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 October 31, 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
(Registrants 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 |
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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 registrants common stock and class A common stock as of November 20, 2012 were 18,690,712 and 6,632,967, respectively.
Index to Quarterly Report on Form 10-Q
October 31, 2012
Page | ||||||||
Part I |
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Item 1. |
Consolidated Balance Sheets at October 31, 2012, January 31, 2012 and October 31, 2011 |
3 | ||||||
4 | ||||||||
5 | ||||||||
Consolidated Statements of Cash Flows for the nine months ended October 31, 2012 and 2011 |
6 | |||||||
7 | ||||||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
16 | ||||||
Item 3. |
26 | |||||||
Item 4. |
28 | |||||||
Part II |
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Item 1. |
29 | |||||||
Item 1A. |
29 | |||||||
Item 2. |
29 | |||||||
Item 6. |
30 | |||||||
31 |
2
PART I - FINANCIAL INFORMATION
MOVADO GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
October 31,
2012 |
January 31,
2012 |
October 31,
2011 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
$ | 164,813 | $ | 182,201 | $ | 138,028 | ||||||
Trade receivables |
107,138 | 62,754 | 95,415 | |||||||||
Inventories |
169,668 | 163,680 | 176,092 | |||||||||
Other current assets |
34,339 | 25,516 | 25,413 | |||||||||
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Total current assets |
475,958 | 434,151 | 434,948 | |||||||||
Property, plant and equipment, net |
35,541 | 36,290 | 35,585 | |||||||||
Deferred income taxes |
26,863 | 14,959 | 7,426 | |||||||||
Other non-current assets |
24,009 | 22,162 | 22,120 | |||||||||
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Total assets |
$ | 562,371 | $ | 507,562 | $ | 500,079 | ||||||
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LIABILITIES AND EQUITY |
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Current liabilities: |
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Accounts payable |
$ | 29,770 | $ | 33,814 | $ | 27,252 | ||||||
Accrued liabilities |
63,494 | 53,083 | 53,006 | |||||||||
Deferred and current income taxes payable |
12,842 | 1,015 | 1,617 | |||||||||
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Total current liabilities |
106,106 | 87,912 | 81,875 | |||||||||
Deferred and non-current income taxes payable |
4,548 | 7,291 | 6,548 | |||||||||
Other non-current liabilities |
20,318 | 18,285 | 17,807 | |||||||||
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Total liabilities |
130,972 | 113,488 | 106,230 | |||||||||
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Commitments and contingencies (Note 8) |
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Equity: |
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Preferred Stock, $0.01 par value, 5,000,000 shares authorized; no shares issued |
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Common Stock, $0.01 par value, 100,000,000 shares authorized; 26,399,239; 26,124,281 and 26,015,047 shares issued, respectively |
264 | 261 | 260 | |||||||||
Class A Common Stock, $0.01 par value, 30,000,000 shares authorized; 6,632,967; 6,632,967 and 6,632,967 shares issued and outstanding, respectively |
66 | 66 | 66 | |||||||||
Capital in excess of par value |
158,912 | 153,331 | 151,578 | |||||||||
Retained earnings |
284,514 | 251,695 | 241,751 | |||||||||
Accumulated other comprehensive income |
96,110 | 97,922 | 108,964 | |||||||||
Treasury Stock, 7,708,527; 7,776,407 and 7,757,323 shares, respectively, at cost |
(111,569 | ) | (111,909 | ) | (111,544 | ) | ||||||
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Total Movado Group, Inc. shareholders equity |
428,297 | 391,366 | 391,075 | |||||||||
Noncontrolling interests |
3,102 | 2,708 | 2,774 | |||||||||
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Total equity |
431,399 | 394,074 | 393,849 | |||||||||
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Total liabilities and equity |
$ | 562,371 | $ | 507,562 | $ | 500,079 | ||||||
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See Notes to Consolidated Financial Statements
3
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three Months
Ended
October 31, |
Nine Months Ended
October 31, |
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2012 | 2011 | 2012 | 2011 | |||||||||||||
Net sales |
$ | 160,202 | $ | 142,622 | $ | 381,884 | $ | 345,707 | ||||||||
Cost of sales |
69,783 | 61,588 | 166,682 | 155,104 | ||||||||||||
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Gross profit |
90,419 | 81,034 | 215,202 | 190,603 | ||||||||||||
Selling, general and administrative |
65,429 | 61,906 | 170,975 | 164,881 | ||||||||||||
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Operating income |
24,990 | 19,128 | 44,227 | 25,722 | ||||||||||||
Other income (Note 11) |
| | | 747 | ||||||||||||
Interest expense |
(69 | ) | (290 | ) | (287 | ) | (988 | ) | ||||||||
Interest income |
66 | 21 | 84 | 67 | ||||||||||||
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Income before income taxes |
24,987 | 18,859 | 44,024 | 25,548 | ||||||||||||
(Benefit from) / provision for income taxes (Note 9) |
(9,866 | ) | 2,071 | (5,744 | ) | 3,661 | ||||||||||
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Net Income |
34,853 | 16,788 | 49,768 | 21,887 | ||||||||||||
Less: Net income attributed to noncontrolling interests |
380 | 384 | 604 | 584 | ||||||||||||
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Net income attributed to Movado Group, Inc. |
$ | 34,473 | $ | 16,404 | $ | 49,164 | $ | 21,303 | ||||||||
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Basic income per share: |
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Weighted basic average shares outstanding |
25,304 | 24,926 | 25,204 | 24,905 | ||||||||||||
Net income per share attributed to Movado Group, Inc. |
$ | 1.36 | $ | 0.66 | $ | 1.95 | $ | 0.86 | ||||||||
Diluted income per share: |
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Weighted diluted average shares outstanding |
25,710 | 25,108 | 25,598 | 25,105 | ||||||||||||
Net income per share attributed to Movado Group, Inc. |
$ | 1.34 | $ | 0.65 | $ | 1.92 | $ | 0.85 | ||||||||
Dividends declared per share |
$ | 0.05 | $ | 0.03 | $ | 0.65 | $ | 0.09 |
See Notes to Consolidated Financial Statements
4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME / (LOSS)
(In thousands)
(Unaudited)
Three Months
Ended
October 31, |
Nine Months Ended
October 31, |
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2012 | 2011 | 2012 | 2011 | |||||||||||||
Comprehensive income / (loss), net of taxes: |
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Net income |
$ | 34,853 | $ | 16,788 | $ | 49,768 | $ | 21,887 | ||||||||
Net unrealized gain / (loss) on investments |
38 | (62 | ) | 14 | (33 | ) | ||||||||||
Net change in hedging contracts |
990 | (213 | ) | 990 | (851 | ) | ||||||||||
Foreign currency translation adjustments |
11,439 | (26,814 | ) | (2,792 | ) | 16,857 | ||||||||||
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Comprehensive income / (loss) |
47,320 | (10,301 | ) | 47,980 | 37,860 | |||||||||||
Less: Comprehensive income attributable to noncontrolling interests |
488 | 316 | 628 | 621 | ||||||||||||
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Total comprehensive income / (loss) attributable to Movado Group, Inc. |
$ | 46,832 | ($ | 10,617 | ) | $ | 47,352 | $ | 37,239 | |||||||
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See Notes to Consolidated Financial Statements
5
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended October 31, | ||||||||
2012 | 2011 | |||||||
Cash flows from operating activities: |
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Net income |
$ | 49,768 | $ | 21,887 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
8,036 | 8,791 | ||||||
Deferred income taxes |
(19,088 | ) | 62 | |||||
Stock-based compensation |
2,065 | 1,292 | ||||||
Gain on sale of an asset held for sale |
| (747 | ) | |||||
Changes in assets and liabilities: |
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Trade receivables |
(44,384 | ) | (32,576 | ) | ||||
Inventories |
(6,981 | ) | 12,860 | |||||
Other current assets |
(2,648 | ) | 5,775 | |||||
Accounts payable |
(3,830 | ) | 4,455 | |||||
Accrued liabilities |
10,939 | 10,898 | ||||||
Current income taxes payable |
12,349 | 265 | ||||||
Other non-current assets |
(2,465 | ) | (164 | ) | ||||
Other non-current liabilities |
2,029 | (62 | ) | |||||
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Net cash provided by operating activities |
5,790 | 32,736 | ||||||
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Cash flows from investing activities: |
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Capital expenditures |
(6,524 | ) | (4,535 | ) | ||||
Trademarks |
(251 | ) | (179 | ) | ||||
Proceeds from sale of an asset held for sale |
| 1,165 | ||||||
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Net cash (used in) investing activities |
(6,775 | ) | (3,549 | ) | ||||
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Cash flows from financing activities: |
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Stock options exercised and other changes |
1,695 | 581 | ||||||
Distribution of noncontrolling interest earnings |
(234 | ) | (127 | ) | ||||
Dividends paid |
(16,345 | ) | (2,237 | ) | ||||
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Net cash (used in) financing activities |
(14,884 | ) | (1,783 | ) | ||||
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Effect of exchange rate changes on cash and cash equivalents |
(1,519 | ) | 7,608 | |||||
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Net (decrease) / increase in cash and cash equivalents |
(17,388 | ) | 35,012 | |||||
Cash and cash equivalents at beginning of period |
182,201 | 103,016 | ||||||
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Cash and cash equivalents at end of period |
$ | 164,813 | $ | 138,028 | ||||
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See Notes to Consolidated Financial Statements
6
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 Companys Annual Report filed on Form 10-K for the fiscal year ended January 31, 2012 (the Annual Report 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. The consolidated balance sheet data for January 31, 2012 is derived from the audited financial statements, which are included in the Companys Annual Report on Form 10-K. These unaudited 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 RECLASSIFICATIONS
Certain reclassifications were made to prior years financial statement amounts and related note disclosures to conform to the fiscal 2013 presentation. In fiscal 2012, certain liabilities were reclassified from accrued liabilities to accounts payable to conform to the fiscal 2013 presentation. Also, in fiscal 2012, there was a reclassification of deferred revenue for certain customers from accounts receivables to accrued liabilities to conform to the fiscal 2013 presentation.
NOTE 2 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:
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Level 1 - Quoted prices in active markets for identical assets or liabilities. |
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Level 2 - Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly. |
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Level 3 - Unobservable inputs based on the Companys assumptions. |
The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of October 31, 2012 (in thousands):
Fair Value at October 31, 2012 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets: |
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Available-for-sale securities |
$ | 301 | $ | | $ | | $ | 301 | ||||||||
SERP assets employer |
984 | | | 984 | ||||||||||||
SERP assets - employee |
16,742 | | | 16,742 | ||||||||||||
Hedge derivatives |
| 584 | | 584 | ||||||||||||
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Total |
$ | 18,027 | $ | 584 | $ | | $ | 18,611 | ||||||||
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Liabilities: |
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SERP liabilities - employee |
$ | 16,742 | $ | | $ | | $ | 16,742 | ||||||||
Hedge derivatives |
| 63 | | 63 | ||||||||||||
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$ | 16,742 | $ | 63 | $ | | $ | 16,805 | |||||||||
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7
The fair values of the Companys 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 Companys hedge derivatives are calculated based on quoted foreign exchange rates, quoted interest rates and market volatility factors. The assets related to the Companys defined contribution supplemental executive retirement plan (SERP) consist of both employer (employee unvested) and employee assets which are invested in investment funds with fair values calculated based on quoted market prices. The SERP liability represents the Companys liability to the employees in the plan for their vested balances.
NOTE 3 EQUITY
The components of equity for the nine months ended October 31, 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 |
49,164 | 604 | 49,768 | |||||||||||||||||||||||||||||
Dividends paid |
(16,345 | ) | (16,345 | ) | ||||||||||||||||||||||||||||
Distribution of noncontrolling interest earnings |
(234 | ) | (234 | ) | ||||||||||||||||||||||||||||
Stock options exercised, net of tax |
3 | 2,671 | (1,099 | ) | 1,575 | |||||||||||||||||||||||||||
Stock-based compensation expense |
2,065 | 2,065 | ||||||||||||||||||||||||||||||
Supplemental executive retirement plan |
120 | 120 | ||||||||||||||||||||||||||||||
Stock donation |
725 | 1,439 | 2,164 | |||||||||||||||||||||||||||||
Net unrealized gain on investments, net of tax |
14 | 14 | ||||||||||||||||||||||||||||||
Net change in hedging contracts, net of tax |
990 | 990 | ||||||||||||||||||||||||||||||
Foreign currency translation adjustment (1) |
(2,816 | ) | 24 | (2,792 | ) | |||||||||||||||||||||||||||
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Balance, October 31, 2012 |
$ | 264 | $ | 66 | $ | 158,912 | $ | 284,514 | ($ | 111,569 | ) | $ | 96,110 | $ | 3,102 | $ | 431,399 | |||||||||||||||
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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 |
21,303 | 584 | 21,887 | |||||||||||||||||||||||||||||
Dividends paid |
(2,237 | ) | (2,237 | ) | ||||||||||||||||||||||||||||
Distribution of noncontrolling interest earnings |
(127 | ) | (127 | ) | ||||||||||||||||||||||||||||
Stock options exercised, net of tax |
1 | 744 | (213 | ) | 532 | |||||||||||||||||||||||||||
Stock-based compensation expense |
1,292 | 1,292 | ||||||||||||||||||||||||||||||
Supplemental executive retirement plan |
50 | 50 | ||||||||||||||||||||||||||||||
Net unrealized loss on investments, net of tax |
(33 | ) | (33 | ) | ||||||||||||||||||||||||||||
Net change in hedging contracts, net of tax |
(851 | ) | (851 | ) | ||||||||||||||||||||||||||||
Foreign currency translation adjustment (1) |
16,820 | 37 | 16,857 | |||||||||||||||||||||||||||||
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Balance, October 31, 2011 |
$ | 260 | $ | 66 | $ | 151,578 | $ | 241,751 | ($ | 111,544 | ) | $ | 108,964 | $ | 2,774 | $ | 393,849 | |||||||||||||||
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(1) | The foreign currency translation adjustments are tax-affected to the extent they relate to nonpermanent investments in foreign subsidiaries. |
8
NOTE 4 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 Companys 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 Companys outlet stores all located in the United States 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, which includes the results of all other Company operations. The allocation of geographic revenue is based upon the location of the customer. The Companys international operations are principally conducted in Europe, Asia, Canada, the Middle East, South America and the Caribbean. The Companys international assets are substantially located in Switzerland.
Operating Segment Data for the Three Months Ended October 31, 2012 and 2011 (in thousands):
Net Sales | Operating Income | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Wholesale |
$ | 147,280 | $ | 129,601 | $ | 22,756 | $ | 17,447 | ||||||||
Retail |
12,922 | 13,021 | 2,234 | 1,681 | ||||||||||||
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Consolidated total |
$ | 160,202 | $ | 142,622 | $ | 24,990 | $ | 19,128 | ||||||||
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Operating Segment Data for the Nine Months Ended October 31, 2012 and 2011 (in thousands):
Net Sales | Operating Income | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Wholesale |
$ | 345,252 | $ | 308,931 | $ | 37,665 | $ | 21,152 | ||||||||
Retail |
36,632 | 36,776 | 6,562 | 4,570 | ||||||||||||
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Consolidated total |
$ | 381,884 | $ | 345,707 | $ | 44,227 | $ | 25,722 | ||||||||
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Total Assets | ||||||||||||
October 31,
2012 |
January 31,
2012 |
October 31,
2011 |
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Wholesale |
$ | 542,588 | $ | 489,347 | $ | 481,082 | ||||||
Retail |
19,783 | 18,215 | 18,997 | |||||||||
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Consolidated total |
$ | 562,371 | $ | 507,562 | $ | 500,079 | ||||||
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9
Geographic Segment Data for the Three Months Ended October 31, 2012 and 2011 (in thousands):
Net Sales | Operating Income | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
United States |
$ | 87,231 | $ | 74,082 | $ | 3,972 | $ | 803 | ||||||||
International |
72,971 | 68,540 | 21,018 | 18,325 | ||||||||||||
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Consolidated total |
$ | 160,202 | $ | 142,622 | $ | 24,990 | $ | 19,128 | ||||||||
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United States and International net sales are net of intercompany sales of $93.2 million and $73.9 million for the three months ended October 31, 2012 and 2011, respectively.
Geographic Segment Data for the Nine Months Ended October 31, 2012 and 2011 (in thousands):
Net Sales | Operating (Loss) / Income | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
United States |
$ | 198,032 | $ | 174,177 | ($ | 3,529 | ) | ($ | 7,849 | ) | ||||||
International |
183,852 | 171,530 | 47,756 | 33,571 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Consolidated total |
$ | 381,884 | $ | 345,707 | $ | 44,227 | $ | 25,722 | ||||||||
|
|
|
|
|
|
|
|
United States and International net sales are net of intercompany sales of $211.5 million and $164.5 million for the nine months ended October 31, 2012 and 2011, respectively.
Total Assets | ||||||||||||
October 31,
2012 |
January 31,
2012 |
October 31,
2011 |
||||||||||
United States |
$ | 248,062 | $ | 214,882 | $ | 202,954 | ||||||
International |
314,309 | 292,680 | 297,125 | |||||||||
|
|
|
|
|
|
|||||||
Consolidated total |
$ | 562,371 | $ | 507,562 | $ | 500,079 | ||||||
|
|
|
|
|
|
|||||||
Long-Lived Assets | ||||||||||||
October 31,
2012 |
January 31,
2012 |
October 31,
2011 |
||||||||||
United States |
$ | 26,010 | $ | 28,476 | $ | 28,491 | ||||||
International |
9,531 | 7,814 | 7,094 | |||||||||
|
|
|
|
|
|
|||||||
Consolidated total |
$ | 35,541 | $ | 36,290 | $ | 35,585 | ||||||
|
|
|
|
|
|
10
NOTE 5 INVENTORIES
Inventories consist of the following (in thousands):
October 31,
2012 |
January 31,
2012 |
October 31,
2011 |
||||||||||
Finished goods |
$ | 104,531 | $ | 97,975 | $ | 96,370 | ||||||
Component parts |
55,892 | 57,700 | 67,062 | |||||||||
Work-in-process |
9,245 | 8,005 | 12,660 | |||||||||
|
|
|
|
|
|
|||||||
$ | 169,668 | $ | 163,680 | $ | 176,092 | |||||||
|
|
|
|
|
|
NOTE 6 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 Agent in its good faith credit judgment. The Second Amendment reduced the Lenders total commitment under the Loan Agreement from $55.0 million to $25.0 million and consequently availability was correspondingly reduced. As of October 31, 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 $20.5 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 October 31, 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.
11
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 October 31, 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 an aggregate of $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 an aggregate of $50.0 million, as long as, at the time of such transaction, either (A) Borrowers have cash assets of at least $60.0 million with no revolver loans outstanding, or (B) (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, as of October 31, 2012, 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 any dividends declared 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 October 31, 2012 and 2011, these lines of credit totaled 10.0 million Swiss francs for both periods, with dollar equivalents of $10.7 million and $11.4 million, respectively. As of October 31, 2012 and 2011, there were no borrowings against these lines. As of October 31, 2012, two European banks have guaranteed obligations to third parties on behalf of two of the Companys foreign subsidiaries in the amount of $2.3 million in various foreign currencies.
NOTE 7 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 25,304,000 and 24,926,000 for the three months ended October 31, 2012 and 2011, respectively. For the three months ended October 31, 2012 and 2011, respectively, the number of shares outstanding for diluted earnings per share was increased by 406,000 and 182,000, due to potentially dilutive common stock equivalents issuable under the Companys stock compensation plans.
12
For the three months ended October 31, 2012 and October 31, 2011, approximately 332,000 and 660,000 of common stock equivalents, respectively, were excluded from the computation of diluted earnings per share because their effect would have been antidilutive.
The weighted-average number of shares outstanding for basic earnings per share was 25,204,000 and 24,905,000 for the nine months ended October 31, 2012 and 2011, respectively. For the nine months ended October 31, 2012 and 2011, respectively, the number of shares outstanding for diluted earnings per share was increased by 394,000 and 199,000, due to potentially dilutive common stock equivalents issuable under the Companys stock compensation plans.
For the nine months ended October 31, 2012 and October 31, 2011, approximately 258,000 and 606,000 of common stock equivalents, respectively, were excluded from the computation of diluted earnings per share because their effect would have been antidilutive.
NOTE 8 COMMITMENTS AND CONTINGENCIES
As of October 31, 2012, one bank in the domestic bank group had issued five 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 October 31, 2012, the Company had outstanding letters of credit totaling $4.5 million with expiration dates through April 30, 2014.
As of October 31, 2012, two European banks have guaranteed obligations to third parties on behalf of two of the Companys foreign subsidiaries in the amount of $2.3 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 Companys business. Although the outcome of such matters cannot be determined with certainty, the Companys general counsel and management believe that the final outcome would not have a material effect on the Companys consolidated financial position, results of operations or cash flows.
NOTE 9 INCOME TAXES
The Company recorded a tax benefit of $9.9 million and a tax expense of $2.1 million for the three months ended October 31, 2012 and 2011, respectively. The effective tax rate for the three months ended October 31, 2012 was -39.5%. The effective tax rate for the three months ended October 31, 2011 was 11.0%.
The Company recorded a tax benefit of $5.7 million and a tax expense of $3.7 million for the nine months ended October 31, 2012 and 2011, respectively. The effective tax rate for the nine months ended October 31, 2012 was -13.0%. The effective tax rate for the nine months ended October 31, 2011 was 14.3%.
The three and nine months ended October 31, 2012 included a tax benefit of $19.4 million attributable to the reversal of a majority of the valuation allowance on the U.S. net deferred tax assets. The remaining valuation allowance of $2.8 million represents the portion of the Companys deferred tax assets for state net operating losses that management estimates will not be realized in the future. All periods include the effects of the application of accounting for income taxes in interim periods. The fluctuation in the effective tax rate is also due to a shift in the mix of global pre-tax financial results. The nine months ended October 31, 2012, included a $0.5 million discrete expense recorded in the current year for a contingent exposure relative to a recent foreign tax audit.
13
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 Companys 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 it was appropriate to record a full valuation allowance against its net deferred tax assets in the United States, primarily due to the Companys domestic loss position in recent years. In the third quarter of fiscal 2013, the Company was no longer in a domestic loss position, and based on expectations of future income, the Company changed its judgment regarding the appropriateness of the level of allowance on the U.S. deferred tax assets, maintaining a valuation allowance only against state tax loss carry-forwards.
NOTE 10 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 position and measure those instruments at fair value. A significant portion of the Companys 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 Statements of Operations 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 Companys derivative instruments have liquid markets to assess fair value. The Company does not enter into any derivative instruments for trading purposes.
As of October 31, 2012, the Companys entire net forward contracts hedging portfolio consisted of 39.0 million Swiss francs equivalent with various expiry dates ranging through April 19, 2013.
14
The following table summarizes the fair value and presentation in the Consolidated Balance Sheets for derivatives as of October 31, 2012 and 2011 (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 | $ | 584 | $ | 150 | Accrued Liabilities | $ | 63 | $ | 916 | ||||||||||
Commodity Future Contracts |
Other Current Assets | | | Accrued Liabilities | | 116 | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total Derivative Instruments |
$ | 584 | $ | 150 | $ | 63 | $ | 1,032 | ||||||||||||
|
|
|
|
|
|
|
|
As of October 31, 2012, the balance of deferred net gains on derivative financial instruments documented as cash flow hedges included in accumulated other comprehensive income (AOCI) was $0. As of October 31, 2011, the balance of deferred net gains on derivative financial instruments documented as cash flow hedges included in AOCI was $1.0 million in net losses, net of tax of $1.0 million. The Companys 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 and nine months ended October 31, 2012 there were no reclassifications from AOCI to earnings. For the three months ended October 31, 2011, the Company reclassified from AOCI to earnings $0.2 million of net gains, net of tax of $0. For the nine months ended October 31, 2011 the Company reclassified from AOCI to earnings $0.9 million of net gains, net of tax of $0.
During the three and nine months ended October 31, 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 cost of sales of the Consolidated Statements of Operations.
NOTE 11 OTHER INCOME
Other income for the nine months ended October 31, 2011 consisted of $0.7 million of pre-tax gain on the sale of a building. The Company received cash proceeds from the sale of $1.2 million. As of October 31, 2011, the building had been classified as an asset held for sale in other current assets.
NOTE 12 SUBSEQUENT EVENTS
The Company announced on November 27, 2012 that the Board of Directors approved the payment of a special cash dividend of $0.75 per share of the Companys outstanding common stock and class A common stock. This dividend will be paid on December 21, 2012 to all shareholders of record on December 10, 2012.
15
Item 2. | Managements 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 Managements 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 Companys 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 managements 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 Companys 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 Companys 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 (including Europe) where the Companys 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 suppliers inability to fulfill the Companys orders, the loss of or curtailed sales to significant customers, the Companys 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, potential effects of economic and currency instability in Europe and countries using the Euro as their functional currency, 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 Companys 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.
16
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 dates 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 Companys financial condition and the results of operations and require managements 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 Companys most critical accounting policies have been discussed in the Companys Annual Report on Form 10-K.
As of October 31, 2012, there have been no material changes to any of the critical accounting policies as disclosed in the Companys Annual Report on Form 10-K.
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.
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 $2.2 million in the form of shares of the Companys common stock issued out of treasury, and $0.8 million in cash. This expense was recorded in the fourth quarter of fiscal 2012.
On March 27, 2012, as a result of Movado Groups strong financial position in fiscal 2012, the Companys Board of Directors decided to increase the quarterly cash dividend to $0.05 per share, subject, in each quarter, to the Boards review of the Companys financial performance and other factors as determined by the Board. On November 27, 2012, the Board approved the payment of a cash dividend on December 21, 2012 in the amount of $0.05 per share of the Companys outstanding common stock and class A common stock held by shareholders of record as of the close of business on December 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.
On March 29, 2012, the Board of Directors approved the payment of a special cash dividend of $0.50 per share of the Companys 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 October 31, 2012, the Company accrued a $3.0 million pre-tax charge to selling, administrative, and general expenses, related to a pledged donation to the Movado Group Foundation. The Company expects to pay this amount in the fourth quarter of fiscal 2013, consisting of both shares of the Companys common stock and cash.
17
On November 27, 2012 the Board of Directors approved the payment of a special cash dividend of $0.75 per share of the Companys outstanding common stock and class A common stock. This dividend will be paid on December 21, 2012 to all shareholders of record on December 10, 2012.
Overview
The Company conducts its business primarily in two operating segments: Wholesale and Retail. The Companys Wholesale segment includes the designing, manufacturing and distribution of quality watches. The Retail segment consists of the Companys 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 ® 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.
Results of operations for the three months ended October 31, 2012 as compared to the three months ended October 31, 2011
Net Sales: Comparative net sales by business segment were as follows (in thousands):
Three Months Ended
October 31, |
||||||||
2012 | 2011 | |||||||
Wholesale: |
||||||||
United States |
$ | 74,309 | $ | 61,061 | ||||
International |
72,971 | 68,540 | ||||||
|
|
|
|
|||||
Total Wholesale |
147,280 | 129,601 | ||||||
Retail |
12,922 | 13,021 | ||||||
|
|
|
|
|||||
Net Sales |
$ | 160,202 | $ | 142,622 | ||||
|
|
|
|
Net sales for the three months ended October 31, 2012 were $160.2 million, above prior year by $17.6 million or 12.3%. For the three months ended October 31, 2012, fluctuations in foreign currency exchange rates unfavorably impacted net sales by $2.9 million when compared to the prior year period.
Net sales for the three months ended October 31, 2012 in the wholesale segment were $147.3 million, above the prior year period by $17.7 million or 13.6%. The increase in wholesale 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 October 31, 2012 in the United States location of the wholesale segment were $74.3 million, above the prior year period by $13.2 million or 21.7%, driven by sales increases in both the accessible luxury and licensed brand categories. Net sales in the accessible luxury category were above prior
18
year by $9.1 million, or 23.2%, primarily due to strong sell-through in the Companys distribution channels, higher sales of the Movado BOLD collection and continued focus and investment in marketing and advertising. Net sales in the accessible luxury category included sales of the newly styled ESQ collection branded ESQ Movado which launched in the current period. Net sales in the licensed brand category were above the prior year period by $4.4 million, or 23.1%, primarily due to increased demand driven by innovative product designs and key price points that are resonating well with customers. The net sales in the luxury category for the three months ended October 31, 2012 were $1.0 million which were relatively flat when compared to the prior year period.
Net sales for the three months ended October 31, 2012 in the International location of the wholesale segment were $73.0 million, above the prior year period by $4.5 million or 6.5%, driven by a sales increase in the licensed brand and accessible luxury categories, partially offset by a sales decrease in the luxury brand category. Net sales in the licensed brand category were above the prior year period by $4.3 million, or 9.8%, primarily due to continued growth in existing markets resulting from higher demand, as well as new market expansion. Net sales in the accessible luxury category were above the prior year period by $2.8 million, or 25.8%, primarily due to continued growth in existing markets resulting from higher demand, as well as new market expansion and sales of the newly styled ESQ collection branded ESQ Movado which launched in the current period. Net sales in the luxury category were below the prior year period by $2.5 million, or 21.3% primarily due to the category being less promotional when compared to the prior year period. For the three months ended October 31, 2012, fluctuations in foreign currency exchange rates unfavorably impacted net sales by $2.9 million when compared to the prior year period.
Net sales for the three months ended October 31, 2012 in the Retail segment were $12.9 million, which were relatively flat when compared to the prior year period. As of October 31, 2012 and 2011, the Company operated 33 outlet stores.
Gross Profit. Gross profit for the three months ended October 31, 2012 was $90.4 million or 56.4% of net sales as compared to $81.0 million or 56.8% of net sales for the three months ended October 31, 2011. The increase in gross profit of $9.4 million was primarily due to higher net sales partially offset by a lower gross margin percentage achieved. The gross margin percentage for the three months ended October 31, 2012 was unfavorably impacted by approximately 110 basis points due to a shift in channel and product mix. When compared to the prior year period, the gross margin for the three months ended October 31, 2012 was favorably impacted by approximately 60 basis points due to fluctuations in foreign currency exchange rates. Additionally, the gross margin percentage for the three months ended October 31, 2012 was favorably impacted by approximately 10 basis points resulting from leverage gained on certain fixed costs due to the increase in sales volume year-over-year.
Selling, General and Administrative (SG&A). SG&A expenses for the three months ended October 31, 2012 were $65.4 million, representing an increase of $3.5 million or 5.7%. The increase in SG&A expenses included a $3.0 million charitable contribution to the Movado Group Foundation and higher compensation and benefit expense of $2.3 million recorded during the current year period resulting from higher performance-based compensation, separation agreements, higher headcount and salary increases. Higher marketing expense of $1.3 million was recorded during the current year period due to the Companys decision to increase spending to drive sales growth. These increases in SG&A expenses were partially offset by the effect of fluctuations in foreign currency exchange rates which favorably impacted SG&A expenses for the three months ended October 31, 2012 by $2.0 million, of which $1.1 million was the result of decreases from the translation of foreign subsidiary results and $0.9 million was the result of lower transactional losses recorded year-over-year. These increases in SG&A expenses were also partially offset by $0.6 million of lower bad debt expenses and $0.5 million of tradeshow related expenses.
19
Wholesale Operating Income. Operating income of $22.8 million and $17.4 million was recorded in the wholesale segment for the three months ended October 31, 2012 and 2011, respectively. The $5.4 million increase in operating income was the result of an increase in gross profit of $9.1 million, partially offset by an increase in SG&A expenses of $3.7 million. The increase in SG&A expenses included a $3.0 million charitable contribution to the Movado Group Foundation and higher compensation and benefit expense of $2.3 million recorded during the current year period resulting from higher performance-based compensation, separation agreements, higher headcount and salary increases. Higher marketing expense of $1.3 million was recorded during the current year period due to the Companys decision to increase spending to drive sales growth. These increases in SG&A expenses were partially offset by the effect of fluctuations in foreign currency exchange rates which favorably impacted SG&A expenses for the three months ended October 31, 2012 by $2.0 million, of which $1.1 million was the result of decreases from the translation of foreign subsidiary results and $0.9 million was the result of lower transactional losses recorded year-over-year. These increases in SG&A expenses were also partially offset by $0.6 million of lower bad debt expenses and $0.5 million of tradeshow related expenses.
Retail Operating Income. Operating income of $2.2 million and $1.7 million was recorded in the retail segment for the three months ended October 31, 2012 and 2011, respectively. The $0.5 million increase in operating income was the result of an increase in gross profit of $0.3 million and a decrease in SG&A expenses of $0.2 million. The increase in gross profit of $0.3 million was primarily attributed to higher gross margin percentage achieved. The decrease in SG&A expenses of $0.2 million was primarily due to the closing in the current year of the Movado brand flagship store located at Rockefeller Center in New York City.
Interest Expense . Interest expense for the three months ended October 31, 2012 and 2011 was $0.1 million and $0.3 million, respectively, which primarily consisted of the amortization of deferred financing costs.
Interest Income . Interest income for both three months ended October 31, 2012 and 2011 was immaterial.
Income Taxes . The Company recorded a tax benefit of $9.9 million and a tax expense of $2.1 million for the three months ended October 31, 2012 and 2011, respectively. The three months ended October 31, 2012 included a tax benefit of $19.4 million attributable to the reversal of a majority of the valuation allowance on the U.S. net deferred tax assets. The remaining valuation allowance of $2.8 million represents the portion of the Companys deferred tax assets for state net operating losses that management estimates will not be realized in the future. The effective tax rate for the three months ended October 31, 2012 was -39.5%. The effective tax rate for the three months ended October 31, 2011 was 11.0%. The effective tax rates for both periods include the application of guidelines related to accounting for income taxes in interim periods. The fluctuation in the effective tax rate is also due to a shift in the mix of global pre-tax financial results.
Net Income Attributed to Movado Group, Inc. For the three months ended October 31, 2012, the Company recorded net income of $34.5 million, compared to net income of $16.4 million recorded for the three months ended October 31, 2011.
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Results of operations for the nine months ended October 31, 2012 as compared to the nine months ended October 31, 2011
Net Sales: Comparative net sales by business segment were as follows (in thousands):
Nine Months Ended
October 31, |
||||||||
2012 | 2011 | |||||||
Wholesale: |
||||||||
United States |
$ | 161,400 | $ | 137,401 | ||||
International |
183,852 | 171,530 | ||||||
|
|
|
|
|||||
Total Wholesale |
345,252 | 308,931 | ||||||
Retail |
36,632 | 36,776 | ||||||
|
|
|
|
|||||
Net Sales |
$ | 381,884 | $ | 345,707 | ||||
|
|
|
|
Net sales for the nine months ended October 31, 2012 were $381.9 million, above prior year by $36.2 million or 10.5%. For the nine months ended October 31, 2012, fluctuations in foreign currency exchange rates unfavorably impacted net sales by $7.7 million when compared to the prior year period.
Net sales for the nine months ended October 31, 2012 in the wholesale segment were $345.3 million, above the prior year period by $36.3 million or 11.8%. The increase in wholesale net sales was driven by growth in both the United States and International locations of the wholesale segment.
Net sales for the nine months ended October 31, 2012 in the United States location of the wholesale segment were $161.4 million, above the prior year period by $24.0 million or 17.5%, driven by sales increases in both the accessible luxury and licensed brand categories. Net sales in the accessible luxury category were above prior year by $14.4 million, or 16.7%, primarily due to strong sell-through in the Companys distribution channels, higher sales of the Movado BOLD and Museum collections and the continued focus and investment in marketing and advertising. For the nine months ended October 31, 2012 net sales in the accessible luxury category included sales of the newly styled ESQ collection branded ESQ Movado which launched during the three months ended October 31, 2012, were more than offset by lower sales of the ESQ by Movado brand collection in the first half of the year. This was pursuant to the Companys strategy to minimize non-go forward inventory and maximize go-forward inventory at the retail level. Net sales in the licensed brand category were above the prior year period by $10.5 million, or 24.8%, 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 $0.1 million when compared to the prior year.
Net sales for the nine months ended October 31, 2012 in the International location of the wholesale segment were $183.9 million, above the prior year period by $12.3 million or 7.2%, driven by sales increases in the licensed brand and accessible luxury brand categories, partially offset by a sales decrease in the luxury brand category. Net sales in the licensed brand category were above the prior year period by $19.2 million, or 17.9%, primarily due to continued growth in existing markets resulting from higher demand, as well as new market expansion. Net sales in the accessible luxury category were above the prior year period by $1.9 million, or 6.9%, primarily due to continued growth in existing markets resulting from higher demand, as well as new market expansion and sales of the newly styled ESQ collection branded ESQ Movado which launched in the current three month period. Net sales in the luxury category were below the prior year period by $7.7 million, or
21
26.8% primarily due to the category being less promotional when compared to the prior year. For the nine months ended October 31, 2012, fluctuations in foreign currency exchange rates unfavorably impacted net sales by $7.7 million when compared to the prior year.
Net sales for the nine months ended October 31, 2012 in the Retail segment were $36.6 million, which were relatively flat in comparison to prior year. As of October 31, 2012 and 2011, the Company operated 33 outlet stores.
Gross Profit. Gross profit for the nine months ended October 31, 2012 was $215.2 million or 56.4% of net sales as compared to $190.6 million or 55.1% of net sales for the nine months ended October 31, 2011. The increase in gross profit of $24.6 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 nine months ended October 31, 2012 was favorably impacted by approximately 110 basis points due to a shift in channel and product mix and approximately 50 basis points resulting from reductions in and leverage gained on certain fixed costs due to the increase in sales volume year-over-year. Additionally, the gross margin for the nine months ended October 31, 2012 was unfavorably impacted by approximately 30 basis points due to fluctuations in foreign currency exchange rates.
Selling, General and Administrative (SG&A). SG&A expenses for the nine months ended October 31, 2012 were $171.0 million, representing an increase of $6.1 million or 3.7%. The increase in SG&A expense included higher compensation and benefit expense of $7.1 million recorded during the current year resulting from higher performance-based compensation, separation agreements, higher headcount and salary increases. The increase in SG&A expenses included a $3.0 million charitable contribution to the Movado Group Foundation. Additionally, higher marketing expense of $1.7 million was recorded during the current year resulting from the Companys decision to continue investment in this area to drive sales growth. These increases in SG&A expenses were partially offset by the effect of fluctuations in foreign currency exchange rates which favorably impacted SG&A expenses for the nine months ended October 31, 2012 by $5.0 million, of which $2.6 million was the result of lower transactional losses recorded year-over-year and $2.4 million was the result of decreases from the translation of foreign subsidiary results. These increases in SG&A expenses were also partially offset by $0.5 million of lower bad debt expenses.
Wholesale Operating Income. Operating income of $37.7 million and $21.2 million was recorded in the wholesale segment for the nine months ended October 31, 2012 and 2011, respectively. The $16.5 million increase in operating income was the net result of an increase in gross profit of $23.1 million, partially offset by an increase in SG&A expenses of $6.6 million. The increase in gross profit of $23.1 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 $7.1 million recorded during the current year resulting from higher performance-based compensation, separation agreements, higher headcount and salary increases. The increase in SG&A expenses included a $3.0 million charitable contribution to the Movado Group Foundation. Additionally, higher marketing expenses of $1.7 million were recorded during the current year resulting from the Companys decision to continue investment in this area to drive sales growth. These increases in SG&A expenses were partially offset by the effect of fluctuations in foreign currency exchange rates which favorably impacted SG&A expenses for the nine months ended October 31, 2012 by $5.0 million, of which $2.6 million was the result of lower transactional losses recorded year-over-year and $2.4 million was the result of decreases from the translation of foreign subsidiary results. These increases in SG&A expenses were also partially offset by $0.5 million of lower bad debt expenses.
Retail Operating Income. Operating income of $6.6 million and $4.6 million was recorded in the retail segment for the nine months ended October 31, 2012 and 2011, respectively. The $2.0 million increase in operating income was the result of an increase in gross profit of $1.5 million and a decrease in SG&A expenses of $0.5 million. The increase in gross profit of $1.5 million was primarily attributed to higher gross margin percentage
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achieved. The decrease in SG&A expenses of $0.5 million was primarily due to the closing in the current year of the Movado brand flagship store located at Rockefeller Center in New York City.
Other Income . The Company recorded other income of $0.7 million for the nine months ended October 31, 2011 resulting from the pre-tax gain on the sale of a building.
Interest Expense . Interest expense for the nine months ended October 31, 2012 and 2011 was $0.3 million and $1.0 million, respectively, which primarily consisted of the amortization of deferred financing costs.
Interest Income . Interest income for both nine months ended October 31, 2012 and 2011 was immaterial.
Income Taxes . The Company recorded a tax benefit of $5.7 million and a tax expense of $3.7 million for the nine months ended October 31, 2012 and 2011, respectively. The nine months ended October 31, 2012 included a tax benefit of $19.4 million attributable to the reversal of a majority of the valuation allowance on the U.S. net deferred tax assets. The remaining valuation allowance of $2.8 million represents the portion of the Companys deferred tax assets for state net operating losses that management estimates will not be realized in the future. The effective tax rate for the nine months ended October 31, 2012 was -13.0%. The effective tax rate for the nine months ended October 31, 2011 was 14.3%. The effective tax rates for both periods include the application of guidelines related to accounting for income taxes in interim periods. The fluctuation in the effective tax rate is also due to a shift in the mix of global pre-tax financial results. The nine months ended October 31, 2012, included a $0.5 million discrete expense recorded in the current year for a contingent exposure relative to a recent foreign tax audit.
Net Income Attributed to Movado Group, Inc. For the nine months ended October 31, 2012, the Company recorded net income of $49.2 million, compared to net income of $21.3 million recorded for the nine months ended October 31, 2011.
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 2012 and October 31, 2011, the Company had $164.8 million and $138.0 million, respectively, of cash and cash equivalents, $124.8 million and $112.7 million of which consisted of cash and cash equivalents at the Companys 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 excess cash balances attributable to certain prior year earnings in Hong Kong and Switzerland, and has provided tax accordingly.
Cash provided by operating activities was $5.8 million and $32.7 million for the nine months ended October 31, 2012 and 2011, respectively. The $5.8 million of cash provided by operating activities for the fiscal 2013 period was primarily due to income from operations of $49.8 million, partially offset by the change in working capital of $34.6 million and unfavorable non-cash items of $9.0 million. The change in working capital of $34.6 million was primarily due to the increase of accounts receivables and an increase in inventory, partially offset by the pay down of liabilities. The $32.7 million of cash provided by operating activities for the fiscal 2012 period was primarily the result of net income for the period of $21.9 million and favorable non-cash items of $9.4 million.
Cash used in investing activities amounted to $6.8 million for the nine months ended October 31, 2012 and $3.5 million for the nine months ended October 31, 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. For the nine months ended October 31, 2012, the cash used in investing activities for capital expenditures also included spending related to the relocation of the Companys Swiss offices. For the nine
23
months ended October 31, 2011, the cash used in investing activities of $3.5 million also included proceeds from a sale of an asset held for sale of $1.2 million.
Cash used in financing activities amounted to $14.9 million and $1.8 million for the nine months ended October 31, 2012 and 2011, respectively, primarily to pay dividends.
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 $50.0 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 Agent in its good faith credit judgment. The Second Amendment reduced the Lenders total commitment under the Loan Agreement from $55.0 million to $25.0 million and consequently availability was correspondingly reduced. As of October 31, 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 $20.5 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 October 31, 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 October 31, 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,
24
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 an aggregate of $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 an aggregate of $50.0 million, as long as, at the time of such transaction, either (A) Borrowers have cash assets of at least $60.0 million with no revolver loans outstanding, or (B) (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, as of October 31, 2012, 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 any dividends declared 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 October 31, 2012 and 2011, these lines of credit totaled 10.0 million Swiss francs for both periods, with dollar equivalents of $10.7 million and $11.4 million, respectively. As of October 31, 2012 and 2011, there were no borrowings against these lines. As of October 31, 2012, two European banks have guaranteed obligations to third parties on behalf of two of the Companys foreign subsidiaries in the amount of $2.3 million in various foreign currencies.
The Company paid dividends of $0.65 per share or approximately $16.3 million, for the nine months ended October 31, 2012. The Company paid dividends of $0.09 per share or approximately $2.2 million, for the nine months ended October 31, 2011.
The Company announced on November 27, 2012 that the Board of Directors approved the payment of a special cash dividend of $0.75 per share of the Companys outstanding common stock and class A common stock. This dividend will be paid on December 21, 2012 to all shareholders of record on December 10, 2012.
On April 15, 2008, the Board authorized a program to repurchase up to one million shares of the Companys 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 nine months ended October 31, 2012, the Company did not repurchase shares of common stock under this program.
25
Management believes that the cash on hand in addition to the expected cash flow from operations and the Companys 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.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Foreign Currency Risk
The Companys primary market risk exposure relates to foreign currency exchange risk. A significant portion of the Companys 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 Companys 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 October 31, 2012, the Companys entire net forward contracts hedging portfolio consisted of 39.0 million Swiss francs equivalent with various expiry dates ranging through April 19, 2013 compared to a portfolio of 27.0 million Swiss francs equivalent for various expiry dates ranging through April 25, 2012 as of October 31, 2011. If the Company were to settle its Swiss franc forward contracts at October 31, 2012, the net result would be a gain of $0.3 million, net of tax of $0.2 million. The Company had no Swiss franc option contracts related to cash flow hedges as of October 31, 2012 and 2011.
The Board authorized the hedging of the Companys 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 October 31, 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 Companys 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
26
underlying actual gold purchases. The Company did not hold any future contracts in its gold hedge portfolio related to cash flow hedges as of October 31, 2012 and 2011, thus any changes in the gold price will have an equal effect on the Companys cost of sales.
During the fourth quarter of fiscal year ended January 31, 2011, the Company concluded it would significantly reduce its offering of gold watches, as it relates to non-core gold inventory. The Company decided to melt the non-core gold inventory because the current salvage value of the gold was adequate and could be easily and quickly realized, while significant excessive time, effort and costs would be required to sell the gold watches. As a result, the Company entered into commodity futures contracts in fiscal 2012 to offset its exposure to the fluctuating value of gold. These futures contracts were not designated as qualified hedges and, therefore, changes in the fair value of these derivatives were recognized into earnings, thereby offsetting the earnings effect of fluctuations in the sale price of gold.
As of October 31, 2011, the Companys commodity futures contracts consisted of approximately 600 ounces of gold equivalent with various expiry dates ranging through November 30, 2011. If the Company were to settle its commodity future contracts at October 31, 2011, the net result would be a loss of $0.1 million, net of tax benefit of $0.1 million. As of October 31, 2012, the Company did not hold any gold future contracts in its fair value hedge portfolio.
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 October 31, 2012, the Company had no outstanding debt. For additional information concerning potential changes to future interest obligations, see Managements Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources.
27
Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
The Companys disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, and the Companys 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 Companys 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 Companys 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 Companys internal control over financial reporting during the nine months ended October 31, 2012, that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.
28
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 Companys 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 Companys consolidated financial position, results of operations or cash flows.
Item 1A. | Risk Factors |
As of October 31, 2012, there have been no material changes to any of the risk factors previously reported in the Annual Report on Form 10-K.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
On April 15, 2008, the Board authorized a program to repurchase up to one million shares of the Companys 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 nine months ended October 31, 2012, the Company has not repurchased shares of Common Stock under this program.
An aggregate of 32,120 shares have been repurchased during the nine months ended October 31, 2012 as a result of the surrender of shares in connection with the vesting of certain restricted stock awards and stock options. At the election of an employee, shares having an aggregate value on the vesting date equal to the employees withholding tax obligation may be surrendered to the Company.
The following table summarizes information about the Companys purchases for the three month period ended October 31, 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 |
||||||||||||
August 1, 2012 August 31, 2012 |
| $ | | | 62,640 | |||||||||||
September 1, 2012 September 30, 2012 |
11,001 | $ | 35.00 | | 62,640 | |||||||||||
October 1, 2012 October 31, 2012 |
21,119 | $ | 33.77 | | 62,640 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
32,120 | $ | 34.19 | | 62,640 | |||||||||||
|
|
|
|
|
|
|
|
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Item 6. | Exhibits |
10.1 |
Second Amendment entered into as of September 30, 2012 to Amended and Restated License Agreement dated September 16, 2009 between the Registrant, Swissam Products Limited and Tommy Hilfiger Licensing, LLC.* |
|
10.2 |
Fourth Amendment dated as of September 28, 2012 to License Agreement dated as of November 15, 2005 by and between the Registrant and L.C. Licensing LLC.* |
|
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 |
The following financial information from Movado Group, Inc.s Quarterly Report on Form 10-Q for the fiscal quarter ended October 31, 2012, furnished with the SEC, formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Operations; (iii) the Consolidated Statements of Comprehensive Income / (Loss); (iv) the Consolidated Statements of Cash Flows; and (v) the Notes to the Consolidated Financial Statements. |
* |
Confidential portions of Exhibits 10.1 and 10.2 have been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934. |
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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: November 28, 2012 |
By: |
/s/ Sallie A. DeMarsilis |
||||
Sallie A. DeMarsilis |
||||||
Senior Vice President, |
||||||
Chief Financial Officer and |
||||||
Principal Accounting Officer |
31
EXHIBIT 10.1*
SECOND AMENDMENT
TO AMENDED AND RESTATED LICENSE AGREEMENT
THIS SECOND AMENDMENT TO THE AMENDED AND RESTATED LICENSE AGREEMENT (the Second Amendment), entered into as of the 30 day of September, 2012, between TOMMY HILFIGER LICENSING, LLC, having an address at 601 West 26 th Street, New York, New York 10001 (Licensor), and MOVADO GROUP, INC., having its offices at 650 From Road, Paramus, New Jersey 07652 (MGI) and SWISSAM PRODUCTS LIMITED, having its offices at 5th Floor, Alexander House, 18 Charter Road, Hong Kong (SPL, and together with MGI, Licensee).
W I T N E S S E T H :
WHEREAS, Licensor and Licensee entered into an Amended and Restated License Agreement, dated September 16, 2009, which has been amended by an amendment dated January 11, 2010 (hereinafter, collectively, the License); and
WHEREAS, the parties have agreed to further amend the License as set forth herein;
NOW, THEREFORE, the parties hereto, in consideration of the mutual agreements herein contained and promises herein expressed, and for other good consideration acknowledged by each of them to be satisfactory and adequate, do hereby agree as follows:
1. All capitalized terms used herein and not otherwise defined shall have the same meanings ascribed to them in the License.
2. The Table of Contents of the License is hereby amended by replacing the titles of 6.9, 6.10 and EXHIBIT E as follows:
6.9 Standards
6.10 Audit Requirement
EXHIBIT E STANDARDS
3. Paragraph 1.24(b)(ii) of the License is hereby amended by deleting Syria from the list of countries comprising the Middle East.
4. Paragraph 2.1 of the License is hereby amended by adding the following words after the words anywhere in the world and at the end of the paragraph after the words the Territory:
(other than in Myanmar (Burma), Cuba, Iran, North Korea, Sudan or Syria and in any jurisdiction or country if the manufacture of Licensed Products by Licensor, its parent, PVH Corp. (PVH) or their respective Affiliates in such jurisdiction or country would cause a violation of United States laws and regulations).
* |
CONFIDENTIAL PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED FROM EXHIBIT F AND EXHIBIT G AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION (SEC) PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (1934 ACT). |
5. Paragraph 6.9 of the License is hereby amended by deleting it in its entirety and replacing it with the following:
Standards . Licensee acknowledges that it has received, read and understands PVHs publications A Shared Commitment - Requirements for Our Business Partners and Statement of Corporate Responsibility attached hereto as Exhibit E . Licensee shall conduct its business in compliance with the moral, ethical and legal standards set forth in such publication, as the same may from time to time be revised by PVH upon reasonable notice to Licensee (the Standards) and shall use its best efforts to cause all manufacturers, contractors, suppliers and business partners which manufacture Licensed Products or from whom Licensee obtains Licensed Products or materials for the manufacture of Licensed Products to abide by the Standards.
6. Paragraph 6.10 of the License is hereby amended by deleting it in its entirety and replacing it with the following:
Audit Requirement .
(a) |
Audit . Prior to producing Licensed Products in a facility (whether directly produced or produced by or through a contractor, subcontractor or supplier), Licensee will arrange to have the facility audited for compliance with the Standards unless Licensor notifies Licensee in writing that it already has a current audit with respect to such facility that evidences compliance with the Standards. For the avoidance of doubt, any such current audit that evidences compliance with the Tommy Hilfiger Licensing, LLC Supplier Code of Conduct, previously comprising Exhibit E to the Agreement prior to this Second Amendment, shall be deemed to also evidence compliance with the Standards. Audits on each facility used must thereafter be conducted no less often than annually. Notwithstanding the foregoing, any future Audit must evidence compliance with the Standards. Each audit shall be conducted by a suitable independent third party auditor designated by Licensee and approved by Licensor and shall be conducted using the evaluation procedures and forms provided by Licensor from time to time. Licensee shall identify to Licensor in writing each facility in which it is proposed that any Licensed Product (or part thereof) be produced or which is to be re-audited and Licensor shall notify Licensee within forty five (45) days of Licensors receipt of the notice if Licensor has currently approved the facility for production and when re-audit is required. All audits shall be conducted at Licensees sole expense. |
(b) |
Approval . A comprehensive audit report prepared by the approved independent third party auditor shall be provided to Licensor, attention the Director of Licensee Compliance in PVHs Global Human Rights & Social Responsibility Program, promptly upon its completion with respect to each facility proposed to be used for the production of Licensed Products (or parts |
2
thereof). Licensor shall have forty five (45) days from its receipt of an audit report to notify Licensee of its disapproval of the facility that is the subject thereof. If Licensor does not give notice to Licensee within such forty five (45) day period, the facility shall be deemed approved by Licensor. Licensor shall set forth in its notice of disapproval its reason(s) for disapproval in reasonable detail. |
(c) |
Use of Facility . Subject to Paragraph 6.10(a), unless and until Licensor approves such facility after receipt of an audit report as required by Paragraph 6.10 (b), the facility shall not be used for the production of Licensed Products. If Licensee (i) uses a facility that has not been approved in accordance herewith or that fails to improve after such audit report, or (ii) fails timely to cause an approved auditor to submit to Licensor an audit report evidencing continued compliance with the Standards when a re-audit of a facility is required in accordance with the terms hereof, or if Licensee or any of its manufacturers, contractors or suppliers with respect to Licensed Products shall, in Licensors reasonable determination, fail to abide by the Standards, Licensors remedy with respect to such breach of this Paragraph 6.10 and Paragraph 6.9, to the extent that Licensor is not otherwise damaged as a result of such breach, shall be to (y) hire an independent auditor of Licensors choosing who shall report directly to Licensor to conduct an independent assessment, and Licensee shall reimburse Licensor for all costs incurred in connection with such independent assessment and/or (z) require that Licensee terminate any further dealings with such non-compliant manufacturer, contractor or supplier in connection with the Licensed Products. |
7. Paragraph 6.11 of the License is hereby amended by adding the following to the end of that Paragraph:
In the event Licensee has knowledge of, has reason to believe, or should have reason to know that any Third Party Manufacturer, Subcontractor or Supplier is in breach of the Third Party Manufacturing Agreement or Certification, as the case may be, and Licensee shall fail to notify Licensor of such breach as required hereunder and such failure by Licensee would reasonably be expected to adversely affect any of the image, prestige, value or ownership of the Trademarks, the Licensed Products or Licensor, then Licensor shall have the right to terminate this Agreement as provided in Section 15.2 hereof.
8. Paragraph 6.12 of the License is hereby amended by replacing the word Code with the word Standards.
9. Paragraph 6.13 of the License is hereby amended by replacing the word Code with the word Standards.
10. Paragraph 6.15 of the License is hereby amended by replacing the words Tommy Hilfiger Supplier Code of Conduct with the words PVHs publications A Shared Commitment - Requirements for Our Business Partners and Statement of Corporate Responsibility.
3
11. Exhibit E of the License is hereby amended by deleting it in its entirety and replacing it with the attached Exhibit E.
12. Exhibit F of the License is hereby amended by deleting it in its entirety and replacing it with the attached Exhibit F.
13. Exhibit G of the License is hereby amended by deleting it in its entirety and replacing it with the attached Exhibit G.
14. This Agreement may be executed in counterparts. Transmission by electronic or digital means of an executed counterpart shall constitute delivery of the counterpart. This Agreement shall only take effect when all executed counterparts are exchanged or transmitted by Licensor and Licensee.
15. Except as modified hereby, all other paragraphs and provisions contained in the License shall remain in full force and effect and nothing contained herein shall alter them in any way and are hereby in all respects ratified and confirmed.
- Signature page to follow
4
IN WITNESS WHEREOF, Licensor and Licensee have executed this Second Amendment as of the date first above written.
TOMMY HILFIGER LICENSING, LLC | ||
By: |
/s/ Mark Fischer |
|
Name: |
Mark Fischer |
|
Title: |
SVP General Counsel |
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MOVADO GROUP, INC. | ||
By: |
/s/ Richard J. Coté |
|
Name: |
Richard J. Coté |
|
Title: |
President/COO |
|
SWISSAM PRODUCTS LIMITED | ||
By: |
/s/ Timothy F. Michno |
|
Name: |
Timothy F. Michno |
|
Title: |
Director |
5
EXHIBIT E
A SHARED COMMITMENT
Requirements for our Business Partners
I. |
Introduction |
A Shared Commitment is our code of conduct for all of our business partners, including suppliers, contractors, vendors, licensees and agents. This code is of utmost importance to PVH Corp. and embodies our commitment to the workers who manufacture our products and their communities. Adherence to the human and labor rights standards in this code by those who seek to do business with us, and by their business partners in our supply chain, is a prerequisite for establishing or continuing a relationship with our company.
At PVH Corp., we actively seek business associations with those who share our values. Indeed, we cannot do business with any organization or individual that fails to adhere to these ideals in their operations or cause their business partners in our supply chain to do the same. We believe that by working together to see these standards enforced, our company and business partners can help achieve a genuine improvement in the lives of working people around the world and the communities in which they live.
This mission has been a guiding principle of our company for more than 130 years and it will guide us in the future and take precedence over any economic or business interests.
Emanuel Chirico
Chairman & Chief Executive Officer
Michael A. Shaffer
Executive Vice President and Chief Operating & Financial Officer
II. |
Code Language |
At PVH , we require our business partners to comply with the letter and spirit of all laws, rules and regulations relevant to the conduct of their business and, in particular, those of the countries in which workers are employed in the manufacturing of our products. When local law and the code differ or conflict, we expect them to apply the highest standard.
The following standards are prerequisites for all of our business partners & apply equally to their business partners in our supply chain.
EMPLOYMENT RELATIONSHIP
Our business partners are required to adopt and adhere to rules and conditions of employment that respect workers and, at a minimum, safeguard their rights under applicable national and international labor and social security laws and regulations.
NONDISCRIMINATION
Our business partners cannot discriminate in employment, including with regard to hiring, compensation, advancement, discipline, termination and retirement, whether on the basis of gender, race, religion, age, disability, sexual orientation, nationality, political opinion, social class or ethnic origin.
HARASSMENT AND ABUSE
Our business partners must treat employees with respect and dignity. No employee can be subjected to any physical, sexual, psychological or verbal harassment and/or abuse.
FORCED LABOR
Our business partners are prohibited from utilizing forced labor, whether in the form of prison labor, indentured labor, bonded labor or otherwise. Mental and physical coercion, slavery and human trafficking are prohibited throughout our supply chain.
CHILD LABOR
Employees of our business partners must be at least 15 years old or over the age required for completion of compulsory education in the country of manufacture, whichever is higher. Our business partners are also required to observe all legal requirements for the work of authorized minors, including those pertaining to hours of work, wages, work type and working conditions.
FREEDOM OF ASSOCIATION
Our business partners are required to recognize and respect the right of their employees to freedom of association and collective bargaining. Employees should be free to join organizations of their choice. Employees should not be subjected to intimidation or harassment in the exercise of their right to join or to refrain from joining any organization.
HEALTH AND SAFETY
Our business partners must provide a safe and healthy workplace designed and maintained to prevent accidents, illness and injury attributable to the work performed or the operation of the facility and machinery. In doing so, our business partners must comply with all national laws, regulations and best practices concerning health and safety in the workplace, as well as provide all required and appropriate workers compensation coverage in the event of injury or fatality.
COMPENSATION AND BENEFITS
Every worker has a right to compensation for a regular work week that is sufficient to meet the workers basic needs and provide some discretionary income. Our business partners must pay at least the minimum wage or the appropriate prevailing wage, whichever is higher, comply with all legal requirements on wages, and provide any fringe benefits required by law or contract. If the compensation paid does not meet the workers basic needs and provide some discretionary income, our business partners are required to take appropriate actions that seek to progressively realize a level of compensation that does.
HOURS OF WORK
Our business partners are prohibited from requiring their employees to work more than the regular and overtime hours permitted under the law of the country where they are employed. In no circumstance may regular hours exceed 48 hours in a week and, other than in exceptional circumstances, the sum of regular and overtime hours in a week cannot exceed 60 hours. Employees must have at least 24 consecutive hours of rest in every sevenday period.
Our business partners are not permitted to request overtime on a regular basis. All overtime must be consensual and compensated at a premium rate.
THE ENVIRONMENT
Our business partners are required to comply with all applicable environmental laws, rules and regulations at their facilities and in the communities in which they operate, particularly with respect to water, energy, hazardous chemicals, air quality and waste. Further, we expect our business partners to incorporate environmentally responsible practices into all of their activities that relate to their business with us.
STATEMENT OF CORPORATE RESPONSIBILITY
At PVH we are guided by the principle that success in business is dependent on putting human issues first. Indeed, we know that our company would not have grown as it has if we did not place the highest priority on making a genuine contribution to improving the quality of life and upholding the basic rights of our associates, their families and the communities in which we operate.
Statement Of Commitment To Our Associates
Our foremost concern, even in the most challenging economic climate, must be for our associates; the thousands of people who have made our company one of the most successful apparel and footwear manufacturers in the world today.
For over 100 years, our credo has been:
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To conduct all business in keeping with the highest moral, ethical and legal standards. |
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To recruit, train, and provide career advancement to all associates without regard to gender, race, religion, age, disability, sexual orientation, nationality, or social or ethnic origin. Diversity in the workplace will be encouraged. Bigotry, racism, and sexual or any other form of harassment will not be tolerated. |
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To maintain workplace environments that encourage frank and open communications. |
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To be concerned with the preservation and improvement of our environment. |
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To be ever mindful that our dedication to these standards is absoluteit will not be compromised. We endeavor to consider the environmental impacts of the materials used in the manufacturing and packaging our apparel, footwear and other products. Our efforts include or will include the following: |
A Shared Responsibility
This commitment must be shared by the companies with which we do business.
We categorically state:
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We will not discriminate based on race, gender, religion or sexual orientation, and we will not do business with any company that does. |
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We will treat our employees fairly with regard to wages, benefits and working conditions including a safe and healthy environment and we will not do business with any company that does otherwise. |
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We will never violate the legal or moral rights of employees in any way, and we will not do business with any company that does. |
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We will only do business with companies who share our commitment to preserving and improving the environment. |
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We will never employ children in our facilities, nor will we do business with any company that makes use of child labor. Our employees and those of our partners and vendors must be over the applicable minimum legal age requirement, or be at least 15 years old (or 14 years old where the law of the country of manufacture allows), or older than the age for completing compulsory education in the country of manufacture, whichever is greater. |
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PVH is committed to an ongoing program of monitoring all our facilities and those of companies with whom we do business in accordance with our code of conduct, A Shared Commitment. This code defines PVH standards and values, which must be upheld in our facilities and those of our supplies, contractors and business partners. |
A Commitment To People
The history of PVH, over the course of more than a century, represents a proud tradition of genuine commitment to people:
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An absolute commitment to and respect for the dignity of all our associates without regard to race, gender, religion or sexual orientation. |
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Support for continuing education for our associates and their families. |
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Charitable contributions, financial, in kind and volunteer support to the communities in which we operate. |
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Loans and gifts to associates in need. |
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Firm commitment to policies that support and foster family work/life balance. |
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Demand that the people we do business with adhere to the same high standards which have guided our company for more than a century. |
EXHIBIT F
MINIMUM SALES LEVELS
MINIMUM SALES OF LICENSED PRODUCTS
(EXCLUSIVE OF JEWLERY PRODUCTS)
ANNUAL PERIOD |
GLOBAL MINIMUM SALES
LEVEL (Inclusive of U.S.) |
|
April 1, 2009 March 31, 2010 |
* | |
April 1, 2010 March 31, 2011 |
* | |
April 1, 2011 March 31, 2012 |
* | |
April 1, 2012 March 31, 2013 |
* | |
April 1, 2013 March 31, 2014 |
* |
EXTENSION TERM (IF APPLICABLE)
MINIMUM SALES OF LICENSED PRODUCTS
(EXCLUSIVE OF JEWLERY PRODUCTS)
EXTENSION TERM ANNUAL PERIOD |
EXTENSION TERM
GLOBAL MINIMUM SALES LEVEL (Inclusive of U.S.) |
|
April 1, 2014 March 31, 2015 |
* | |
April 1, 2015 March 31, 2016 |
* | |
April 1, 2016 March 31, 2017 |
* | |
April 1, 2017 March 31, 2018 |
* | |
April 1, 2018 March 31, 2019 |
* |
MINIMUM SALES OF JEWELRY PRODUCTS
ANNUAL PERIOD |
GLOBAL MINIMUM SALES
LEVEL (Inclusive of U.S.) |
|
April 1, 2009 March 31, 2010 |
* | |
April 1, 2010 March 31, 2011 |
* | |
April 1, 2011 March 31, 2012 |
* | |
April 1, 2012 March 31, 2013 |
* | |
April 1, 2013 March 31, 2014 |
* |
* |
CONFIDENTIAL PORTION OF THIS EXHIBIT OMITTED AND FILED SEPARATELY WITH THE SEC PURSUANT TO RULE 24b-2 OF THE 1934 ACT |
EXTENSION TERM (IF APPLICABLE)
MINIMUM SALES OF JEWELRY PRODUCTS
EXTENSION TERM ANNUAL PERIOD |
EXTENSION TERM
GLOBAL MINIMUM SALES LEVEL (Inclusive of U.S.) |
|
April 1, 2014 March 31, 2015 |
* | |
April 1, 2015 March 31, 2016 |
* | |
April 1, 2016 March 31, 2017 |
* | |
April 1, 2017 March 31, 2018 |
* | |
April 1, 2018 March 31, 2019 |
* |
* |
CONFIDENTIAL PORTION OF THIS EXHIBIT OMITTED AND FILED SEPARATELY WITH THE SEC PURSUANT TO RULE 24b-2 OF THE 1934 ACT |
EXHIBIT G
GUARANTEED MINIMUM ROYALTY
GUARANTEED MINIMUM ROYALTY OF LICENSED PRODUCTS
(EXCLUSIVE OF JEWLERY PRODUCTS)
ANNUAL PERIOD |
GLOBAL MINIMUM ROYALTY | |
April 1, 2009 March 31, 2010 |
* | |
April 1, 2010 March 31, 2011 |
* | |
April 1, 2011 March 31, 2012 |
* | |
April 1, 2012 March 31, 2013 |
* | |
April 1, 2013 March 31, 2014 |
* |
EXTENSION TERM (IF APPLICABLE)
GUARANTEED MINIMUM ROYALTY OF LICENSED PRODUCTS
(EXCLUSIVE OF JEWLERY PRODUCTS)
EXTENSION TERM ANNUAL PERIOD |
EXTENSION TERM
GLOBAL MINIMUM ROYALTY |
|
April 1, 2014 March 31, 2015 |
* | |
April 1, 2015 March 31, 2016 |
* | |
April 1, 2016 March 31, 2017 |
* | |
April 1, 2017 March 31, 2018 |
* | |
April 1, 2018 March 31, 2019 |
* |
GUARANTEED MINIMUM ROYALTY OF JEWELRY PRODUCTS
ANNUAL PERIOD |
GLOBAL MINIMUM ROYALTY | |
April 1, 2009 March 31, 2010 |
* | |
April 1, 2010 March 31, 2011 |
* | |
April 1, 2011 March 31, 2012 |
* | |
April 1, 2012 March 31, 2013 |
* | |
April 1, 2013 March 31, 2014 |
* |
* |
CONFIDENTIAL PORTION OF THIS EXHIBIT OMITTED AND FILED SEPARATELY WITH THE SEC PURSUANT TO RULE 24b-2 OF THE 1934 ACT |
EXTENSION TERM (IF APPLICABLE)
GUARANTEED MINIMUM ROYALTY OF JEWELRY PRODUCTS
EXTENSION TERM ANNUAL PERIOD |
EXTENSION TERM
GLOBAL MINIMUM ROYALTY |
|
April 1, 2014 March 31, 2015 |
* | |
April 1, 2015 March 31, 2016 |
* | |
April 1, 2016 March 31, 2017 |
* | |
April 1, 2017 March 31, 2018 |
* | |
April 1, 2018 March 31, 2019 |
* |
* |
CONFIDENTIAL PORTION OF THIS EXHIBIT OMITTED AND FILED SEPARATELY WITH THE SEC PURSUANT TO RULE 24b-2 OF THE 1934 ACT |
EXHIBIT 10.2*
FOURTH AMENDMENT
TO
LICENSE AGREEMENT
THIS FOURTH AMENDMENT (this Fourth Amendment ), dated as of September 28, 2012 (the Effective Date ), to the License Agreement dated as of November 15, 2005 (together with its amendments, the License Agreement ) by and between L.C. Licensing LLC. (f/k/a L.C. Licensing, Inc.) a Delaware limited liability company with an office at c/o Fifth & Pacific Companies, Inc., 1441 Broadway, New York 10018 on the one hand ( Licensor ), and Movado Group, Inc., a New York Corporation with an office at 650 From Road, Paramus, New Jersey 07652 (the Licensee ).
WHEREAS , the Licensor and Licensee (together the parties ) are parties to the License Agreement; and,
WHEREAS , the parties now desire to amend certain terms of the License Agreement, on and subject to the provisions herein.
NOW THEREFORE , in consideration of the premises, the mutual promises set forth below and for other good and valuable consideration, the sufficiency of which are hereby acknowledged, the parties agree as follows:
1. |
The parties acknowledge and agree that Licensees Contract Year 8 (2012) National Advertising, Marketing and Coop. expenditure obligation set forth on Schedule 7.2 of the License Agreement is hereby revised such that Licensee shall be required to spend an amount for Contract Year 8 (2012) that is * such Contract Year pursuant to such schedule. |
2. |
Schedule 3.3(g) (MINIMUM NET SALES) of the License Agreement is hereby amended by deleting such Schedule in its entirety and replacing it with the corresponding Schedule attached hereto. |
3. |
Schedule 8.2 (GUARANTEED MINIMUM ROYALTIES) of the License Agreement is hereby amended by deleting such Schedule in its entirety and replacing it with the corresponding Schedule attached hereto. |
4. |
Except to the extent expressly modified by this Fourth Amendment, the License Agreement and all of its terms and conditions remain in full force and effect. |
IN WITNESS WHEREOF , the parties hereto have caused their respective duly authorized officers to execute this Fourth Amendment as of the Effective Date.
L.C. LICENSING, LLC | MOVADO GROUP, INC. | |||||||
(f/k/a L.C. LICENSING, INC.) | ||||||||
By: |
/s/ Diane Bernstein |
By: |
/s/ Timothy F. Michno |
|||||
Name: | Diane Bernstein | Name: | Timothy F. Michno | |||||
Title: | SVP Global Business Strategy | Title: | General Counsel |
* |
CONFIDENTIAL PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED FROM THIS PAGE AND FROM SCHEDULE 3.3(g) AND SCHEDULE 8.2 AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION (SEC) PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (1934 ACT). |
SCHEDULE 3.3(g) MINIMUM NET SALES
Licensee shall achieve Net Sales of Licensed Merchandise in the U.S. of * in Year 1 (2005) and * in Year 2 (2006).
Licensee shall achieve Net Sales in Contract Year 8 (2012) of * .
Licensee shall achieve Net Sales in Contract Year 9 (2013) of * .
In each Contract Year thereafter, other than with respect to Contract Year 8 (2012) and Contract Year 9 (2013), Licensee shall achieve Net Sales equal to * for the prior Contract Year and the following base sales amount for such Contract Year:
Initial Term:
CONTRACT YEAR |
SALES | |
Contract Year 3 (2007) | * | |
Contract Year 4 (2008) | * | |
Contract Year 5 (2009) | * | |
Contract Year 6 (2010) | * | |
Contract Year 7 (2011) | * |
Renewal Term:
CONTRACT YEAR excluding Contract Year 8 (2012) and Contract Year 9 (2013) |
SALES | |
Contract Year 10 (2014) | * | |
Contract Year 11 (2015) | * | |
Contract Year 12 (2016) | * |
* |
CONFIDENTIAL PORTION OF THIS EXHIBIT OMITTED AND FILED SEPARATELY WITH THE SEC PURSUANT TO RULE 24b-2 OF THE 1934 ACT |
2
SCHEDULE 8.2 GUARANTEED MINIMUM ROYALTIES (GMR)
The minimum royalty shall be * in Contract Year 1 (2005) and * in Contract Year 2 (2006) .
In each subsequent Contract Year, other than with respect Contract Year 8 (2012) and Contract Year 9 (2013) (which minimum royalty amounts are set forth separately below), the minimum shall be * in the prior Contract Year and the following base amount for such Contract Year:
Initial Term:
CONTRACT YEAR |
MINIMUM ROYALTY | |
Contract Year 3 (2007) |
* | |
Contract Year 4 (2008) |
* | |
Contract Year 5 (2009) |
* | |
Contract Year 6 (2010) |
* | |
Contract Year 7 (2011) |
* |
Renewal Term:
CONTRACT YEAR (excluding Contract Year 8 (2012) and Contract Year 9 (2013) |
MINIMUM ROYALTY | |
Contract Year 10 (2014) |
* | |
Contract Year 11 (2015) |
* | |
Contract Year 12 (2016) |
* |
The minimum royalty shall be * in Contract Year 8 (2012) .
The minimum royalty shall be * in Contract Year 9 (2013) .
For the Contract Year 2 (2006), royalties in excess of the GMR will only be payable on sales that generate royalty revenue in excess of *.
Payment of Guaranteed Minimum Royalties: The minimum royalty for each Contract Year shall be paid in advance in four (4) equal quarterly installments, on the first day of Licensors fiscal quarters commencing January 1, 2006.
* |
CONFIDENTIAL PORTION OF THIS EXHIBIT OMITTED AND FILED SEPARATELY WITH THE SEC PURSUANT TO RULE 24b-2 OF THE 1934 ACT |
3
EXHIBIT 31.1
CERTIFICATIONS
I, Efraim Grinberg, certify that:
1) |
I have reviewed this quarterly report on Form 10-Q of Movado Group, Inc.; |
2) |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3) |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4) |
The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) |
Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) |
Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5) |
The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: November 28, 2012
/s/ Efraim Grinberg |
Efraim Grinberg |
Chairman of the Board of Directors and Chief Executive Officer |
EXHIBIT 31.2
CERTIFICATIONS
I, Sallie A. DeMarsilis, certify that:
1) |
I have reviewed this quarterly report on Form 10-Q of Movado Group, Inc.; |
2) |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3) |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4) |
The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) |
Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) |
Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5) |
The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: November 28, 2012
/s/ Sallie A. DeMarsilis |
Sallie A. DeMarsilis |
Senior Vice President, |
Chief Financial Officer and |
Principal Accounting Officer |
EXHIBIT 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
In connection with the quarterly report on Form 10-Q of Movado Group, Inc. (the Company) for the quarter ended October 31, 2012, as filed with the Securities and Exchange Commission on the date hereof (the Report) the undersigned hereby certifies, in the capacity indicated below and pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(i) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(ii) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: November 28, 2012 |
/s/ Efraim Grinberg |
|||
Efraim Grinberg
Chairman of
the Board of
Chief Executive Officer |
EXHIBIT 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
In connection with the quarterly report on Form 10-Q of Movado Group, Inc. (the Company) for the quarter ended October 31, 2012 as filed with the Securities and Exchange Commission on the date hereof (the Report) the undersigned hereby certifies, in the capacity indicated below and pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(i) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(ii) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: November 28, 2012 |
/s/ Sallie A. DeMarsilis |
|||
Sallie A. DeMarsilis Senior Vice President, Chief Financial Officer and Principal Accounting Officer |