FOSSIL GROUP, INC. The following is a discussion of the financial condition and results of operations ofFossil Group, Inc. and its subsidiaries for the thirteen and twenty-seven week periods endedJuly 4, 2020 (the "Second Quarter" and "Year To Date Period," respectively) as compared to the thirteen and twenty-six week periods endedJune 29, 2019 (the "PriorYear Quarter " and "Prior Year YTD Period," respectively). This discussion should be read in conjunction with the condensed consolidated financial statements and the related notes thereto. General We are a global design, marketing and distribution company that specializes in consumer fashion accessories. Our principal offerings include an extensive line of men's and women's fashion watches and jewelry, handbags, small leather goods, belts and sunglasses. In the watch and jewelry product categories, 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 meet 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, Company-owned retail and outlet stores, mass market stores and through our FOSSIL® website and third-party websites. Our wholesale customer base includes, among others, Amazon, Best Buy, Dillard's, Kohl's, Macy's, Nordstrom,Saks Fifth Avenue , Target and Wal-Mart. Inthe United States , our network of Company-owned stores included 55 retail stores located in premier retail sites and 101 outlet stores located in major outlet malls as ofJuly 4, 2020 . In addition, we offer an extensive collection of our FOSSIL brand products 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 approximately 150 countries worldwide through 23 Company-owned foreign sales subsidiaries and through a network of approximately 80 independent distributors. Internationally, our network of Company-owned stores included 155 retail stores and 119 outlet stores as ofJuly 4, 2020 . 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 in certain countries. Our business is subject to economic cycles, retail industry conditions and the impact of tariffs on our products. 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. In addition, acts of terrorism, acts of war and military action both in theU.S. and abroad can have a significant effect on economic conditions and may negatively affect our ability to procure our products from manufacturers for sale to our customers. Our business is also subject to the risks inherent in global sourcing supply. Certain key components in our products come from limited sources of supply, which exposes us to potential supply shortages that could disrupt the manufacture and sale of our products. Any interruption or delay in the supply of key components could significantly harm our ability to meet scheduled product deliveries to our customers and cause us to lose sales. Interruptions or delays in supply may be caused by a number of factors that are outside of our and our contract manufacturers' control. 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 in the respective markets in which we compete. As is typical with new products, including our lines of connected accessories, 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 that we can drive long-term growth with brand building, innovation through design, fashion and new materials and introducing new technology and functionality into our accessories, while continuing to provide a solid value proposition to consumers across all of our brands. Our international operations are subject to many risks, including foreign currency fluctuations and risks related to the global economy. Generally, a strengthening of theU.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 risks managed by using derivative instruments are the future payments by non-U.S. dollar functional currency subsidiaries of intercompany 32
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inventory transactions denominated inU.S. dollars. We enter into foreign exchange forward contracts ("forward contracts") to manage fluctuations in global currencies that will ultimately be used to settle suchU.S. dollar denominated inventory purchases. Known or Anticipated Trends: Based on our recent operating results and current perspectives on our operating environment, we anticipate certain trends will continue to impact our operating results: InMarch 2020 , a novel strain of coronavirus ("COVID-19") was declared a global pandemic by theWorld Health Organization . Our business operations and financial performance for the Second Quarter and Year To Date Period were materially impacted by COVID-19. The COVID-19 pandemic has negatively affected the global economies, disrupted global supply chains and financial markets, and led to significant travel and transportation restrictions, including mandatory closures of non-essential businesses and orders to "shelter-in-place." We are focused on protecting the health and safety of our employees, customers and suppliers to minimize potential disruptions and supporting the community to address challenges posed by the global COVID-19 pandemic. At the end of the first quarter of fiscal year 2020 ("First Quarter"), the impact of COVID-19 resulted in the closure of the majority of our stores and many of our wholesale partners' stores. During the Second Quarter, many regional and local governments lifted or modified restrictions and orders. By the end of the Second Quarter, the majority of our stores have re-opened; however, these stores have been impacted by a decrease in retail traffic and reduced hours at many locations. By the date of this filing, an additional number of our stores have reopened in some capacity. The reopening of our remaining stores and our wholesale partners' stores, which remain closed, is dependent on a number of factors, including, but not limited to, the lifting of any government restrictions and implementation of safety protocols. While we believe the closed stores will open over stages during the next several months, we cannot reasonably estimate the impact such closures will have on our retail and wholesale sales and overall results. We expect revenue declines to continue in our retail and wholesale channels as consumers react to, or otherwise practice, "social distancing" and other safety measures. We experienced a larger decline in revenues in the Second Quarter than in the First Quarter, as a significant number of our retail and wholesale partners' stores were closed for the majority of the period. For our stores that have reopened, we are seeing trends in traffic down significantly, and those effects are being partially offset by improved conversions. Since the COVID-19 pandemic began, we have seen strong growth trends in our direct and wholesale e-commerce channels. We expect these trends to continue, as consumers continue to focus on online shopping options. We have taken certain cost saving and other actions, and plan to take further actions, to address the decrease in revenues and cash flow and other impacts on our business as a result of COVID-19 in order to maintain liquidity and in order to remain in compliance with financial covenants. Examples of some of these actions include the following: Board of Director and Executive Compensation: We implemented base salary reductions for each of our executive officers for an indefinite time period. Further, the cash fees for all non-employee directors serving on our Board of Directors were deferred for the First Quarter until the end of the year, and the cash fees were reduced by 20% for the Second Quarter. Other Employee Actions: We have implemented base salary reductions for a substantial number of our employees globally. We also implemented weekly work hour reductions (e.g., from 40 hours to 32 or 24 hours) and have implemented work-reduction furloughs for certain other employees. We closed all of our corporate offices at various times in 2020. Many of our offices inAsia andEurope have reopened in some capacity with health and safety guidelines in place. Our offices in theU.S. remain closed with plans to reopen in some capacity inSeptember 2020 . We believe our employees have generally been successful in transitioning to a virtual working environment. Office and Retail Location Expenses: We have entered into agreements, or are in discussions with, most of our retail and corporate office landlords to modify rent payments, receive other concessions or otherwise reduce our operating costs for these locations. Other Expense Reductions: We have also extended the payment terms with a number of our vendors and suppliers globally and have agreements, or are in discussions with, licensors of certain third party trademarks to reduce our royalty obligations in fiscal year 2020. In addition, we plan to reduce marketing and capital spending and eliminate all non-business critical spending for the balance of 2020. 2020 Operating Expenses: Selling, general and administrative expenses ("SG&A") for 2020 is expected to be several million dollars lower than 2019 and our original plan for 2020. Our NWF 2.0 initiative is being expanded to include additional expense reduction programs which are partly dependent on the length and depth of the COVID-19 pandemic impact. Expense reductions are expected to be primarily driven by additional store closings and rent concessions, reduced compensation levels, lower marketing investment, and fewer discretionary expenses. 33
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Capital Expenditures: Capital expenditures for 2020 are expected to be approximately$9 million , compared to original guidance of approximately$25 million . This reduction reflects the deferral or cancellation of certain planned investments. Management believes our cost reduction plans are probable of being successfully implemented, which will result in adequate cash flows to support our ongoing operations and to meet our covenant requirements for one year following the date these financial statements are issued. Our Term Credit Agreement (as defined in "Note 15-Debt Activity") contains certain affirmative and negative covenants. InJune 2020 , we entered into Amendment No. 3 to our Term Credit Agreement to amend, among other things, certain of these financial covenants as a result of the impact of COVID-19 on our business. Refer to "Note 15-Debt Activity" for additional details on the Term Credit Agreement. We are currently in compliance with our covenants and are forecasting to remain in compliance for the year following the date that these financial statements are issued. Due to the uncertainty related to the duration of COVID-19, we could experience material further decreases to revenues and cash flows and may experience difficulty in remaining in compliance with financial covenants under the Term Credit Agreement, as amended. Business Strategies and Outlook: Notwithstanding the COVID-19 pandemic, we plan to execute on the following strategies to enhance our brands, grow our revenue and achieve profitability. These strategies remain highly relevant and we believe they will be important to our long-term success. The first strategic initiative is delivering compelling storytelling and innovation to build upon brand equities for both owned and licensed brands. Our second strategic initiative is commercial transformation, which we are accelerating due to the current operating environment created by the COVID-19 pandemic. We have deployed substantial resources toward increasing our digital commerce and marketing capabilities in recent years, and that is helping us serve our customers during this time of heightened e-commerce demand. We have invested in a robust set of tools that can support a larger direct to consumer business in the future. Our third strategic initiative is expanding our opportunity inChina andIndia . In these countries, we are continuing to execute against a strategy centered around localized marketing and segmented assortments. Although the impact of COVID-19 is likely to disrupt our growth trajectory in the short to intermediate term, we continue to viewChina andIndia as compelling long-term opportunities. Our fourth strategic initiative is to capture greater efficiency in our processes and right-sizing our cost structure. Our NWF 2.0 initiative is a primary example of this strategy. In 2019, we reduced our operating expenses by nearly$50 million through our NWF 2.0 program. Given the current environment and our perspective on the future state of business, we are expanding our NWF 2.0 program to capture an incremental$50 million in benefits in years 2020 and 2021, which brings the total savings derived from NWF 1.0 and NWF 2.0 from$200 million to$300 million . Since the outbreak of the COVID-19 pandemic, we have taken quick and strong actions to accelerate aspects of our strategy to generate current year savings, preserve liquidity and improve financial flexibility during the COVID-19 pandemic. Examples of some of these actions include: •Board of director and executive compensation reductions and deferrals •Other employee actions, like reduced hours •Office and retail location expense reductions •Other expense reductions •Capital expenditure deferral and cancellations For a more complete discussion of the risks facing our business, see "Part I, Item 1A. Risk Factors" of our Annual Report on Form 10-K for the fiscal year endedDecember 28, 2019 , "Part II, Item 1A. Risk Factors" of our Quarter Report on Form 10-Q for the First Quarter and "Part II, Item 1A. Risk Factors" of this Quarter Report on Form 10-Q. Results of Operations Executive Summary. Since the onset of the COVID-19 pandemic, we have acted to protect our employees, partners and communities worldwide, adapted to rapidly changing circumstances, mitigated business disruption and strengthened our financial position. While significant disruption has been caused by the COVID-19 pandemic, during the Second Quarter, investments in our digital channels, one of our strategic imperatives, supported sales growth as sales grew strongly through digital channels and partially offset declines in our stores and wholesale channels. As regions in the world lifted stay at home orders during the Second Quarter, we also saw an improvement in sales in our retail stores and through our wholesale partners. By the end of the Second Quarter, 407 of our global stores had re-opened. Overall sales for the Second Quarter were$259 million , down 48% (47% in constant currency) compared with the PriorYear Quarter . Gross margins were 54.3% for the Second Quarter as compared with 52.9% for the PriorYear Quarter , as disciplined inventory management practices helped us focus on selling through on hand inventory and total inventories ended at$376 million , down sequentially from the First Quarter and the comparable period of the prior fiscal year. We accelerated and executed cost-savings measures under our NWF 2.0 program during the Second Quarter as we transitioned certain temporary reductions in our corporate staff to permanent 34
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reductions. We also made progress on improving our liquidity through ongoing discussions with key suppliers, licensors and landlords. Constant Currency Financial Information As a multinational enterprise, we are exposed to changes in foreign currency exchange rates. The translation of the operations of our foreign-based entities from their local currencies intoU.S. dollars is sensitive to changes in foreign currency exchange rates and can have a significant impact on our reported financial results. In general, our overall financial results are affected positively by a weakerU.S. dollar and are affected negatively by a strongerU.S. dollar as compared to the foreign currencies in which we conduct our business. As a result, in addition to presenting financial measures in accordance with accounting principles generally accepted inthe United States of America ("GAAP"), our discussions contain references to constant currency financial information, which is a non-GAAP financial measure. To calculate net sales on a constant currency basis, net sales for the current year for entities reporting in currencies other than theU.S. dollar are translated intoU.S. dollars at the average rates during the comparable period of the prior fiscal year. We present constant currency information to provide investors with a basis to evaluate how our underlying business performed, excluding the effects of foreign currency exchange rate fluctuations. The constant currency financial information presented herein should not be considered a substitute for, or superior to, the measures of financial performance prepared in accordance with GAAP. We provide constant currency financial information and the most directly comparable GAAP measure where applicable. Quarterly Periods EndedJuly 4, 2020 andJune 29, 2019 ConsolidatedNet Sales . Net sales decreased$242.4 million or 48.3% (47.4% in constant currency) for the Second Quarter as compared to the PriorYear Quarter , primarily as a result of the ongoing COVID-19 pandemic. During the Second Quarter, watch sales decreased$203.8 million or 49.3% (48.4% in constant currency), our leathers products decreased$26.0 million or 49.4% (48.9% in constant currency) and our jewelry business decreased$5.6 million or 26.9% (26.0% in constant currency). As we progressed through the Second Quarter, sales trends improved as a result of an easing of COVID-19 related restrictions in many markets, enabling some return of traffic in our retail stores and wholesale customer locations. Our direct business decreased significantly during the Second Quarter, largely driven by temporary store and concession closures due to COVID-19 and permanent store closures since the end of the PriorYear Quarter in connection with our NWF program. Global comparable retail sales decreased 36%, which includes both our stores and our own e-commerce channels and the impacts of COVID-19 closures in both channels. While many stores re-opened during the Second Quarter, we still experienced significant traffic declines, which were partially offset by improved conversions. The sales declines in our store channel were partially offset by strong growth in e-commerce, both in our owned websites and in third party marketplace sites recorded in our wholesale channel. We will continue focusing on sales in the digital channel, as customers continue to shift to digital and we are generating greater return on our investments in digital infrastructure. We have reduced our store footprint by 20 stores since the end of the PriorYear Quarter and expect to reduce it further during the remainder of fiscal year 2020. Net sales information by product category is summarized as follows (dollars in millions): For the 13 Weeks Ended July For the 13 Weeks Ended June 4, 2020 29, 2019 Growth (Decline) Percentage Percentage Percentage Percentage As Constant Net Sales of Total Net Sales of Total Dollars Reported Currency Watches$ 209.5 80.9 %$ 413.3 82.4 %$ (203.8 ) (49.3 )% (48.4 )% Leathers 26.6 10.3 52.6 10.5 (26.0 ) (49.4 ) (48.9 ) Jewelry 15.2 5.9 20.8 4.2 (5.6 ) (26.9 ) (26.0 ) Other 7.7 2.9 14.7 2.9 (7.0 ) (47.6 ) (46.9 ) Total$ 259.0 100.0 %$ 501.4 100.0 %$ (242.4 ) (48.3 )% (47.4 )%
In the Second Quarter, the translation of foreign-based net sales into
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The following table sets forth consolidated net sales by segment (dollars in millions):
For the 13 Weeks Ended July For the 13 Weeks Ended June
4, 2020 29, 2019 Growth (Decline)
Percentage
Percentage Percentage Percentage As Constant
Net Sales of Total Net Sales of Total Dollars Reported Currency
Americas $ 105.8 40.8 % $ 223.1 44.5 % $ (117.3 ) (52.6 )% (52.3 )%
Europe 79.5 30.7 147.1 29.4 (67.6 ) (46.0 ) (45.0 )
Asia 69.2 26.7 126.3 25.2 (57.1 ) (45.2 ) (43.4 )
Corporate 4.5 1.8 4.9 0.9 (0.4 ) (8.2 ) (8.2 )
Total $ 259.0 100.0 % $ 501.4 100.0 % $ (242.4 ) (48.3 )% (47.4 )%
Americas Net Sales . Americas net sales decreased $117.3 million or 52.6% (52.3%
in constant currency) during the Second Quarter in comparison to the Prior Year
Quarter . During the Second Quarter, watches decreased $100.6 million or 54.3%
(54.0% in constant currency), our leathers business decreased $16.2 million or
48.2% (47.9% in constant currency), and our jewelry category increased $1.1
million or 68.8% (68.8% in constant currency). In the region, sales declined in
the U.S. , Mexico and Canada . Strong sales growth in e-commerce partially offset
the declines in other channels. Sales declined in most brands, most notably in
FOSSIL and MICHAEL KORS®. Comparable retail sales declined in the mid-thirties
on a percentage basis during the Second Quarter, driven by temporary store
closures due to the COVID-19 pandemic, partially offset by strong positive
e-commerce comparable retail sales.
The following table sets forth product net sales and the changes in product net
sales on both a reported and constant-currency basis from period to period for
the Americas segment (dollars in millions):
For the 13 Weeks For the 13 Weeks
Ended July 4, 2020 Ended June 29, 2019 Growth (Decline)
Percentage Percentage
Net Sales Net Sales Dollars As Reported Constant Currency
Watches $ 84.5 $ 185.1 $ (100.6 ) (54.3 )% (54.0 )%
Leathers 17.4 33.6 (16.2 ) (48.2 ) (47.9 )
Jewelry 2.7 1.6 1.1 68.8 68.8
Other 1.2 2.8 (1.6 ) (57.1 ) (57.1 )
Total $ 105.8 $ 223.1 $ (117.3 ) (52.6 )% (52.3 )%
Europe Net Sales . Europe net sales decreased $67.6 million or 46.0% (45.0% in
constant currency) during the Second Quarter in comparison to the Prior Year
Quarter . During the Second Quarter, watches decreased $52.3 million or 45.7%
(44.7% in constant currency), jewelry declined $7.0 million or 38.0% (37.5% in
constant currency) and our leathers business declined $4.2 million or 45.7%
(44.6% in constant currency). Across the Eurozone , sales were down in all major
markets with the greatest declines in Germany , the U.K. , Italy and France . Sales
decreased in all major brands, most notably in FOSSIL, MICHAEL KORS and EMPORIO
ARMANI®. Comparable retail sales declined in the mid-twenties on a percentage
basis during the Second Quarter, driven by temporary store closures due to the
COVID-19 pandemic, partially offset by strong positive e-commerce comparable
retail sales.
The following table sets forth product net sales and the changes in product net
sales on both a reported and constant-currency basis from period to period for
the Europe segment (dollars in millions):
For the 13 Weeks Ended For the 13 Weeks
July 4, 2020 Ended June 29, 2019 Growth (Decline)
Percentage
Percentage Constant
Net Sales Net Sales Dollars As Reported Currency
Watches $ 62.2 $ 114.5 $ (52.3 ) (45.7 )% (44.7 )%
Leathers 5.0 9.2 (4.2 ) (45.7 ) (44.6 )
Jewelry 11.4 18.4 (7.0 ) (38.0 ) (37.5 )
Other 0.9 5.0 (4.1 ) (82.0 ) (80.0 )
Total $ 79.5 $ 147.1 $ (67.6 ) (46.0 )% (45.0 )%
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Asia Net Sales. Net sales inAsia decreased$57.1 million or 45.2% (43.4% in constant currency) during the Second Quarter in comparison to the PriorYear Quarter . During the Second Quarter, watches decreased$50.8 million or 44.7% (42.9% in constant currency), our leathers business decreased$5.7 million or 58.2% (56.1% in constant currency) and our jewelry category increased$0.4 million or 57.1% (71.4% in constant currency). Sales declined in most brands during the Second Quarter, most notably in FOSSIL, EMPORIO ARMANI,MICHAEL KORS and DIESEL®. Sales decreased in all major markets acrossAsia , except for mainlandChina , where sales growth was driven by e-commerce channels. Throughout the region our wholesale and retail channels were negatively impacted by shutdowns and traffic declines due to the COVID-19 pandemic. Comparable retail sales declined in the mid-fifties on a percentage basis during the Second Quarter, driven by temporary store closures due to the COVID-19 pandemic. Compared to our other segments, our comparable stores sales inAsia declined less, but also experienced relatively less offsetting e-commerce growth. The following table sets forth product net sales and the changes in product net sales on both a reported and constant-currency basis from period to period for theAsia segment (dollars in millions): For the 13 Weeks Ended For the 13 Weeks July 4, 2020 Ended June 29, 2019 Growth (Decline) Percentage Percentage Constant Net Sales Net Sales Dollars As Reported Currency Watches $ 62.8 $ 113.6$ (50.8 ) (44.7 )% (42.9 )% Leathers 4.1 9.8 (5.7 ) (58.2 ) (56.1 ) Jewelry 1.1 0.7 0.4 57.1 71.4 Other 1.2 2.2 (1.0 ) (45.5 ) (50.0 ) Total $ 69.2 $ 126.3$ (57.1 ) (45.2 )% (43.4 )% The following table sets forth the number of stores by concept on the dates indicated below: July 4, 2020 June 29, 2019 Americas Europe Asia Total Americas Europe Asia Total Full price accessory 80 76 54 210 87 88 51 226 Outlets 114 74 32 220 115 73 35 223 Full priced multi-brand - 3 3 6 - 4 3 7 Total stores 194 153 89 436 202 165 89 456 During the Second Quarter, we closed 15 stores and opened 4 new stores in connection with our NWF program. Both stores and our own e-commerce sites are included in comparable retail 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 retail sales base, but are included in total sales. These stores are returned to the comparable retail sales base in the thirteenth month following the expansion and/or relocation. Comparable retail sales are calculated on a comparable calendar period. Therefore, the percentage change in comparable sales for 2020 were calculated on a 27-to-27 week basis to normalize the 27-week Year To Date Period with the 26-week Prior Year YTD Period. Comparable retail sales also exclude the effects of foreign currency fluctuations. Gross Profit. Gross profit of$140.6 million in the Second Quarter decreased 47.0% in comparison to$265.1 million in the PriorYear Quarter , as a result of decreased sales. Gross profit margin rate increased to 54.3% in the Second Quarter compared to 52.9% in the PriorYear Quarter , primarily reflecting a higher mix of e-commerce sales and reduced minimum licensor royalty costs, partially offset by heightened promotional activity and increased freight and duty costs. Currency favorably impacted the gross profit margin rate in the Second Quarter by approximately 50 basis points. Operating Expenses. Total operating expenses in the Second Quarter decreased by$86.0 million , or 32.7%, to$177.4 million compared to$263.4 million in the PriorYear Quarter . Operating expenses in the Second Quarter included$10.5 million of restructuring costs, primarily related to employee costs, store closures and professional services, while the PriorYear Quarter included$7.3 million in restructuring costs. SG&A expenses in the Second Quarter decreased$89.2 million from the PriorYear Quarter due to lower compensation, marketing and discretionary costs. The translation of foreign-denominated expenses during the Second Quarter decreased operating expenses by$2.4 million as a result of the strongerU.S. dollar. As a percentage of net sales, SG&A expenses increased to 64.4% in the Second Quarter as compared to 51.1% in the PriorYear Quarter . 37
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Operating Income (Loss). Operating income (loss) was a loss of$36.8 million in the Second Quarter as compared to income of$1.7 million in the PriorYear Quarter . During the Second Quarter, the operating loss was primarily driven by COVID-19 impacts on sales. As a percentage of net sales, operating margin (loss) was (14.2)% in the Second Quarter compared to 0.3% in the PriorYear Quarter . Operating margin rate in the Second Quarter included a favorable impact of 20 basis points due to changes in foreign currencies. Operating income (loss) by segment is summarized as follows (dollars in millions): For the 13 Weeks Ended For the 13 Weeks Ended Change Operating Margin % July 4, 2020 June 29, 2019 Dollars Percentage 2020 2019 Americas $ 4.8 $ 29.5$ (24.7 ) (83.7 )% 4.5 % 13.2 % Europe (10.5 ) 12.5 (23.0 ) (184.0 ) (13.2 ) 8.5 Asia 6.6 27.0 (20.4 ) (75.6 ) 9.6 21.3 Corporate (37.7 ) (67.3 ) 29.6 (44.0 ) Total operating income (loss) $ (36.8 ) $ 1.7
Interest Expense. Interest expense increased by$0.5 million during the Second Quarter compared to the PriorYear Quarter as a result of a larger borrowing base and a partial offset by a decreased interest rate. Other Income (Expense)-Net. During the Second Quarter, other income (expense)-net changed favorably to income of$0.9 million in comparison to income of$0.5 million in the PriorYear Quarter , primarily driven by net transactional currency gains, compared to net transactional currency losses in the PriorYear Quarter and partially offset by decreased interest income mainly due to declining interest rates. Provision for Income Taxes. Income tax benefit for the Second Quarter was$20.8 million , resulting in an effective income tax rate of 47.6%. For the PriorYear Quarter , income tax expense was$1.4 million , resulting in an effective income tax rate of (28.0)%. The effective tax rate in the Second Quarter differed from the PriorYear Quarter primarily due to changes enacted in the Coronavirus Aid, Relief, and Economic Security ("CARES") Act, which was signed into law onMarch 27, 2020 . The CARES Act allowsU.S. taxpayers to carry back a net operating loss ("NOL") arising in tax years 2018, 2019 and 2020 to prior years when the tax rate was 35%. The Company recognized aU.S. tax benefit from its fiscal year 2019 and Second Quarter tax losses, which will be carried back to offset taxable income reported in prior years. The Company will receive a refund of 2015 taxes as well as a portion of 2014 taxes. The PriorYear Quarter effective tax rate was negative because income tax expense was accrued on certain foreign entities with positive taxable income and no benefit was recognized for losses in theU.S. and certain foreign jurisdictions. Due to the Global Intangible Low-Taxed Income ("GILTI") provision of the Tax Cuts and Jobs Act, certain foreign income is included inU.S. taxable income effectively absorbing theU.S. NOLs, eliminating the availability of any future tax benefit or loss carryback prior to the NOL carryback provision in the CARES Act. Net Income (Loss) Attributable toFossil Group, Inc. Second Quarter net income (loss) attributable toFossil Group, Inc. was a loss of$22.5 million , or$0.44 per diluted share, in comparison to a net loss of$7.3 million , or$0.15 per diluted share, in the PriorYear Quarter . Diluted earnings (loss) per share in the Second Quarter included restructuring charges of$0.16 per diluted share. Diluted earnings (loss) per share in the PriorYear Quarter included restructuring charges of$0.11 per diluted share. Currency fluctuations favorably impacted diluted earnings per share by$0.05 during the Second Quarter. 38
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Fiscal Year To Date Periods EndedJuly 4, 2020 andJune 29, 2019 ConsolidatedNet Sales . Net sales decreased$317.0 million or 32.8% (31.7% in constant currency) for the Year To Date Period as compared to the Prior Year YTD Period. During the Year To Date Period, watches decreased$260.1 million or 33.4% (32.2% in constant currency), our leathers business decreased$32.6 million or 30.6% (29.9% in constant currency) and our jewelry category decreased$13.5 million or 26.0% (24.9% in constant currency) as compared to the Prior Year YTD Period. We experienced sales declines in all three geographic segments and major product categories. In the beginning of the first quarter of fiscal year 2020, sales results were positively impacted by increased off-price and liquidation sales of connected inventory. Due to the ongoing COVID-19 pandemic, sales began to slow in February inAsia and in March in theAmericas andEurope as a result of store closures in our direct to consumer and wholesale channels. At various times throughout the Second Quarter, certain restrictions due to the COVID-19 pandemic were lifted or eased, allowing stores in our direct to consumer and wholesale channels to re-open. However, certain restrictions are still in place and traffic remains down in the Year To Date Period compared to the Prior Year YTD Period. Comparable retail sales declined in the low-twenties on a percentage basis during the Year To Date Period, driven by temporary store closures due to the COVID-19 pandemic, but were partially offset by strong positive e-commerce comparable retail sales. Net sales information by product category is summarized as follows (dollars in millions): For the 27 Weeks Ended July For the 26 Weeks Ended June 4, 2020 29, 2019 Growth (Decline) Percentage Percentage Percentage Percentage As Constant Net Sales of Total Net Sales of Total Dollars Reported Currency Watches$ 519.4 79.9 %$ 779.5 80.6 %$ (260.1 ) (33.4 )% (32.2 )% Leathers 73.9 11.4 106.5 11.0 (32.6 ) (30.6 ) (29.9 ) Jewelry 38.4 5.9 51.9 5.4 (13.5 ) (26.0 ) (24.9 ) Other 18.0 2.8 28.8 3.0 (10.8 ) (37.5 ) (36.8 ) Total$ 649.7 100.0 %$ 966.7 100.0 %$ (317.0 ) (32.8 )% (31.7 )% In the Year To Date Period, the translation of foreign-based net sales intoU.S. dollars decreased reported net sales by$10.5 million , including unfavorable impacts of$5.1 million ,$4.5 million , and$0.9 million in ourAsia ,Europe andAmericas segments, respectively, compared to the Prior Year YTD Period. The following table sets forth consolidated net sales by segment (dollars in millions): For the 27 Weeks Ended July For the 26 Weeks Ended June 4, 2020 29, 2019 Growth (Decline) Percentage Percentage Percentage Percentage As Constant Net Sales of Total Net Sales of Total Dollars Reported Currency Americas$ 258.7 39.8 %$ 413.5 42.8 %$ (154.8 ) (37.4 )% (37.2 )% Europe 207.8 31.9 300.3 31.0 (92.5 ) (30.8 ) (29.3 ) Asia 175.4 27.0 243.2 25.2 (67.8 ) (27.9 ) (25.8 ) Corporate 7.8 1.3 9.7 1.0 (1.9 ) (19.6 ) (19.6 ) Total$ 649.7 100.0 %$ 966.7 100.0 %$ (317.0 ) (32.8 )% (31.7 )% AmericasNet Sales .Americas net sales decreased$154.8 million or 37.4% (37.2% in constant currency) during the Year To Date Period in comparison to the Prior Year YTD Period. During the Year To Date Period, watches decreased$129.7 million or 38.9% (38.6% in constant currency), our leathers business decreased$19.0 million or 29.5% (29.3% in constant currency) and our jewelry category declined$4.1 million or 38.0% (39.8% in constant currency). During the Year To Date Period, sales declined in most brands in our watch portfolio, with the largest decreases in FOSSIL andMICHAEL KORS . Geographically, sales declined in theU.S. ,Mexico andCanada . Strong e-commerce sales growth partially offset retail store and wholesale sales decline. Comparable retail sales in the region decreased in the low-twenties on a percentage basis during the Year To Date Period, driven by temporary store closures due to the COVID-19 pandemic, but were partially offset by strong positive e-commerce comparable retail sales. 39
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The following table sets forth product net sales and the changes in product net sales on both a reported and constant-currency basis from period to period for theAmericas segment (dollars in millions): For the 27 Weeks For the 26 Weeks Ended July 4, 2020 Ended June 29, 2019 Growth (Decline) Percentage Constant Net Sales Net Sales Dollars Percentage As Reported Currency Watches $ 203.7 $ 333.4$ (129.7 ) (38.9 )% (38.6 )% Leathers 45.4 64.4 (19.0 ) (29.5 ) (29.3 ) Jewelry 6.7 10.8 (4.1 ) (38.0 ) (39.8 ) Other 2.9 4.9 (2.0 ) (40.8 ) (38.8 ) Total $ 258.7 $ 413.5$ (154.8 ) (37.4 )% (37.2 )% EuropeNet Sales .Europe net sales decreased$92.5 million or 30.8% (29.3% in constant currency) during the Year To Date Period in comparison to the Prior Year YTD Period. During the Year To Date Period, watches decreased$70.6 million or 30.6% (29.1% in constant currency), our jewelry category declined$10.3 million or 26.3% (24.7% in constant currency), and our leathers business decreased$6.1 million or 29.6% (28.2% in constant currency). During the Year To Date Period, most of the brands in the portfolio declined, driven mainly by temporary store closures in our direct to consumer and wholesale channel due to the COVID-19 pandemic and reduced traffic as stores re-opened. Sales were down in all markets, most notably inGermany , theU.K. andItaly . Strong e-commerce sales growth partially offset declines in our retail store and wholesale channels. Comparable retail sales in the region decreased in the low twenties on a percentage basis during the Year To Date Period, driven by temporary store closures due to the COVID-19 pandemic, but were partially offset by strong positive e-commerce comparable retail sales. The following table sets forth product net sales and the changes in product net sales on both a reported and constant-currency basis from period to period for theEurope segment (dollars in millions): For the 27 Weeks For the 26 Weeks Ended July 4, 2020 Ended June 29, 2019 Growth (Decline) Percentage Constant Net Sales Net Sales Dollars Percentage As Reported Currency Watches $ 160.1 $ 230.7$ (70.6 ) (30.6 )% (29.1 )% Leathers 14.5 20.6 (6.1 ) (29.6 ) (28.2 ) Jewelry 28.9 39.2 (10.3 ) (26.3 ) (24.7 ) Other 4.3 9.8 (5.5 ) (56.1 ) (55.1 ) Total $ 207.8 $ 300.3$ (92.5 ) (30.8 )% (29.3 )% Asia Net Sales.Asia net sales decreased$67.8 million or 27.9% (25.8% in constant currency) during the Year To Date Period in comparison to the Prior Year YTD Period. During the Year To Date Period, watches decreased$59.6 million or 27.7% (25.6% in constant currency), our leathers business decreased$7.6 million or 35.2% (33.3% in constant currency) and our jewelry category increased$0.8 million or 40.0% (45.0% in constant currency). Sales of most brands declined in the Year To Date Period as compared to the Prior Year YTD Period, most notably in FOSSIL. Strong e-commerce sales growth partially offset retail store and wholesale sales declines. Within the region, we continued to have strong sales growth in mainlandChina , while all other major markets declined. For the Year To Date Period, comparable retail sales decreased in the mid-thirties on a percentage basis driven by temporary store closures due to the COVID-19 pandemic, but were partially offset by strong positive e-commerce comparable retail sales. 40
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The following table sets forth product net sales and the changes in product net sales on both a reported and constant-currency basis from period to period for theAsia segment (dollars in millions): For the 27 Weeks For the 26 Weeks Ended July 4, 2020 Ended June 29, 2019 Growth (Decline) Percentage Constant Net Sales Net Sales Dollars Percentage As Reported Currency
Watches $ 155.6 $ 215.2$ (59.6 ) (27.7 )% (25.6 )% Leathers 14.0 21.6 (7.6 ) (35.2 ) (33.3 ) Jewelry 2.8 2.0 0.8 40.0 45.0 Other 3.0 4.4 (1.4 ) (31.8 ) (29.5 ) Total $ 175.4 $ 243.2$ (67.8 ) (27.9 )% (25.8 )% Gross Profit. Gross profit of$281.0 million in the Year To Date Period decreased$232.1 million or 45.2% in comparison to$513.0 million in the Prior Year YTD Period primarily due to the decline in net sales. Gross profit margin rate decreased to 43.2% in the Year To Date Period compared to 53.1% in the Prior Year YTD Period. The gross profit margin rate contracted primarily due to increased liquidation and inventory valuation adjustments of older generation connected products, primarily in the first quarter, and was partially offset by a higher mix of e-commerce sales and favorable region and product mix. Currency favorably impacted the gross profit margin rate by approximately 10 basis points. Operating Expenses. For the Year To Date Period, total operating expenses decreased to$452.1 million compared to$531.3 million in the Prior Year YTD Period. SG&A expenses were lower compared to the Prior Year YTD Period mainly due to corporate and regional infrastructure reductions and lower store costs as a result of store closures. During the Year To Date Period, we incurred restructuring costs of$19.9 million in comparison to restructuring costs of$17.5 million in the Prior Year YTD Period. We incurred non-cash intangible asset impairment charges of$2.5 million in the Year To Date Period. The translation of foreign-denominated expenses during the Year To Date Period decreased operating expenses by$5.5 million as a result of the strongerU.S. dollar. As a percentage of net sales, SG&A expenses increased to 66.1% in the Year To Date Period as compared to 53.2% in the Prior Year YTD Period. Operating Income (Loss). Operating income (loss) was a loss of$171.1 million in the Year To Date Period as compared to a loss of$18.3 million in the Prior Year YTD Period. The$317.0 million decline in net sales from the Year To Date Period compared with the Prior Year YTD Period was predominately due to the COVID-19 pandemic. The gross margin rate primarily decreased due to increased liquidation and inventory valuation adjustments of older generation connected products and was partially offset by a higher mix of e-commerce sales and favorable region and product mix. Within operating expenses, SG&A expenses decreased$84.1 million driven by corporate and regional infrastructure reductions and lower store costs due to store closures both as part of our long term operating strategy and as a response to the global COVID-19 pandemic. As a percentage of net sales, operating margin was (26.3)% in the Year To Date Period as compared to (1.9)% in the Prior Year YTD Period and was negatively impacted by approximately 10 basis points due to changes in foreign currencies. Operating income (loss) by segment is summarized as follows (dollars in millions): For the 27 Weeks Change Operating Margin % Ended July 4, For the 26 Weeks 2020(1) Ended June 29, 2019 Dollars Percentage 2020 2019 Americas$ (32.4 ) $ 40.5$ (72.9 ) (180.0 )% (12.5 )% 9.8 % Europe (13.2 ) 26.7 (39.9 ) (149.4 ) (6.3 ) 8.9 Asia 17.9 48.0 (30.1 ) (62.7 ) 10.2 19.7 Corporate (143.4 ) (133.5 ) (9.9 ) 7.4 Total operating income (loss)$ (171.1 ) $ (18.3 ) $
(152.8 ) 835.0 % (26.3 )% (1.9 )%
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(1)Subsequent to the issuance of our condensed consolidated financial statements for the 14 weeks endedApril 4, 2020 , we determined that Operating Loss for theAmericas and Corporate segments for the 14 weeks endedApril 4, 2020 was incorrectly presented as certain charges totaling$24.5 million were incorrectly attributed to theAmericas segment rather than the Corporate segment. As a result, Operating Loss for theAmericas and Corporate segments for the 27 week period endedJuly 4, 2020 has been corrected. We evaluated the materiality of the disclosure misstatement from a quantitative and qualitative perspective and concluded the misstatement was not material to the 14 weeks endedApril 4, 2020 . Interest Expense. Interest expense decreased by$0.1 million during the Year To Date Period as a result of a decreased interest rate and was mostly offset by a larger borrowing base. 41
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Other Income (Expense)-Net. During the Year To Date Period, other income (expense)-net was a net expense of$6.4 million in the Year to Date Period compared to net income of$26.4 million in the Prior Year YTD Period. This change was primarily driven by a$21.6 million gain on the sale of intellectual property in the Prior Year YTD Period, and net foreign currency losses during the Year To Date Period as compared to net gains in the Prior Year YTD Period. Provision for Income Taxes. Income tax benefit for the Year To Date Period was$84.5 million , resulting in an effective income tax rate of 43.8%. The effective tax rate in the Year To Date Period differed from the Prior Year YTD Period primarily due to changes enacted in the CARES Act allowing aU.S. NOL carryback. The Prior Year YTD Period effective tax rate was negative because income tax expense was accrued on certain foreign entities with positive taxable income and no benefit was recognized for losses in theU.S. and certain foreign jurisdictions. Net Income (Loss) Attributable toFossil Group, Inc. For the Year To Date Period, we had a net loss of$108.1 million , or$2.13 per diluted share, in comparison to a loss of$19.6 million , or$0.39 per diluted share, in the Prior Year YTD Period. A reduction in operating expenses partially offset the decline in gross margin. The Company also benefited from a$21.6 million gain on the sale of intellectual property in the Prior Year YTD Period. Diluted earnings per share in the Year To Date Period, as compared to the Prior Year YTD Period, decreased$0.09 per diluted share due to the currency impact of a strongerU.S. dollar. Liquidity and Capital Resources Our cash and cash equivalents balance at the end of the Second Quarter was$277.6 million , including$211.2 million held in banks outside theU.S. , in comparison to cash and cash equivalents of$226.6 million at the end of the PriorYear Quarter and$200.2 million at the end of fiscal year 2019. Historically, our business operations have not required substantial cash during the first several months of our fiscal year. Generally, starting in the third 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 debt repayments, restructuring charges, strategic investments such as acquisitions and other capital expenditures. We believe cash flows from operations, including our current and planned cost savings measures, combined with existing cash on hand and amounts available under our credit facilities will be sufficient to fund our cash needs for the next twelve months. Although we believe we have adequate sources of liquidity in the short-term and long-term, the success of our operations, in light of the market volatility and uncertainty as a result of the COVID-19 pandemic, among other factors, could impact our business and liquidity. We have taken various actions to mitigate the impact of the current economic crisis on our financial position, with a focus on financial liquidity enhancements, cost reduction measures, capital preservation and inventory management. In addition to these temporary savings, we plan to address permanent cost reductions under our NWF 2.0 program. We believe our cost reduction plans, if successfully executed, will result in adequate cash flows to support our ongoing operations. For the Second Quarter, we generated operating cash flow of$11.6 million . A net loss of$108.4 million was more than offset by an increase in working capital items of$17.2 million and net non-cash items of$102.8 million . We had net debt borrowings of$69.3 million and capital expenditures of$5.6 million . We increased our borrowings under the Revolving Facility (as defined below) as a precautionary measure to increase our cash position, provide liquidity for a sustained period and to preserve financial flexibility in light of current uncertainty in the global markets resulting from the COVID-19 pandemic. Accounts receivable, net of allowances, decreased by 36.3% to$130.1 million at the end of the Second Quarter compared to$204.2 million at the end of the PriorYear Quarter driven by reduced sales. Days sales outstanding for our wholesale businesses for the Second Quarter increased to 72 days compared to 50 days in the PriorYear Quarter , primarily driven by the COVID-19 pandemic related closures and the related negative impact on collections. Inventory at the end of the Second Quarter was$375.9 million , which decreased by 18.3% from the end of the PriorYear Quarter ending inventory balance of$460.3 million , largely reflecting accelerated inventory reduction actions, particularly of older generation connected product, and proactive management of inbound receipts to align with reduced consumer demand. At the end of the Second Quarter, we had net working capital of$417.9 million compared to net working capital of$488.0 million at the end of the PriorYear Quarter . At the end of the Second Quarter, we had$25.2 million of short-term borrowings and$243.9 million in long-term debt. For fiscal year 2020, we expect total capital expenditures to be approximately$9 million in order to maintain liquidity and in order to remain in compliance with financial covenants. Of this amount, we expect approximately 50% will be for retail store renovations and enhancements, approximately 40% will be for technology and facilities maintenance, and approximately 10% for strategic growth, including investments in global concessions and technology. Our capital expenditure budget and allocation to the foregoing investments are estimates and are subject to change. We believe that cash flows from operations combined with existing cash on hand and amounts available under our credit facilities will be sufficient to fund our working capital needs and planned capital expenditures for the next twelve months. 42
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OnSeptember 26, 2019 , we andFossil Partners, L.P. (together with the Company, the "U.S. Borrowers"), as theU.S. borrowers, andFossil Group Europe GmbH (the "Swiss Borrower"),Fossil Asia Pacific Limited (the "Hong Kong Borrower"),Fossil (Europe) GmbH (the "German Borrower"),Fossil (UK) Limited (the "UK Borrower" and theUK Borrower, together with the Swiss Borrower and the German Borrower, the "European Borrowers") andFossil Canada Inc. (the "Canadian Borrower"), as the non-U.S. borrowers, certain other of our subsidiaries from time to time party thereto designated as borrowers (includingFossil France SA , the "French Borrower", and the French Borrower, together with theU.S. Borrowers, the European Borrowers, the Hong Kong Borrower and the Canadian Borrower, the "ABL Borrowers"), and certain of our subsidiaries from time to time party thereto as guarantors, entered into an asset-based revolving credit agreement (as amended, the "Revolving Facility") withJPMorgan Chase Bank, N.A . as administrative agent (the "ABL Agent"),J.P. Morgan AG , as French collateral agent,JPMorgan Chase Bank, N.A .,Citizens Bank, N.A. andWells Fargo Bank, National Association as joint bookrunners and joint lead arrangers, andCitizens Bank, N.A. andWells Fargo Bank, National Association , as co-syndication agents and each of the lenders from time to time party thereto (the "ABL Lenders"). In addition, we, as borrower, entered into a term credit agreement (as amended to date, the "Term Credit Agreement") withJPMorgan Chase Bank, N.A . as administrative agent (the "Term Agent"),JPMorgan Chase Bank, N.A ., CitizensBank, National Association andWells Fargo Securities, LLC , as joint bookrunners and joint lead arrangers and the lenders party thereto (the "Term Loan Lenders"). The Revolving Facility provides that the ABL Lenders may extend revolving loans in an aggregate principal amount not to exceed$275.0 million at any time outstanding (the "Revolving Credit Commitment"), of which up to$160.0 million is available under aU.S. facility, an aggregate of$70.0 million is available under a European facility,$30.0 million is available under aHong Kong facility,$10.0 million is available under a French facility, and$5.0 million is available under a Canadian facility, in each case, subject to the borrowing base availability limitations described below. The Revolving Facility also includes an up to$45.0 million subfacility for the issuance of letters of credit (the "Letters of Credit"). The Revolving Facility expires and is due and payable onSeptember 26, 2024 . The French facility includes a$1.0 million subfacility for swingline loans, and the European facility includes a$7.0 million subfacility for swingline loans. The Revolving Facility is subject to a line cap (the "Line Cap") equal to the lesser of the total Revolving Credit Commitment and the aggregate borrowing bases under theU.S. facility, the European facility, theHong Kong facility, the French facility and the Canadian facility. Loans under the Revolving Facility may be made inU.S. dollars, Canadian dollars, euros,Hong Kong dollars or pounds sterling. OnMarch 24, 2020 , theU.S. Borrowers provided notice to the ABL Agent for an alternate base rate borrowing of$71.0 million under the Revolving Facility effectiveMarch 25, 2020 , the Hong Kong Borrower provided notice to the ABL Agent for a Eurodollar borrowing of$10.0 million under the Revolving Facility effectiveMarch 30, 2020 and the European Borrowers provided notice to the ABL Agent for a Eurodollar borrowing of €19.0 million under the Revolving Facility effectiveMarch 30, 2020 . We increased our borrowings under the Revolving Facility as a precautionary measure to increase our cash position, provide liquidity for a sustained period and to preserve financial flexibility in light of current uncertainty in the global markets resulting from the COVID-19 outbreak. The Revolving Facility is an asset-based facility, in which borrowing availability is subject to a borrowing base equal to: (a) with respect to us, the sum of (i) the lesser of (x) 90% of the appraised net orderly liquidation value percentage of eligibleU.S. finished goods inventory and (y) 65% of the lower of cost or market value of eligibleU.S. finished goods inventory, plus (ii) 85% of the eligibleU.S. accounts receivable, plus (iii) 90% of eligibleU.S. credit card accounts receivable, minus (iv) the aggregate amount of reserves, if any, established by the ABL Agent; (b) with respect to each non-U.S. borrower (except for the French Borrower), the sum of (i) the lesser of (x) 90% of the appraised net orderly liquidation value of eligible foreign finished goods inventory of such non-U.S. borrower and (y) 65% of the lower of cost or market value of eligible foreign finished goods inventory of such non-U.S. borrower, plus (ii) 85% of the eligible foreign accounts receivable of such non-U.S. borrower, minus (iii) the aggregate amount of reserves, if any, established by the ABL Agent; and (c) with respect to the French Borrower, (i) 85% of eligible French accounts receivable minus (ii) the aggregate amount of reserves, if any, established by the ABL Agent. Not more than 60% of the aggregate borrowing base under the Revolving Facility may consist of the non-U.S. borrowing bases. Eurodollar loans under theU.S. facility will bear interest at the adjusted LIBO rate plus the applicable rate, and Eurodollar loans under the Canadian facility, European facility, French facility andHong Kong facility will bear interest at the LIBO rate plus the applicable rate. Base rate loans under theU.S. facility will bear interest at the alternate base rate plus the applicable rate. Under the Canadian facility, Canadian prime rate loans will bear interest at the Canadian prime rate plus the applicable rate, and Canadian dollar loans will bear interest at the CDOR rate plus the applicable rate. Under theHong Kong facility,Hong Kong dollar loans will bear interest at the HIBOR rate plus the applicable rate. Each swingline loan shall bear interest at the overnight LIBO rate plus the applicable rate for overnight LIBO rate loans. The applicable rate varies from 1.25% to 1.75% for adjusted LIBO, CDOR and HIBOR rate loans and from 0.25% to 0.75% for alternate base rate and Canadian prime rate loans depending on our average daily excess availability under the Revolving Facility for the most recently ended fiscal quarter, which is an amount equal to (x)(1) the lesser of the total revolving commitments then in effect and (2) the aggregate borrowing base, minus (y) the total credit exposure of all ABL Lenders at such time. 43
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The Revolving Facility also includes a commitment fee, payable quarterly in arrears, of 0.250% or 0.375% determined by reference to the average daily unused portion of the overall commitment under the Revolving Facility. The ABL Borrowers will pay the ABL Agent, on the account of the issuing ABL Lenders, an issuance fee of 0.125% for any issued letters of credit. The ABL Borrowers are permitted to voluntarily prepay the revolving loans, in whole or in part, without premium or penalty. The ABL Borrowers may reduce the commitments at any time, in whole or in part, without premium or penalty, in a minimum aggregate principal amount of not less than$5.0 million or increments of$1.0 million in excess thereof. If the total amount of outstanding revolving loans and Letters of Credit exceeds the total commitment under the Revolving Facility, the ABL Borrowers must prepay the revolving loans in an amount equal to such excess. During any periods (each, a "Covenant Period") while availability under the Revolving Facility is less than the greater of (x) 15% of the Line Cap and (y)$30,000,000 , we will be subject to a financial covenant which requires us to not permit the fixed charge coverage ratio to be less than 1.00 to 1.00 on the first day of such Covenant Period or the last day of each fiscal quarter during such Covenant Period. The ABL Borrowers have the right to request an increase to the commitments under the Revolving Facility or any subfacility in an aggregate principal amount not to exceed$75.0 million in increments no less than$10.0 million , subject to certain terms and conditions as defined in the Revolving Facility, including that the Term Credit Agreement has been amended, restated or otherwise modified to permit any additional commitments. The Revolving Facility is secured by guarantees by us and certain of our domestic subsidiaries. Additionally, we and our subsidiaries have granted liens on all or substantially all of our assets in order to secure the obligations under the Revolving Facility. In addition, the non-U.S. borrowers from time to time party to the Revolving Facility are required to enter into security instruments with respect to all or substantially all of their assets that can be pledged under applicable local law, and certain of their respective subsidiaries may guarantee the respective non-U.S. obligations under the Revolving Facility. The Term Credit Agreement provides for term loans to us in the aggregate principal amount of$200 million . Proceeds from the Term Credit Agreement were reduced by a$12 million original issue discount, which is presented as a reduction of the Term Credit Agreement on our condensed consolidated balance sheet and will be amortized to interest expense over the life of the term loan. The term loans under the Term Credit Agreement bore interest at (a) the adjusted LIBO rate plus 8.50% for Eurodollar loans or (b) the alternate base rate plus 7.50% for alternate base rate loans as ofJuly 4, 2020 . The Term Credit Agreement amortized in quarterly installments in an aggregate amount equal (x) to 2.50% of its original principal amount untilMarch 31, 2020 and, thereafter, (y)$5,000,000 onJune 30, 2020 ,$8,000,000 onSeptember 30, 2020 , and$10,000,000 in each quarter thereafter untilJune 30, 2024 . The Term Credit Agreement expires and is due and payable onSeptember 26, 2024 , subject to possible extensions. We are permitted to voluntarily prepay the term loans, in whole or in part, without premium or penalty, and are required to prepay the term loans with the net cash proceeds of certain asset sales and other dispositions, insurance and condemnation events, debt and equity issuances, and are also subject to an annual excess cash flow sweep. If we prepay the term loans (x) with the proceeds of any other financing, (y) to remove a non-consenting lender, or (z) upon the acceleration of the term loans or the term loans otherwise becoming due prior to their maturity date, each during the period fromJune 5, 2020 toSeptember 4, 2022 , we are required to pay a prepayment fee of 2.00% with respect to the principal amount prepaid prior toSeptember 4, 2021 and 1.00% with respect to the principal amount prepaid betweenSeptember 4, 2021 andSeptember 4, 2022 . Notwithstanding the above, we are not required to pay the prepayment fee for prepayments made prior toSeptember 4, 2020 in connection with the issuance of financings that are not in connection with a change in control of the Company. In connection with the amendment entered into onJune 5, 2020 , we were granted relief from compliance with the maximum total leverage ratio covenant until the third fiscal quarter of fiscal year 2021, after which the maximum total leverage ratio permitted under the covenant will be 1.50 to 1.00. Solely during such relief period, we will be subject to a covenant to maintain a consolidated EBITDA of negative$75,000,000 for the fiscal quarter endingApril 3, 2021 , negative$65,000,000 for the two fiscal quarter period endingJuly 3, 2021 , and negative$30,000,000 for the three fiscal quarter period endingOctober 2, 2021 . The amendment also added an additional covenant to restricted consolidated capital expenditures of the Company to$10,000,00 for the fiscal year endedJanuary 2, 2021 ,$20,000,000 for the fiscal year endedJanuary 1, 2022 , and$25,000,000 for the fiscal year endedDecember 31, 2022 and thereafter. The Term Credit Agreement also limits the amount of principal amount incurred under the Revolving Facility to the lesser of the borrowing base or$200.0 million . A payment default under the Revolving Facility triggers a cross default under the Term Credit Agreement. 44
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The Term Credit Agreement is secured by guarantees by us and certain of our domestic subsidiaries. Additionally,we and such subsidiaries have granted liens on all or substantially all of their assets in order to secure the obligations under the Term Credit Agreement. The Term Credit Agreement contains customary affirmative and negative covenants and events of default such as compliance with annual audited and quarterly unaudited financial statements disclosures. Upon an event of default, the Term Agent will have the right to declare the term loans and other obligations outstanding immediately due and payable and all commitments immediately terminated or reduced, subject to cure periods and grace periods set forth in the Term Credit Agreement. The obligations under the Revolving Facility and the Term Credit Agreement are governed by a customary intercreditor agreement (the "Intercreditor Agreement"). The Intercreditor Agreement specifies that (i) the Term Credit Agreement is secured by (a) a perfected first priority security interest inU.S. fixed assets and (b) a perfected second priority security interest in theU.S. liquid assets and accounts receivable, and (ii) the Revolving Facility is secured by (a) a perfected first priority security interest in theU.S. liquid assets and accounts receivable and (b) a perfected second priority security interest inU.S. fixed assets. We had net payments of$30.0 million during the Year To Date Period under the Term Credit Agreement at an average interest rate of 9.4%. We had net borrowings of$95.8 million under the Revolving Facility during the Year To Date Period at an average interest rate of 1.9%. As ofJuly 4, 2020 , we had$170.0 million outstanding under the Term Loan Facility and$123.8 million outstanding under the Revolving Credit Facility. We also had unamortized debt issuance costs of$21.5 million , which reduces the corresponding debt liability. In addition, we had$2.7 million of outstanding standby Letters of Credit atJuly 4, 2020 . Amounts available under the Revolving Facility are reduced by any amounts outstanding under standby letters of credit. As ofJuly 4, 2020 , we had available borrowing capacity of$32.5 million under the Revolving Facility. AtJuly 4, 2020 , we were in compliance with all debt covenants related to all our credit facilities. Off Balance Sheet Arrangements As ofJuly 4, 2020 , there were no material changes to our off balance sheet arrangements as set forth in commitments and contingencies in our Annual Report on Form 10-K for the fiscal year endedDecember 28, 2019 . Critical Accounting Policies and Estimates The preparation of financial statements in conformity with GAAP 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 condensed consolidated financial statements and the reported amounts of revenues and expenses during the periods reported. On an on-going basis, we evaluate our estimates and judgments, including those related to product returns, inventories, long-lived asset impairment, impairment of trade names, income taxes and warranty costs. We base our estimates and judgments on historical experience and on various other factors that we believe to 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. There have been no changes to the critical accounting policies disclosed in "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the fiscal year endedDecember 28, 2019 . 45
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Forward-Looking Statements The statements contained in this Quarterly Report on Form 10-Q that are not historical facts, including, but not limited to, statements regarding our expected financial position, results of operations, business and financing plans found in this "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Item 3. Quantitative and Qualitative Disclosures About Market Risk," constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and involve a number of risks and uncertainties. The words "may," "believes," "expects," "plans," "intends," "estimates," "anticipates" and similar expressions identify forward-looking statements. The actual results of the future events described in such forward-looking statements could differ materially from those stated in such forward-looking statements. Among the factors that could cause actual results to differ materially are: the effect of worldwide economic conditions; the impact of COVID-19; the length and severity of COVID-19; the pace of recovery following COVID-19; significant changes in consumer spending patterns or preferences; interruptions or delays in the supply of key components; acts of war or acts of terrorism; changes in foreign currency valuations in relation to theU.S. dollar; lower levels of consumer spending resulting from COVID-19, a general economic downturn or generally reduced shopping activity caused by public safety (including COVID-19) or consumer confidence concerns; the performance of our products within the prevailing retail environment; customer acceptance of both new designs and newly-introduced product lines, including risks related to the expanded launch of connected accessories; financial difficulties encountered by customers and related bankruptcy and collection issues; the effects of vigorous competition in the markets in which we operate; risks related to the success of our restructuring programs; the termination or non-renewal of material licenses, foreign operations and manufacturing; changes in the costs of materials, labor and advertising; government regulation and tariffs; our ability to secure and protect trademarks and other intellectual property rights; and the outcome of current and possible future litigation. In addition to the factors listed above, our actual results may differ materially due to the other risks and uncertainties discussed in our Quarterly Reports on Form 10-Q and the risks and uncertainties set forth in our Annual Report on Form 10-K for the fiscal year endedDecember 28, 2019 . Accordingly, readers of this Quarterly Report on Form 10-Q should consider these facts in evaluating the information and are cautioned not to place undue reliance on the forward-looking statements contained herein. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
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