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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended July 31, 2003
[ ] 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 0-22378
MOVADO GROUP, INC.
(Exact Name of Registrant as Specified in its Charter)
New York 13-2595932
(State or Other Jurisdiction (IRS Employer
of Incorporation or Organization) Identification No.)
650 From Road, Paramus, New Jersey 07652
(Address of Principal Executive Offices) (Zip Code)
(201) 267-8000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for that past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [X] No [
]
The number of shares outstanding of the registrant's common stock and class
A common stock as of September 8, 2003 were 8,662,795 and 3,400,906,
respectively.
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MOVADO GROUP, INC.
Index to Quarterly Report on Form 10-Q
July 31, 2003
Page
----
Part I Financial Information (Unaudited)
Item 1. Consolidated Balance Sheets at July 31, 2003, January 31, 2003 and July
31, 2002 3
Consolidated Statements of Income for the six months and three months
ended July 31, 2003 and 2002 4
Consolidated Statements of Cash Flows for the six months ended July 31,
2003 and 2002 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 12
Item 3. Quantitative and Qualitative Disclosure about Market Risks 18
Item 4. Controls and Procedures 19
Part II Other Information
Item 1. Legal Proceedings 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 6. Exhibits and Reports on Form 8-K 21
Signature 22
2
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
MOVADO GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Unaudited)
July 31, January 31, July 31,
2003 2003 2002
--------- ----------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 47,737 $ 38,365 $ 29,355
Trade receivables, net 99,192 94,438 102,120
Inventories, net 125,325 111,736 119,858
Other 24,114 36,646 32,970
--------- --------- ---------
Total current assets 296,368 281,185 284,303
Property, plant and equipment, net 39,127 39,939 38,250
Other 26,284 24,030 26,171
--------- --------- ---------
Total assets $ 361,779 $ 345,154 $ 348,724
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Loans payable to banks $ 14,000 $ - $ 32,000
Current portion of long-term debt 5,000 - 5,000
Accounts payable 21,836 22,712 22,037
Accrued liabilities 23,812 22,735 24,639
Current taxes payable 9,881 11,467 8,538
Deferred taxes payable 5,081 4,851 4,313
--------- --------- ---------
Total current liabilities 79,610 61,765 96,527
Long-term debt 30,000 35,000 35,000
Deferred and non-current income taxes 2,835 4,229 1,708
Other liabilities 9,568 7,948 7,844
--------- --------- ---------
Total liabilities 122,013 108,942 141,079
--------- --------- ---------
Shareholders' equity:
Preferred Stock, $0.01 par value,
5,000,000 shares authorized; no shares issued - - -
Common Stock, $0.01 par value,
20,000,000 shares authorized; 10,377,500, 10,057,367 and
9,999,947 shares issued, respectively 104 101 99
Class A Common Stock, $0.01 par value,
10,000,000 shares authorized; 3,400,906, 3,401,820 and
3,473,123 shares issued and outstanding, respectively 34 34 35
Capital in excess of par value 77,016 72,145 71,213
Retained earnings 177,816 172,287 162,031
Accumulated other comprehensive income 16,966 19,386 1,958
Treasury Stock, 1,726,631, 1,547,156 and 1,544,487
shares, respectively, at cost (32,170) (27,741) (27,691)
--------- --------- ---------
Total shareholders' equity 239,766 236,212 207,645
--------- --------- ---------
Total liabilities and shareholders' equity $ 361,779 $ 345,154 $ 348,724
========= ========= =========
See Notes to Consolidated Financial Statements
3
MOVADO GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
Six Months Ended July 31, Three Months Ended July 31,
------------------------- ---------------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net sales $136,715 $129,515 $ 76,545 $ 72,244
Cost of sales 53,036 49,963 29,306 27,871
-------- -------- -------- --------
Gross profit 83,679 79,552 47,239 44,373
Operating expenses:
Selling, general and administrative 72,894 69,616 38,426 35,825
-------- -------- -------- --------
Operating income 10,785 9,936 8,813 8,548
Net interest expense 1,608 2,014 825 1,087
-------- -------- -------- --------
Income before income taxes 9,177 7,922 7,988 7,461
Provision for income taxes 2,570 2,218 2,237 2,089
-------- -------- -------- --------
Net income $ 6,607 $ 5,704 $ 5,751 $ 5,372
======== ======== ======== ========
Earnings per share:
Basic $ 0.55 $ 0.48 $ 0.48 $ 0.45
======== ======== ======== ========
Diluted $ 0.53 $ 0.47 $ 0.46 $ 0.44
======== ======== ======== ========
Weighted average shares outstanding:
Basic 11,974 11,794 12,001 11,826
======== ======== ======== ========
Diluted 12,453 12,194 12,570 12,248
======== ======== ======== ========
See Notes to Consolidated Financial Statements
4
MOVADO GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended July 31,
-------------------------
2003 2002
-------- --------
Cash flows from operating activities:
Net income $ 6,607 $ 5,704
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization 4,554 3,872
Deferred income taxes 176 32
Provision for losses on accounts receivable 602 920
Provision for losses on inventory 350 580
Changes in assets and liabilities:
Trade receivables (4,988) (9,834)
Inventories (13,958) (15,968)
Other current assets 8,300 5,993
Accounts payable (778) (3,253)
Accrued liabilities 1,212 (1,583)
Current taxes payable (1,548) (381)
Other non-current assets (2,319) (252)
Other non-current liabilities 1,620 (740)
-------- --------
Net cash used in operating activities (170) (14,910)
-------- --------
Cash flows from investing activities:
Capital expenditures (3,530) (1,801)
Trademarks (270) (165)
-------- --------
Net cash used in investing activities (3,800) (1,966)
-------- --------
Cash flows from financing activities:
Net proceeds from bank borrowings 14,000 25,500
Stock options exercised & other 1,172 1,886
Dividends paid (1,078) (709)
Purchase of treasury stock (727) -
-------- --------
Net cash provided by financing activities 13,367 26,677
-------- --------
Effect of exchange rate changes on cash and cash equivalents (25) 2,583
-------- --------
Net increase in cash and cash equivalents 9,372 12,384
Cash and cash equivalents at beginning of period 38,365 16,971
-------- --------
Cash and cash equivalents at end of period $ 47,737 $ 29,355
======== ========
See Notes to Consolidated Financial Statements
5
MOVADO GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
by Movado Group, Inc. (the "Company") in a manner consistent with that used in
the preparation of the financial statements included in the Company's fiscal
2003 Annual Report filed on Form 10-K. In the opinion of management, the
accompanying financial statements reflect all adjustments, consisting of only
normal and recurring adjustments, necessary for a fair presentation of the
financial position and results of operations for the periods presented. These
consolidated financial statements should be read in conjunction with the
aforementioned annual report. Operating results for the interim periods
presented are not necessarily indicative of the results that may be expected for
the full year.
NOTE 1 - RECLASSIFICATION
Certain reclassifications were made to prior years' financial statement amounts
and related note disclosures to conform to the fiscal 2004 presentation.
NOTE 2 - STOCK OPTION PLAN
The Company applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for its stock option plans. No compensation cost
has been recognized for any stock options granted under the Company's stock
option plan because the quoted market price of the Common Stock at the grant
date was not in excess of the amount an employee must pay to acquire the Common
Stock. Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation," issued by the Financial Accounting Standards
Board ("FASB") in 1995, prescribes a method to record compensation cost for
stock-based employee compensation plans at fair value. The Company utilizes the
Black-Scholes option-pricing model for determining the fair value of the
stock-based compensation. Using this method, the weighted-average fair value of
each outstanding option is $8.61, and the weighted-average exercise price is
$18.62. Pro forma disclosures as if the Company had adopted the recognition
requirements under SFAS No. 123 for the six months and three months ended July
31, 2003 and 2002, respectively, are presented below.
6
For the Six Months For the Three Months
Ended July 31, Ended July 31,
-------------------------- --------------------------
(In thousands, except per share data) 2003 2002 2003 2002
--------- --------- --------- ---------
Net income as reported: $ 6,607 $ 5,704 $ 5,751 $ 5,372
Fair value based compensation
expense, net of taxes 1,539 1,765 852 971
--------- --------- --------- ---------
Pro forma net income $ 5,068 $ 3,939 $ 4,899 $ 4,401
========= ========= ========= =========
Basic earnings per share:
As reported $ 0.55 $ 0.48 $ 0.48 $ 0.45
Pro forma under SFAS No. 123 $ 0.42 $ 0.33 $ 0.41 $ 0.37
Diluted earnings per share:
As reported $ 0.53 $ 0.47 $ 0.46 $ 0.44
Pro forma under SFAS No. 123 $ 0.41 $ 0.32 $ 0.39 $ 0.36
NOTE 3 - SUPPLEMENTAL CASH FLOW INFORMATION
The following is provided as supplemental information to the consolidated
statements of cash flows (in thousands):
Six Months Ended
July 31,
--------------------
2003 2002
------ ------
Cash paid during the period for:
Interest $1,346 $1,668
Income taxes $3,890 $2,766
7
NOTE 4 - COMPREHENSIVE INCOME
The components of comprehensive income for the six months and three months ended
July 31, 2003 and 2002 are as follows (in thousands):
Six Months Ended Three Months Ended
July 31, July 31,
------------------------- -------------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net income $ 6,607 $ 5,704 $ 5,751 $ 5,372
Net unrealized gain (loss) on
investments, net of tax 146 (71) 104 (60)
Effective portion of unrealized (loss)
income on hedging contracts, net of
tax (2,133) 6,424 (1,473) 5,375
Foreign currency translation
adjustment (433) 18,891 (2,012) 14,392
-------- -------- -------- --------
Total comprehensive income $ 4,187 $ 30,948 $ 2,370 $ 25,079
======== ======== ======== ========
NOTE 5 - SEGMENT INFORMATION
The Company conducts its business primarily in three operating segments:
Wholesale, Retail and Other. The Company's wholesale segment includes the
designing, manufacturing and distribution of quality watches. Retail includes
the Movado Boutiques and outlet stores. Other segment includes the Company's
service center operations and shipping revenue.
Operating Segment Data for the Six Months Ended July 31, 2003 and 2002:
Net Sales Operating Income (Loss)
--------------------------- ---------------------------
2003 2002 2003 2002
--------------------------- ---------------------------
Wholesale $ 202,973 $ 184,376 $ 14,531 $ 13,013
Retail 24,565 22,417 (2,210) (1,186)
Other 4,007 3,939 (1,536) (1,891)
Elimination (1) (94,830) (81,217) - -
--------- --------- --------- ---------
Consolidated total $ 136,715 $ 129,515 $ 10,785 $ 9,936
========= ========= ========= =========
8
Operating Segment Data for the Three Months Ended July 31, 2003 and 2002:
Net Sales Operating Income (Loss)
--------------------------- ---------------------------
2003 2002 2003 2002
--------------------------- ---------------------------
Wholesale $ 114,473 $ 108,877 $ 9,611 $ 9,462
Retail 13,745 12,580 (148) 133
Other 2,074 1,968 (650) (1,047)
Elimination (1) (53,747) (51,181) - -
--------- --------- --------- ---------
Consolidated total $ 76,545 $ 72,244 $ 8,813 $ 8,548
========= ========= ========= =========
Geographic Segment Data for the Six Months Ended July 31, 2003 and 2002:
Income (Loss)
Net Sales Before Taxes
--------------------------- ----------------------------
2003 2002 2003 2002
--------------------------- ----------------------------
Domestic $ 124,060 $ 115,237 ($ 175) ($ 774)
International 107,485 95,495 9,352 8,696
Elimination (1) (94,830) (81,217) - -
--------- --------- ---------- ----------
Consolidated total $ 136,715 $ 129,515 $ 9,177 $ 7,922
========= ========= ========== ==========
Geographic Segment Data for the Three Months Ended July 31, 2003 and 2002:
Net Sales Income Before Taxes
------------------------- ------------------------
2003 2002 2003 2002
------------------------- ------------------------
Domestic $ 71,725 $ 67,460 $ 2,624 $ 1,683
International 58,567 55,965 5,364 5,778
Elimination (1) (53,747) (51,181) - -
-------- -------- -------- --------
Consolidated total $ 76,545 $ 72,244 $ 7,988 $ 7,461
======== ======== ======== ========
(1) Elimination of intercompany sales.
9
NOTE 6 - INVENTORIES
Inventories consist of the following (in thousands):
July 31, January 31, July 31,
2003 2003 2002
--------- ----------- ---------
Finished goods $ 82,937 $ 73,148 $ 76,598
Component parts 43,161 40,649 46,396
Work-in-process 2,869 2,262 3,349
--------- --------- ---------
128,967 116,059 126,343
Less: inventories reserve (3,642) (4,323) (6,485)
--------- --------- ---------
$ 125,325 $ 111,736 $ 119,858
========= ========= =========
NOTE 7 - EARNINGS PER SHARE
The Company presents net income per share on a basic and diluted basis. Basic
earnings per share is computed using weighted-average shares outstanding during
the period. Diluted earnings per share is 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
were 11,974,000 and 11,794,000 for the six months ended July 31, 2003 and 2002,
respectively. For diluted earnings per share, these amounts were increased by
479,000 and 400,000 for the six months ended July 31, 2003 and 2002,
respectively, due to potentially dilutive common stock equivalents issuable
under the Company's stock option plans and restricted stock grants.
The weighted-average number of shares outstanding for basic earnings per share
were 12,001,000 and 11,826,000 for the three months ended July 31, 2003 and
2002, respectively. For diluted earnings per share, these amounts were increased
by 569,000 and 422,000 for the three months ended July 31, 2003 and 2002,
respectively, due to potentially dilutive common stock equivalents issuable
under the Company's stock option plans and restricted stock grants.
NOTE 8 - RECENTLY ISSUED ACCOUNTING STANDARDS
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. In particular, this Statement clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a derivative
and when a derivative contains a financing component that warrants special
reporting in the statement of cash flows. This Statement is generally effective
for contracts entered into or modified after June 30, 2003. During the quarter
ended July 31, 2003, the Company adopted SFAS No. 149 which did not have a
significant impact on the Company's consolidated financial position, results of
operations or cash flows.
10
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." This Statement
requires certain financial instruments that embody obligations of the issuer and
have characteristics of both liabilities and equity to be classified as
liabilities (or an asset in some circumstances). SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. The adoption of SFAS No. 150 is not expected to have an impact on the
Company's consolidated financial position, results of operations or cash flows.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
Statements included under Management's Discussion and Analysis of Financial
Condition and Results of Operations, in this report, as well as statements in
future filings by the Company with the Securities and Exchange Commission
("SEC"), in the Company's press releases and oral statements made by or with the
approval of an authorized executive officer of the Company, which are not
historical in nature, are intended to be, and are hereby identified as,
"forward-looking statements" for purposes of the safe harbor provided by the
Private Securities Litigation Reform Act of 1995. These statements are based on
current expectations, estimates, forecasts and projections about the Company,
its future performance, the industry in which the Company operates and
management's assumptions. Words such as "expects," "anticipates," "targets,"
"goals," "projects," "intends," "plans," "believes," "seeks," "estimates,"
"may," "will," "should" and variations of such words and similar expressions are
also intended to identify such forward-looking statements. The Company cautions
readers that forward-looking statements include, without limitation, those
relating to the Company's future business prospects, projected operating or
financial results, revenues, working capital, liquidity, capital needs, plans
for future operations, expectations regarding capital expenditures and operating
expenses, effective tax rates, margins, interest costs, and income as well as
assumptions relating to the foregoing. Forward-looking statements are subject to
certain risks and uncertainties, some of which cannot be predicted or
quantified. Actual results and future events could differ materially from those
indicated in the forward-looking statements, due to several important factors
herein identified, among others, and other risks and factors identified from
time to time in the Company's reports filed with the SEC including, without
limitation, the following: general economic and business conditions which may
impact disposable income of consumers in the United States and the other
significant markets where the Company's products are sold, 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, the loss of significant customers, the Company's dependence on key
employees and officers, the continuation of licensing arrangements with third
parties, ability to secure and protect trademarks, patents and other
intellectual property rights, ability to lease new stores on suitable terms in
desired markets and to complete construction on a timely basis, 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.
Critical Accounting Policies and Estimates
There has been no material change in the Company's Critical Accounting Policies
and Estimates, as disclosed in its Annual Report on Form 10-K for the fiscal
year ended January 31, 2003.
12
Results of operations for the six months ended July 31, 2003 as compared to the
six months ended July 31, 2002.
Net Sales: Comparative net sales by business segment were as follows (in
thousands):
Six Months Ended
July 31,
-----------------------------
2003 2002
------------ ------------
Wholesale:
Domestic $ 91,125 $ 85,828
International 17,018 17,331
Retail 24,565 22,417
Other 4,007 3,939
------------ ------------
Net Sales $ 136,715 $ 129,515
============ ============
Net sales increased by $7.2 million or 5.6% for the six months ended July 31,
2003 as compared to the six months ended July 31, 2002. Sales in the wholesale
segment increased 4.8% to $108.1 million versus $103.2 million in the prior
year. With sales of $91.1 million, the domestic wholesale business was $5.3
million or 6.2% above prior year sales of $85.8 million. Increases were recorded
in the Movado brand as a result of the continued development of the chain store
distribution channel and strong new product introductions. In addition, Coach
watch sales increased reflecting the strength of the Coach brand and improved
product offerings.
Sales in the international wholesale business were $0.3 million or 1.8% below
prior year. Concord and Movado brand sales were below prior year as a result of
the outbreak of Severe Acute Respiratory Syndrome or SARS in Asia, the war in
Iraq and a general sluggish economy in Europe and South America. Sales increases
were recorded in the Coach business in Japan and also for the Tommy Hilfiger
brand as a result of the launch in eight European countries during the past
twelve months.
For the six months ended July 31, 2003, sales in the retail segment rose 9.6% to
$24.6 million. The increase was driven by a 25.7% comparable store sales
increase in the Movado Boutiques. In addition, sales increases were recorded in
the Movado Boutiques as a result of the new stores opened in Dadeland and
Aventura in South Florida. The outlet business was 0.3% above last year for the
six months.
Sales in the other segment, which represents service and shipping revenue, were
slightly higher than prior year with higher service revenue in the quarter.
Gross Profit. The gross profit for the six months ended July 31, 2003 was $83.7
million or 61.2% of net sales as compared to $79.6 million or 61.4% of net sales
for the six months ended July 31, 2002. The increase in gross profit of $4.1
million is the result of the higher sales volume.
Selling, General and Administrative. Selling, general and administrative
expenses for the six months ended July 31, 2003 were $72.9 million or 53.3% of
net sales as compared to $69.6 million or 53.8% of net sales for the six months
ended July 31, 2002. Increased expenses were recorded as a result of planned
investments in sales support and advertising to drive customer and marketing
initiatives, increased costs in the retail segment
13
primarily the result of opening two new Movado Boutiques, the weak U.S. dollar
and the translation effect of the Swiss and Canadian costs and higher costs in
payroll, health care and travel. These were somewhat offset by reduced legal and
bad debt expense.
Interest Expense. Net interest expense for the six months ended July 31, 2003
declined by 20.2% to $1.6 million as compared to $2.0 million for the six months
ended July 31, 2002. The decrease is due to significantly reduced average
borrowings. The average debt decreased 25.0% from prior year to $50.2 million,
reflecting the favorable results of cash flow and working capital management.
Income Taxes. The Company recorded a tax expense of $2.6 million for the six
months ended July 31, 2003 as compared to a tax expense of $2.2 million for the
six months ended July 31, 2002. Taxes were recorded at a 28.0% rate for both
fiscal 2004 and fiscal 2003.
Results of operations for the three months ended July 31, 2003 as compared to
the three months ended July 31, 2002.
Net Sales: Comparative net sales by business segment were as follows (in
thousands):
Three Months Ended
July 31,
-----------------------------
2003 2002
------------ ------------
Wholesale:
Domestic $ 51,986 $ 49,368
International 8,740 8,328
Retail 13,745 12,580
Other 2,074 1,968
------------ ------------
Net Sales $ 76,545 $ 72,244
============ ============
Net sales increased by $4.3 million or 6.0% for the three months ended July 31,
2003 as compared to the three months ended July 31, 2002. Sales in the wholesale
segment increased 5.3% to $60.7 million versus $57.7 million in the prior year.
The domestic wholesale business was $2.6 million or 5.3% above prior year sales
of $49.4 million. Increases were recorded in the Movado brand with strong new
product introductions and in the Concord brand due to more accessible luxury
price points resulting in improved sell-through. In addition, Coach watch sales
increased due to the overall strength of the Coach brand and the continued
introduction of new products.
Sales in the international wholesale business were $0.4 million or 4.9% above
prior year. Sales increases were recorded in the Coach business in Japan and
also in the Tommy Hilfiger brand as a result of the launch in eight European
countries in the second half of fiscal 2003 and the first half of fiscal 2004.
Internationally, Concord and Movado brand sales declined due to several factors:
the outbreak of Severe Acute Respiratory Syndrome or SARS in Asia, the war in
Iraq, a general sluggish economy in Europe and South America and a general
decline in tourism.
14
During the quarter, sales in the retail segment rose 9.3% to $13.7 million. The
increase was driven by a 26.5% comparable store sales increase in the Movado
Boutiques. In addition, sales increases were recorded in the Movado Boutiques as
a result of the new stores opened in Dadeland and Aventura in South Florida. The
outlet business was 0.3% below last year for the quarter due to reduced level of
traffic.
Sales in the other segment, which represents service and shipping revenue, were
slightly above prior year with higher service revenue in the quarter.
Gross Profit. The gross profit for the three months ended July 31, 2003 was
$47.2 million or 61.7% of net sales as compared to $44.4 million or 61.4% of net
sales for the three months ended July 31, 2002. The increase in gross profit of
$2.9 million is the result of the higher sales volume. The increase in the gross
profit as a percentage of sales is the result of a favorable product mix and
continued cost reductions from the Company's supply chain productivity
initiatives.
Selling, General and Administrative. Selling, general and administrative
expenses for the three months ended July 31, 2003 were $38.4 million or 50.2% of
net sales as compared to $35.8 million or 49.6% of net sales for the three
months ended July 31, 2002. The increases reflect planned investments in sales
support and advertising, increased costs in the retail segment primarily the
result of opening two new Movado Boutiques, the unfavorable impact of the weak
U.S. dollar on translating the Swiss and Canadian costs and higher payroll and
health care costs.
Interest Expense. Net interest expense for the three months ended July 31, 2003
declined by 24.1% to $0.8 million as compared to $1.1 million for the three
months ended July 31, 2002. The decrease is due to significantly reduced average
borrowings for the quarter. The average debt for the quarter decreased 23.7%
from prior year to $55.8 million, reflecting the favorable results of cash flow
and working capital management.
Income Taxes. The Company recorded a tax expense of $2.2 million for the three
months ended July 31, 2003 as compared to a tax expense of $2.1 million for the
three months ended July 31, 2002. Taxes were recorded at a 28.0% rate for both
fiscal 2004 and fiscal 2003.
LIQUIDITY AND FINANCIAL POSITION
Cash used in operating activities amounted to $0.2 million and $14.9 million for
the six months ended July 31, 2003 and 2002, respectively. The reduction in cash
used in operating activities for the comparative six months ended July 31, 2003
and 2002 benefited from decreased accounts receivable and the timing of
inventory purchases and related payments coupled with the favorable impact of
the Company's hedging program.
Cash used in investing activities amounted to $3.8 million and $2.0 million for
the six months ended July 31, 2003 and 2002, respectively, and was primarily for
capital expenditures. For the six months ended July 31, 2003, capital
expenditures were mainly for the build out of the new Movado Boutiques and
normal ongoing systems hardware and software investments. Expenditures for the
six months ended July 31, 2002 relate primarily to normal ongoing systems
hardware and software investments and construction of the trade show booth used
at the Basel Watch and Jewelry Fair.
Cash provided by financing activities amounted to $13.4 million and $26.7
million for the six months ended July 31, 2003 and 2002, respectively, which was
due to seasonal short-term bank borrowings. In fiscal 2004, the Company's
seasonal borrowing decreased due mainly to improved cash flows from operations.
15
At July 31, 2003, the Company had two series of Senior Notes outstanding. Senior
Notes due January 31, 2005, with a remaining principal amount due of $10.0
million, were originally issued in a private placement completed in fiscal 1994.
These notes have required annual principal payments of $5.0 million since
January 1998 and bear interest of 6.56% per annum. During fiscal 1999, the
Company issued $25.0 million of Series A Senior Notes under a Note Purchase and
Private Shelf Agreement dated November 30, 1998. These notes bear interest of
6.90% per annum, mature on October 30, 2010 and are subject to annual repayments
of $5.0 million commencing October 31, 2006.
On March 21, 2001, the Company entered into a new Note Purchase and Private
Shelf Agreement, which allows for the issuance for up to three years after the
date thereof of senior promissory notes in the aggregate principal amount of up
to $40.0 million with maturities up to 12 years from their original date of
issuance. As of July 31, 2003, no such notes were issued.
On June 17, 2003, the Company completed the renewal of its revolving credit line
with its bank group. The agreement provides for a three year $75.0 million
unsecured revolving line of credit. The line of credit expires on June 17, 2006.
The credit facility allows for certain Swiss subsidiaries to borrow in local
currency under the line. In addition, the Company has $16.5 million in
uncommitted working capital lines with its bank group which includes a $1.5
million sub-limit for letters of credit. At July 31, 2003, the Company had $14.0
million of outstanding borrowings under its bank lines as compared to $32.0
million at July 31, 2002. In addition, one bank in the domestic bank group
issued five irrevocable standby letters of credit for retail and operating
facility leases to various landlords and Canadian payroll to the Royal Bank of
Canada totaling $0.6 million with expiration dates through June 30, 2004.
A Swiss subsidiary of the Company maintains unsecured lines of credit with an
unspecified length of time with a Swiss bank. Available credit under these lines
totaled 8.8 million Swiss francs, with dollar equivalents of approximately $6.4
million and $5.9 million at July 31, 2003 and 2002, respectively, of which a
maximum of $5.0 million may be drawn under the terms of the Company's revolving
credit line with its bank group. As of July 31, 2003, the Swiss bank has
guaranteed the Company's Swiss subsidiary's obligations to certain Swiss third
parties in the amount of approximately 0.9 million Swiss francs.
Under a series of share repurchase authorizations approved by the Board of
Directors, the Company has maintained a discretionary share buy-back program.
There were no purchases during fiscal 2003 under the repurchase program and
there have been no repurchases for the six months ended July 31, 2003.
During the six months ended July 31, 2003, treasury shares increased by 179,475
as the result of cashless exercises of stock options for 248,023 shares of
stock.
The Company paid dividends of $0.03 for the first quarter and $0.06 for the
second quarter per share, or approximately $1.1 million for the six months ended
July 31, 2003, and $0.03 per share per quarter, or approximately $0.7 million
for the six months ended July 31, 2002.
Cash and cash equivalents at July 31, 2003 amounted to $47.7 million compared to
$29.4 million at July 31, 2002. The increase in cash relates to the Company's
continued profitability, management of working capital, translation of Swiss
entities' cash balances and the favorable impact of the Company's hedging
program.
16
RECENTLY ISSUED ACCOUNTING STANDARDS
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. In particular, this Statement clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a derivative
and when a derivative contains a financing component that warrants special
reporting in the statement of cash flows. This Statement is generally effective
for contracts entered into or modified after June 30, 2003. During the quarter
ended July 31, 2003, the Company adopted SFAS No. 149 which did not have a
significant impact on the Company's consolidated financial position, results of
operations or cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." This Statement
requires certain financial instruments that embody obligations of the issuer and
have characteristics of both liabilities and equity to be classified as
liabilities (or an asset in some circumstances). SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. The adoption of SFAS No. 150 is not expected to have an impact on the
Company's consolidated financial position, results of operations or cash flows.
17
Item 3. Quantitative and Qualitative Disclosure about Market Risks
Foreign Currency and Commodity Price Risks
The majority of the Company's purchases are denominated in Swiss francs. The
Company reduces its exposure to the Swiss franc exchange rate risk through a
hedging program. Under the hedging program, the Company purchases various
derivatives, predominantly forward and option contracts. Changes in derivative
fair values will either be recognized in earnings as offsets to the changes in
fair value of related hedged assets, liabilities and firm commitments or, for
forecasted transactions, deferred and recorded as a component of other
shareholders' equity until the hedged transactions occur and are recognized in
earnings. The ineffective portion of a hedging derivative's change in fair value
will be immediately recognized in earnings. If the Company did not engage in a
hedging program, any change in the Swiss franc currency rate would have an equal
effect on the entities' cost of sales. The Company purchases gold for the
production of certain watches. The Company purchases gold derivatives under its
hedging program and treats the changes in fair value on these derivatives in the
same manner as the changes in fair value in its Swiss franc derivatives.
The Company also hedges its 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 SFAS No.
133. Under SFAS No. 133, the change in fair value of these instruments is
recognized in accumulated other comprehensive income to offset the change in the
value of the net investment being hedged.
The following presents fair value and maturities of the Company's foreign
currency derivatives outstanding as of July 31, 2003 (in millions):
July 31, 2003
Fair Value Maturities
---------- ----------
Forward exchange contracts $ 1.1 2003 - 2004
Purchased foreign currency options 1.5 2005 - 2006
-------------
$ 2.6
=============
The Company's international trade business accounts for 12.9% of the Company's
sales in various currencies. The international trade operations are denominated
in local currency and fluctuations in these currency rates may have an impact on
the Company's sales, cost of sales, operating expenses and net income. During
the six months ended July 31, 2003 and 2002, there was no material effect to the
results of operations due to foreign currency rate fluctuations. There can be no
assurance that this trend will continue.
Interest Rate Risk
As of July 31, 2003, the Company had $14.0 million in short-term bank debt
obligations with variable interest rates based on LIBOR plus an applicable loan
spread. The Company does not hedge these interest rate risks. The Company also
has $35.0 million Senior Note debt bearing fixed interest rates per annum. The
difference between the market based interest rates at July 31, 2003 and the
fixed rates were unfavorable.
18
Item 4. Controls and Procedures
The Company's management, under the supervision and with the participation of
the Chief Executive Officer and Chief Financial Officer, conducted an
evaluation of the effectiveness of the Company's disclosure controls and
procedures (as defined in Securities Exchange Act Rules 13a-15(e) and
15d-15(e)). Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures were effective as of the end of the period covered by this report.
There have been no significant changes in internal controls over financial
reporting or in other factors that could significantly affect these internal
controls subsequent to the date of such evaluation.
It should be noted that any system of controls, however well designed and
operated, can provide only reasonable, and not absolute, assurance that the
objectives of the systems are met. In addition, the design of any control system
is based in part upon certain assumptions about the likelihood of future events.
Because of these and other inherent limitations of control systems, there is
only reasonable assurance that the Company's controls will succeed in achieving
these stated goals under all future conditions.
19
PART II - OTHER INFORMATION
Item 1. Legal proceedings
None
Item 4. Submission of Matters to a Vote of Security Holders
On June 18, 2003, the Company held its annual meeting of
shareholders at its corporate office in Paramus, New Jersey.
The following matters were voted upon at the meeting:
(i) Margaret Hayes Adame, Richard Cote, Efraim Grinberg, Gedalio
Grinberg, Alan H. Howard, Donald Oresman, Leonard L.
Silverstein were elected directors of the Company. The
results of the vote were as follows:
Withheld/
Nominee For Against
- -------------------------------------------------------- ---------- ---------
Margaret Hayes Adame ................................... 39,107,690 820,973
Richard Cote ........................................... 38,394,282 1,534,381
Efraim Grinberg ........................................ 38,394,282 1,534,381
Gedalio Grinberg ....................................... 38,393,147 1,535,516
Alan H. Howard ......................................... 39,107,720 820,943
Donald Oresman ......................................... 39,107,220 821,443
Leonard L. Silverstein ................................. 38,415,057 1,513,606
(ii) A proposal to ratify the selection of PricewaterhouseCoopers
LLP as the Company's independent public accountants for the
fiscal year ending January 31, 2004 was approved. The
results of the vote were as follows:
For Withheld/Against Exception/Abstain
- ---------- ---------------- -----------------
39,644,218 283,599 846
20
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Line of Credit Agreement dated June 24, 2003 between
the Registrant and Fleet Bank, as amended July 28,
2003.
10.2 Amendment dated June 17, 2003 to Line of Credit
Agreement dated August 20, 2001, as amended, between
the Registrant and The Bank of New York.
10.3 Revolving Credit Agreement dated June 17, 2003
between Registrant, Concord Watch Company S.A.,
Movado Watch Company S.A., the Lenders signatory
thereto and JP Morgan Chase Bank as Administrative
Agent, Swingline Bank and Issuing Bank.
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 Principal 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 Principal Financial Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
The Company furnished a report on Form 8-K (Item 12) on June
10, 2003 for a press release, dated May 29, 2003, announcing
financial results for the quarter ended April 30, 2003.
21
SIGNATURE
Pursuant to the requirements of the Securities and 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: September 15, 2003 By: /s/ Eugene J. Karpovich
------------------------------
Eugene J. Karpovich
Senior Vice President and
Chief Financial Officer
(Chief Financial Officer and
Principal Accounting Officer)
22