by this report.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersThe information required in response to this Item is incorporated herein by reference to our proxy statement to be filed with the SEC pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year covered by this report.
Item 13. Certain Relationships and Related Transactions, and Director Independence Item 13. Certain Relationships and Related Transactions, and Director IndependenceThe information required in response to this Item is incorporated herein by reference to our proxy statement to be filed with the SEC pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year covered by this report.
Item 14. Principal Accountant Fees and Services Item 14. Principal Accountant Fees and ServicesThe information required in response to this Item is incorporated herein by reference to our proxy statement to be filed with the SEC pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year covered by this report.
Item 15. Exhibits and Financial Statement Schedules(a)Documents filed as part of Report.
Page 1.
Report of Independent Registered Public Accounting Firm
64 Consolidated Balance Sheets
65 Consolidated Statements of Income and Comprehensive Income
66 Consolidated Statements of Stockholders' Equity
67 Consolidated Statements of Cash Flows
68 Notes to Consolidated Financial Statements
69 2.
Consolidated Financial Statement Schedule: See "Schedule II".
110 3.
Exhibits required to be filed by Item 601 of Regulation S-K.
111 Item 15. Exhibits and Financial Statement Schedules (a) Documents filed as part of Report. The exhibits required to be filed by this Item 15 are set forth in the Exhibit Index accompanying this report.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
March 3, 2010.2, 2011FOSSIL, INC. /
s/ KOSTAS/ KOSTA N.KARTSOTIS
KARTSOTISKosta N. Kartsotis, Chairman of the Board of Directors and Chief Executive Officer and DirectorPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Capacity
Date
/
s/ TOM KARTSOTIS
S/ KOSTA N. KARTSOTISTomKosta N. Kartsotis
Chairman of the Board of Directors and DirectorChief Executive Officer (Principal Executive Officer)March 3, 20102, 2011/s/ KOSTA N. KARTSOTISKosta N. KartsotisChief Executive Officer and Director (Principal Executive Officer)March 3, 2010/
s/ MIKES/ MIKE L.KOVAR
KOVARMike L. Kovar
Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)
March3, 20102, 2011/s/ MICHAEL W. BARNESMichael W. BarnesPresident and Chief Operating Officer and DirectorMarch 3, 2010/s/ ELAINE AGATHERElaine AgatherDirectorMarch 3, 2010/s/ JEFFREY N. BOYERJeffrey N. BoyerDirectorMarch 3, 2010/s/ ELYSIA HOLT RAGUSAElysia Holt RagusaDirectorMarch 3, 2010SignatureCapacityDate/
s/ JAL S. SHROFF
S/ ELAINE AGATHERJal S. ShroffElaine Agather
Director March 3, 20102, 2011/
s/ JAMESS/ JEFFREY N. BOYERJeffrey N. Boyer
Director March 2, 2011 /S/ ELYSIA HOLT RAGUSA
Elysia Holt Ragusa
Director March 2, 2011 /S/ JAL S. SHROFF
Jal S. Shroff
Director March 2, 2011 /S/ JAMES E.
SKINNER
SKINNERJames E. Skinner
Director
March3, 20102, 2011/s/ MICHAEL STEINBERGMichael SteinbergDirectorMarch 3, 2010/
s/ DONALDS/ MICHAEL STEINBERGMichael Steinberg
Director March 2, 2011 /S/ DONALD J.
STONE
STONEDonald J. Stone
Director
March3, 20102, 2011/
s/ JAMESS/ JAMES M.ZIMMERMAN
ZIMMERMANJames M. Zimmerman
Director
March3, 20102, 2011SCHEDULE IIVALUATIONS AND QUALIFYING ACCOUNTS
Fiscal Years
2007,2008, 2009 and2009
2010(in Thousands)
Additions Deductions Balance at the
Begining of
PeriodCharged
(Credited) to
OperationsActual
Returns or
WriteoffsBalance at
End of
PeriodClassification
Fiscal Year 2007:
Account receivable allowances:
Sales returns
38,258 70,210 66,590 41,878 Bad debts
9,812 3,851 3,740 9,923 Deferred tax asset valuation allowance
2,982 1,112 2,100 1,994 Fiscal Year 2008:
Account receivable allowances:
Sales returns
41,878 74,186 73,832 42,232 Bad debts
9,923 8,339 4,898 13,364 Deferred tax asset valuation allowance
1,994 3,035 138 4,891 Fiscal Year 2009:
Account receivable allowances:
Sales returns
42,232 59,435 61,664 40,003 Bad debts
13,364 5,906 3,307 15,963 Deferred tax asset valuation allowance
4,891 2,250 2,176 4,965 Additions Deductions Balance at the
Begining of
PeriodCharged
(Credited) to
OperationsActual
Returns or
WriteoffsBalance at End
of PeriodClassification
Fiscal Year 2008:
Account receivable allowances:
Sales returns
41,878 74,186 73,832 42,232 Bad debts
9,923 8,339 4,898 13,364 Deferred tax asset valuation allowance
1,994 3,035 138 4,891 Fiscal Year 2009:
Account receivable allowances:
Sales returns
42,232 59,435 61,664 40,003 Bad debts
13,364 5,906 3,307 15,963 Deferred tax asset valuation allowance
4,891 2,250 2,176 4,965 Fiscal Year 2010:
Account receivable allowances:
Sales returns
40,003 99,581 76,886 62,698 Bad debts
15,963 6,078 4,080 17,961 Deferred tax asset valuation allowance
4,965 1,501 2,285 4,181 Exhibit
NumberDescription 3.1 Second Amended and Restated Certificate of Incorporation of Fossil, Inc. (incorporated by reference to the Company's Report on Form 10-K for the year ended January 1, 2005). 3.2 Certificate of Amendment of the Second Amended and Restated Certificate of Incorporation of Fossil, Inc. (incorporated by reference to the Company's Report on Form 10-K for the year ended January 1, 2005). 3.3 Second Amended and Restated Bylaws of Fossil, Inc. (incorporated by reference to the Company's Report on Form 8-K filed on August 28, 2008). 10.1 (2) Fossil, Inc. 1993 Nonemployee Director Stock Option Plan (incorporated herein by reference to the Company's Registration Statement on Form S-1, registration no. 33-45357, filed with the Securities and Exchange Commission). 10.2 (2) Fossil, Inc. 1993 Long-Term Incentive Plan (incorporated herein by reference to the Company's Registration Statement on Form S-1, registration no. 33-45357, filed with the Securities and Exchange Commission). 10.3 (2) Form of Award Agreement under the Fossil, Inc. 1993 Long-Term Incentive Plan (incorporated herein by reference to the Company's Registration Statement on Form S-3, registration no. 333-107476, filed with the Securities and Exchange Commission). 10.4 (2) Fossil, Inc. 1993 Savings and Retirement Plan (incorporated herein by reference to the Company's Registration Statement on Form S-1, registration no. 33-45357, filed with the Securities and Exchange Commission). 10.5 Subordination Agreement of Fossil Trust for the benefit of First Interstate Bank of Texas, N.A. dated as of August 31, 1994 (incorporated by reference to the Company's Report on Form 10-K for the year ended January 1, 2005). 10.6 Master Licensing Agreement dated as of August 30, 1994, by and between Fossil, Inc. and Fossil Partners, L.P. (incorporated by reference to the Company's Report on Form 10-K for the year ended January 1, 2005). 10.7 Agreement of Limited Partnership of Fossil Partners, L.P. (incorporated by reference to the Company's Report on Form 10-K for the year ended January 1, 2005). 10.8 (2) First Amendment to the Fossil, Inc. 1993 Long-Term Incentive Plan (incorporated by reference to the Company's Report on Form 10-K for the year ended January 1, 2005). 10.9 (2) Second Amendment to the Fossil, Inc. 1993 Long-Term Incentive Plan (incorporated by reference to the Company's Report on Form 10-K for the year ended January 1, 2005). 10.10 (2) Amendment to the Fossil, Inc. 1993 Non-Employee Director Stock Option Plan (incorporated by reference to the Company's Report on Form 10-K for the year ended January 1, 2005). 10.11 (2) Third Amendment to the Fossil, Inc. 1993 Long-Term Incentive Plan (incorporated by reference to the Company's Report on form 10-K for the year ended January 3, 2009). 10.12 (2) 2002 Restricted Stock Plan of Fossil, Inc. and Form of Award Agreement (incorporated by reference to the Company's Report on Form 10-K for the year ended January 1, 2005). Exhibit
NumberDescription
3.1 Third Amended and Restated Certificate of Incorporation of Fossil, Inc. (incorporated by reference to the Company’s Current Report on Form 8-K filed on May 25, 2010). 3.2 Third Amended and Restated Bylaws of Fossil, Inc. (incorporated by reference to the Company’s Current Report on Form 8-K filed on May 25, 2010). 10.1(2) Fossil, Inc. 1993 Nonemployee Director Stock Option Plan (incorporated herein by reference to the Company’s Registration Statement on Form S-1, registration no. 33-45357, filed with the Securities and Exchange Commission). 10.2(2) Fossil, Inc. 1993 Long-Term Incentive Plan (incorporated herein by reference to the Company’s Registration Statement on Form S-1, registration no. 33-45357, filed with the Securities and Exchange Commission). 10.3(2) Form of Award Agreement under the Fossil, Inc. 1993 Long-Term Incentive Plan (incorporated herein by reference to the Company’s Registration Statement on Form S-3, registration no. 333-107476, filed with the Securities and Exchange Commission). 10.4(2) Fossil, Inc. 1993 Savings and Retirement Plan (incorporated herein by reference to the Company’s Registration Statement on Form S-1, registration no. 33-45357, filed with the Securities and Exchange Commission). 10.5(1) Subordination Agreement of Fossil Trust for the benefit of First Interstate Bank of Texas, N.A. dated as of August 31, 1994. 10.6(1) Master Licensing Agreement dated as of August 30, 1994, by and between Fossil, Inc. and Fossil Partners, L.P. 10.7(1) Agreement of Limited Partnership of Fossil Partners, L.P. 10.8(1)(2) First Amendment to the Fossil, Inc. 1993 Long-Term Incentive Plan. 10.9(1)(2) Second Amendment to the Fossil, Inc. 1993 Long-Term Incentive Plan. 10.10(1)(2) Amendment to the Fossil, Inc. 1993 Non-Employee Director Stock Option Plan. 10.11(2) Third Amendment to the Fossil, Inc. 1993 Long-Term Incentive Plan (incorporated by reference to the Company’s Report on form 10-K for the year ended January 3, 2009). 10.12(1)(2) 2002 Restricted Stock Plan of Fossil, Inc. and Form of Award Agreement. 10.13 Loan Agreement, by and among, Wells Fargo Bank, National Association, Fossil Partners, L.P., Fossil, Inc., Fossil Intermediate, Inc., Fossil Trust, Fossil Stores I, Inc., Intermediate Leasing, Inc., Arrow Merchandising, Inc., Fossil Holdings, LLC and FMW Acquisition, Inc., dated September 23, 2004 (incorporated by reference to the Company’s Report on form 10-K for the year ended January 2, 2010). 10.14(1) First Amendment to Loan Agreement, by and among Wells Fargo Bank, National Association, a national banking association, Fossil Partners, L.P., Fossil, Inc., Fossil Intermediate, Inc., Fossil Trust, Fossil Stores I, Inc., Intermediate Leasing, Inc., Arrow Merchandising, Inc. and Fossil Holdings, LLC, dated September 22, 2005. 10.15(1) Second Amendment to Loan Agreement, by and among Wells Fargo Bank, National Association, a national banking association, Fossil Partners, L.P., Fossil, Inc., Fossil Intermediate, Inc., Fossil Trust, Fossil Stores I, Inc., Arrow Merchandising, Inc. and Fossil Holdings, LLC, dated February 20, 2006 to be effective as of September 22, 2005. 10.16(2) Fourth Amendment to the Fossil, Inc. 1993 Long-Term Incentive Plan (incorporated by reference to the Company’s Report on Form 10-K for the year ended January 6, 2007). Table of ContentsExhibit
NumberDescription
10.17(2) Fifth Amendment to the Fossil, Inc. 2004 Long-Term Incentive Plan (incorporated by reference to the Company’s Report on Form 10-K for the year ended January 6, 2007). 10.18(2) Amendment to Award Agreement, by and between Fossil, Inc. and Mark Quick, dated November 10, 2005 (incorporated by reference to the Company’s Report on Form 10-K for the year ended January 6, 2007). 10.19(2) Form of Restricted Stock Award Agreement under the Fossil, Inc. 2004 Long-Term Incentive Plan (incorporated by reference to the Company’s Report on Form 10-K for the year ended January 6, 2007). 10.20(2) Form of Restricted Stock Unit Award Agreement under the Fossil, Inc. 2004 Long-Term Incentive Plan (incorporated by reference to the Company’s Report on Form 10-K for the year ended January 6, 2007). 10.21(2) Form of Stock Appreciation Rights Award Agreement under the Fossil, Inc. 2004 Long-Term Incentive Plan (incorporated by reference to the Company’s Report on Form 10-K for the year ended January 6, 2007). 10.22(2) Sixth Amendment to the 2004 Long-Term Incentive Plan of Fossil, Inc. (incorporated by reference to the Company’s Report on Form 8-K filed on May 30, 2006). 10.23 Third Amendment to Loan Agreement, by and among Wells Fargo Bank, National Association, Fossil Partners, L.P., Fossil, Inc., Fossil Intermediate, Inc., Fossil Trust, Fossil Stores I, Inc., Arrow Merchandising, Inc. and Fossil Holdings, LLC, effective as of September 21, 2006 (incorporated by reference to the Company’s Report on Form 8-K filed on September 26, 2006). 10.24 Amended and Restated Stock Pledge Agreement, by and between Fossil, Inc. and Wells Fargo Bank, National Association, a national banking association, dated September 21, 2006 (incorporated by reference to the Company’s Report on Form 8-K filed on September 26, 2006). 10.25 Fourth Amendment to Loan Agreement, by and among Wells Fargo Bank, National Association, a national banking association, Fossil Partners, L.P., Fossil, Inc., Fossil Intermediate, Inc., Fossil Trust, Fossil Stores I, Inc., Arrow Merchandising, Inc. and Fossil Holdings, LLC, effective as of December 22, 2006 (incorporated by reference to the Company’s Report on Form 8-K filed on December 27, 2006). 10.26(2) Form of Letter Agreement relating to outstanding stock options under the Company’s long-term equity plans (incorporated by reference to the Company’s report on Form 8-K filed on January 5, 2007). 10.27(2) Form of Revised Stock Option Award Agreement under the Fossil, Inc. 2004 Long-Term Incentive Plan (incorporated by reference to the Company’s Report on Form 10-K filed on August 8, 2007). 10.28(2) Form of Revised Restricted Stock Award Agreement under the Fossil, Inc. 2004 Long-Term Incentive Plan (incorporated by reference to the Company’s Report on Form 10-K filed on August 8, 2007). 10.29(2) Form of Revised Restricted Stock Unit Award Agreement under the Fossil, Inc. 2004 Long-Term Incentive Plan (incorporated by reference to the Company’s Report on Form 10-K filed on August 8, 2007). 10.30(2) Form of Revised Stock Appreciation Rights Award Agreement under the Fossil, Inc. 2004 Long-Term Incentive Plan (incorporated by reference to the Company’s Report on Form 10-K filed on August 8, 2007). 10.31(2) Form of International Stock Option Award Agreement under the Fossil, Inc. 2004 Long-Term Incentive Plan (incorporated by reference to the Company’s Report on Form 10-K filed on August 8, 2007). Exhibit
NumberDescription
10.32(2) Form of International Restricted Stock Award Agreement under the Fossil, Inc. 2004 Long-Term Incentive Plan (incorporated by reference to the Company’s Report on Form 10-K filed on August 8, 2007). 10.33(2) Form of International Restricted Stock Unit Award Agreement under the Fossil, Inc. 2004 Long-Term Incentive Plan (incorporated by reference to the Company’s Report on Form 10-K filed on August 8, 2007). 10.34 Fifth Amendment to Loan Agreement, by and among Wells Fargo Bank, National Association, a national banking association, Fossil Partners, L.P., Fossil, Inc., Fossil Intermediate, Inc., Fossil Trust, Fossil Stores I, Inc., Arrow Merchandising, Inc. and Fossil Holdings, LLC, effective as of September 19, 2007 (incorporated by reference to the Company’s Report on Form 8-K filed on September 24, 2007). 10.35(2) Amendment Number One to the Fossil, Inc. 1993 Nonemployee Director Stock Option Plan (incorporated by reference to the Company’s Report on Form 10-K for the year ended January 3, 2009). 10.36(2) Fossil, Inc. 2008 Long-Term Incentive Plan (incorporated by reference to the Company’s Report on Form 8-K filed on May 23, 2008). 10.37(2) Form of Stock Option Award Agreement—U.S. Employees (incorporated by reference to the Company’s Report on Form 8-K filed on June 27, 2008). 10.38(2) Form of Stock Option Award Agreement—Non-U.S. Employees (incorporated by reference to the Company’s Report on Form 8-K filed on June 27, 2008). 10.39(2) Restricted Stock Unit Award Agreement—U.S. Participants (incorporated by reference to the Company’s Report on Form 8-K filed on June 27, 2008). 10.40(2) Restricted Stock Unit Award Agreement—Non-U.S. Participants (incorporated by reference to the Company’s Report on Form 8-K filed on June 27, 2008). 10.41(2) Restricted Stock Award Agreement—U.S. Participants (incorporated by reference to the Company’s Report on Form 8-K filed on June 27, 2008). 10.42(2) Restricted Stock Award Agreement—Non-U.S. Participants (incorporated by reference to the Company’s Report on Form 8-K filed on June 27, 2008). 10.43(2) Stock Appreciation Rights Award (incorporated by reference to the Company’s Report on Form 8-K filed on June 27, 2008). 10.44 Sixth Amendment to Loan Agreement, by and among Wells Fargo Bank, National Association, a national banking association, Fossil Partners, L.P., Fossil, Inc., Fossil Intermediate, Inc., Fossil Trust, Fossil Stores I, Inc., Arrow Merchandising, Inc. and Fossil Holdings, LLC, effective as of September 19, 2008 (incorporated by reference to the Company’s Report on Form 8-K filed on September 23, 2008). 10.45 Fourth Amended and Restated Revolving Line of Credit Note, by and between Fossil Partners, L.P. and Wells Fargo Bank, National Association, a national banking association, dated September 19, 2008 (incorporated by reference to the Company’s Report on Form 8-K filed on September 23, 2008). 10.46 Seventh Amendment to Loan Agreement, by and among Wells Fargo Bank, National Association, a national banking association, Fossil Partners, L.P., Fossil, Inc., Fossil Intermediate, Inc., Fossil Trust, Fossil Stores I, Inc., Arrow Merchandising, Inc., Fossil Holdings, LLC and Fossil International Holdings, Inc., effective as of November 19, 2008 (incorporated by reference to the Company’s Report on Form 8-K filed on November 25, 2008). Exhibit
NumberDescription 10.13 (1) Loan Agreement, by and among, Wells Fargo Bank, National Association, Fossil Partners, L.P., Fossil, Inc., Fossil Intermediate, Inc., Fossil Trust, Fossil Stores I, Inc., Intermediate Leasing, Inc., Arrow Merchandising, Inc., Fossil Holdings, LLC and FMW Acquisition, Inc., dated September 23, 2004. 10.14 First Amendment to Loan Agreement, by and among Wells Fargo Bank, National Association, a national banking association, Fossil Partners, L.P., Fossil, Inc., Fossil Intermediate, Inc., Fossil Trust, Fossil Stores I, Inc., Intermediate Leasing, Inc., Arrow Merchandising, Inc. and Fossil Holdings, LLC, dated September 22, 2005 (incorporated by reference to the Company's Report on Form 8-K filed on October 3, 2005). 10.15 Second Amendment to Loan Agreement, by and among Wells Fargo Bank, National Association, a national banking association, Fossil Partners, L.P., Fossil, Inc., Fossil Intermediate, Inc., Fossil Trust, Fossil Stores I, Inc., Arrow Merchandising, Inc. and Fossil Holdings, LLC, dated February 20, 2006 to be effective as of September 22, 2005 (incorporated by reference to the Company's Report on Form 8-K filed on February 23, 2006). 10.16 (2) Fourth Amendment to the Fossil, Inc. 1993 Long-Term Incentive Plan (incorporated by reference to the Company's Report on Form 10-K for the year ended January 6, 2007). 10.17 (2) Fifth Amendment to the Fossil, Inc. 2004 Long-Term Incentive Plan (incorporated by reference to the Company's Report on Form 10-K for the year ended January 6, 2007). 10.18 (2) Form of Resale Restriction Agreement (for certain senior and executive officers), effective as of November 16, 2005 (incorporated by reference to the Company's Report on Form 10-K for the year ended January 6, 2007). 10.19 (2) Form of Resale Restriction Agreement (for non-employee directors), effective as of November 30, 2005 (incorporated by reference to the Company's Report on Form 10-K for the year ended January 6, 2007). 10.20 (2) Amendment to Award Agreement, by and between Fossil, Inc. and Mark Quick, dated November 10, 2005 (incorporated by reference to the Company's Report on Form 10-K for the year ended January 6, 2007). �� 10.21 (2) Form of Restricted Stock Award Agreement under the Fossil, Inc. 2004 Long-Term Incentive Plan (incorporated by reference to the Company's Report on Form 10-K for the year ended January 6, 2007). 10.22 (2) Form of Restricted Stock Unit Award Agreement under the Fossil, Inc. 2004 Long-Term Incentive Plan (incorporated by reference to the Company's Report on Form 10-K for the year ended January 6, 2007). 10.23 (2) Form of Stock Appreciation Rights Award Agreement under the Fossil, Inc. 2004 Long-Term Incentive Plan (incorporated by reference to the Company's Report on Form 10-K for the year ended January 6, 2007). 10.24 (2) Sixth Amendment to the 2004 Long-Term Incentive Plan of Fossil, Inc. (incorporated by reference to the Company's Report on Form 8-K filed on May 30, 2006). Table of ContentsExhibit
NumberDescription
10.47 Fifth Amended and Restated Revolving Line of Credit Note, by and between Fossil Partners, L.P. and Wells Fargo Bank, National Association, a national banking association, dated November 19, 2008 (incorporated by reference to the Company’s Report on Form 8-K filed on November 25, 2008). 10.48 Amended and Restated Stock Pledge Agreement, by and between Fossil, Inc. and Wells Fargo Bank, National Association, a national banking association, dated November 19, 2008 (incorporated by reference to the Company’s Report on Form 8-K filed on November 25, 2008). 10.49 Amended and Restated Guaranty Agreement, executed by Fossil, Inc., Fossil Intermediate, Inc., Fossil Trust, Fossil Stores I, Inc., Arrow Merchandising, Inc., Fossil Holdings, LLC and Fossil International Holdings, Inc. in favor of Wells Fargo Bank, National Association, a national banking association (incorporated by reference to the Company’s Report on Form 8-K filed on November 25, 2008). 10.50 Eighth Amendment to Loan Agreement, by and among Wells Fargo Bank, National Association, a national banking association, Fossil partners, L.P., Fossil, Inc., Fossil Intermediate, Inc. Fossil Trust, Fossil Stores I, Inc., Arrow Merchandising, Inc., Fossil Holdings, LLC and Fossil International Holdings, Inc. effective as of November 18, 2009 (incorporated by reference to the Company’s Report on Form 8-K filed on November 23, 2009). 10.51 Sixth Amended and Restated Revolving Line of Credit Note, by and between Fossil Partners, L.P. and Wells Fargo Bank, National Association, a national banking association, dated November 18, 2009 (incorporated by reference to the Company’s Report on Form 8-K filed on November 23, 2009). 10.52 Letter Agreement Regarding Acceptance to Serve as an Advisory Director and Election to Decline Participation in the Fossil, Inc. 2008 Long-Term Incentive Plan, executed by Kenneth W. Anderson on May 20, 2009 (incorporated by reference to the Company’s Report on Form 8-K filed on May 22, 2009). 10.53 Letter Agreement Regarding Acceptance to Serve as an Advisory Director and Election to Decline Participation in the Fossil, Inc. 2008 Long-Term Incentive Plan, executed by Alan J. Gold on May 20, 2009 (incorporated by reference to the Company’s Report on Form 8-K filed on May 22, 2009). 10.54(2) Summary Sheet of Non-employee Director Cash Compensation (incorporated by reference to the Company’s report on Form 8-K filed on April 7, 2009). 10.55(2) Form of Stock Option Award Agreement for Outside Directors under the Fossil, Inc. 2008 Long-Term Incentive Plan (incorporated by reference to the Company’s Report on Form 8-K filed on January 5, 2009). 10.56(2) Form of Restricted Stock Unit Award Agreement for Outside Directors under the Fossil, Inc. 2008 Long-Term Incentive Plan (incorporated by reference to the Company’s Report on form 10-K for the year ended January 2, 2010). 10.57(2) Form of Restricted Stock Unit Award Agreement under the Fossil, Inc. 2008 Long-Term Incentive Plan for Non-U.S. Participants (incorporated by reference to the Company’s Report on Form 10-Q for the quarter ended April 3, 2010). 10.58(2) Form of Stock Option Award Agreement for Non-US Optionees under the Fossil, Inc. 2008 Long-Term Incentive Plan (incorporated by reference to the Company’s Report on form 10-K for the year ended January 2, 2010). 10.59(2) Summary Sheet of Non-employee Director Compensation, dated as of January 1, 2010 (incorporated by reference to the Company’s Report on form 10-K for the year ended January 2, 2010). Exhibit
NumberDescription
10.60(2) Fossil, Inc. 2010 Cash Incentive Plan (incorporated by reference to the Company’s Current Report on Form 8-K filed on May 25, 2010). 10.61 Ninth Amendment to Loan Agreement, by and among Wells Fargo Bank, National Association, a national banking association, Fossil Partners, L.P., Fossil, Inc., Fossil Intermediate, Inc., Fossil Trust, Fossil Stores I, Inc., Arrow Merchandising, Inc., Fossil Holdings, LLC and Fossil International Holdings, Inc., effective as of November 17, 2010 (incorporated by reference to the Company’s Current Report on Form 8-K filed on November 19, 2010). 10.62 Seventh Amended and Restated Revolving Line of Credit Note, by and among Fossil Partners, L.P. and Wells Fargo Bank, National Association, a national banking association, dated November 17, 2010 (incorporated by reference to the Company’s Current Report on Form 8-K filed on November 19, 2010). 10.63 Third Amended and Restated Fossil, Inc. and Affiliates Deferred Compensation Plan (incorporated by reference to the Company’s Current Report on Form 8-K filed on December 21, 2010). 10.64 Credit Agreement, dated as of December 17, 2010, by and among Fossil, Inc., Fossil Intermediate, Inc., Fossil Trust, Fossil Partners, L.P., Arrow Merchandising, Inc., Fossil Stores I, Inc., Fossil Holdings, LLC, Fossil International Holdings, Inc., Wells Fargo Bank, National Association and Wells Fargo Securities, LLC (the exhibits and schedules to the Credit Agreement have not been filed herewith and will be provided to the Securities and Exchange Commission supplementally upon request) (incorporated by reference to the Company’s Current Report on Form 8-K filed on December 23, 2010). 10.65 Guaranty Agreement, dated as of December 17, 2010, executed and delivered by Fossil Intermediate, Inc., Fossil Trust, Fossil Stores I, Inc. and Fossil International Holdings, Inc. to Wells Fargo Bank, National Association (incorporated by reference to the Company’s Current Report on Form 8-K filed on December 23, 2010). 10.66 Pledge Agreement, dated as of December 17, 2010, by and among Fossil, Inc. and Wells Fargo Bank, National Association (incorporated by reference to the Company’s Current Report on Form 8-K filed on December 23, 2010). 21.1(1) Subsidiaries of Fossil, Inc. 23.1(1) Consent of Independent Registered Public Accounting Firm. 31.1(1) Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002. 31.2(1) Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002. 32.1(1) Certification of Chief Executive Officer Pursuant to Section 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2(1) Certification of Chief Financial Officer Pursuant to Section 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101(3) The following materials from the Company’s Annual Report on Form 10-K for the year ended January 1, 2011, formatted in XBRL (eXtensible Business Reporting Language), (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Earnings, (iii) Consolidated Statements of Cash Flows, and (iv) the Notes to the Consolidated Financial Statements. Exhibit
NumberDescription 10.25 Third Amendment to Loan Agreement, by and among Wells Fargo Bank, National Association, Fossil Partners, L.P., Fossil, Inc., Fossil Intermediate, Inc., Fossil Trust, Fossil Stores I, Inc., Arrow Merchandising, Inc. and Fossil Holdings, LLC, effective as of September 21, 2006 (incorporated by reference to the Company's Report on Form 8-K filed on September 26, 2006). 10.26 Amended and Restated Stock Pledge Agreement, by and between Fossil, Inc. and Wells Fargo Bank, National Association, a national banking association, dated September 21, 2006 (incorporated by reference to the Company's Report on Form 8-K filed on September 26, 2006). 10.27 Fourth Amendment to Loan Agreement, by and among Wells Fargo Bank, National Association, a national banking association, Fossil Partners, L.P., Fossil, Inc., Fossil Intermediate, Inc., Fossil Trust, Fossil Stores I, Inc., Arrow Merchandising, Inc. and Fossil Holdings, LLC, effective as of December 22, 2006 (incorporated by reference to the Company's Report on Form 8-K filed on December 27, 2006). 10.28 (2) Form of Letter Agreement relating to outstanding stock options under the Company's long-term equity plans (incorporated by reference to the Company's report on Form 8-K filed on January 5, 2007). 10.29 (2) Form of Revised Stock Option Award Agreement under the Fossil, Inc. 2004 Long-Term Incentive Plan (incorporated by reference to the Company's Report on Form 10-K filed on August 8, 2007). 10.30 (2) Form of Revised Restricted Stock Award Agreement under the Fossil, Inc. 2004 Long-Term Incentive Plan (incorporated by reference to the Company's Report on Form 10-K filed on August 8, 2007). 10.31 (2) Form of Revised Restricted Stock Unit Award Agreement under the Fossil, Inc. 2004 Long-Term Incentive Plan (incorporated by reference to the Company's Report on Form 10-K filed on August 8, 2007). 10.32 (2) Form of Revised Stock Appreciation Rights Award Agreement under the Fossil, Inc. 2004 Long-Term Incentive Plan (incorporated by reference to the Company's Report on Form 10-K filed on August 8, 2007). 10.33 (2) Form of International Stock Option Award Agreement under the Fossil, Inc. 2004 Long-Term Incentive Plan (incorporated by reference to the Company's Report on Form 10-K filed on August 8, 2007). 10.34 (2) Form of International Restricted Stock Award Agreement under the Fossil, Inc. 2004 Long-Term Incentive Plan (incorporated by reference to the Company's Report on Form 10-K filed on August 8, 2007). 10.35 (2) Form of International Restricted Stock Unit Award Agreement under the Fossil, Inc. 2004 Long-Term Incentive Plan (incorporated by reference to the Company's Report on Form 10-K filed on August 8, 2007). 10.36 Fifth Amendment to Loan Agreement, by and among Wells Fargo Bank, National Association, a national banking association, Fossil Partners, L.P., Fossil, Inc., Fossil Intermediate, Inc., Fossil Trust, Fossil Stores I, Inc., Arrow Merchandising, Inc. and Fossil Holdings, LLC, effective as of September 19, 2007 (incorporated by reference to the Company's Report on Form 8-K filed on September 24, 2007). (1) Filed herewith. (2) Management contract or compensatory plan or arrangement. (3) Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections. Exhibit
NumberDescription 10.37 (2) Amendment Number One to the Fossil, Inc. 1993 Nonemployee Director Stock Option Plan (incorporated by reference to the Company's Report on Form 10-K for the year ended January 3, 2009). 10.38 (2) Option Forfeiture Agreement dated December 31, 2007 between Fossil, Inc. and Kenneth W. Anderson (incorporated by reference to the Company's Report on Form 10-K for the year ended January 3, 2009). 10.39 (2) Summary Sheet of Non-Employee Director Compensation dated as of April 1, 2008 (incorporated by reference to the Company's Report on Form 10-Q for the quarter ended April 5, 2008). 10.40 (2) Fossil, Inc. 2008 Long-Term Incentive Plan (incorporated by reference to the Company's Report on Form 8-K filed on May 23, 2008). 10.41 (2) Form of Stock Option Award Agreement—U.S. Employees (incorporated by reference to the Company's Report on Form 8-K filed on June 27, 2008). 10.42 (2) Form of Stock Option Award Agreement—Non-U.S. Employees (incorporated by reference to the Company's Report on Form 8-K filed on June 27, 2008). 10.43 (2) Restricted Stock Unit Award Agreement—U.S. Participants (incorporated by reference to the Company's Report on Form 8-K filed on June 27, 2008). 10.44 (2) Restricted Stock Unit Award Agreement—Non-U.S. Participants (incorporated by reference to the Company's Report on Form 8-K filed on June 27, 2008). 10.45 (2) Restricted Stock Award Agreement—U.S. Participants (incorporated by reference to the Company's Report on Form 8-K filed on June 27, 2008). 10.46 (2) Restricted Stock Award Agreement—Non-U.S. Participants (incorporated by reference to the Company's Report on Form 8-K filed on June 27, 2008). 10.47 (2) Stock Appreciation Rights Award (incorporated by reference to the Company's Report on Form 8-K filed on June 27, 2008). 10.48 Sixth Amendment to Loan Agreement, by and among Wells Fargo Bank, National Association, a national banking association, Fossil Partners, L.P., Fossil, Inc., Fossil Intermediate, Inc., Fossil Trust, Fossil Stores I, Inc., Arrow Merchandising, Inc. and Fossil Holdings, LLC, effective as of September 19, 2008 (incorporated by reference to the Company's Report on Form 8-K filed on September 23, 2008). 10.49 Fourth Amended and Restated Revolving Line of Credit Note, by and between Fossil Partners, L.P. and Wells Fargo Bank, National Association, a national banking association, dated September 19, 2008 (incorporated by reference to the Company's Report on Form 8-K filed on September 23, 2008). 10.50 (2) Second Amended and Restated Fossil, Inc. and Affiliates Deferred Compensation Plan (incorporated by reference to the Company's Report on Form 8-K filed on October 31, 2008). Exhibit
NumberDescription 10.51 Seventh Amendment to Loan Agreement, by and among Wells Fargo Bank, National Association, a national banking association, Fossil Partners, L.P., Fossil, Inc., Fossil Intermediate, Inc., Fossil Trust, Fossil Stores I, Inc., Arrow Merchandising, Inc., Fossil Holdings, LLC and Fossil International Holdings, Inc., effective as of November 19, 2008 (incorporated by reference to the Company's Report on Form 8-K filed on November 25, 2008). 10.52 Fifth Amended and Restated Revolving Line of Credit Note, by and between Fossil Partners, L.P. and Wells Fargo Bank, National Association, a national banking association, dated November 19, 2008 (incorporated by reference to the Company's Report on Form 8-K filed on November 25, 2008). 10.53 Amended and Restated Stock Pledge Agreement, by and between Fossil, Inc. and Wells Fargo Bank, National Association, a national banking association, dated November 19, 2008 (incorporated by reference to the Company's Report on Form 8-K filed on November 25, 2008). 10.54 Amended and Restated Guaranty Agreement, executed by Fossil, Inc., Fossil Intermediate, Inc., Fossil Trust, Fossil Stores I, Inc., Arrow Merchandising, Inc., Fossil Holdings, LLC and Fossil International Holdings, Inc. in favor of Wells Fargo Bank, National Association, a national banking association (incorporated by reference to the Company's Report on Form 8-K filed on November 25, 2008). 10.55 Eighth Amendment to Loan Agreement, by and among Wells Fargo Bank, National Association, a national banking association, Fossil partners, L.P., Fossil, Inc., Fossil Intermediate, Inc. Fossil Trust, Fossil Stores I, Inc., Arrow Merchandising, Inc., Fossil Holdings, LLC and Fossil International Holdings, Inc. effective as of November 18, 2009 (incorporated by reference to the Company's Report on Form 8-K filed on November 23, 2009). 10.56 Sixth Amended and Restated Revolving Line of Credit Note, by and between Fossil Partners, L.P. and Wells Fargo Bank, National Association, a national banking association, dated November 18, 2009 (incorporated by reference to the Company's Report on Form 8-K filed on November 23, 2009). 10.57 Letter Agreement Regarding Acceptance to Serve as an Advisory Director and Election to Decline Participation in the Fossil, Inc. 2008 Long-Term Incentive Plan, executed by Kenneth W. Anderson on May 20, 2009 (incorporated by reference to the Company's Report on Form 8-K filed on May 22, 2009). 10.58 Letter Agreement Regarding Acceptance to Serve as an Advisory Director and Election to Decline Participation in the Fossil, Inc. 2008 Long-Term Incentive Plan, executed by Alan J. Gold on May 20, 2009 (incorporated by reference to the Company's Report on Form 8-K filed on May 22, 2009). 10.59 (2) Summary Sheet of Non-employee Director Cash Compensation (incorporated by reference to the Company's report on Form 8-K filed on April 7, 2009). 10.60 (2) Form of Stock Option Award Agreement for Outside Directors under the Fossil, Inc. 2008 Long-Term Incentive Plan (incorporated by reference to the Company's Report on Form 8-K filed on January 5, 2009). 10.61 (1)(2) Form of Restricted Stock Unit Award Agreement for Outside Directors under the Fossil, Inc. 2008 Long-Term Incentive Plan. Exhibit
NumberDescription 10.62 (1)(2) Form of Stock Option Award Agreement for Non-US Optionees under the Fossil, Inc. 2008 Long-Term Incentive Plan. 10.63 (1)(2) Summary Sheet of Non-employee Director Compensation, dated as of January 1, 2010. 21.1 (1) Subsidiaries of Fossil, Inc. 23.1 (1) Consent of Independent Registered Public Accounting Firm. 31.1 (1) Certification of Principal Executive Officer 31.2 (1) Certification of Principal Financial Officer 32.1 (1) Certification of Chief Executive Officer Pursuant to Section 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 (1) Certification of Chief Financial Officer Pursuant to Section 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (1)Filed herewith.(2)Management contract or compensatory plan or arrangement.