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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 April 30, 2004
[ ] 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 May 31, 2004 were 8,869,898 and 3,400,906, respectively.
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MOVADO GROUP, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
APRIL 30, 2004
Page
----
Part I Financial Information (Unaudited)
Item 1. Consolidated Balance Sheets at April 30, 2004, January 31, 2004 and April
30, 2003 3
Consolidated Statements of Income for the three months ended April 30,
2004 and 2003 4
Consolidated Statements of Cash Flows for the three months ended April 30,
2004 and 2003 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 16
Item 4. Controls and Procedures 17
Part II Other Information
Item 1. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 18
Signature 19
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MOVADO GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Unaudited)
April 30, January 31, April 30,
2004 2004 2003
--------- ----------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 35,948 $ 82,083 $ 34,548
Trade receivables, net 99,546 88,800 97,362
Inventories, net 176,001 121,678 119,445
Other 31,217 27,932 34,440
--------- --------- ---------
Total current assets 342,712 320,493 285,795
Property, plant and equipment, net 45,713 42,112 39,579
Other 36,149 28,362 25,055
--------- --------- ---------
Total assets $ 424,574 $ 390,967 $ 350,429
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Loans payable to banks $ 27,450 $ -- $ 18,750
Mortgage payable 5,089 -- --
Current portion of long-term debt 5,000 10,000 5,000
Accounts payable 26,281 23,631 14,436
Accrued liabilities 38,698 25,781 18,790
Current taxes payable 9,474 12,150 8,324
Deferred taxes 5,798 5,961 4,878
--------- --------- ---------
Total current liabilities 117,790 77,523 70,178
Long-term debt 25,000 25,000 30,000
Deferred and non-current income taxes 961 2,282 3,823
Other liabilities 14,795 11,449 8,657
--------- --------- ---------
Total liabilities 158,546 116,254 112,658
--------- --------- ---------
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; 10,909,920, 10,861,631 and
10,080,164 shares issued and outstanding, respectively 110 109 101
Class A Common Stock, $0.01 par value,
10,000,000 shares authorized; 3,400,906, 3,400,906 and 34 34 34
3,400,906 shares issued and outstanding, respectively
Capital in excess of par value 90,195 89,491 72,547
Retained earnings 192,356 192,601 172,785
Accumulated other comprehensive income 25,697 34,473 20,347
Treasury Stock, 2,043,362, 2,040,591 and 1,553,198
shares, respectively, at cost (42,364) (41,995) (28,043)
--------- --------- ---------
Total shareholders' equity 266,028 274,713 237,771
--------- --------- ---------
Total liabilities and shareholders' equity $ 424,574 $ 390,967 $ 350,429
========= ========= =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
MOVADO GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended April 30,
----------------------------
2004 2003
------------- -------------
Net sales $74,187 $60,170
Cost of sales 30,802 23,730
------- -------
Gross profit 43,385 36,440
Selling, general and administrative 41,678 34,468
------- -------
Operating income 1,707 1,972
Net interest expense 725 783
------- -------
Income before income taxes 982 1,189
Provision for income taxes 246 333
------- -------
Net income $ 736 $ 856
======= =======
Earnings per share:
Basic $ 0.06 $ 0.07
======= =======
Diluted $ 0.06 $ 0.07
======= =======
Weighted average shares outstanding:
Basic 12,268 11,948
======= =======
Diluted 12,754 12,348
======= =======
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
MOVADO GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended April 30,
----------------------------
2004 2003
------------- ------------
Cash flows from operating activities:
Net income $ 736 $ 856
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization 2,905 2,199
Deferred income taxes (1,237) --
Provision for losses on accounts receivable (182) 335
Provision for losses on inventory 393 200
Changes in assets and liabilities:
Trade receivables 4,917 (2,939)
Inventories (18,312) (7,424)
Other current assets (1,432) 2,732
Accounts payable 1,255 (8,328)
Accrued liabilities (7,480) (4,000)
Current taxes payable (2,624) (3,102)
Other non-current assets (674) (2,627)
Other non-current liabilities 731 286
-------- --------
Net cash used in operating activities (21,004) (21,812)
-------- --------
Cash flows from investing activities:
Capital expenditures (3,916) (1,591)
Acquisition of Ebel, net of cash acquired (38,985) --
Trademarks (19) --
-------- --------
Net cash used in investing activities (42,920) (1,591)
-------- --------
Cash flows from financing activities:
Net proceeds from bank borrowings 22,410 18,750
Stock options exercised and other charges 336 100
Dividends paid (981) (358)
-------- --------
Net cash provided by financing activities 21,765 18,492
-------- --------
Effect of exchange rate changes on cash and cash equivalents (3,976) 1,094
-------- --------
Net decrease in cash and cash equivalents (46,135) (3,817)
Cash and cash equivalents at beginning of period 82,083 38,365
-------- --------
Cash and cash equivalents at end of period $ 35,948 $ 34,548
======== ========
SUPPLEMENTAL DISCLOSURE
Business acquired in purchase transaction
FV of assets acquired $ 70,435
Less: liabilities assumed (24,823)
Less: payable for Germany (5,507)
--------
Cash paid for the transaction $ 40,105
--------
Less: cash acquired (1,340)
Less: accrued deal costs (2,100)
Add: preliminary purchase price adjustment 2,320
--------
Net cash paid for transaction $ 38,985
========
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 consolidated financial statements included in the
Company's fiscal 2004 Annual Report filed on Form 10-K. In the opinion of
management, the accompanying consolidated financial statements reflect all
adjustments, consisting of only normal and recurring adjustments, necessary for
a fair 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 2005 presentation.
NOTE 2 - ACQUISITION
On December 22, 2003, the Company entered into an agreement to acquire Ebel S.A.
and the worldwide business related to the Ebel brand (collectively "Ebel") from
LVMH Moet Hennessy Louis Vuitton ("LVMH"). On March 1, 2004, the Company
completed the acquisition of Ebel with the exception of the payment for the
acquired Ebel business in Germany, which is expected to be completed June 2004,
at which time the Company is obligated to pay 7.0 million Swiss francs, less the
amount of the purchase price adjustment. The Ebel brand, one of the world's
premier luxury watch brands, was established in La Chaux-de-Fonds, Switzerland
in 1911. The Company acquired Ebel to revitalize and re-build the brand and to
expand its global market share.
Under the terms of the agreement, the Company acquired all of the outstanding
common stock of Ebel S.A. and the related worldwide businesses in exchange for:
- 47.9 million Swiss francs in cash less an estimated purchase price
adjustment of 2.9 million Swiss francs;
- the assumption of a short-term mortgage payable of 6.6 million Swiss
francs; and
- an obligation to pay an additional 7.0 million Swiss francs at the
Germany closing.
Under the purchase method of accounting, the Company recorded an aggregate
purchase price of approximately $45.6 million, which consisted of approximately
$37.7 million in cash, an obligation to pay $5.5 million at the Germany closing
and $4.7 million in deal costs and other incurred liabilities, which primarily
consisted of legal, accounting, investment banking and financial advisory
services fees, less $2.3 million in purchase price adjustments.
In accordance with Statement of Financial Accounting Standards 141, "Business
Combinations," ("SFAS 141"), the Company allocated the purchase price to the
tangible assets, intangible assets, and liabilities acquired based on their
estimated fair values. The fair value assigned to tangible and intangible assets
acquired was based on an independent appraisal. The fair value of assets
acquired and liabilities assumed exceeds the purchase price. That excess has
been allocated as a pro rata reduction of the amounts that otherwise would have
been assigned
6
to all of the acquired assets except for certain specific types of assets as set
forth in SFAS 141. The pro forma adjustments were based upon a preliminary
assessment of appraised values. Certain of these assessments are not complete at
this time, such as worldwide inventory valuations, restructuring costs, and
total deal costs, but will be finalized by the Company within one year of the
date of the acquisition. The final purchase price allocation may include an
adjustment of the total consideration as well as an adjustment to the estimate
of the fair value of acquired assets and assumed liabilities. In accordance with
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"), goodwill and purchased intangibles with
indefinite lives are not amortized but will be reviewed annually for impairment.
Purchased intangibles with finite lives are amortized on a straight-line basis
over their respective estimated useful lives.
In accordance with Emerging Issues Task Force No. 95-3 ("EITF 95-3"),
"Recognition of Liabilities in Connection with a Purchase Business Combination",
the Company recognized costs associated with exiting an activity of an acquired
Company and involuntary termination of employees of an acquired company as
liabilities assumed in a purchase business combination and included the
liabilities in the allocation of the acquisition cost. The liability recognized
in connection with the acquisition of Ebel is comprised of approximately $2.2
million for employee severance, $0.1 million for lease terminations, $1.7
million for exit costs related to certain promotional and purchase contracts and
$0.4 million of other liabilities. Additionally, the Company recorded an
estimated incremental contractual liability to engage a third party to service
the acquired backlog of warranty claims. There was no change in these
liabilities in the quarter ended April 30, 2004. Payments are expected to
commence during the quarter ending July 31, 2004.
As part of the acquisition, the Company recorded deferred tax assets resulting
from Ebel's net operating loss carry forwards amounting to approximately 164.9
million Swiss francs. The Company established a full valuation allowance on the
deferred tax assets, however, if the deferred tax assets are subsequently
recognized, the recognition of the tax benefit will be applied to reduce the
carrying value of acquired intangible assets to zero, prior to being recognized
as a reduction of income tax expense. The total purchase price has initially
been allocated as follows (in thousands):
Cash $ 1,340
Accounts receivable 15,926
Property, plant and equipment 3,873
Inventories 38,592
Intangible assets 7,376
Other assets 3,328
-------
Total assets acquired 70,435
Current liabilities 14,528
Short-term commitments and contingencies 5,110
Mortgage payable 5,185
-------
Total purchase price $45,612
=======
In allocating the purchase price, the Company considered, among other factors,
its intention for future use of the acquired assets, analyses of historical
financial performance and estimates of future performance of Ebel's products.
Included in the other current assets are certain assets held for sale of
approximately $1.4 million, which are expected to be disposed of within the next
12 months.
7
The fair value of intangible assets was primarily based on the income approach
and cost approach. The discount rates used were 16% for customer lists and 21%
for trade names and trademarks. These discount rates were determined after
consideration of the industry's cost of capital which is equal to the weighted
average, after-tax cost of equity and debt. At April 30, 2004, identifiable
intangible assets purchased in the Ebel acquisition consisted of the following
(in thousands):
Identifiable Intangible Assets Gross
Value Useful Life
------- -----------
Trade names and trademarks $ 6,735 Indefinite
Customer List 641 5 years
-------
Total $ 7,376
=======
Amortization expense for the next four years and thereafter for intangibles with
finite lives is as follows:
Estimated
Amortization
For The Year Ended Expense
-------------
January 31, 2005 117
January 31, 2006 128
January 31, 2007 128
January 31, 2008 and thereafter 268
-------------
$ 641
=============
Pro Forma Financial Information
The unaudited financial information in the table below summarizes the combined
results of operations of the Company and Ebel, on a pro forma basis, as though
the acquisition had been completed as of the beginning of each period presented.
This pro forma financial information is presented for informational purposes
only and is not necessarily indicative of the results of operations that would
have been achieved had the acquisition taken place at the beginning of each
three month period presented. The unaudited pro forma condensed combined
statement of income for the three months ended April 30, 2004 combines the
historical results for the Company for the three months ended April 30, 2004 and
the historical results for Ebel for the period preceding the acquisition of
February 1 through February 29, 2004. The unaudited pro forma condensed combined
statement of income for the three months ended April 30, 2003 combines the
historical results for the Company for the three months ended April 30, 2003,
and the historical results for Ebel for the three months ended April 30, 2003.
The following amounts are in thousands, except per share amounts:
Three Months Ended
April 30
--------------------------
2004 2003
(UNAUDITED) (UNAUDITED)
---------- ----------
Revenues $ 75,556 $ 72,351
Net income $ (1,339) $ (2,129)
Basic income per share $ (0.11) $ (0.18)
Diluted income per share $ (0.11) $ (0.18)
8
NOTE 3 - STOCK OPTION PLAN
The Company applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for its stock option plan. 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 No. 123, "Accounting for
Stock-Based Compensation," ("SFAS 123") issued by the Financial Accounting
Standards Board ("FASB"), 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. Pro forma disclosures as if the Company had adopted
the recognition requirements under SFAS 123 for the three months ended April 30,
2004 and 2003, respectively, are presented below.
Three Months Ended
April 30,
--------------------------
(In thousands, except per share data) 2004 2003
---------- ----------
Net income as reported $ 736 $ 856
Fair value based compensation
expense, net of taxes 1,554 687
---------- ----------
Pro forma net (loss) income ($ 818) $ 169
========== ==========
Basic earnings per share:
As reported $ 0.06 $ 0.07
Pro forma under SFAS 123 ($ 0.07) $ 0.01
Diluted earnings per share:
As reported $ 0.06 $ 0.07
Pro forma under SFAS 123 ($ 0.07) $ 0.01
NOTE 4 - COMPREHENSIVE (LOSS) INCOME
The components of comprehensive (loss) income for the three months ended April
30, 2004 and 2003 are as follows (in thousands):
Three Months Ended
April 30,
--------------------------
2004 2003
---------- ----------
Net income $ 736 $ 856
Net unrealized gain on investments, net of tax 28 42
Net change in effective portion of hedging
contracts, net of tax 1,937 (660)
Foreign currency translation adjustment (10,741) 1,579
---------- ----------
Total comprehensive (loss) income ($ 8,040) $ 1,817
========== ==========
9
NOTE 5 - SEGMENT INFORMATION
The Company conducts its business primarily in two operating segments: Wholesale
and Retail. The Company's Wholesale segment includes the designing,
manufacturing and distribution of quality watches. The Retail segment includes
the Movado Boutiques and outlet stores.
The Company divides its business into two major geographic segments: Domestic,
which includes the results of the Company's North American, Caribbean and Tommy
Hilfiger South American operations, and International, which includes the
results of the Company's operations in all other parts of the world. The
Company's International operations are principally conducted in Europe, the
Middle East and Asia. The Company's International assets are substantially
located in Europe.
Operating Segment Data For The Three Months Ended April 30, 2004 And 2003 (In
Thousands):
Net Sales Operating Income (Loss)
-------------------- -----------------------
2004 2003 2004 2003
-------------------- -----------------------
Wholesale $61,008 $49,350 $ 3,415 $ 3,703
Retail 13,179 10,820 (1,708) (1,731)
-------------------- -----------------------
Consolidated total $74,187 $60,170 $ 1,707 $ 1,972
==================== =====================
Geographic Segment Data For The Three Months Ended April 30, 2004 And 2003 (In
Thousands):
Net Sales Operating Income (Loss)
-------------------- -----------------------
2004 2003 2004 2003
-------------------- -----------------------
Domestic $59,219 $51,553 $ 124 ($2,026)
International 14,968 8,617 1,583 3,998
-------------------- -----------------------
Consolidated total $74,187 $60,170 $ 1,707 $ 1,972
==================== =====================
Domestic and International net sales are net of intercompany sales of $59.7
million and $41.1 million for the three months ended April 30, 2004 and 2003,
respectively.
Total Assets
--------------------
2004 2003
--------------------
Domestic 127,542 117,517
International 297,032 232,912
--------------------
Consolidated total 424,574 350,429
====================
10
NOTE 6 - EXECUTIVE RETIREMENT PLAN
The Company has a number of employee benefit plans covering substantially all
employees. Certain eligible executives of the Company have elected to defer a
portion of their compensation on a pre-tax basis under a defined contribution,
supplemental executive retirement plan (SERP) sponsored by the Company. The SERP
was adopted effective June 1, 1995, and provides eligible executives with
supplemental pension benefits in addition to amounts received under the
Company's other retirement plans. The Company makes a matching contribution
which vests equally over five years. For the quarter ended April 30, 2004 and
2003, the Company recorded an expense related to the SERP of approximately $0.1
million for each period.
NOTE 7 - INVENTORIES
Inventories consist of the following (in thousands):
April 30, January 31, April 30,
2004 2004 2003
--------- --------- ---------
Finished goods $ 122,939 $ 78,490 $ 78,396
Component parts 101,890 43,335 42,016
Work-in-process 5,158 2,261 2,445
--------- --------- ---------
229,987 124,086 122,857
Less: inventories reserve (53,986) (2,408) (3,412)
--------- --------- ---------
$ 176,001 $ 121,678 $ 119,445
========= ========= =========
The increase in all inventory categories, including the inventory reserve, is
primarily the result of the acquired net assets of Ebel. Gross inventory
acquired was $90.4 million with reserves of $50.8 million.
NOTE 8 - 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 12,268,000 and 11,948,000 for the three months ended April 30, 2004 and
2003, respectively. For diluted earnings per share, these amounts were increased
by 486,000 and 400,000 for the three months ended April 30, 2004 and 2003,
respectively, due to potentially dilutive common stock equivalents issuable
under the Company's stock option plans and restricted stock grants.
NOTE 9 - SUBSEQUENT EVENTS
On March 10, 2004, the Board approved a 2 for 1 stock split to be effected by
means of a stock dividend distributable on June 25, 2004 to shareholders of
record as of June 11, 2004, subject to shareholder approval of an increase in
the number of authorized shares of Common Stock and Class A Common Stock at the
annual shareholders meeting.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FORWARD-LOOKING STATEMENTS
Statements in this quarterly report on Form 10-Q, including, without limitation,
statements under this Item 2, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere in this report, as well as
statements in future filings by the Company with the Securities and Exchange
Commission ("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, general uncertainty
related to possible terrorist attacks and the impact 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, the loss of significant customers, the
Company's dependence on key employees and officers, the ability to successfully
integrate the operations of acquired businesses without disruption to other
business activities, the continuation of licensing arrangements with third
parties, 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
In accordance with Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142"), goodwill and purchased
intangibles with indefinite lives are not amortized but will be reviewed
annually for impairment. Purchased intangibles with finite lives are amortized
on a straight-line basis over their respective estimated useful lives.
Aside from the above, there has been no other 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, 2004.
12
Results of operations for the three months ended April 30, 2004 as compared to
the three months ended April 30, 2003.
Net Sales: Comparative net sales by business segment were as follows (in
thousands):
Three Months Ended
April 30,
-------------------
2004 2003
------- -------
Wholesale:
Domestic $46,040 $40,733
International 14,968 8,617
Retail 13,179 10,820
------- -------
Net Sales $74,187 $60,170
======= =======
Net sales increased by $14.0 million or 23.3% for the three months ended April
30, 2004 as compared to the three months ended April 30, 2003. Sales in the
wholesale segment increased 23.6% to $61.0 million versus $49.4 million in the
prior year. Sales of all brands were above prior year in double digits except
ESQ which was slightly below last year. Sales include $3.4 million for Ebel.
The domestic wholesale business was $5.3 million or 13.0% above prior year sales
of $40.7 million. Tommy Hilfiger posted sales up 63.2% over prior year due to
positive sell through at retail in existing doors plus added distribution.
Concord and Coach were up double digits, Movado up high single digits.
Sales in the international wholesale business were $6.4 million or 73.7% above
prior year. All brands recorded double digit increases, with Tommy Hilfiger
sales more than doubling year over year reflecting the strength of the Tommy
Hilfiger brand name and the appeal of the watch designs in the international
marketplace. Sales were particularly strong in Asia up almost 90% from the prior
year's first quarter, which was significantly impacted by the outbreak of SARS.
Sales in the retail segment rose 21.8% to $13.2 million. The increase was driven
by an overall 68.9% increase in Movado Boutique sales. This was the result of an
18.2% comparable store sales increase, along with the addition of nine new doors
year over year. The outlet business was relatively flat when compared to the
prior year.
Gross Profit. The gross profit for the three months ended April 30, 2004 was
$43.4 million or 58.5% of net sales as compared to $36.4 million or 60.6% of net
sales for the three months ended April 30, 2003. The increase in gross profit of
$6.9 million was the result of the higher sales volume. The decrease in the
gross profit as a percentage of sales was the result of brand and product mix,
particularly the effect of the Ebel business which generated lower margins and
the proportionately higher sales growth of Tommy Hilfiger. In addition, the mix
of product within the Movado Boutiques also contributed to the margin decrease
due to higher jewelry sales relative to watch sales in the current year. Jewelry
has a lower gross margin than watches for the Company.
13
Selling, General and Administrative. Selling, general and administrative
expenses for the three months ended April 30, 2004 were $41.7 million or 56.2%
of net sales as compared to $34.5 million or 57.3% of net sales for the three
months ended April 30, 2003. The increase reflects spending to operate the Ebel
business for two months and increases in spending relating to the base business.
The spending increase in the base business included higher marketing expenses
due to the increase in sales, added spending in support of the nine new Movado
Boutiques, higher payroll and commissions and increased spending in Asia to
support the development of the Movado brand in China and the global expansion of
Tommy Hilfiger.
Interest Expense. Net interest expense for the three months ended April 30, 2004
declined by 7.4% to $0.7 million as compared to $0.8 million for the three
months ended April 30, 2003. The decrease is due to the reduction of the average
borrowing rate to 5.2% as of April 30, 2004 from 5.8% as of April 30, 2003. This
reduced rate is the result of the mix of the borrowings with a greater portion
classified as short-term bank loans due to the continued paydown of the
Company's long-term debt. The average debt for the quarter increased 2.5% from
prior year to $45.5 million.
Income Taxes. The Company recorded a tax expense of $0.2 million for the three
months ended April 30, 2004 as compared to a tax expense of $0.3 million for the
three months ended April 30, 2003. Taxes were recorded at a 25.0% and 28.0% rate
for the period ended April 30, 2004 and 2003, respectively. The decrease in the
effective tax rate is the result of the Company's projected profits and earnings
mix for the year.
Net Income. For the quarter ended April 30, 2004, the Company recorded net
income of $0.7 million. This reflects the consolidated net income from the
Company's base business, prior to the Ebel acquisition, of $2.5 million
partially offset by a loss from Ebel of $1.8 million.
LIQUIDITY AND FINANCIAL POSITION
Cash used in operating activities amounted to $21.0 million for the three months
ended April 30, 2004 and $21.8 million for the three months ended April 30,
2003. The decrease in cash used in operating activities for the three months
ended April 30, 2004 as compared to the three months ended April 30, 2003 was
primarily due to an improvement in the accounts receivable days outstanding due
to the mix of sales growth in the Movado Boutiques and Tommy Hilfiger watches
where shorter payment terms are the norm. Additionally, the base business
experienced improved cash collections as of April 30, 2004. Cash was also
favorably impacted by higher accounts payable. This was partially offset by
increased inventory to stock the nine new Movado Boutiques and a normal cyclical
build of new products for introduction at the annual International Watch and
Jewelry Fair held in Basel, Switzerland.
Cash used in investing activities amounted to $44.9 million and $1.6 million for
the three months ended April 30, 2004 and 2003, respectively. The cash used
during the period ended April 30, 2004 was primarily for the acquisition of
Ebel. In addition, cash was used for capital expenditures primarily related to
the build out of the new Movado Boutiques and renovations of existing retail
operations. The cash used during the period ended April 30, 2003 was mainly for
the build out of the Movado Boutiques and various information systems projects.
Cash provided by financing activities amounted to $21.8 million and $18.5
million for the three months ended April 30, 2004 and 2003, respectively, which
was the result of seasonal short-term borrowings.
At April 30, 2004, the Company had two series of Senior Notes outstanding.
Senior Notes due January 31, 2005, with a remaining principal amount due of $5.0
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 at a rate of 6.56% per annum.
14
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 at a rate of 6.90% per annum, mature on October 30, 2010 and
are subject to annual repayments of $5.0 million commencing October 31, 2006.
As of March 21, 2004, the Company amended its Note Purchase and Private Shelf
Agreement, originally dated March 21, 2001, to expire on March 21, 2007. This
agreement 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 April 30, 2004 and 2003, there were no amounts outstanding under the
agreement.
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 and $15.0 million of uncommitted working
capital lines. The line of credit expires on June 17, 2006. At April 30, 2004,
the Company had $27.5 million of outstanding borrowings under its bank lines as
compared to $18.8 million at April 30, 2003. 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 term with a Swiss bank. Available credit under these lines totaled
8.0 million Swiss francs, with dollar equivalents of approximately $6.2 million
and $5.9 million at April 30, 2004 and 2003, 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 April 30, 2004, 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. As of April 30, 2004, there
are no borrowings against these lines.
During the acquisition, the Company assumed the existing mortgage of 6.6 million
Swiss francs. The Company has classified this debt as current liabilities to
reflect the Company's intent to settle this liability within the next 12 months.
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 under the repurchase program for the three months ended
April 30, 2004 and 2003, respectively.
During the three months ended April 30, 2004, treasury shares increased by 2,771
as the result of cashless exercises of stock options for 18,183 shares of stock.
The Company paid dividends per share of $0.08 or approximately $1.0 million, for
the three months ended April 30, 2004.
Cash and cash equivalents at April 30, 2004 amounted to $35.9 million compared
to $34.5 million at April 30, 2003. The increase in cash and cash equivalents
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.
15
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 April 30, 2004 (in millions):
April 30, 2004
Fair Value Maturities
-------------- ----------
Forward exchange contracts $ 0.3 2004 - 2005
Purchased foreign currency options 4.2 2004 - 2006
-----------
$ 4.5
===========
The Company's international business accounts for 20.2% of the Company's sales.
The international 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 three months ended April
30, 2004 and 2003, 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 April 30, 2004, the Company had $27.5 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 $30.0 million Senior Note debt bearing fixed interest rates per annum. The
difference between the market based interest rates at April 30, 2004 and the
fixed rates were unfavorable.
16
Item 4. Controls and Procedures
The Company, under the supervision and with the participation of its management,
including the Chief Executive Officer and the Chief Financial Officer, evaluated
the effectiveness of the design and operation of the Company's "disclosure
controls and procedures" (as defined in Rule 13a-15(e) under the Securities
Exchange Act) as of the end of the period covered by this report. Based on that
evaluation, the Chief Executive Officer and the Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective in
making known to them, in a timely manner, material information relating to the
Company and the Company's consolidated subsidiaries required to be disclosed in
the Company's reports filed or submitted under the Exchange Act.
There has been no change in the Company's internal control over financial
reporting during the quarter ended April 30, 2004, that has materially affected,
or is reasonably likely to materially affect, the Company's internal control
over financial reporting.
It should be noted that while the Company's Chief Executive Officer and Chief
Financial Officer believe that the Company's disclosure controls and procedures
provide a reasonable level of assurance that they are effective, they do not
expect that the Company's disclosure controls and procedures or internal control
over financial reporting will prevent all errors and fraud. A control system, no
matter how well conceived or operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met.
17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Third Amendment to License Agreement dated June 3, 1999
between Tommy Hilfiger Licensing, Inc. and the
Registrant entered into as of May 7, 2004.*
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 2, 2004 for a press
release, dated June 2, 2004, announcing financial results for the first quarter
ended April 30, 2004.
On May 17, 2004, the Company amended a report on Form 8-K (Item 7) that was
furnished on March 15, 2004 announcing the Ebel acquisition.
*Confidential Portions of Exhibit 10.1 have been omitted and filed separately
with the Securities and Exchange Commission pursuant to Rule 24b-2 of the
Securities Exchange Act of 1934, as amended.
18
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: June 9, 2004 By: /s/ Eugene J. Karpovich
-------------------------------
Eugene J. Karpovich
Senior Vice President and
Chief Financial Officer
(Chief Financial Officer and
Principal Accounting Officer)
(Duly Authorized Officer)
19