Entity information:

• Entity registrant name: MOVADO GROUP INC
• CIK: 0000072573
• SEC filing page: http://www.sec.gov/Archives/edgar/data/72573/000156459018007083/0001564590-18-007083-index.htm
• XBRL Instance: http://www.sec.gov/Archives/edgar/data/72573/000156459018007083/mov-20180131.xml
• XBRL Cloud Viewer: https://edgardashboard.xbrlcloud.com/flex/viewer/XBRLViewer.html#instance=http://www.sec.gov/Archives/edgar/data/72573/000156459018007083/mov-20180131.xml
• EDGAR Dashboard: https://edgardashboard.xbrlcloud.com/edgar-dashboard/?cik=0000072573
• Generator: Donnelley Financial Solutions
• Total assets: 645,380,000
• Income tax expense (benefit): 57,367,000
• Found reconcilation from statutory to effective rates: True
• Found income tax policy: Coming soon!

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NOTE 7 - INCOME TAXES

The 2017 Tax Act that was signed into law on December 22, 2017 significantly changed existing U.S. corporate income tax laws by, among other things, lowering the corporate tax rate from 35% to 21%, limiting the deductibility of interest expense and executive compensation, implementing a territorial tax system, and imposing a one-time mandatory deemed Transition Tax on undistributed foreign earnings which have not been previously taxed. Undistributed foreign earnings in the form of cash and cash equivalents will be taxed at a rate of 15.5% and all other earnings will be taxed at a rate of 8.0%.

On December 22, 2017, the SEC issued SAB 118, which allows the Company to record provisional amounts related to the 2017 Tax Act and provides a measurement period of up to one year from the enactment date for companies to complete their accounting under ASC Topic 740. The 2017 Tax Act is complex and the Company has not completed its accounting for the tax effects of the enactment. The $45.0 million estimated impact of the law as of January 31, 2018 is based on management’s current interpretations of the 2017 Tax Act and is subject to changes to the Company’s analysis and assumptions related to certain matters, such as changes to estimates and amounts related to the earnings and profits and tax pools of certain subsidiaries, the Company’s indefinite reinvestment assertion, including the measurement of deferred taxes on foreign unremitted earnings, and its policy related to the treatment of withholding tax transaction gains and losses. The estimated impact of the 2017 Tax Act is also subject to change as a result of additional guidance from, and interpretations by, U.S. regulatory and standard-setting bodies. The Company expects to complete its assessment of these items within the measurement period, and any adjustments to the provisional amounts initially recorded will be included as an adjustment to income tax expense or benefit in the period in which the amounts are determined.

The Company has not completed its full analysis with respect to the GILTI provision within the 2017 Tax Act which would require the current inclusion in federal taxable income of earnings of certain foreign controlled corporations.  The Company is not yet able to make reasonable estimates of the tax impact of GILTI; therefore, it has not yet elected a policy as to whether it will recognize deferred taxes for basis differences expected to reverse as GILTI or whether the Company will account for GILTI as period costs if and when incurred. As a result, the Company has not included an estimate of tax expense or benefit related to GILTI within the financial statements. The Company will continue to evaluate these provisions and elect an accounting policy within the measurement period.

The Company has recorded its best estimate of the impact of the 2017 Tax Act in its fiscal year 2018 provision for income taxes in accordance with its understanding of the 2017 Tax Act and, as a result, has recorded a provisional tax expense of $45.0 million in the fourth quarter, the period in which the legislation was enacted. The provisional amount related to the Transition Tax, which will be paid in installments over eight years, was $28.2 million based on an estimate of foreign earnings of $279.9 million. The provisional amount related to the re-measurement of certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future was $8.3 million. In light of the 2017 Tax Act, the Company continues to evaluate its assertion related to the permanent reinvestment of earnings in its foreign operations. The provisional change to deferred taxes related to withholding and U.S. state income taxes were $8.5 million based on unremitted foreign earnings of $236.8 million, which are earmarked for future repatriation. The Company performs a quarterly assessment reviewing its global cash projections and investment needs, and considers such factors as projected future results, continued need for investment in the overseas business as well as cash needs in the U.S., among other countries. A deferred tax liability has not been recorded for the remaining undistributed foreign earnings of approximately $83.7 million. In accordance with SAB 118, if the Company revises its assertion regarding the permanent reinvestment of foreign earnings during the measurement period, the change would be recorded as part of the 2017 Tax Act enactment.

FASB issued ASU 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,” which permits companies to reclassify disproportionate tax effects in accumulated other comprehensive income caused by the 2017 Tax Act to retained earnings. The Company early adopted ASU 2018-02 during the fourth quarter of fiscal 2018 (see Note 18 – Accounting Changes and Recent Accounting Pronouncements) and, as a result, the Company made the election to reclassify the income tax effects of the 2017 Tax Act from AOCI to retained earnings. The adoption of this standard did not have a material impact on the Company’s consolidated results of operations or financial position.

Income before provision for income taxes on a legal entity basis consists of the following (in thousands):

 

 

The Company conducts business globally and, as a result, is subject to income taxes in the U.S. federal, state, local and foreign jurisdictions. In the normal course of business, the Company is subject to examinations by taxing authorities in many countries, such as Germany, Hong Kong, Switzerland and the United States. The Company is no longer subject to income tax examination for years ended prior to January 31, 2014, with few exceptions.

The provision for income taxes for the fiscal years ended January 31, 2018, 2017 and 2016 consists of the following components (in thousands):

 

Significant components of the Company’s deferred income tax assets and liabilities as of January 31, 2018 and 2017 are as follows (in thousands):

 

 

As of January 31, 2018, the Company had no U.S. federal net operating loss carryforwards and had U.S. state and foreign net operating loss carryforwards of approximately $9.0 million and $39.1 million, respectively, with expiration dates ranging from 1-10 years and some foreign jurisdictions with an indefinite carryforward period. Of the foreign net operating losses, $16.4 million are related to Switzerland and the remaining is related to Germany, China and other foreign countries.

A valuation allowance is required to be established unless management determines it is more likely than not that the Company will ultimately utilize the tax benefit associated with a deferred tax asset. The Company has U.S. state and foreign valuation allowances of $0.1 million and $8.9 million, respectively, which are primarily related to net operating loss carryforwards.

Management will continue to evaluate the appropriate level of valuation allowance on all deferred tax assets considering such factors as prior earnings history, expected future earnings, carryback and carryforward periods, and tax and business strategies that could potentially enhance the likelihood of realization of the deferred tax assets.

The Company adopted the provisions of ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting,” during the first quarter of fiscal year 2018 (see Note 18 – Accounting Changes and Recent Accounting Pronouncements for additional disclosures). The new guidance requires, among other provisions, that excess tax benefits and tax deficiencies associated with stock-based compensation to be recorded as an income tax expense or benefit in the period in which the awards vest or are settled. Prior to fiscal year 2018, the recognition of deductible windfall tax benefits related to stock-based compensation was prohibited until realized through a reduction to income taxes payable. Shortfall tax expenses of $1.1 million was recorded in income tax expense during fiscal year 2018. Shortfall tax expenses of $0.3 million and $0.0 million were recorded in additional paid-in-capital during fiscal years 2017 and 2016, respectively.

The provision for income taxes differs from the U.S. federal statutory rate due to the following (in thousands):

 

 

Due to the 2017 Tax Act, the Company had a U.S. federal statutory blended rate of 33.8%, for its fiscal year ended January 31, 2018. For fiscal years 2017 and 2016, the federal statutory rate in the above table remains at 35%. The effective tax rate for fiscal 2018 was 136.1%, primarily due to the impact of the 2017 Tax Act and excess tax deficiencies related to stock-based compensation, partially offset by foreign profits being taxed in lower taxing jurisdictions. The effective tax rate for fiscal 2017 was 31.7%, primarily as a result of foreign profits being taxed in lower taxing jurisdictions, partially offset by no tax benefit being recognized on certain earnings of foreign subsidiaries and U.S. tax provided on earnings of non-U.S. subsidiaries. The effective tax rate for fiscal 2016 was 33.8%, primarily as a result of foreign profits being taxed in lower taxing jurisdictions, partially offset by U.S. tax provided on earnings of non-U.S. subsidiaries.

A reconciliation of the beginning and ending amounts of gross unrecognized tax benefits (exclusive of interest) for the fiscal years ended January 31, 2018, 2017 and 2016 are as follows (in thousands):

 

Included in the balances at January 31, 2018, January 31, 2017 and January 31, 2016 are $2.3 million, $2.6 million, and $2.4 million of unrecognized tax benefits which would impact the Company’s effective tax rate, if recognized. Interest and penalties, if any, related to unrecognized tax benefits are recorded as income tax expense in the consolidated statement of operations. As of January 31, 2018, January 31, 2017 and January 31, 2016, the Company had $0.8 million, $0.7 million and $0.6 million, respectively of accrued interest (net of tax benefit) and penalties related to unrecognized tax benefits. During fiscal years 2018, 2017 and 2016, the Company accrued $0.1 million, $0.1 million and $0.1 million of interest (net of tax benefit) and penalties.