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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10-Q
------------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended July 31, 2006
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-16497
MOVADO GROUP, INC.
(Exact Name of Registrant as Specified in its Charter)
New York 13-2595932
(State or Other Jurisdiction (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 a large accelerated filer,
an accelerated filer or a non-accelerated filer. See definition of "accelerated
filer" or "large accelerated filer" in Rule 12b-2 of the Exchange Act. Large
accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The number of shares outstanding of the registrant's common stock and class
A common stock as of August 31, 2006 were 19,036,033 and 6,657,159,
respectively.
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MOVADO GROUP, INC.
Index to Quarterly Report on Form 10-Q
July 31, 2006
Page
----
Part I Financial Information (Unaudited)
Item 1. Consolidated Balance Sheets at July 31, 2006, January 31, 2006
and July 31, 2005 3
Consolidated Statements of Income for the three months and six
months ended July 31, 2006 and 2005 4
Consolidated Statements of Cash Flows for the six months ended
July 31, 2006 and 2005 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosure about Market Risks 24
Item 4. Controls and Procedures 25
Part II Other Information
Item 1A. Risk Factors 26
Item 6. Exhibits 26
Signature 27
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
MOVADO GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
July 31, January 31, July 31,
2006 2006 2005
-------- ----------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 78,126 $123,625 $ 50,323
Trade receivables, net 128,416 109,852 108,775
Inventories 215,461 198,582 203,047
Other assets 34,712 26,596 33,392
-------- -------- --------
Total current assets 456,715 458,655 395,537
Property, plant and equipment, net 51,931 52,168 52,687
Other assets 40,464 39,069 38,519
-------- -------- --------
Total assets $549,110 $549,892 $486,743
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Loans payable to banks $ -- $ -- $ 37,500
Current portion of long-term debt 5,000 5,000 --
Accounts payable 40,266 35,529 35,283
Accrued liabilities 31,990 43,065 41,129
Current taxes payable 1,674 7,724 --
Deferred taxes 876 503 4,756
-------- -------- --------
Total current liabilities 79,806 91,821 118,668
Long-term debt 91,978 104,955 45,000
Deferred and non-current income taxes 13,278 11,947 9,031
Other liabilities 20,112 19,491 17,363
-------- -------- --------
Total liabilities 205,174 228,214 190,062
-------- -------- --------
Commitments and contingencies (Note 8)
Minority interest 245 -- --
Shareholders' equity:
Preferred Stock, $0.01 par value,
5,000,000 shares authorized; no shares issued -- -- --
Common Stock, $0.01 par value,
100,000,000 shares authorized; 23,661,968, 23,215,836
and 23,116,663 shares issued, respectively 237 232 231
Class A Common Stock, $0.01 par value,
30,000,000 shares authorized; 6,700,909, 6,766,909 and
6,773,258 shares issued and outstanding, respectively 67 68 68
Capital in excess of par value 113,405 107,965 103,470
Retained earnings 247,656 236,515 221,981
Accumulated other comprehensive income 34,812 27,673 21,997
Treasury Stock, 4,676,117, 4,613,645 and 4,613,645
shares, respectively, at cost (52,486) (50,775) (51,066)
-------- -------- --------
Total shareholders' equity 343,691 321,678 296,681
-------- -------- --------
Total liabilities and equity $549,110 $549,892 $486,743
======== ======== ========
See Notes to Consolidated Financial Statements
3
MOVADO GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
Three Months Six Months
Ended July 31, Ended July 31,
------------------- -------------------
2006 2005 2006 2005
-------- -------- -------- --------
Net sales $126,588 $115,326 $224,332 $203,082
Cost of sales 48,076 45,340 86,230 80,258
-------- -------- -------- --------
Gross profit 78,512 69,986 138,102 122,824
Selling, general and administrative 64,438 57,701 120,594 108,400
-------- -------- -------- --------
Operating income 14,074 12,285 17,508 14,424
Interest expense (919) (926) (1,862) (1,804)
Interest income 616 42 1,507 111
Minority interest (15) -- 64 --
-------- -------- -------- --------
Income before income taxes 13,756 11,401 17,217 12,731
Provision for income taxes 2,407 2,850 3,013 3,183
-------- -------- -------- --------
Net income $ 11,349 $ 8,551 $ 14,204 $ 9,548
======== ======== ======== ========
Earnings per share:
Basic $ 0.44 $ 0.34 $ 0.56 $ 0.38
======== ======== ======== ========
Diluted $ 0.43 $ 0.33 $ 0.54 $ 0.37
======== ======== ======== ========
Weighted-average shares outstanding:
Basic 25,661 25,241 25,550 25,148
======== ======== ======== ========
Diluted 26,584 26,126 26,506 26,074
======== ======== ======== ========
See Notes to Consolidated Financial Statements
4
MOVADO GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months
Ended July 31,
-------------------
2006 2005
-------- --------
Cash flows from operating activities:
Net income $ 14,204 $ 9,548
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 7,736 7,816
Deferred income taxes (1,351) (731)
Provision for losses on accounts receivable 1,739 600
Provision for losses on inventory 319 300
Stock-based compensation 1,340 624
Excess tax benefit from stock-based compensation (1,345) --
Minority interest (64) --
Changes in assets and liabilities:
Trade receivables (17,858) (3,813)
Inventories (13,146) (27,078)
Other current assets (5,575) (4,312)
Accounts payable 4,059 (1,526)
Accrued liabilities (8,893) (6,363)
Current taxes payable (4,704) 159
Other non-current assets (1,448) (912)
Other non-current liabilities 616 174
-------- --------
Net cash used in operating activities (24,371) (25,514)
-------- --------
Cash flows from investing activities:
Capital expenditures (6,811) (7,879)
Trademarks (381) (343)
-------- --------
Net cash used in investing activities (7,192) (8,222)
-------- --------
Cash flows from financing activities:
Net (repayments) / proceeds of bank borrowings (15,161) 37,500
Stock options exercised and other changes 1,048 (819)
Excess tax benefit from stock-based compensation 1,345 --
Dividends paid (3,063) (2,520)
-------- --------
Net cash (used in) / provided by financing activities (15,831) 34,161
-------- --------
Effect of exchange rate changes on cash and cash equivalents 1,895 (13,884)
-------- --------
Net decrease in cash and cash equivalents (45,499) (13,459)
Cash and cash equivalents at beginning of period 123,625 63,782
-------- --------
Cash and cash equivalents at end of period $ 78,126 $ 50,323
======== ========
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 2006 Annual Report filed on Form 10-K. In the opinion of
management, the accompanying consolidated financial statements reflect all
adjustments, consisting of only normal and recurring adjustments, necessary for
a fair statement of the financial position and results of operations for the
periods presented. These consolidated financial statements should be read in
conjunction with the aforementioned Annual Report. Operating results for the
interim periods presented are not necessarily indicative of the results that may
be expected for the full year.
NOTE 1 - RECLASSIFICATION
Certain reclassifications were made to prior years' financial statement amounts
and related note disclosures to conform to the fiscal 2007 presentation.
NOTE 2 - STOCK-BASED COMPENSATION
Effective concurrently with the consummation of the Company's public offering in
the fourth quarter of fiscal 1994, the Board of Directors and the shareholders
of the Company approved the adoption of the Movado Group, Inc. 1993 Employee
Stock Option Plan (the "Employee Stock Option Plan") for the benefit of certain
officers, directors and key employees of the Company. The Employee Stock Option
Plan was amended in fiscal 1997 and restated as the Movado Group, Inc. 1996
Stock Incentive Plan (the "Plan"). Under the Plan, as amended and restated as of
April 8, 2004, the Compensation Committee of the Board of Directors, which is
comprised of four of the Company's outside directors, has the authority to grant
incentive stock options and nonqualified stock options to purchase, as well as
stock appreciation rights and stock awards, up to 9,000,000 shares of Common
Stock. Options granted to participants under the Plan generally become
exercisable in equal installments over three or five years and remain
exercisable until the tenth anniversary of the date of grant. The option price
may not be less than the fair market value of the stock at the time the options
are granted.
On February 1, 2006, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 123(R), "Share-Based Payment" ("SFAS No.
123(R)"), electing to use the modified prospective application transition
method, and accordingly, prior period financial statements have not been
restated. Under this method, the fair value of all stock options granted after
adoption and the unvested portion of previously granted awards must be
recognized in the Consolidated Statements of Income. The Company utilizes the
Black-Scholes option-pricing model to calculate the fair value of each option at
the grant date which requires certain assumptions be made. The expected life of
stock option grants is determined using historical data and represents the time
period which the stock option is expected to be outstanding until it is
exercised. The risk free interest rate is the yield on the grant date of U.S.
Treasury constant maturities with a maturity date closest to the expected life
of the stock option. The expected stock price volatility is derived from
historical volatility and calculated based on the estimated term structure of
the stock option grant. The expected dividend yield is calculated using the
expected annualized dividend which remains constant during the expected term of
the option.
The weighted-average assumptions used with the Black-Scholes option-pricing
model for the calculation of the fair value of stock option grants during the
six months ended July 31, 2006 were: expected term of 5.59 years;
6
risk-free interest rate of 5.01%; expected volatility of 31.78% and dividend
yield of 1.29%. The weighted-average grant date fair value of options granted
during the six months ended July 31, 2006 was $6.34.
Total compensation expense for unvested stock option grants recognized during
the three and six months ended July 31, 2006 was approximately $0.2 million, net
of a tax benefit of $0.1 million and $0.4 million, net of a tax benefit of $0.2
million, respectively. Expense related to stock option compensation is
recognized on a straight-line basis over the vesting term. As of July 31, 2006,
there was approximately $3.0 million of unrecognized compensation cost related
to unvested stock options. These costs are expected to be recognized over a
weighted-average period of 2.5 years. Total cash received for stock option
exercises during the six months ended July 31, 2006 amounted to approximately
$2.4 million. Windfall tax benefits realized on these exercises were
approximately $1.0 million.
Prior to February 1, 2006, employee stock options were accounted for under the
intrinsic value method, which measures compensation cost as the excess, if any,
of the quoted market price of the stock at grant date over the amount an
employee must pay to acquire the stock. Accordingly, compensation expense had
not been recognized for stock options granted at or above fair value. Had
compensation expense been determined and recorded based upon the fair value
recognition provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation", net income (in thousands) and net income per share would have
been reduced to pro forma amounts for the three months and six months ended July
31, 2005 as follows:
Three Months Six Months
Ended Ended
(In thousands, except per share data) July 31, 2005 July 31, 2005
------------- -------------
Net income as reported $8,551 $ 9,548
Fair value based compensation
expense, net of taxes (673) (1,511)
------ -------
Pro forma net income $7,878 $ 8,037
====== =======
Basic earnings per share:
As reported $ 0.34 $ 0.38
Pro forma under SFAS No. 123 $ 0.31 $ 0.32
Diluted earnings per share:
As reported $ 0.33 $ 0.37
Pro forma under SFAS No. 123 $ 0.30 $ 0.31
The weighted-average assumptions used with the Black-Scholes option-pricing
model for the calculation of the fair value of stock option grants during the
six months ended July 31, 2005 were: expected term of 7.0 years; risk-free
interest rate of 3.76%; expected volatility of 46.52% and dividend yield of
1.75%. The weighted-average grant date fair value of options granted during the
six months ended July 31, 2005 was $8.16.
7
Stock option activity for the six months ended July 31, 2006 is summarized
as follows:
Weighted-
Number of Average
Options Exercise Price
--------- --------------
January 31, 2006 3,169,613 $12.96
Options granted 21,000 $19.33
Options exercised (42,564) $ 8.96
--------- ------
April 30, 2006 3,148,049 $13.06
Options granted 97,000 $18.41
Options exercised (242,015) $ 8.33
Options cancelled (20,000) $14.32
--------- ------
July 31, 2006 2,983,034 $13.61
========= ======
The total intrinsic value of stock options exercised for the six months ended
July 31, 2006 and 2005 was approximately $4.0 million and $6.2 million,
respectively. The total fair value of the stock options vested for the six
months ended July 31, 2006 and 2005 was approximately $1.9 million and $10.3
million, respectively.
The following table summarizes outstanding and exercisable stock options as of
July 31, 2006:
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (years) Price Exercisable Price
--------------- ----------- ------------ --------- ----------- ---------
$ 3.12 - $ 6.22 135,060 3.2 $ 4.25 135,060 $ 4.25
$ 6.23 - $ 9.34 156,198 4.1 $ 7.26 156,198 $ 7.26
$ 9.35 - $12.45 754,564 3.2 $10.67 730,464 $10.70
$12.46 - $15.57 1,198,465 5.0 $14.53 908,365 $14.65
$15.58 - $18.68 720,747 7.0 $18.13 376,416 $18.36
$18.69 - $21.81 18,000 9.1 $19.76 334 $18.75
--------- --- ------ --------- ------
2,983,034 5.0 $13.61 2,306,837 $12.90
--------- --- ------ --------- ------
The total intrinsic value of outstanding and exercisable stock options as of
July 31, 2006 was approximately $26.6 million and $22.2 million, respectively.
Under the 1996 Stock Incentive Plan, the Company has the ability to grant
restricted stock to certain employees. Restricted stock grants generally vest
three to five years from the date of grant. Expense for these grants is
recognized on a straight-line basis over the vesting period. The fair value of
restricted stock grants is equal to the closing price of the Company's
publicly-traded common stock on the grant date.
On May 31, 2006, the Compensation Committee of the Board of Directors adopted
the Executive Long Term Incentive Plan (the "LTIP") authorized by section 9 of
the Plan. The LTIP provides for the award of "Performance Share Units" that are
equivalent, one for one, to shares of the Company's common stock and that vest
based on the Company's achievement of its operating margin goal for the fiscal
year ending January 31,
8
2009. The number of actual shares earned by a participant is based on the
Company's actual performance at the end of the award period and can range from
0% to 150% of the participant's target award. Total target awards of 189,500
Performance Share Units were granted by the Compensation Committee on May 31,
2006 that vest over three and five year periods.
Total compensation expense for restricted stock grants and for grants of
Performance Share Units under the LTIP (together "restricted stock") recognized
during the three months ended July 31, 2006 and 2005 was $0.3 million, net of a
tax benefit of $0.2 million, and $0.2 million, net of a tax benefit of $0.1
million, respectively. Total compensation expense for restricted stock grants
recognized during the six months ended July 31, 2006 and 2005 was $0.4 million,
net of a tax benefit of $0.3 million, and $0.4 million, net of a tax benefit of
$0.2 million, respectively. Prior to February 1, 2006, compensation expense for
restricted stock grants was reduced as actual forfeitures of the awards
occurred. SFAS No. 123(R) requires forfeitures to be estimated at the time of
grant in order to estimate the amount of share-based awards that will ultimately
vest and thus, current period compensation expense has been adjusted for
estimated forfeitures based on historical data. As of July 31, 2006, there was
approximately $4.9 million of unrecognized compensation cost related to unvested
restricted stock, including those issued under the LTIP. These costs are
expected to be recognized over a weighted-average period of 3.0 years.
Restricted stock activity for the six months ended July 31, 2006 are summarized
as follows:
Weighted-
Number of Average
Restricted Grant Date
Stock Units Fair Value
----------- ----------
January 31, 2006 321,090 $14.39
Units granted 46,400 $20.43
Units vested (92,390) $ 9.83
Units forfeited (220) $13.27
------- ------
April 30, 2006 274,880 $16.95
Units granted 194,000 $18.20
Units vested (4,550) $ 9.98
Units forfeited (8,410) $16.64
------- ------
July 31, 2006 455,920 $17.56
======= ======
Restricted stock units are exercised simultaneously when they vest and are
issued from the pool of authorized shares. The total intrinsic value of
restricted stock units that vested during the six months ended July 31, 2006 was
approximately $1.9 million. The windfall tax benefits realized on the vested
restricted stock grants for the six months ended July 31, 2006 were $0.3
million. The weighted-average grant date fair values for restricted stock grants
for the six months ended July 31, 2006 and 2005 were $18.63 and $17.89,
respectively. Outstanding restricted stock units had a total intrinsic value of
approximately $10.3 million as of July 31, 2006.
9
NOTE 3 - COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss) for the three months and six
months ended July 31, 2006 and 2005 are as follows (in thousands):
Three Months Ended Six Months Ended
July 31, July 31,
------------------- -------------------
2006 2005 2006 2005
------- --------- ------- ---------
Net income $11,349 $ 8,551 $14,204 $ 9,548
Net unrealized gain on
investments, net of tax 13 143 20 153
Effective portion of unrealized gain (loss)
on hedging contracts, net of tax 157 (4,790) 2,062 (5,127)
Foreign currency translation adjustment (1) (100) (19,545) 5,057 (21,736)
------- --------- ------- ---------
Total comprehensive income (loss) $11,419 ($15,641) $21,343 ($17,162)
======= ========= ======= =========
(1) The currency translation adjustments are not adjusted for income taxes as
they relate to permanent investments in international subsidiaries.
NOTE 4 - 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 Switzerland.
Operating Segment Data for the Three Months Ended July 31, 2006 and 2005 (in
thousands):
Net Sales Operating Income
------------------- -----------------
2006 2005 2006 2005
-------- -------- ------- -------
Wholesale $106,108 $ 95,658 $13,210 $12,177
Retail 20,480 19,668 864 108
-------- -------- ------- -------
Consolidated total $126,588 $115,326 $14,074 $12,285
======== ======== ======= =======
Operating Segment Data for the Six Months Ended July 31, 2006 and 2005 (in
thousands):
Operating Income
Net Sales (Loss)
------------------- -----------------
2006 2005 2006 2005
-------- -------- ------- -------
Wholesale $187,110 $168,263 $17,896 $15,911
Retail 37,222 34,819 (388) (1,487)
-------- -------- ------- -------
Consolidated total $224,332 $203,082 $17,508 $14,424
======== ======== ======= =======
10
Total Assets
------------------------------------------------
July 31, 2006 January 31, 2006 July 31, 2005
------------- ---------------- -------------
Wholesale $483,625 $484,767 $420,266
Retail 65,485 65,125 66,477
-------- -------- --------
Consolidated total $549,110 $549,892 $486,743
======== ======== ========
Geographic Segment Data for the Three Months Ended July 31, 2006 and 2005 (in
thousands):
Net Sales Operating Income
------------------- -----------------
2006 2005 2006 2005
-------- -------- ------- -------
Domestic $ 94,356 $ 89,231 $ 3,794 $ 4,986
International 32,232 26,095 10,280 7,299
-------- -------- ------- -------
Consolidated total $126,588 $115,326 $14,074 $12,285
======== ======== ======= =======
Geographic Segment Data for the Six Months Ended July 31, 2006 and 2005 (in
thousands):
Net Sales Operating Income
------------------- -----------------
2006 2005 2006 2005
-------- -------- ------- -------
Domestic $166,910 $157,306 $ 728 $ 3,669
International 57,422 45,776 16,780 10,755
-------- -------- ------- -------
Consolidated total $224,332 $203,082 $17,508 $14,424
======== ======== ======= =======
Domestic and International net sales are net of intercompany sales of $60.5
million and $59.3 million for the three months ended July 31, 2006 and 2005,
respectively.
Domestic and International net sales are net of intercompany sales of $110.0
million and $105.3 million for the six months ended July 31, 2006 and 2005,
respectively.
Total Assets
------------------------------------------------
July 31, 2006 January 31, 2006 July 31, 2005
------------- ---------------- -------------
Domestic $353,226 $391,310 $276,343
International 195,884 158,582 210,400
-------- -------- --------
Consolidated total $549,110 $549,892 $486,743
======== ======== ========
11
Long-Lived Assets
------------------------------------------------
July 31, 2006 January 31, 2006 July 31, 2005
------------- ---------------- -------------
Domestic $37,126 $37,903 $38,932
International 14,805 14,265 13,755
------- ------- -------
Consolidated total $51,931 $52,168 $52,687
======= ======= =======
NOTE 5 - 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 over five years. For the three months ended July 31, 2006 and 2005,
the Company recorded an expense related to the SERP of $0.1 million for each
period. For the six months ended July 31, 2006 and 2005, the Company recorded an
expense related to the SERP of $0.3 million for each period.
NOTE 6 - INVENTORIES
Inventories consist of the following (in thousands):
July 31, January 31, July 31,
2006 2006 2005
-------- ----------- --------
Finished goods $142,594 $135,160 $128,746
Component parts 65,392 59,325 68,251
Work-in-process 7,475 4,097 6,050
-------- -------- --------
$215,461 $198,582 $203,047
======== ======== ========
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 25,661,000 and 25,241,000 for the three months ended July 31, 2006 and
2005, respectively. For diluted earnings per share, these amounts were increased
by 923,000 and 885,000 for the three months ended July 31, 2006 and 2005,
respectively, due to potentially dilutive common stock equivalents issuable
under the Company's stock option plan and restricted stock grants.
The weighted-average number of shares outstanding for basic earnings per share
were 25,550,000 and 25,148,000 for the six months ended July 31, 2006 and 2005,
respectively. For diluted earnings per share, these amounts were increased by
956,000 and 926,000 for the six months ended July 31, 2006 and 2005,
respectively, due to potentially dilutive common stock equivalents issuable
under the Company's stock option plan and restricted stock grants.
12
NOTE 8 - COMMITMENTS AND CONTINGENCIES
At July 31, 2006, the Company had outstanding letters of credit totaling $1.2
million with expiration dates through August 31, 2007. One bank in the domestic
bank group has issued irrevocable standby letters of credit for retail and
operating facility leases to various landlords, for the administration of the
Movado Boutique private-label credit card and Canadian payroll to the Royal Bank
of Canada.
As of July 31, 2006, two European banks have guaranteed obligations to third
parties on behalf of two of the Company's foreign subsidiaries in the amount of
$3.3 million in various foreign currencies.
The Company is involved from time to time in legal claims involving trademarks
and intellectual property, contracts, employee relations and other matters
incidental to the Company's business. Although the outcome of such matters
cannot be determined with certainty, the Company's general counsel and
management believe that the final outcome would not have a material effect on
the Company's consolidated financial position, results of operations or cash
flows.
NOTE 9 - RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes (an
interpretation of FASB Statement No. 109)" which is effective for fiscal years
beginning after December 15, 2006. This interpretation clarifies the accounting
for uncertainty in income taxes recognized in the financial statements by
prescribing a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. The Company is currently evaluating the impact of this
interpretation.
13
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, the ability to secure and protect trademarks, patents and other
intellectual property rights, the ability to lease new stores on suitable terms
in desired markets and to complete construction on a timely basis, continued
availability to the Company of financing and credit on favorable terms, business
disruptions, disease, general risks associated with doing business outside the
United States including, without limitation, import duties, tariffs, quotas,
political and economic stability, and success of hedging strategies with respect
to currency exchange rate fluctuations.
These risks and uncertainties, along with the risk factors discussed under Item
1A "Risk Factors" in the Company's Annual Report on Form 10-K, should be
considered in evaluating any forward-looking statements contained in this
Quarterly Report on Form 10-Q or incorporated by reference herein. All
forward-looking statements speak only as of the date of this report or, in the
case of any document incorporated by reference, the date of that document. All
subsequent written and oral forward-looking statements attributable to the
Company or any person acting on its behalf are qualified by the cautionary
statements in this section. The Company undertakes no obligation to update or
publicly release any revisions to forward-looking statements to reflect events,
circumstances or changes in expectations after the date of this report.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of
14
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements. These estimates and
assumptions also affect the reported amounts of revenues and expenses. Estimates
by their nature are based on judgments and available information. Therefore,
actual results could materially differ from those estimates under different
assumptions and conditions.
Critical accounting policies are those that are most important to the portrayal
of the Company's financial condition and the results of operations and require
management's most difficult, subjective and complex judgments as a result of the
need to make estimates about the effect of matters that are inherently
uncertain. The Company's most critical accounting policies have been discussed
in the Company's Annual Report on Form 10-K for the year ended January 31, 2006.
In applying such policies, management must use significant estimates that are
based on its informed judgment. Because of the uncertainty inherent in these
estimates, actual results could differ from estimates used in applying the
critical accounting policies. Changes in such estimates, based on more accurate
future information, may affect amounts reported in future periods.
As of July 31, 2006, except as noted below, there have been no material changes
to any of the critical accounting policies as disclosed in its Annual Report on
Form 10-K for the fiscal year ended January 31, 2006.
On February 1, 2006, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 123(R), "Share-Based Payment" ("SFAS No.
123(R)"), electing to use the modified prospective application transition
method, and accordingly, prior period financial statements have not been
restated. Under this method, the fair value of all employee stock options
granted after adoption and the unvested portion of previously granted awards
must be recognized in the Consolidated Statements of Income. Prior to February
1, 2006, employee stock option grants were accounted for under the intrinsic
value method, which measures compensation cost as the excess, if any, of the
quoted market price of the stock at grant date over the amount an employee must
pay to acquire the stock. Accordingly, compensation expense had not been
recognized for employee stock options granted at or above fair value.
Overview
The Company divides its watch business into distinct categories. The luxury
category is comprised of the Ebel and Concord brands. The accessible luxury
category is comprised of the Movado and ESQ brands. The licensed brands category
represents all brands distributed under licensing agreements and includes Coach,
Hugo Boss and Tommy Hilfiger.
Results of operations for the three months ended July 31, 2006 as compared to
the three months ended July 31, 2005
Net Sales: Comparative net sales by business segment were as follows (in
thousands):
Three Months Ended
July 31,
-------------------
2006 2005
-------- --------
Wholesale:
Domestic $ 73,876 $ 69,563
International 32,232 26,095
Retail 20,480 19,668
-------- --------
Net Sales $126,588 $115,326
======== ========
15
Net sales increased by $11.3 million or 9.8% for the three months ended July 31,
2006 as compared to the three months ended July 31, 2005.
Sales in the domestic wholesale segment were $73.9 million for the three months
ended July 31, 2006 representing a 6.2% increase above prior year sales of $69.6
million. The increase of $4.3 million was attributed to higher sales in the
accessible luxury brands category. Movado sales were above prior year by $5.0
million as the brand achieved increased demand in the major chain and department
store businesses in part due to the successful launch of the Series 800 sport
collection. ESQ sales were above prior year by $1.1 million primarily due to
new door openings as the brand continues to gain positive retailer response to
the new model introductions as well as the ESQ&U marketing campaign. Sales of
both luxury brands were down by $3.4 million year over year. Ebel sales were
$1.7 million below prior year primarily the result of the timing of new product
launches in the first quarter this fiscal year compared to the second quarter of
the prior year. Concord sales decreased by $1.7 million as planned. The Company
is in the process of developing a strategic plan for the re-launch of the
Concord brand. Sales of licensed brands were above the prior year period by $1.6
million.
Sales in the international wholesale segment were $32.2 million or 23.5% above
prior year sales of $26.1 million. In the luxury brands category, sales
increased by $1.7 million. Increased sales of $2.9 million were recorded for
Ebel primarily due to the Brasilia collection launch, while Concord sales
decreased by $1.2 million for the same reasons as in the domestic wholesale
segment. In the accessible luxury brands category, Movado sales were below prior
year by $1.1 million due to planned reductions in the brand's overseas
distribution. In the licensed brands category, sales were above prior year by
$6.0 million. The licensed brands growth was primarily due to the launch of the
new collection of Hugo Boss watches, which did not contribute significantly to
revenues in the prior year.
Sales in the retail segment were $20.5 million or 4.1% above prior year sales of
$19.7 million. The increase was driven by an overall 20.9% increase in Movado
Boutique sales. This was the result of a 9.3% comparable store sales increase in
the Movado Boutiques along with sales from four non-comparable stores year over
year. Sales by the Company's outlet stores were below prior year by 7.1%. This
was the result of an 8.7% comparable store sales decrease. The Company operated
28 Movado Boutiques and 29 outlet stores at July 31, 2006 compared to 27 Movado
Boutiques and 28 outlet stores at July 31, 2005.
The Company considers comparable store sales to be sales of stores that were
open as of February 1st of the last year through January 31st of the current
year. The Company had 24 comparable Movado Boutiques and 26 comparable outlet
stores for purposes of the three months ended July 31, 2006. The sales from
stores that have been relocated, renovated or refurbished are included in the
calculation of comparable store sales. The method of calculating comparative
store sales varies across the retail industry. As a result, the calculation of
comparative store sales may not be the same as measures reported by other
companies.
Gross Profit. Gross profit for the three months ended July 31, 2006 was $78.5
million or 62.0% of net sales as compared to $70.0 million or 60.7% of net sales
for the three months ended July 31, 2005. The increase in gross profit of $8.5
million was primarily the result of the higher sales volume along with increases
generated from the margin percentage improvement. The increase in gross profit
as a percentage of sales was driven by higher margins in the Movado Boutiques
due to both product mix and better jewelry margins. In addition, increases were
recorded across most brands largely due to higher margin percentages on new
product introductions.
Selling, General and Administrative ("SG&A"). Selling, general and
administrative expenses for the three months ended July 31, 2006 were $64.4
million or 50.9% of net sales as compared to $57.7 million or 50.0% of net sales
for the three months ended July 31, 2005. The dollar increase reflects spending
primarily to invest in the Company's growth initiatives, including higher
marketing spending of $1.3 million to support the sales
16
growth initiatives, added spending of $0.6 million in support of the retail
expansion and higher payroll and related expenses of $3.1 million reflecting
salary increases, increased headcount to support the growth for both new and
existing brands and higher equity compensation costs. In addition, as a result
of the consolidation of the Company's majority-owned joint venture with TWC SA
("TWC") established to distribute the licensed brands in France and Germany,
$0.7 million of expense was included in the consolidated results.
Wholesale Operating Income. Operating income in the wholesale segment increased
by $1.0 million to $13.2 million. The increase was the net result of higher
gross profit of $7.2 million, partially offset by the increase in SG&A expenses
of $6.2 million.
The higher gross margin of $7.2 million was the result of the increase in net
sales of $10.5 million as well as improved gross margin percentage in most
brands largely due to higher margins on new product introductions. The increase
in the SG&A expenses of $6.2 million was primarily due to higher marketing
spending of $1.3 million to support the sales growth initiatives and higher
payroll and related expenses of $3.1 million reflecting salary increases,
increased headcount to support the growth for both new and existing brands and
higher equity compensation costs. In addition, as a result of the consolidation
of the Company's majority-owned joint venture with TWC, $0.7 million of expense
was recorded in the wholesale segment's results.
Retail Operating Income. Operating income of $0.9 million and $0.1 million were
recorded in the retail segment for the three months ended July 31, 2006 and
2005, respectively.
The increase in operating income was the net result of higher gross profit of
$1.4 million offset by higher SG&A expenses of $0.6 million. The increased gross
profit was primarily attributed to improved margin percentage in the Movado
Boutiques. The higher SG&A expenses were primarily the result of added spending
for the seven non-comparable stores.
Interest Expense. Interest expense for the three months ended July 31, 2006 and
2005 was $0.9 million for each period. Average borrowings were $99.3 million at
an average borrowing rate of 3.7% for the three months ended July 31, 2006
compared to average borrowings of $72.1 million at an average rate of 5.2% for
the three months ended July 31, 2005. The lower average borrowing rate was due
to the shifting of debt from the U.S. to Switzerland, which is at a more
favorable borrowing rate.
Interest Income. Interest income was approximately $0.6 million for the three
months ended July 31, 2006 as compared to approximately $40 thousand for the
three months ended July 31, 2005. The repatriated foreign earnings of $150.0
million in the fourth quarter of fiscal year 2006 under the American Jobs
Creation Act of 2004 resulted in significantly higher cash balances in the
United States. The cash invested in the United States generated interest income
at the rate of 4.9%.
Income Taxes. The Company recorded a tax expense of $2.4 million for the three
months ended July 31, 2006 as compared to a tax expense of $2.9 million for the
three months ended July 31, 2005. Taxes were recorded at an effective tax rate
of 17.5% and 25.0% for the three months ended July 31, 2006 and 2005,
respectively. The lower effective tax rate was the result of the Company's
adoption of tax planning strategies in Switzerland which will enable it to
utilize a greater portion of the acquired Ebel net operating loss carryforward.
Net Income. For the three months ended July 31, 2006, the Company recorded net
income of $11.3 million as compared to $8.6 million for the three months ended
July 31, 2005.
17
Results of operations for the six months ended July 31, 2006 as compared to the
six months ended July 31, 2005
Net Sales: Comparative net sales by business segment were as follows (in
thousands):
Six Months Ended
July 31,
-------------------
2006 2005
-------- --------
Wholesale:
Domestic $129,688 $122,487
International 57,422 45,776
Retail 37,222 34,819
-------- --------
Net Sales $224,332 $203,082
======== ========
Net sales increased by $21.3 million or 10.5% for the six months ended July 31,
2006 as compared to the six months ended July 31, 2005.
Sales in the domestic wholesale segment were $129.7 million or 5.9% above prior
year sales of $122.5 million. The increase of $7.2 million was primarily
attributed to higher sales in the accessible luxury brands. Movado sales were
above prior year by $7.2 million as major chain and department stores had
increased sell through at retail. ESQ sales were above prior year by $1.9
million primarily due to new door openings as the brand continues to gain
positive retailer response to the new model introductions as well as the ESQ&U
marketing campaign. In the luxury brands category, Ebel sales were relatively
flat year over year while Concord sales declined by $3.9 million as planned. The
Company is in the process of developing a strategic plan for the re-launch of
the Concord brand. Sales in the licensed brands category were above the prior
year period by $1.5 million.
Sales in the international wholesale segment were $57.4 million or 25.4% above
prior year sales of $45.8 million. In the luxury brands category, sales
increased by $6.1 million. Increased sales of $8.4 million were recorded for
Ebel primarily due to the Brasilia collection launch, while lower sales of $2.3
million were recorded in Concord for the same reasons as in the domestic
wholesale segment. In the accessible luxury brands category, Movado sales were
below prior year by $2.6 million due to planned reductions in the brand's
overseas distribution. In the licensed brands category, sales were above prior
year by $8.7 million primarily driven by the launch of the new collection of
Hugo Boss watches, which did not contribute significantly to revenues in the
prior year.
Sales in the retail segment were $37.2 million or 6.9% above prior year sales of
$34.8 million. The increase was driven by an overall 16.6% increase in Movado
Boutique sales. This was the result of a 7.0% comparable store sales increase in
the Movado Boutiques along with sales from four non-comparable stores year over
year. Sales by the Company's outlet stores were below prior year by 0.9%. This
was the result of a 2.6% comparable store sales decrease somewhat offset by
higher sales from non-comparable stores year over year. The Company operated 28
Movado Boutiques and 29 outlet stores at July 31, 2006 compared to 27 Movado
Boutiques and 28 outlet stores at July 31, 2005.
Gross Profit. Gross profit for the six months ended July 31, 2006 was $138.1
million or 61.6% of net sales as compared to $122.8 million or 60.5% of net
sales for the six months ended July 31, 2005. The increase in gross profit of
$15.3 million was primarily the result of the higher sales volume. The increase
in gross profit as a
18
percentage of sales was driven by higher margins in the Movado Boutiques due to
both product mix and better jewelry margins. In addition, percentage increases
were recorded across most brands largely due to new product introductions.
Selling, General and Administrative. Selling, general and administrative
expenses for the six months ended July 31, 2006 were $120.6 million or 53.8% of
net sales as compared to $108.4 million or 53.4% of net sales for the six months
ended July 31, 2005. The increase reflects spending primarily to invest in the
Company's growth initiatives, including higher marketing spending of $2.5
million to support the sales growth initiatives, added spending of $1.2 million
in support of the retail expansion and higher payroll and related expenses of
$5.2 million reflecting salary increases, increased headcount to support the
growth for both new and existing brands and higher equity compensation
costs. In addition, as a result of the consolidation of the Company's
majority-owned joint venture with TWC, $1.1 million of expense was included in
the consolidated results.
Wholesale Operating Income. Operating income in the wholesale segment increased
by $2.0 million to $17.9 million. The increase was the net result of higher
gross profit of $13.0 million, partially offset by the increase in SG&A expenses
of $11.0 million.
The higher gross margin of $13.0 million was primarily the result of the
increase in net sales of $18.8 million. The increase in the SG&A expenses of
$11.0 million was primarily due to higher marketing spending of $2.5 million to
support the sales growth initiatives and higher payroll and related expenses of
$5.2 million reflecting salary increases, increased headcount to support the
growth for both new and existing brands and higher equity compensation costs.
In addition, as a result of the consolidation of the Company's majority-owned
joint venture with TWC, $1.1 million of expense was recorded in the wholesale
segment's results.
Retail Operating Loss. Operating losses of $0.4 million and $1.5 million were
recorded in the retail segment for the six months ended July 31, 2006 and 2005,
respectively.
The decrease in operating loss was the net result of higher gross profit of $2.3
million offset by higher SG&A expenses of $1.2 million. The increased gross
profit was primarily attributable to improved margin percentage in the Movado
Boutiques. The higher SG&A expenses were primarily the result of added spending
for the seven non-comparable stores.
Interest Expense. Interest expense for the six months ended July 31, 2006 and
2005 was $1.9 million and $1.8 million, respectively. Average borrowings were
$102.8 million at an average borrowing rate of 3.6% for the six months ended
July 31, 2006 compared to average borrowings of $61.9 million at an average rate
of 5.4% for the six months ended July 31, 2005. The lower average borrowing rate
was due to the shifting of debt from the U.S. to Switzerland, which is at a more
favorable borrowing rate.
Interest Income. Interest income was $1.5 million for the six months ended July
31, 2006 as compared to $0.1 million for the six months ended July 31, 2005. The
repatriated foreign earnings of $150.0 million in the fourth quarter of fiscal
year 2006 under the American Jobs Creation Act of 2004 resulted in significantly
higher cash balances in the United States. The cash invested in the United
States generated interest income at the rate of 4.7%.
Income Taxes. The Company recorded a tax expense of $3.0 million for the six
months ended July 31, 2006 as compared to a tax expense of $3.2 million for the
six months ended July 31, 2005. Taxes were recorded at an effective tax rate of
17.5% and 25.0% for the six months ended July 31, 2006 and 2005, respectively.
The lower effective tax rate is the result of the Company's adoption of tax
planning strategies in Switzerland which will enable it to utilize a greater
portion of the acquired Ebel net operating loss carryforward.
19
Net Income. For the six months ended July 31, 2006, the Company recorded net
income of $14.2 million as compared to $9.5 million for the six months ended
July 31, 2005.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities was $24.4 million for the six months ended
July 31, 2006 as compared to $25.5 million for the six months ended July 31,
2005. The cash used in operating activities reflects the historic pattern of the
Company to fund its working capital needs in the first half of the year due to
the seasonal nature of the business. For the six months ended July 31, 2006, the
most significant changes in operating assets were the increases in accounts
receivable of $17.9 million, primarily resulting from the growth in sales and an
increase of $13.1 million in inventory levels, primarily in anticipation of the
upcoming holiday selling season. In addition, $9.5 million of cash was used to
reduce total current liabilities but was offset by cash from net earnings of
$14.2 million for the six months ended July 31, 2006. For the six months ended
July 31, 2005, the most significant changes in operating assets were the
increases in accounts receivable of $3.8 million, primarily resulting from the
growth in sales and an increase of $27.1 million in inventory levels. This was
partially offset by net earnings of $9.5 million for the six months ended July
31, 2005.
Cash used in investing activities amounted to $7.2 million and $8.2 million for
the six months ended July 31, 2006 and 2005, respectively. The cash used during
both periods consisted of the capital expenditures primarily related to the
expansion and renovations of retail stores, the acquisition of tooling for new
product introductions and computer hardware and software enhancements. Capital
expenditures in the 2005 period also included the acquisition of machinery and
equipment to further automate distribution activities.
Cash used in financing activities amounted to $15.8 million for the six months
ended July 31, 2006 compared to cash provided of $34.2 million for the six
months ended July 31, 2005. Cash used in financing activities for the six months
ended July 31, 2006 was primarily to pay down long-term debt, while cash
provided in the six months ended July 31, 2005 resulted primarily from
short-term borrowings required to fund the Company's working capital needs.
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. These
notes contain certain financial covenants including an interest coverage ratio
and maintenance of consolidated net worth and certain non-financial covenants
that restrict the Company's activities regarding investments and acquisitions,
mergers, certain transactions with affiliates, creation of liens, asset
transfers, payment of dividends and limitation of the amount of debt
outstanding. At July 31, 2006, the Company was in compliance with all financial
and non-financial covenants and $25.0 million of these notes were issued and
outstanding.
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. On
October 8, 2004, the Company issued, pursuant to the Note Purchase Agreement,
4.79% Senior Series A-2004 Notes due 2011 (the "Senior Series A-2004 Notes"), in
an aggregate principal amount of $20.0 million, which will mature on October 8,
2011 and are subject to annual repayments of $5.0 million commencing on October
8, 2008. Proceeds of the Senior Series A-2004 Notes have been used by the
Company for capital expenditures, repayment of certain of its debt obligations
and general corporate purposes. These notes contain certain financial covenants,
including an interest coverage ratio and maintenance of consolidated net worth
and certain non-financial covenants that restrict the Company's activities
regarding investments and acquisitions, mergers, certain transactions with
affiliates, creation of liens, asset transfers, payment of dividends and
limitation of the amount of debt
20
outstanding. As of July 31, 2006, the Company was in compliance with all
financial and non-financial covenants and $20.0 million of these notes were
issued and outstanding.
On December 15, 2005, the Company as parent guarantor, and its Swiss
subsidiaries, MGI Luxury Group S.A. and Movado Watch Company SA as borrowers,
entered into a credit agreement with JPMorgan Chase Bank, N.A., JPMorgan
Securities, Inc., Bank of America, N.A., The Bank of New York and Citibank, N.A.
(the "Swiss Credit Agreement") which provides for a revolving credit facility of
90.0 million Swiss francs and matures on December 15, 2010. The obligations of
the Company's two Swiss subsidiaries under this credit agreement are guaranteed
by the Company under a Parent Guarantee, dated as of December 15, 2005, in favor
of the lenders. The Swiss Credit Agreement contains financial covenants,
including an interest coverage ratio, average debt coverage ratio and
limitations on capital expenditures and certain non-financial covenants that
restrict the Company's activities regarding investments and acquisitions,
mergers, certain transactions with affiliates, creation of liens, asset
transfers, payment of dividends and limitation of the amount of debt
outstanding. Borrowings under the Swiss Credit Agreement bear interest at a rate
equal to the LIBOR (as defined in the Swiss Credit Agreement) plus a margin
ranging from .50% per annum to .875% per annum (depending upon a leverage
ratio). As of July 31, 2006, the Company was in compliance with all financial
and non-financial covenants and had 64.0 million Swiss francs, with a dollar
equivalent of $52.0 million, outstanding under this revolving credit facility.
On December 15, 2005, the Company and its Swiss subsidiaries, MGI Luxury Group
S.A. and Movado Watch Company SA, entered into a credit agreement with JPMorgan
Chase Bank, N.A., JPMorgan Securities, Inc., Bank of America, N.A., The Bank of
New York and Citibank, N.A. (the "US Credit Agreement") which provides for a
revolving credit facility of $50.0 million (including a sublimit for borrowings
in Swiss francs of up to $25.0 million) with a provision to allow for an
increase of an additional $50.0 million subject to certain terms and conditions.
The US Credit Agreement will mature on December 15, 2010. The obligations of MGI
Luxury Group S.A. and Movado Watch Company SA are guaranteed by the Company
under a Parent Guarantee, dated as of December 15, 2005, in favor of the
lenders. The obligations of the Company are guaranteed by certain domestic
subsidiaries of the Company under subsidiary guarantees, in favor of the
lenders. The US Credit Agreement contains financial covenants, including an
interest coverage ratio, average debt coverage ratio and limitations on capital
expenditures and certain non-financial covenants that restrict the Company's
activities regarding investments and acquisitions, mergers, certain transactions
with affiliates, creation of liens, asset transfers, payment of dividends and
limitation of the amount of debt outstanding. Borrowings under the US Credit
Agreement bear interest, at the Company's option, at a rate equal to the
Adjusted LIBOR (as defined in the US Credit Agreement) plus a margin ranging
from .50% per annum to .875% per annum (depending upon a leverage ratio), or the
Alternate Base Rate (as defined in the US Credit Agreement). As of July 31,
2006, the Company was in compliance with all financial and non-financial
covenants, and there were no outstanding borrowings against this line.
On June 16, 2006, the Company renewed a line of credit letter agreement with
Bank of America and an amended and restated promissory note in the principal
amount of up to $20.0 million payable to Bank of America, originally dated
December 12, 2005. Pursuant to the line of credit letter agreement, Bank of
America will consider requests for short-term loans and documentary letters of
credit for the importation of merchandise inventory, the aggregate amount of
which at any time outstanding shall not exceed $20.0 million. The Company's
obligations under the agreement are guaranteed by its subsidiaries, Movado
Retail Group, Inc. and Movado LLC. Pursuant to the amended and restated
promissory note, the Company promised to pay to Bank of America $20.0 million,
or such lesser amount as may then be the unpaid balance of all loans made by
Bank of America to the Company thereunder, in immediately available funds upon
the maturity date of June 16, 2007. The Company has the right to prepay all or
part of any outstanding amounts under the promissory note without penalty at any
time prior to the maturity date. The amended and restated promissory note bears
interest at an annual rate equal to either (i) a floating rate equal to the
prime rate or (ii) such fixed rate as may be agreed upon
21
by the Company and Bank of America for an interest period which is also then
agreed upon. The amended and restated promissory note contains various
representations and warranties and events of default that are customary for
instruments of that type. As of July 31, 2006, there were no outstanding
borrowings against this line.
On July 31, 2006, the Company renewed a promissory note, originally dated
December 13, 2005, in the principal amount of up to $37.0 million, at a revised
amount of up to $7.0 million, payable to JPMorgan Chase Bank, N.A. ("Chase").
Pursuant to the promissory note, the Company promised to pay to Chase $7.0
million, or such lesser amount as may then be the unpaid balance of each loan
made or letter of credit issued by Chase to the Company thereunder, upon the
maturity date of July 31, 2007. The Company has the right to prepay all or part
of any outstanding amounts under the promissory note without penalty at any time
prior to the maturity date. The promissory note bears interest at an annual rate
equal to either (i) a floating rate equal to the prime rate, (ii) a fixed rate
equal to an adjusted LIBOR plus 0.625% or (iii) a fixed rate equal to a rate of
interest offered by Chase from time to time on any single commercial borrowing.
The promissory note contains various events of default that are customary for
instruments of that type. In addition, it is an event of default for any
security interest or other encumbrance to be created or imposed on the Company's
property, other than as permitted in the lien covenant of the US Credit
Agreement. Chase issued 11 irrevocable standby letters of credit for retail and
operating facility leases to various landlords, for the administration of the
Movado Boutique private-label credit card and Canadian payroll to the Royal Bank
of Canada totaling $1.2 million with expiration dates through August 31, 2007.
As of July 31, 2006, there were no outstanding borrowings against this
promissory note.
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 8.0 million Swiss francs, with dollar equivalents of $6.5 million and
$6.2 million at July 31, 2006 and 2005, respectively. As of July 31, 2006, two
European banks have guaranteed obligations to third parties on behalf of two of
the Company's foreign subsidiaries in the amount of $3.3 million in various
foreign currencies. As of July 31, 2006, there were no outstanding borrowings
against these lines.
The Company paid dividends per share of $0.06 or approximately $3.1 million, for
the six months ended July 31, 2006 and $0.05 per share or approximately $2.5
million for the six months ended July 31, 2005.
Cash and cash equivalents at July 31, 2006 amounted to $78.1 million compared to
$50.3 million at July 31, 2005. The increase in cash and cash equivalents
primarily relates to the Company's borrowings in the fourth quarter of fiscal
2006 to repatriate foreign earnings to the United States under the American Jobs
Creation Act of 2004.
Management believes that the cash on hand in addition to the expected cash flow
from operations and the Company's short-term borrowing capacity will be
sufficient to meet its working capital needs for at least the next 12 months.
Off-Balance Sheet Arrangements
The Company does not have off-balance sheet financing or unconsolidated
special-purpose entities.
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RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes (an
interpretation of FASB Statement No. 109)" which is effective for fiscal years
beginning after December 15, 2006. This interpretation clarifies the accounting
for uncertainty in income taxes recognized in the financial statements by
prescribing a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. The Company is currently evaluating the impact of this
interpretation.
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Item 3. Quantitative and Qualitative Disclosure about Market Risks
Foreign Currency and Commodity Price Risks
A significant portion of the Company's purchases are denominated in Swiss
francs. The Company reduces its exposure to the Swiss franc exchange rate risk
through a hedging program. Under the hedging program, the Company manages most
of its foreign currency exposures on a consolidated basis, which allows it to
net certain exposures and take advantage of natural offsets. The Company uses
various derivative financial instruments to further reduce the net exposures to
currency fluctuations, predominately forward and option contracts. These
derivatives either (a) are used to hedge the Company's Swiss franc liabilities
and are recorded at fair value with the changes in fair value reflected in
earnings or (b) are documented as cash flow hedges with the gains and losses on
this latter hedging activity first reflected in other comprehensive income, and
then later classified into earnings in accordance with Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"), as amended by SFAS No. 137, SFAS No. 138 and SFAS
No. 149. In both cases, the earnings impact is partially offset by the effects
of currency movements on the underlying hedged transactions. If the Company did
not engage in a hedging program, any change in the Swiss franc to local currency
would have an equal effect on the Company's cost of sales. In addition, the
Company hedges its Swiss franc payable exposure with forward contracts. As of
July 31, 2006, the Company's entire net forward contracts hedging portfolio
consisted of 128.0 million Swiss francs equivalent for various expiry dates
ranging through July 20, 2007. If the Company were to settle its Swiss franc
forward contracts at July 31, 2006, the net result would have been a gain of
$0.9 million, net of tax of $0.6 million. As of July 31, 2006, the Company had
31.0 million Swiss franc option contracts related to cash flow hedges for
various expiry dates ranging through April 30, 2007. If the Company were to
settle its Swiss franc option contracts at July 31, 2006, the net result would
have been a net loss of approximately $70 thousand.
The Company's Board of Directors authorized the hedging of the Company's Swiss
franc denominated investment in its wholly-owned Swiss subsidiaries using
purchase options under certain limitations. These hedges are treated as net
investment hedges under SFAS No. 133. As of July 31, 2006, the Company did not
hold a purchased option hedge portfolio related to net investment hedging.
Commodity Risk
Additionally, the Company has a hedging program related to gold used in the
manufacturing of the Company's watches. Under this hedging program, the Company
purchases various commodity derivative instruments, primarily future contracts.
These derivatives are documented as SFAS No. 133 cash flow hedges, and gains and
losses on these derivative instruments are first reflected in other
comprehensive income, and later reclassified into earnings, partially offset by
the effects of gold market price changes on the underlying actual gold
purchases. If the Company did not engage in a gold hedging program, any changes
in the gold price would have an equal effect on the Company's cost of sales. The
Company did not hold any futures contracts in its gold hedge portfolio related
to cash flow hedges as of July 31, 2006.
Debt and Interest Rate Risk
In addition, the Company has certain debt obligations with variable interest
rates, which are based on Swiss LIBOR plus a fixed additional interest rate. The
Company does not hedge these interest rate risks. The Company also has certain
debt obligations with fixed interest rates. The differences between the market
based interest rates at July 31, 2006, and the fixed rates were unfavorable. The
Company believes that a 1% change in interest rates would affect the Company's
net income by approximately $0.5 million.
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Item 4. Controls and Procedures
Evaluation of Disclosure 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 Company's disclosure controls and procedures, as such
terms are defined in Rule 13a-15(e) under the Securities Exchange Act, as
amended. Based on that evaluation, the Chief Executive Officer and the Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective as of the end of the period covered by this report.
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.
Changes in Internal Control Over Financial Reporting
There has been no change in the Company's internal control over financial
reporting during the three months ended July 31, 2006, that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
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PART II - OTHER INFORMATION
Item 1A. Risk Factors
As of July 31, 2006, there have been no material changes to any of the risk
factors previously reported in its Annual Report on Form 10-K for the
fiscal year ended January 31, 2006.
Item 6. Exhibits
10.1 Line of Credit Letter Agreement dated as of June 16, 2006 between the
Registrant and Bank of America, N.A. and Amended and Restated
Promissory Note dated as of June 16, 2006 to Bank of America, N.A.
10.2 Promissory Note dated as of July 31, 2006 to JPMorgan Chase Bank, N.A.
31.1 Certification of the Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
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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 7, 2006 By: /s/ Eugene J. Karpovich
------------------------------------
Eugene J. Karpovich
Senior Vice President and
Chief Financial Officer
(Chief Financial Officer)
(Duly Authorized Officer)
/s/ Ernest R. LaPorte
------------------------------------
Ernest R. LaPorte
Vice President of Finance
(Principal Accounting Officer)
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