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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended April 30, 2012

 

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number: 1-16497

MOVADO GROUP, INC.

(Exact Name of Registrant as Specified in its Charter)

 

New York   13-2595932

(State or Other Jurisdiction

of Incorporation or Organization)

 

(IRS Employer

Identification No.)

 

650 From Road, Ste. 375

Paramus, New Jersey

  07652-3556
(Address of Principal Executive Offices)   (Zip Code)

(201) 267-8000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for that past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer    ¨

  Accelerated filer    x   Non-accelerated filer    ¨   Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares outstanding of the registrant’s Common Stock and Class A Common Stock as of May 22, 2012 were 18,507,723 and 6,632,967, respectively.

 

 

 


Table of Contents

MOVADO GROUP, INC.

Index to Quarterly Report on Form 10-Q

April 30, 2012

 

               Page  

Part I Financial Information (Unaudited)

  
  

        Item 1.

  

Consolidated Balance Sheets at April 30, 2012, January 31, 2012 and April 30, 2011

     3   
     

Consolidated Statements of Operations for the three months ended April 30, 2012 and 2011

     4   
     

Consolidated Statements of Comprehensive Income for the three months ended April 30, 2012 and 2011

     5   
     

Consolidated Statements of Cash Flows for the three months ended April 30, 2012 and 2011

     6   
     

Notes to Consolidated Financial Statements

     7   
  

        Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     15   
  

        Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     23   
  

        Item 4.

  

Controls and Procedures

     25   

Part II Other Information

  
  

        Item 1.

  

Legal Proceedings

     26   
  

        Item 1A.

  

Risk Factors

     26   
  

        Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     26   
  

        Item 6.

  

Exhibits

     27   

Signature

     28   

 

2


Table of Contents

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

MOVADO GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

(Unaudited)

 

     April 30,
2012
    January 31,
2012
    April 30,
2011
 

ASSETS

      

Current assets:

      

Cash and cash equivalents

   $ 158,750      $ 182,201      $ 109,256   

Trade receivables

     62,262        61,235        60,610   

Inventories

     172,041        163,680        185,885   

Other current assets

     27,909        25,516        35,222   
  

 

 

   

 

 

   

 

 

 

Total current assets

     420,962        432,632        390,973   

Property, plant and equipment, net

     33,567        36,290        37,642   

Deferred income taxes

     15,106        14,959        8,282   

Other non-current assets

     23,405        22,162        23,120   
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 493,040      $ 506,043      $ 460,017   
  

 

 

   

 

 

   

 

 

 

LIABILITIES AND EQUITY

      

Current liabilities:

      

Accounts payable

   $ 23,130      $ 33,080      $ 21,168   

Accrued liabilities

     35,834        52,298        38,731   

Dividends payable

     12,570        —          —     

Deferred and current income taxes payable

     1,493        1,015        410   
  

 

 

   

 

 

   

 

 

 

Total current liabilities

     73,027        86,393        60,309   

Deferred and non-current income taxes payable

     6,825        7,291        7,174   

Other non-current liabilities

     19,497        18,285        18,618   
  

 

 

   

 

 

   

 

 

 

Total liabilities

     99,349        111,969        86,101   
  

 

 

   

 

 

   

 

 

 

Commitments and contingencies (Note 7)

      

Equity:

      

Preferred Stock, $0.01 par value, 5,000,000 shares authorized; no shares issued

     —          —          —     

Common Stock, $0.01 par value, 100,000,000 shares authorized; 26,184,074, 26,124,281 and 25,978,334 shares issued, respectively

     262        261        260   

Class A Common Stock, $0.01 par value, 30,000,000 shares authorized; 6,632,967, 6,632,967 and 6,634,319 shares issued and outstanding, respectively

     66        66        66   

Capital in excess of par value

     154,987        153,331        150,007   

Retained earnings

     244,502        251,695        222,430   

Accumulated other comprehensive income

     101,445        97,922        110,201   

Treasury Stock, 7,676,407, 7,776,407 and 7,754,977 shares, respectively, at cost

     (110,470     (111,909     (111,503
  

 

 

   

 

 

   

 

 

 

Total Movado Group, Inc. shareholders’ equity

     390,792        391,366        371,461   

Noncontrolling interests

     2,899        2,708        2,455   
  

 

 

   

 

 

   

 

 

 

Total equity

     393,691        394,074        373,916   
  

 

 

   

 

 

   

 

 

 

Total liabilities and equity

   $ 493,040      $ 506,043      $ 460,017   
  

 

 

   

 

 

   

 

 

 

See Notes to Consolidated Financial Statements

 

3


Table of Contents

MOVADO GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

 

$103,655 $103,655
     Three Months Ended
April 30,
 
     2012     2011  

Net sales

   $ 103,655      $ 89,854   

Cost of sales

     44,630        41,231   
  

 

 

   

 

 

 

Gross profit

     59,025        48,623   

Selling, general and administrative

     50,537        47,043   
  

 

 

   

 

 

 

Operating income

     8,488        1,580   

Interest expense

     (145     (383

Interest income

     16        29   
  

 

 

   

 

 

 

Income before income taxes

     8,359        1,226   

Provision for income taxes (Note 8)

     1,598        715   
  

 

 

   

 

 

 

Net Income

     6,761        511   

Less: Net income attributed to noncontrolling interests

     128        20   
  

 

 

   

 

 

 

Net income attributed to Movado Group, Inc.

   $ 6,633      $ 491   
  

 

 

   

 

 

 

Basic income per share:

    

Weighted basic average shares outstanding

     25,109        24,873   

Net income per share attributed to Movado Group, Inc.

   $ 0.26      $ 0.02   

Diluted income per share:

    

Weighted diluted average shares outstanding

     25,475        25,078   

Net income per share attributed to Movado Group, Inc.

   $ 0.26      $ 0.02   

Dividends declared per share

   $ 0.55      $ 0.03   

See Notes to Consolidated Financial Statements

 

4


Table of Contents

MOVADO GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

 

     Three Months Ended April 30,  
     2012      2011  

Comprehensive income, net of taxes:

     

Net income

   $ 6,761       $ 511   

Net unrealized gain on investments

     23         5   

Net change in effective portion of hedging contracts

     —           (319

Foreign currency translation adjustments

     3,563         17,642   
  

 

 

    

 

 

 

Comprehensive income

     10,347         17,839   

Less: Comprehensive income attributable to noncontrolling interests

     191         175   
  

 

 

    

 

 

 

Total comprehensive income attributable to Movado Group, Inc.

   $ 10,156       $ 17,664   
  

 

 

    

 

 

 

See Notes to Consolidated Financial Statements

 

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Table of Contents

MOVADO GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

     Three Months Ended April 30,  
     2012     2011  

Cash flows from operating activities:

  

Net income

   $ 6,761      $ 511   

Adjustments to reconcile net income to net cash (used in) / provided by operating activities:

  

Depreciation and amortization

     3,051        2,943   

Deferred income taxes

     46        125   

Stock-based compensation

     481        414   

Changes in assets and liabilities:

  

Trade receivables

     (681     815   

Inventories

     (6,944     3,877   

Other current assets

     (2,699     (1,097

Accounts payable

     (10,148     (1,121

Accrued liabilities

     (14,524     (2,197

Income taxes payable

     476        (934

Other non-current assets

     (1,419     (477

Other non-current liabilities

     1,209        745   
  

 

 

   

 

 

 

Net cash (used in) / provided by operating activities from continuing operations

     (24,391     3,604   

Net cash (used in) operating activities from discontinued operations

     (2     (19
  

 

 

   

 

 

 

Net cash (used in) / provided by operating activities

     (24,393     3,585   
  

 

 

   

 

 

 

Cash flows from investing activities:

  

Capital expenditures

     (837     (1,622

Trademarks

     —          (24
  

 

 

   

 

 

 

Net cash (used in) investing activities from continuing operations

     (837     (1,646

Net cash (used in) investing activities from discontinued operations

     —          —     
  

 

 

   

 

 

 

Net cash (used in) investing activities

     (837     (1,646
  

 

 

   

 

 

 

Cash flows from financing activities:

  

Stock options exercised

     450        (71

Dividends paid

     (1,256     (746
  

 

 

   

 

 

 

Net cash (used in) financing activities from continuing operations

     (806     (817

Net cash (used in) financing activities from discontinued operations

     —          —     
  

 

 

   

 

 

 

Net cash (used in) financing activities

     (806     (817
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     2,585        5,118   

Net (decrease) / increase in cash and cash equivalents

     (23,451     6,240   

Cash and cash equivalents at beginning of period

     182,201        103,016   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 158,750      $ 109,256   
  

 

 

   

 

 

 

See Notes to Consolidated Financial Statements

 

6


Table of Contents

MOVADO GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared by Movado Group, Inc. (the “Company”) in a manner consistent with that used in the preparation of the consolidated financial statements included in the Company’s fiscal 2012 Annual Report filed on Form 10-K. In the opinion of management, the accompanying consolidated financial statements reflect all adjustments, consisting of only normal and recurring adjustments, necessary for a fair statement of the financial position and results of operations for the periods presented. These consolidated financial statements should be read in conjunction with the aforementioned Annual Report. Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for the full year.

NOTE 1 – FAIR VALUE MEASUREMENTS

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Accounting guidance requires the use of observable market data, if such data is available without undue cost and effort and establishes a fair value hierarchy which prioritizes the inputs used in measuring fair value into three broad levels as follows:

 

 

 

Level 1—Quoted prices in active markets for identical assets or liabilities.

 

 

 

Level 2—Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly.

 

 

 

Level 3—Unobservable inputs based on the Company’s assumptions.

The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of April 30, 2012 (in thousands):

 

$17,196 $17,196 $17,196 $17,196
     Fair Value at April 30, 2012  
     Level 1      Level 2      Level 3      Total  

Assets:

           

Available-for-sale securities

   $ 261       $ —         $ —         $ 261   

SERP assets—employer

     611         —           —           611   

SERP assets—employee

     16,324         —           —           16,324   

Hedge derivatives

     —           612         —           612   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 17,196       $ 612       $ —         $ 17,808   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

SERP liabilities—employee

   $ 16,324       $ —         $ —         $ 16,324   

Hedge derivatives

     —           8         —           8   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 16,324       $ 8       $ —         $ 16,332   
  

 

 

    

 

 

    

 

 

    

 

 

 

The fair values of the Company’s available-for-sale securities are based on quoted prices. The hedge derivatives are entered into by the Company principally to reduce its exposure to the Swiss franc exchange rate risk. Fair values of the Company’s hedge derivatives are calculated based on quoted foreign exchange rates, quoted interest rates and market volatility factors. The assets related to the Company’s defined contribution supplemental executive retirement plan (“SERP”) consist of both employer (employee unvested) and employee

 

7


Table of Contents

assets which are invested in investment funds with fair values calculated based on quoted market prices. The SERP liability represents the Company’s liability to the employees in the plan for their vested balances.

NOTE 2 – EQUITY

The components of equity for the three months ended April 30, 2012 and 2011 are as follows (in thousands):

 

     Movado Group, Inc. Shareholders’ Equity         
     Common
Stock
     Class A
Common
Stock
     Capital in
Excess of
Par Value
     Retained
Earnings
    Treasury
Stock
    Accumulated
Other
Comprehensive
Income
     Noncontrolling
Interests
     Total  

Balance, January 31, 2012

   $ 261       $ 66       $ 153,331       $ 251,695      ($ 111,909   $ 97,922       $ 2,708       $ 394,074   

Net income

              6,633             128         6,761   

Dividends declared

              (13,826             (13,826

Stock options exercised, net of tax

     1            428                   429   

Supplemental executive retirement plan

           22                   22   

Stock-based compensation expense

           481                   481   

Net unrealized gain on investments, net of tax

                  23            23   

Stock donation

           725           1,439              2,164   

Foreign currency translation adjustment (1)

                  3,500         63        3,563   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Balance, April 30, 2012

   $ 262       $ 66       $ 154,987       $ 244,502      ($ 110,470   $ 101,445       $ 2,899       $ 393,691   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

 

     Movado Group, Inc. Shareholders’ Equity        
     Common
Stock
     Class A
Common
Stock
     Capital in
Excess of
Par Value
     Retained
Earnings
    Treasury
Stock
    Accumulated
Other
Comprehensive
Income
    Noncontrolling
Interests
     Total  

Balance, January 31, 2011

   $ 259       $ 66       $ 149,492       $ 222,685      ($ 111,331   $ 93,028      $ 2,280       $ 356,479   

Net income

              491            20         511   

Dividends paid

              (746            (746

Stock options exercised, net of tax

     1            101           (172          (70

Stock-based compensation expense

           414                  414   

Net unrealized gain on investments, net of tax

                  5           5   

Net change in effective portion of hedging contracts, net of tax

                  (319        (319

Foreign currency translation adjustment (1)

                  17,487        155        17,642   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance, April 30, 2011

   $ 260       $ 66       $ 150,007       $ 222,430      ($ 111,503   $ 110,201      $ 2,455       $ 373,916   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

(1)

The foreign currency translation adjustments are tax-affected to the extent they relate to nonpermanent investments in foreign subsidiaries

 

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NOTE 3 – SEGMENT INFORMATION

The Company follows accounting guidance related to disclosures about segments of an enterprise and related information. This guidance requires disclosure of segment data based on how management makes decisions about allocating resources to segments and measuring their performance.

The Company conducts its business primarily in two operating segments: Wholesale and Retail. The Company’s Wholesale segment includes the designing, manufacturing and distribution of quality watches, in addition to revenue generated from after sales service activities and shipping. The Retail segment includes the Company’s outlet stores and, until February 14, 2012, also included the Movado brand flagship store located at Rockefeller Center in New York City. Effective February 14, 2012 the Rockefeller Center store closed, as the Company was not able to renew its lease.

The Company divides its business into two major geographic locations: United States operations and International, the latter of which includes the results of all other Company operations. The allocation of geographic revenue is based upon the location of the customer. The Company’s international operations are principally conducted in Europe, Asia, Canada, the Middle East, South America and the Caribbean. The Company’s international assets are substantially located in Switzerland.

Operating Segment Data for the Three Months Ended April 30, 2012 and 2011 (in thousands):

 

     Net Sales      Operating Income  
     2012      2011      2012      2011  

Wholesale

   $ 93,511       $ 80,009       $ 7,122       $ 975   

Retail

     10,144         9,845         1,366         605   
  

 

 

    

 

 

    

 

 

    

 

 

 

Consolidated total

   $ 103,655       $   89,854       $     8,488       $     1,580   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Total Assets  
     April 30,
2012
     January 31,
2012
     April 30,
2011
 

Wholesale

   $ 474,460       $ 487,828       $ 438,936   

Retail

     18,580         18,215         21,081   
  

 

 

    

 

 

    

 

 

 

Consolidated total

   $ 493,040       $ 506,043       $ 460,017   
  

 

 

    

 

 

    

 

 

 

Geographic Location Data for the Three Months Ended April 30, 2012 and 2011 (in thousands):

 

     Net Sales      Operating Income  
     2012      2011      2012     2011  

United States

   $ 50,914       $ 45,222       ($ 5,051   ($ 3,867

International

     52,741         44,632         13,539        5,447   
  

 

 

    

 

 

    

 

 

   

 

 

 

Consolidated total

   $ 103,655       $   89,854       $   8,488      $   1,580   
  

 

 

    

 

 

    

 

 

   

 

 

 

United States and International net sales are net of intercompany sales of $55.1 million and $42.8 million for the three months ended April 30, 2012 and 2011, respectively.

 

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00000000 00000000 00000000
     Total Assets  
     April 30,
2012
     January 31,
2012
     April 30,
2011
 

United States

   $ 198,576       $ 213,363       $ 180,609   

International

     294,464         292,680         279,408   
  

 

 

    

 

 

    

 

 

 

Consolidated total

   $ 493,040       $ 506,043       $ 460,017   
  

 

 

    

 

 

    

 

 

 

 

00000000 00000000 00000000
     Long-Lived Assets  
     April 30,
2012
     January 31,
2012
     April 30,
2011
 

United States

   $ 27,425       $ 28,476       $ 29,915   

International

     6,142         7,814         7,727   
  

 

 

    

 

 

    

 

 

 

Consolidated total

   $ 33,567       $ 36,290       $ 37,642   
  

 

 

    

 

 

    

 

 

 

NOTE 4 – INVENTORIES

Inventories consist of the following (in thousands):

 

     April 30,
2012
     January 31,
2012
     April 30,
2011
 

Finished goods

   $ 101,104       $ 97,975       $ 94,661   

Component parts

     62,351         57,700         69,308   

Work-in-process

     8,586         8,005         21,916   
  

 

 

    

 

 

    

 

 

 
   $ 172,041       $ 163,680       $ 185,885   
  

 

 

    

 

 

    

 

 

 

NOTE 5 – DEBT AND LINES OF CREDIT

On July 17, 2009, the Company, together with Movado Group Delaware Holdings Corporation, Movado Retail Group, Inc. and Movado LLC (together with the Company, the “Borrowers”), each a wholly-owned domestic subsidiary of the Company, entered into an Amended and Restated Loan and Security Agreement (the “Original Loan Agreement”) with Bank of America, N.A. and Bank Leumi USA, as lenders (“Lenders”), and Bank of America, N.A., as agent (in such capacity, the “Agent”). The parties amended the Original Loan Agreement by entering into Amendment No. 1 thereto (“First Amendment”) on April 5, 2011 and Amendment No. 2 thereto (“Second Amendment”) on March 12, 2012 (the Original Loan Agreement, as so amended, the “Loan Agreement”). The Loan Agreement provides for a $25.0 million asset based senior secured revolving credit facility (the “Facility”), including a $15.0 million letter of credit subfacility, and provides that Borrowers are entitled to request that Lenders increase the Facility up to $50 million subject to any additional terms and conditions the parties may agree upon. The maturity date of the Facility is March 12, 2015.

Availability under the Facility is determined by reference to a borrowing base which is based on the sum of a percentage of eligible accounts receivable and eligible inventory of the Borrowers. $10.0 million in availability is blocked unless the Borrowers have achieved for the most recently ended four fiscal quarter period a consolidated fixed charge coverage ratio of at least 1.25 to 1.0 with domestic EBITDA greater than $10.0 million. The Borrowers are not currently subject to the availability block. The availability block, if applicable, will be reduced by the amount by which the borrowing base exceeds $25.0 million, up to a maximum reduction of $5.0 million. Availability under the Facility may be further reduced by certain reserves established by the

 

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Agent in its good faith credit judgment. The Second Amendment reduced the Lenders’ total commitment under the Loan Agreement from $55 million to $25 million and consequently availability was correspondingly reduced. As of April 30, 2012, total availability under the Facility, giving effect to an availability block of $0, no outstanding borrowings and the letters of credit outstanding under the subfacility, was $20.4 million.

The initial applicable margin for LIBOR rate loans was 4.25% and for base rate loans was 3.25%. After July 17, 2010, the applicable margins decreased or increased by 0.25% per annum from the initial applicable margins depending on whether average availability for the most recently completed fiscal quarter was either greater than $12.5 million, or was $5.0 million or less, respectively. The First Amendment reduced the applicable margins for both LIBOR rate loans and base rate loans by 1.25% and the Second Amendment further reduced the applicable margins by 0.75%. Accordingly, as of April 30, 2012 and based on current availability, the applicable margins were 2.00% and 1.00% for LIBOR and base rate loans, respectively.

After the date (the “Block Release Date”) when availability under the Facility is no longer subject to any blocked amount, if borrowing availability is less than $12.5 million, the Borrowers will be subject to a minimum fixed charge coverage ratio until such time as borrowing availability has been greater than $12.5 million for at least 90 consecutive days.

After the Block Release Date, cash dominion will be imposed if borrowing availability is less than $10.0 million and will continue until such time as borrowing availability has been greater than $10.0 million for at least 45 consecutive days. As of April 30, 2012, the Borrowers were not subject to cash dominion nor do the Borrowers expect to be subject to such a requirement in the foreseeable future.

The Loan Agreement contains additional affirmative and negative covenants binding on the Borrowers and their subsidiaries that are customary for asset based facilities, including, but not limited to, restrictions and limitations on the incurrence of debt for borrowed money and liens, dispositions of assets, capital expenditures, dividends and other payments in respect of equity interests, the making of loans and equity investments, prepayments of subordinated and certain other debt, mergers, consolidations, liquidations and dissolutions, and transactions with affiliates. The Loan Agreement permits Borrowers to pay distributions as dividends and make share repurchases up to $150.0 million (less the amount of any charitable donations made by the Company which are permitted up to an aggregate amount of $14 million) and make acquisitions up to $50.0 million, as long as Borrowers either have cash assets of at least $60.0 million with no revolver loans outstanding, or (i) the consolidated fixed charge coverage ratio is at least 1.25 to 1.00, (ii) availability is greater than $12.5 million and (iii) positive EBITDA plus repatriated cash dividends minus restricted payments are greater than $0. The Company believed that, as of April 30, 2012, it was in compliance with these financial covenants and, therefore, that it is permitted to pay dividends. The Company presently expects that it will be able to pay dividends through the remaining term of the Facility.

The Loan Agreement contains events of default that are customary for facilities of this type, including, but not limited to, nonpayment of principal, interest, fees and other amounts when due, failure of any representation or warranty to be true in any material respect when made or deemed made, violation of covenants, cross default, material judgments, material ERISA liability, bankruptcy events, material loss of collateral in excess of insured amounts, asserted or actual revocation or invalidity of the loan documents, change of control and events or circumstances having a material adverse effect. The borrowings under the Facility are joint and several obligations of the Borrowers and also cross-guaranteed by each Borrower. In addition, the Borrowers’ obligations under the Facility are secured by first priority liens, subject to permitted liens, on substantially all of the Borrowers’ U.S. assets (other than certain excluded assets).

A Swiss subsidiary of the Company maintains unsecured lines of credit with an unspecified length of time with a Swiss bank. As of April 30, 2012 and 2011, these lines of credit totaled 10.0 million Swiss francs for both periods, with dollar equivalents of $11.0 million and $11.4 million, respectively. As of April 30, 2012 and

 

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2011, there were no borrowings against these lines. As of April 30, 2012, two European banks have guaranteed obligations to third parties on behalf of two of the Company’s foreign subsidiaries in the amount of $1.9 million in various foreign currencies.

NOTE 6 – EARNINGS PER SHARE

The Company presents net income per share on a basic and diluted basis. Basic earnings per share are computed using weighted-average shares outstanding during the period. Diluted earnings per share are computed using the weighted-average number of shares outstanding adjusted for dilutive common stock equivalents.

The weighted-average number of shares outstanding for basic earnings per share was 25,109,000 and 24,873,000 for the three months ended April 30, 2012 and 2011, respectively. For the three months ended April 30, 2012 and 2011, respectively, the number of shares outstanding for diluted earnings per share was increased by 366,000 and 205,000, due to potentially dilutive common stock equivalents issuable under the Company’s stock compensation plans and SERP.

For the three months ended April 30, 2012 and April 30, 2011, approximately 104,000 and 708,000 of potentially dilutive common stock equivalents, respectively, were excluded from the computation of dilutive earnings per share because their effect would have been antidilutive.

NOTE 7 – COMMITMENTS AND CONTINGENCIES

As of April 30, 2012, one bank in the domestic bank group had issued six irrevocable standby letters of credit in connection with a trademark license agreement, retail and operating facility leases to various landlords, for the administration of the Movado boutique private-label credit card and Canadian payroll to the Royal Bank of Canada. As of April 30, 2012, the Company had outstanding letters of credit totaling $4.6 million with expiration dates through April 30, 2014.

As of April 30, 2012, two European banks have guaranteed obligations to third parties on behalf of two of the Company’s foreign subsidiaries in the amount of $1.9 million in various foreign currencies.

The Company is involved from time to time in legal claims involving trademarks and other intellectual property, contracts, employee relations and other matters incidental to the Company’s business. Although the outcome of such matters cannot be determined with certainty, the Company’s general counsel and management believe that the final outcome would not have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

NOTE 8 – INCOME TAXES

The Company recorded a tax expense of $1.6 million and $0.7 million for the three months ended April 30, 2012 and 2011, respectively. The effective tax rate for the three month period ended April 30, 2012 and 2011 was 19.1% and 58.3%, respectively. The effective tax rates for both periods include the application of guidelines related to accounting for income taxes in interim periods.

The Company bases its estimate of deferred tax assets and liabilities on current tax laws and rates as well as expected future income. The realization of deferred tax assets depends on the Company’s ability to generate future income. Deferred tax assets are reduced by a valuation allowance if, based on the weight of available positive and negative evidence, it is more-likely-than-not that all or a portion of the deferred tax assets will not be realized. In the third quarter of fiscal 2010 the Company determined that is was appropriate to record a full valuation allowance against its net deferred tax assets in the United States, primarily due to the Company’s

 

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domestic loss position in recent years, although the Company believed it may ultimately utilize the underlying tax benefits within the statutory limits. Management continues to evaluate the appropriate level of allowance on all deferred tax assets considering such factors as prior earnings history, expected future earnings, carryback and carryforward period, and tax and business strategies that could potentially enhance the likelihood of realization of the deferred tax assets. Management believes it may be reasonably possible, based on expectations of future income, that its judgment regarding the appropriateness of the level of allowance on the U.S. deferred tax assets may change in the next twelve months.

NOTE 9 – DERIVATIVE FINANCIAL INSTRUMENTS

The Company accounts for its derivative financial instruments in accordance with guidance which requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. A significant portion of the Company’s purchases are denominated in Swiss francs. The Company reduces its exposure to the Swiss franc exchange rate risk through a hedging program. Under the hedging program, the Company manages most of its foreign currency exposures on a consolidated basis, which allows it to net certain exposures and take advantage of natural offsets. In the event these exposures do not offset, the Company uses various derivative financial instruments to further reduce the net exposures to currency fluctuations, predominately forward and option contracts. When entered into, the Company designates and documents these derivative instruments as a cash flow hedge of a specific underlying exposure, as well as the risk management objectives and strategies for undertaking the hedge transactions. Changes in the fair value of a derivative that is designated and documented as a cash flow hedge and is highly effective, are recorded in other comprehensive income until the underlying transaction affects earnings, and then are later reclassified into earnings in the same account as the hedged transaction. The Company formally assesses, both at the inception and at each financial quarter thereafter, the effectiveness of the derivative instrument hedging the underlying forecasted cash flow transaction. Any ineffectiveness related to the derivative financial instruments’ change in fair value will be recognized in the period in which the ineffectiveness was calculated.

The Company uses forward exchange contracts to offset its exposure to certain foreign currency receivables and liabilities. These forward contracts are not designated as qualified hedges and, therefore, changes in the fair value of these derivatives are recognized into earnings, thereby offsetting the current earnings effect of the related foreign currency receivables and liabilities.

All of the Company’s derivative instruments have liquid markets to assess fair value. The Company does not enter into any derivative instruments for trading purposes.

As of April 30, 2012, the Company’s entire net forward contracts hedging portfolio consisted of 38.0 million Swiss francs equivalent for various expiry dates ranging through October 17, 2012.

 

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The following table summarizes the fair value and presentation in the Consolidated Balance Sheets for derivatives not designated as hedging instruments under the relevant guidance as of April 30, (in thousands):

 

    

Asset Derivatives

    

Liability Derivatives

 
    

Balance Sheet

Location

   2012
Fair
Value
     2011
Fair
Value
    

Balance

Sheet

Location

   2012
Fair
Value
     2011
Fair
Value
 

Derivatives not designated as hedging instruments:

                 

Foreign Exchange Contracts

   Other Current Assets    $ 612       $ 2,350       Accrued Liabilities    $ 8       $ —     
     

 

 

    

 

 

       

 

 

    

 

 

 

Total Derivative Instruments

      $ 612       $ 2,350          $ 8       $ —     
     

 

 

    

 

 

       

 

 

    

 

 

 

As of April 30, 2012, the balance of deferred net losses on derivative financial instruments documented as cash flow hedges included in accumulated other comprehensive income (“AOCI”) was $1.0 million in net losses, net of tax of $1.0 million, compared to $0.5 million in net losses, net of tax of $1.0 million as of April 30, 2011. The Company’s sell through of inventory purchased in Swiss francs will primarily cause the amount in AOCI to affect cost of goods sold. The maximum length of time the Company hedges its exposure to the fluctuation in future cash flows for forecasted transactions is 24 months. For the three months ended April 30, 2012 there were no reclassifications from AOCI to earnings. For the three months ended April 30, 2011, the Company reclassified from AOCI to earnings $0.3 million of net gains, net of tax of $0.

For the three months ended April 30, 2012 and 2011, the Company recorded no charge related to its assessment of the effectiveness of its derivative hedge portfolio because of the high degree of effectiveness between the hedging instrument and the underlying exposure being hedged. Changes in the contracts’ fair value due to spot-forward differences are excluded from the designated hedge relationship. The Company records these transactions in the cost of sales of the Consolidated Statements of Operations.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS

Statements in this Quarterly Report on Form 10-Q, including, without limitation, statements under Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report, as well as statements in future filings by the Company with the Securities and Exchange Commission, in the Company’s press releases and oral statements made by or with the approval of an authorized executive officer of the Company, which are not historical in nature, are intended to be, and are hereby identified as, “forward-looking statements” for purposes of the safe harbor provided by the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations, estimates, forecasts and projections about the Company, its future performance, the industry in which the Company operates and management’s assumptions. Words such as “expects”, “anticipates”, “targets”, “goals”, “projects”, “intends”, “plans”, “believes”, “seeks”, “estimates”, “may”, “will”, “should” and variations of such words and similar expressions are also intended to identify such forward-looking statements. The Company cautions readers that forward-looking statements include, without limitation, those relating to the Company’s future business prospects, projected operating or financial results, revenues, working capital, liquidity, capital needs, plans for future operations, expectations regarding capital expenditures and operating expenses, effective tax rates, margins, interest costs, and income as well as assumptions relating to the foregoing. Forward-looking statements are subject to certain risks and uncertainties, some of which cannot be predicted or quantified. Actual results and future events could differ materially from those indicated in the forward-looking statements, due to several important factors herein identified, among others, and other risks and factors identified from time to time in the Company’s reports filed with the SEC including, without limitation, the following: general economic and business conditions which may impact disposable income of consumers in the United States and the other significant markets where the Company’s products are sold, uncertainty regarding such economic and business conditions, trends in consumer debt levels and bad debt write-offs, general uncertainty related to possible terrorist attacks, natural disasters, the stability of the European Union and defaults on or downgrades of sovereign debt and the impact of any of those events on consumer spending, changes in consumer preferences and popularity of particular designs, new product development and introduction, competitive products and pricing, seasonality, availability of alternative sources of supply in the case of the loss of any significant supplier or any supplier’s inability to fulfill the company’s orders, the loss of or curtailed sales to significant customers, the Company’s dependence on key employees and officers, the ability to successfully integrate the operations of acquired businesses without disruption to other business activities, the continuation of licensing arrangements with third parties, the ability to secure and protect trademarks, patents and other intellectual property rights, the ability to lease new stores on suitable terms in desired markets and to complete construction on a timely basis, the ability of the Company to successfully manage its expenses on a continuing basis, the continued availability to the Company of financing and credit on favorable terms, business disruptions, disease, general risks associated with doing business outside the United States including, without limitation, import duties, tariffs, quotas, political and economic stability, and success of hedging strategies with respect to currency exchange rate fluctuations.

These risks and uncertainties, along with the risk factors discussed under Item 1A “Risk Factors” in the Company’s Annual Report on Form 10-K, should be considered in evaluating any forward-looking statements contained in this Quarterly Report on Form 10-Q or incorporated by reference herein. All forward-looking statements speak only as of the date of this report or, in the case of any document incorporated by reference, the date of that document. All subsequent written and oral forward-looking statements attributable to the Company or any person acting on its behalf are qualified by the cautionary statements in this section. The Company undertakes no obligation to update or publicly release any revisions to forward-looking statements to reflect events, circumstances or changes in expectations after the date of this report.

 

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Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. These estimates and assumptions also affect the reported amounts of revenues and expenses. Estimates by their nature are based on judgments and available information. Therefore, actual results could materially differ from those estimates under different assumptions and conditions.

Critical accounting policies are those that are most important to the portrayal of the Company’s financial condition and the results of operations and require management’s most difficult, subjective and complex judgments as a result of the need to make estimates about the effect of matters that are inherently uncertain. The Company’s most critical accounting policies have been discussed in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2012.

As of April 30, 2012, there have been no material changes to any of the critical accounting policies as disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2012.

 

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Recent Developments

On March 12, 2012, the Company amended its Amended and Restated Loan and Security Agreement, dated as of July 17, 2009, as previously amended, with Bank of America, N.A. and Bank Leumi USA to extend its maturity to 2015, to reflect more favorable current market rate conditions and to modify certain terms.

On March 27, 2012, as a result of Movado Group’s strong financial position in fiscal 2012, the Company’s Board of Directors decided to increase the quarterly cash dividend to $0.05 per share, subject, in each quarter, to the Board’s review of the Company’s financial performance and other factors as determined by the Board and effective March 29, 2012 the Board of Directors approved the payment on April 24, 2012 of a cash dividend in the amount of $0.05 for each share of the Company’s outstanding common stock and class A common stock held by shareholders of record as of the close of business on April 10, 2012. However, the decision of whether to declare any future cash dividend, including the amount of any such dividend and the establishment of record and payment dates, will be determined, in each quarter, by the Board of Directors, in its sole discretion.

The Company also announced that on March 29, 2012 the Board of Directors approved the payment of a special cash dividend of $0.50 for each share of the Company’s outstanding common stock and class A common stock. This dividend was paid on May 15, 2012 to all shareholders of record on April 30, 2012.

As of March 22, 2012, the Company entered into an exclusive worldwide license agreement with Ferrari S.p.A. to use certain well known trademarks of Ferrari including the S.F. and Prancing Horse device in shield, FERRARI OFFICIAL LICENSED PRODUCT and SCUDERIA FERRARI, in connection with the manufacture, advertising, merchandising, promotion, sale and distribution of watches with a suggested retail price not exceeding €1,500. The current term of the license is through December 31, 2017.

As of March 23, 2012, the Company donated $3.0 million to the Movado Group Foundation which consisted of shares of the Company’s common stock of $2.2 million, which were issued out of treasury stock, and $0.8 million in cash.

Overview

The Company conducts its business primarily in two operating segments: Wholesale and Retail. The Company’s Wholesale segment includes the designing, manufacturing and distribution of quality watches. The Retail segment includes the Company’s outlet stores and, until February 14, 2012, also included the Movado brand flagship store located at Rockefeller Center in New York City. Effective February 14, 2012 the Rockefeller Center store closed, as the Company was not able to renew its lease. The Company also operates in two major geographic locations: United States operations and International, the latter of which includes the results of all other Company operations.

The Company divides its watch business into distinct categories. The luxury category consists of the Ebel® and Concord® brands. The accessible luxury category consists of the Movado® and ESQ® by Movado brands. The licensed brands category represents brands distributed under license agreements and includes Coach®, HUGO BOSS®, Juicy Couture®, Lacoste® and Tommy Hilfiger®. Movado Group, Inc. also plans to launch a collection of SCUDERIA FERRARI® watches beginning in fiscal 2014.

 

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Results of operations for the three months ended April 30, 2012 as compared to the three months ended April 30, 2011

Net Sales: Comparative net sales by business segment were as follows (in thousands):

 

     Three Months Ended
April 30,
 
     2012      2011  

Wholesale:

     

United States

   $ 40,770       $ 35,377   

International

     52,741         44,632   
  

 

 

    

 

 

 

Total Wholesale

     93,511         80,009   

Retail

     10,144         9,845   
  

 

 

    

 

 

 

Net Sales

   $ 103,655       $ 89,854   
  

 

 

    

 

 

 

Net sales for the three months ended April 30, 2012 were $103.7 million, above prior year by $13.8 million or 15.4%. For the period ended April 30, 2012, fluctuations in foreign currency exchange rates unfavorably impacted net sales by $1.1 million when compared to the prior year period.

Net sales for the three months ended April 30, 2012 in the wholesale segment were $93.5 million, above the prior year period by $13.5 million or 16.9%. The increase in net sales was driven by growth in both the United States and International locations of the wholesale segment.

Net sales for the three months ended April 30, 2012 in the United States location of the wholesale segment were $40.8 million, above the prior year period by $5.4 million or 15.2%, driven by sales increases in both the licensed and accessible luxury brand categories. Net sales in the accessible luxury category were above prior year by $3.4 million, or 16.1%, which in the current year period included a $1.8 million sales reserve for anticipated returns of older ESQ by Movado watch styles pursuant to the Company’s new strategy to minimize non-go forward inventory and maximize go-forward inventory at the retail level. The increase in sales in the accessible luxury category was primarily due to strong sell-through in the Company’s distribution channels, higher sales of the Movado BOLD collection and continued focus and investment in marketing and advertising. Net sales in the licensed brand category were above the prior year period by $2.6 million, or 23.1%, primarily due to increased demand driven by innovative product designs and key price points that are resonating well with customers. These sales increases were partially offset by lower net sales in the luxury category of $0.2 million when compared to the prior year period.

Net sales for the three months ended April 30, 2012 in the International location of the wholesale segment were $52.7 million, above the prior year period by $8.1 million or 18.2%, driven by sales increases in the licensed brand category, partially offset by a sales decrease in the luxury and accessible luxury brand categories. Net sales in the licensed brand category were above the prior year period by $9.5 million, or 32.8%, primarily due to continued growth in existing markets resulting from higher demand, as well as new market expansion. Net sales in the luxury category were below the prior year period by $0.9 million, or 15.5% primarily due to the category being less promotional when compared to the prior year period. Net sales in the accessible luxury category were below the prior year period by $0.6 million, or 8.3%, primarily driven by lower sales in South America and Canada. For the three months ended April 30, 2012, fluctuations in foreign currency exchange rates unfavorably impacted net sales by $1.1 million when compared to the prior year period.

 

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Net sales for the three months ended April 30, 2012 in the retail segment were $10.1 million, above the prior year period by $0.3 million or 3.0%. As of April 30, 2012 and 2011, the Company operated 33 outlet stores.

Gross Profit. Gross profit for the three months ended April 30, 2012 was $59.0 million or 56.9% of net sales as compared to $48.6 million or 54.1% of net sales for the three months ended April 30, 2011. The increase in gross profit of $10.4 million was primarily due to higher net sales and, to a lesser extent, the higher gross margin percentage achieved. The gross margin percentage for the three months ended April 30, 2012 was favorably impacted by approximately 190 basis points related to a shift in channel and product mix and 130 basis points resulting from leverage gained on certain fixed costs due to the increase in sales volume year-over-year. When compared to the prior year, the gross margin for the three months ended April 30, 2012 was unfavorably impacted by approximately 40 basis points due to fluctuations in foreign currency exchange rates.

Selling, General and Administrative (“SG&A”). SG&A expenses for the three months ended April 30, 2012 were $50.5 million, representing an increase above the prior year period of $3.5 million or 7.4%. The increase in SG&A expense included higher compensation and benefit expense of $2.8 million during the current year period resulting from salary increases, certain employee benefits and performance-based compensation. Additionally, higher marketing expense of $1.1 million was recorded during the current year period resulting from the Company’s decision to continue investment in this area to drive sales growth. The effect of fluctuations in foreign currency exchange rates favorably impacted SG&A expenses for the three months ended April 30, 2012 by $0.4 million, which was the result of lower transactional losses recorded year-over-year related to foreign denominated assets held in strengthening currencies.

Wholesale Operating Income. Operating income of $7.1 million and $1.0 million was recorded in the wholesale segment for the three months ended April 30, 2012 and 2011, respectively. The $6.1 million increase in operating income was the net result of an increase in gross profit of $9.7 million, partially offset by an increase in SG&A expenses of $3.6 million. The increase in gross profit of $9.7 million was primarily due to higher net sales and, to a lesser extent, the higher gross margin percentage achieved. The increase in SG&A expense included higher compensation and benefit expense of $2.8 million during the current year period resulting from salary increases, certain employee benefits and performance-based compensation. Additionally, higher marketing expense of $1.1 million was recorded during the current year period resulting from the Company’s decision to continue investment in this area to drive sales growth. The effect of fluctuations in foreign currency exchange rates favorably impacted SG&A expenses for the three months ended April 30, 2012 by $0.4 million, which was the result of lower transactional losses recorded year-over-year related to foreign denominated assets held in strengthening currencies.

Retail Operating Income. Operating income of $1.4 million and $0.6 million was recorded in the retail segment for the three months ended April 30, 2012 and 2011, respectively. The $0.8 million increase in operating income was the net result of an increase in gross profit of $0.7 million and a slight decrease in SG&A expenses. The increase in gross profit of $0.7 million was primarily attributed to higher gross margin percentage achieved and, to a lesser extent, an increase in sales volume year-over-year.

Interest Expense. Interest expense for the three months ended April 30, 2012 and 2011 was $0.1 million and $0.4 million, respectively, which primarily consisted of the amortization of deferred financing costs.

Interest Income. Interest income for both the three months ended April 30, 2012 and 2011 was immaterial.

Income Taxes. The Company recorded a tax expense of $1.6 million and $0.7 million for the three months ended April 30, 2012 and 2011, respectively. The effective tax rate for the three month period ended April 30, 2012 was 19.1%. The effective tax rate for the three month period ended April 30, 2011 was 58.3%. The effective tax rates for both periods include the application of guidelines related to accounting for income taxes in interim periods.

 

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Net Income Attributed to Movado Group, Inc. For the three months ended April 30, 2012, the Company recorded net income of $6.6 million, compared to a net income of $0.5 million recorded for the three months ended April 30, 2011.

LIQUIDITY AND CAPITAL RESOURCES

At April 30, 2012 and April 30, 2011 the Company had $158.8 million and $109.3 million of cash and cash equivalents, $113.7 million and $86.9 million of which consisted of cash and cash equivalents at the Company’s foreign subsidiaries, respectively. The majority of the foreign cash balances are associated with earnings that the Company has asserted are permanently reinvested, and which are required to support continued growth outside the U.S. through funding of capital expenditures, operating expenses and similar cash needs of the foreign operations. The Company intends to repatriate certain excess cash balances in Hong Kong and Switzerland, and has provided tax accordingly.

Cash used in operating activities was $24.4 million for three months ended April 30, 2012 compared to cash provided by operations of $3.6 million for the three months ended April 30, 2011. The $24.4 million of cash used in operating activities for the fiscal 2013 period was primarily due to the change in working capital of $34.5 million offset by net income for the period of $6.8 million and favorable non-cash items of $3.6 million. The change in working capital of $34.5 million was primarily due to the pay down of liabilities and an increase in inventory. The $3.6 million of cash provided by operating activities for the fiscal 2012 period was the result of net income for the period of $0.5 million and favorable non-cash items of $3.5 million.

Cash used in investing activities amounted to $0.8 million for the three months ended April 30, 2012 and $1.6 million for the three months ended April 30, 2011. The cash used during both periods consisted of capital expenditures which included integration of computer hardware and software, as well as spending for tooling and design.

Cash used in financing activities amounted to $0.8 million for both the three months ended April 30, 2012 and 2011, respectively, primarily to pay dividends. Cash used in financing activities for both the three months ended April 30, 2012 and 2011, was primarily to pay dividends. Cash used in financing activities for the three months ended April 30, 2012 was slightly offset by the result of stock option exercises for the quarter.

On July 17, 2009, the Company, together with Movado Group Delaware Holdings Corporation, Movado Retail Group, Inc. and Movado LLC (together with the Company, the “Borrowers”), each a wholly-owned domestic subsidiary of the Company, entered into an Amended and Restated Loan and Security Agreement (the “Original Loan Agreement”) with Bank of America, N.A. and Bank Leumi USA, as lenders (“Lenders”), and Bank of America, N.A., as agent (in such capacity, the “Agent”). The parties amended the Original Loan Agreement by entering into Amendment No. 1 thereto (“First Amendment”) on April 5, 2011 and Amendment No. 2 thereto (“Second Amendment”) on March 12, 2012 (the Original Loan Agreement, as so amended, the “Loan Agreement”). The Loan Agreement provides for a $25.0 million asset based senior secured revolving credit facility (the “Facility”), including a $15.0 million letter of credit subfacility, and provides that Borrowers are entitled to request that Lenders increase the Facility up to $50 million subject to any additional terms and conditions the parties may agree upon. The maturity date of the Facility is March 12, 2015.

Availability under the Facility is determined by reference to a borrowing base which is based on the sum of a percentage of eligible accounts receivable and eligible inventory of the Borrowers. $10.0 million in availability is blocked unless the Borrowers have achieved for the most recently ended four fiscal quarter period a consolidated fixed charge coverage ratio of at least 1.25 to 1.0 with domestic EBITDA greater than $10.0 million. The Borrowers are not currently subject to the availability block. The availability block, if applicable,

 

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will be reduced by the amount by which the borrowing base exceeds $25.0 million, up to a maximum reduction of $5.0 million. Availability under the Facility may be further reduced by certain reserves established by the Agent in its good faith credit judgment. The Second Amendment reduced the Lenders’ total commitment under the Loan Agreement from $55 million to $25 million and consequently availability was correspondingly reduced. As of April 30, 2012, total availability under the Facility, giving effect to an availability block of $0, no outstanding borrowings and the letters of credit outstanding under the subfacility, was $20.4 million.

The initial applicable margin for LIBOR rate loans was 4.25% and for base rate loans was 3.25%. After July 17, 2010, the applicable margins decreased or increased by 0.25% per annum from the initial applicable margins depending on whether average availability for the most recently completed fiscal quarter was either greater than $12.5 million, or was $5.0 million or less, respectively. The First Amendment reduced the applicable margins for both LIBOR rate loans and base rate loans by 1.25% and the Second Amendment further reduced the applicable margins by 0.75%. Accordingly, as of April 30, 2012 and based on current availability, the applicable margins were 2.00% and 1.00% for LIBOR and base rate loans, respectively.

After the date (the “Block Release Date”) when availability under the Facility is no longer subject to any blocked amount, if borrowing availability is less than $12.5 million, the Borrowers will be subject to a minimum fixed charge coverage ratio until such time as borrowing availability has been greater than $12.5 million for at least 90 consecutive days.

After the Block Release Date, cash dominion will be imposed if borrowing availability is less than $10.0 million and will continue until such time as borrowing availability has been greater than $10.0 million for at least 45 consecutive days. As of April 30, 2012, the Borrowers were not subject to cash dominion nor do the Borrowers expect to be subject to such a requirement in the foreseeable future.

The Loan Agreement contains additional affirmative and negative covenants binding on the Borrowers and their subsidiaries that are customary for asset based facilities, including, but not limited to, restrictions and limitations on the incurrence of debt for borrowed money and liens, dispositions of assets, capital expenditures, dividends and other payments in respect of equity interests, the making of loans and equity investments, prepayments of subordinated and certain other debt, mergers, consolidations, liquidations and dissolutions, and transactions with affiliates. The Loan Agreement permits Borrowers to pay distributions as dividends and make share repurchases up to $150.0 million (less the amount of any charitable donations made by the Company which are permitted up to an aggregate amount of $14 million) and make acquisitions up to $50.0 million, as long as Borrowers either have cash assets of at least $60.0 million with no revolver loans outstanding, or (i) the consolidated fixed charge coverage ratio is at least 1.25 to 1.00, (ii) availability is greater than $12.5 million and (iii) positive EBITDA plus repatriated cash dividends minus restricted payments are greater than $0. The Company believed that, as of April 30, 2012, it was in compliance with these financial covenants and, therefore, that it is permitted to pay dividends. The Company presently expects that it will be able to pay dividends through the remaining term of the Facility.

The Loan Agreement contains events of default that are customary for facilities of this type, including, but not limited to, nonpayment of principal, interest, fees and other amounts when due, failure of any representation or warranty to be true in any material respect when made or deemed made, violation of covenants, cross default, material judgments, material ERISA liability, bankruptcy events, material loss of collateral in excess of insured amounts, asserted or actual revocation or invalidity of the loan documents, change of control and events or circumstances having a material adverse effect. The borrowings under the Facility are joint and several obligations of the Borrowers and also cross-guaranteed by each Borrower. In addition, the Borrowers’ obligations under the Facility are secured by first priority liens, subject to permitted liens, on substantially all of the Borrowers’ U.S. assets (other than certain excluded assets).

 

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A Swiss subsidiary of the Company maintains unsecured lines of credit with an unspecified length of time with a Swiss bank. As of April 30, 2012 and 2011, these lines of credit totaled 10.0 million Swiss francs for both periods, with dollar equivalents of $11.0 million and $11.4 million, respectively. As of April 30, 2012 and 2011, there were no borrowings against these lines. As of April 30, 2012, two European banks have guaranteed obligations to third parties on behalf of two of the Company’s foreign subsidiaries in the amount of $1.9 million in various foreign currencies.

The Company paid dividends of $0.05 per share or approximately $1.2 million compared to $0.03 per share or approximately $0.7 million for the three months ended April 30, 2012 and 2011, respectively. The Company also declared a special cash dividend of $0.50 per share or approximately $12.6 million, which was paid on May 15, 2012 to all shareholders of record on April 30, 2012.

On April 15, 2008, the Board authorized a program to repurchase up to one million shares of the Company’s common stock. Under this authorization, the Company has the option to repurchase shares over time, with the amount and timing of repurchases depending on market conditions and corporate needs. The Company entered into a Rule 10b5-1 plan to facilitate repurchases of its shares under this authorization. A Rule 10b5-1 plan permits a company to repurchase shares at times when it might otherwise be prevented from doing so, provided the plan is adopted when the company is not aware of material non-public information. The Company may suspend or discontinue the repurchase of stock at any time. Under this share repurchase program, the Company had repurchased a total of 937,360 shares of common stock in the open market during the first and second quarters of fiscal 2009 at a total cost of approximately $19.5 million or $20.79 average per share. During the three months ended April 30, 2012, the Company did not repurchase shares of common stock under this program.

Cash at April 30, 2012 amounted to $158.8 million compared to $109.3 million at April 30, 2011. The increase in cash is primarily the result of cash provided by operations.

Management believes that the cash on hand in addition to the expected cash flow from operations and the Company’s short-term borrowing capacity will be sufficient to meet its working capital needs for at least the next twelve months.

Off-Balance Sheet Arrangements

The Company does not have off-balance sheet financing or unconsolidated special-purpose entities.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Foreign Currency Risk

The Company’s primary market risk exposure relates to foreign currency exchange risk. A significant portion of the Company’s purchases are denominated in Swiss francs. The Company reduces its exposure to the Swiss franc exchange rate risk through a hedging program. Under the hedging program, the Company manages most of its foreign currency exposures on a consolidated basis, which allows it to net certain exposures and take advantage of natural offsets. In the event these exposures do not offset, the Company uses various derivative financial instruments to further reduce the net exposures to currency fluctuations, predominately forward and option contracts. When entered into, the Company designates and documents these derivative instruments as a cash flow hedge of a specific underlying exposure, as well as the risk management objectives and strategies for undertaking the hedge transactions. Changes in the fair value of a derivative that is designated and documented as a cash flow hedge and is highly effective, are recorded in other comprehensive income until the underlying transaction affects earnings, and then are later reclassified into earnings in the same account as the hedged transaction. The earnings impact is partially offset by the effects of currency movements on the underlying hedged transactions. If the Company does not engage in a hedging program, any change in the Swiss franc to local currency would have an equal effect on the Company’s cost of sales.

The Company uses forward exchange contracts to offset its exposure to certain foreign currency receivables and liabilities. These forward contracts are not designated as qualified hedges and, therefore, changes in the fair value of these derivatives are recognized into earnings, thereby offsetting the current earnings effect of the related foreign currency liabilities.

As of April 30, 2012, the Company’s entire net forward contracts hedging portfolio consisted of 38.0 million Swiss francs equivalent for various expiry dates ranging through October 17, 2012 compared to a portfolio of 32.0 million Swiss francs equivalent for various expiry dates ranging through October 21, 2011 as of April 30, 2011. If the Company were to settle its Swiss franc forward contracts at April 30, 2012, the net result would be a gain of $0.4 million, net of tax of $0.2 million. The Company had no Swiss franc option contracts related to cash flow hedges as of April 30, 2012 and 2011, respectively.

The Board authorized the hedging of the Company’s Swiss franc denominated investment in its wholly-owned Swiss subsidiaries using purchase options under certain limitations. These hedges are treated as net investment hedges under the relevant accounting guidance regarding derivative instruments. As of April 30, 2012 and 2011, the Company did not hold a purchased option hedge portfolio related to net investment hedging.

Commodity Risk

The Company considers its exposure to fluctuations in commodity prices to be primarily related to gold used in the manufacturing of the Company’s watches. Under its hedging program, the Company can purchase various commodity derivative instruments, primarily future contracts. These derivatives are documented as qualified cash flow hedges, and gains and losses on these derivative instruments are first reflected in other comprehensive income, and later reclassified into earnings, partially offset by the effects of gold market price changes on the underlying actual gold purchases. The Company did not hold any future contracts in its gold hedge portfolio related to cash flow hedges as of April 30, 2012 and 2011, thus any changes in the gold price will have an equal effect on the Company’s cost of sales.

 

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Debt and Interest Rate Risk

The Company has the capability to have certain debt obligations with variable interest rates, which are based on LIBOR plus a fixed additional interest rate. The Company does not hedge these interest rate risks. As of April 30, 2012, the Company had no outstanding debt. For additional information concerning potential changes to future interest obligations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”

 

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company’s disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, and the Company’s Chief Executive Officer and Chief Financial Officer have concluded that such disclosure controls and procedures are effective at that reasonable assurance level. However, it should be noted that a control system, no matter how well conceived or operated, can only provide reasonable, not absolute, assurance that its objectives will be met and may not prevent all errors or instances of fraud.

The Company, under the supervision and with the participation of its management, including the Chief Executive Officer and the Chief Financial Officer, have evaluated the effectiveness of the Company’s disclosure controls and procedures, as such terms are defined in Rule 13a-15(e) under the Securities Exchange Act, as amended. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective at a reasonable assurance level as of the end of the period covered by this report.

Changes in Internal Control Over Financial Reporting

There has been no change in the Company’s internal control over financial reporting during the three months ended April 30, 2012, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II—OTHER INFORMATION

 

Item 1.

Legal Proceedings

The Company is involved in pending legal proceedings and claims in the ordinary course of business. Although the outcome of such matters cannot be determined with certainty, the Company’s general counsel and management believe that the final outcome of currently pending legal proceedings, individually or in the aggregate, would not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

 

Item 1A.

Risk Factors

As of April 30, 2012, there have been no material changes to any of the risk factors previously reported in the Annual Report on Form 10-K for the fiscal year ended January 31, 2012.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

On April 15, 2008, the Board of Directors authorized repurchase up to one million shares of the Company’s Common Stock. Under this authorization, the Company has the option to repurchase shares over time, with the amount and timing of repurchases depending on market conditions and corporate needs. The Company entered into a Rule 10b5-1 plan to facilitate repurchases of its shares under this authorization. A Rule 10b5-1 plan permits a company to repurchase shares at times when it might otherwise be prevented from doing so, provided the plan is adopted when the company is not aware of material non-public information. The Company may suspend or discontinue the repurchase of stock at any time. Under this share repurchase program, the Company had repurchased a total of 937,360 shares of Common Stock in the open market during the first and second quarters of fiscal year 2009 at a total cost of approximately $19.5 million or $20.79 per share. During the three months ended April 30, 2012, the Company has not repurchased shares of Common Stock under this program.

There were no shares repurchased during the three months ended April 30, 2012 as a result of the surrender of shares in connection with the vesting of certain restricted stock awards or stock options. At the election of an employee, shares having an aggregate value on the vesting date equal to the employee’s withholding tax obligation may be surrendered to the Company.

The following table summarizes information about the Company’s purchases for the period ended April 30, 2012 of equity securities that are registered by the Company pursuant to Section 12 of the Securities Exchange Act of 1934:

Issuer Repurchase of Equity Securities

 

Period

   Total
Number of
Shares
Purchased
     Average
Price Paid
Per Share
     Total Number of
Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs
     Maximum
Number of Shares
that May Yet Be
Purchased Under
the Plans or
Programs
 

February 1, 2012—February 29, 2012

     —         $ —           —           62,640   

March 1, 2012—March 31, 2012

     —         $ —           —           62,640   

April 1, 2012—April 30, 2012

     —         $ —           —           62,640   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —         $ —           —           62,640   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Item 6.

Exhibits

 

31.1

  

Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

  

Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

  

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

  

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101

  

101.INS XBRL Instance Document*

  

101.SCH XBRL Schema Document*

  

101.CAL XBRL Calculation Linkbase Document*

  

101.LAB XBRL Labels Linkbase Document*

  

101.PRE XBRL Presentation Linkbase Document*

  

101.DEF XBRL Definition Linkbase Document*

 

*

XBRL (Extensible Business Reporting Language) information will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (15 U.S.C. 78r), or otherwise subject to the liability of that section. Such exhibit will not be deemed to be incorporated by reference into any filing under the Securities Act or Securities Exchange Act, except to the extent that the Company specifically incorporates it by reference.

 

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SIGNATURE

Pursuant to the requirements 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.

 

   

MOVADO GROUP, INC.

   

            (Registrant)

Dated: May 31, 2012

   

By:

 

  /s/    Sallie A. DeMarsilis        

     

  Sallie A. DeMarsilis

     

  Senior Vice President,

     

  Chief Financial Officer and

  Principal Accounting Officer

 

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