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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 October 31, 2005
[ ] 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)
<Table>
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)
</Table>
(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 Exchange Act). Yes [X] No [ ]
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 November 30, 2005 were 18,565,183 and 6,771,909,
respectively.
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MOVADO GROUP, INC.
Index to Quarterly Report on Form 10-Q
October 31, 2005
Page
----
Part I Financial Information (Unaudited)
Item 1. Consolidated Balance Sheets at October 31, 2005, January 31, 2005 and October 31, 2004 3
Consolidated Statements of Income for the three months and nine months ended October
31, 2005 and 2004 4
Consolidated Statements of Cash Flows for the nine months ended October 31, 2005 and
2004 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 22
Item 4. Controls and Procedures 23
Part II Other Information
Item 1. Legal Proceedings 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 6. Exhibits 24
Signatures 25
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
MOVADO GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
October 31, January 31, October 31,
2005 2005 2004
----------- ----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 56,064 $ 63,782 $ 35,870
Trade receivables, net 144,484 102,622 137,861
Inventories, net 211,442 187,890 192,811
Other 31,622 34,515 42,540
-------- -------- --------
Total current assets 443,612 388,809 409,082
Property, plant and equipment, net 49,109 50,283 50,105
Other 35,449 37,858 39,972
-------- -------- --------
Total assets $528,170 $476,950 $499,159
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Loans payable to banks $ 44,000 $ -- $ 16,300
Current portion of long-term debt -- -- 5,000
Accounts payable 42,016 38,488 41,928
Accrued liabilities 49,135 39,618 47,237
Current taxes payable 1,721 -- 2,830
Deferred taxes 5,334 5,250 6,081
-------- -------- --------
Total current liabilities 142,206 83,356 119,376
Long-term debt 45,000 45,000 45,000
Deferred and non-current income taxes 9,741 14,827 15,291
Other liabilities 17,629 17,209 13,281
-------- -------- --------
Total liabilities 214,576 160,392 192,948
-------- -------- --------
Commitments and contingencies (Note 9)
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; 23,178,828, 22,580,459 and 22,031,474
shares issued, respectively 232 226 220
Class A Common Stock, $0.01 par value,
30,000,000 shares authorized; 6,773,258, 6,801,812 and 6,803,161 68 68 68
shares issued and outstanding, respectively
Capital in excess of par value 105,023 100,289 92,754
Retained earnings 234,823 214,953 208,771
Accumulated other comprehensive income 24,223 48,707 46,836
Treasury Stock, 4,613,645, 4,433,553 and 4,092,588
shares, respectively, at cost (50,775) (47,685) (42,438)
-------- -------- --------
Total shareholders' equity 313,594 316,558 306,211
-------- -------- --------
Total liabilities and shareholders' equity $528,170 $476,950 $499,159
======== ======== ========
See Notes to Consolidated Financial Statements
3
MOVADO GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
Three Months Nine Months
Ended October 31, Ended October 31,
------------------- -------------------
2005 2004 2005 2004
-------- -------- -------- --------
Net sales $141,736 $127,023 $344,818 $298,998
Cost of sales 55,563 49,882 135,821 120,494
-------- -------- -------- --------
Gross profit 86,173 77,141 208,997 178,504
Selling, general and administrative 67,163 61,157 175,563 152,065
-------- -------- -------- --------
Operating income 19,010 15,984 33,434 26,439
Other income, net (Note 10) 1,008 -- 1,008 1,444
Interest expense, net 1,208 872 2,901 2,380
-------- -------- -------- --------
Income before income taxes 18,810 15,112 31,541 25,503
Provision for income taxes 4,702 3,778 7,885 6,376
-------- -------- -------- --------
Net income $ 14,108 $ 11,334 $ 23,656 $ 19,127
======== ======== ======== ========
Earnings per share:
Basic $ 0.56 $ 0.46 $ 0.94 $ 0.78
======== ======== ======== ========
Diluted $ 0.54 $ 0.44 $ 0.91 $ 0.75
======== ======== ======== ========
Weighted average shares outstanding:
Basic 25,328 24,756 25,209 24,646
======== ======== ======== ========
Diluted 26,211 25,621 26,123 25,497
======== ======== ======== ========
Dividends declared per share $ 0.05 $ 0.04 $ 0.15 $ 0.12
======== ======== ======== ========
See Notes to Consolidated Financial Statements
4
MOVADO GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months
Ended October 31,
-------------------
2005 2004
-------- --------
Cash flows from operating activities:
Net income $ 23,656 $ 19,127
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 11,158 8,601
Deferred income taxes (1,860) --
Provision for losses on accounts receivable 900 723
Provision for losses on inventory 450 215
Gain on sale of asset held for sale (2,630) --
Loss on hedge derivatives 1,622 --
Changes in assets and liabilities:
Trade receivables (42,498) (37,760)
Inventories (29,643) (30,242)
Other current assets (734) (3,031)
Accounts payable 4,974 14,130
Accrued liabilities 5,486 9,157
Current taxes payable 1,721 2,630
Other non-current assets (1,074) (1,402)
Other non-current liabilities 442 (31)
-------- --------
Net cash used in operating activities (28,030) (17,883)
-------- --------
Cash flows from investing activities:
Capital expenditures (9,970) (10,906)
Proceeds from sale of asset held for sale 4,000 --
Acquisition of Ebel, net of cash acquired -- (43,525)
Trademarks (533) (321)
-------- --------
Net cash used in investing activities (6,503) (54,752)
-------- --------
Cash flows from financing activities:
Net proceeds from bank borrowings 44,000 26,113
Stock options exercised and other changes 1,650 2,963
Dividends paid (3,786) (2,957)
-------- --------
Net cash provided by financing activities 41,864 26,119
-------- --------
Effect of exchange rate changes on cash and cash equivalents (15,049) 303
-------- --------
Net decrease in cash and cash equivalents (7,718) (46,213)
Cash and cash equivalents at beginning of period 63,782 82,083
-------- --------
Cash and cash equivalents at end of period $ 56,064 $ 35,870
======== ========
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 2005 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 2006 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 was completed July 30, 2004.
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 was comprised of approximately $2.4
million for employee severance, $0.2 million for lease terminations, $1.7
million for exit costs related to certain promotional and purchase contracts and
$0.4 million of other liabilities. As of October 31, 2005, payments against
employee severance, lease terminations, exit costs and other liabilities
amounted to $1.8 million, $0.2 million, $1.7 million and $0.4 million,
respectively. There were no further adjustments related to the abovementioned
accruals as of October 31, 2005.
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 the nine month period
ended October 31, 2004. 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 the nine month period ended October 31, 2004. The unaudited pro
forma condensed combined statement of income for the nine month period ended
October 31, 2004 combines the historical results for the Company for the nine
month period ended October 31, 2004 and the historical results for Ebel for the
period preceding the acquisition of February 1 through February 29, 2004. The
following amounts are in thousands, except per share amounts:
6
Nine Months Ended
October 31, 2004
-----------------
Revenues $300,367
Net income $ 17,052
Basic income per share $ 0.69
Diluted income per share $ 0.67
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 valuation 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 and nine months
ended October 31, 2005 and 2004, respectively, are presented below.
For the Three Months Ended For the Nine Months Ended
October 31, October 31,
--------------------------- -------------------------
2005 2004 2005 2004
------- ------- ------- -------
(In thousands, except per share data)
Net income as reported $14,108 $11,334 $23,656 $19,127
Fair value based compensation
expense, net of taxes (277) (210) (1,788) (3,015)
------- ------- ------- -------
Pro forma net income $13,831 $11,124 $21,868 $16,112
======= ======= ======= =======
Basic earnings per share:
As reported $ 0.56 $ 0.46 $ 0.94 $ 0.78
Pro forma under SFAS No. 123 $ 0.55 $ 0.45 $ 0.87 $ 0.65
Diluted earnings per share:
As reported $ 0.54 $ 0.44 $ 0.91 $ 0.75
Pro forma under SFAS No. 123 $ 0.53 $ 0.43 $ 0.84 $ 0.63
7
NOTE 4 - COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss) for the three months and nine
months ended October 31, 2005 and 2004 are as follows (in thousands):
Three Months Ended Nine Months Ended
October 31, October 31,
------------------ ------------------
2005 2004 2005 2004
------- ------- -------- -------
Net income $14,108 $11,334 $ 23,656 $19,127
Net unrealized (loss) gain on
investments, net of tax (92) 26 62 46
Effective portion of unrealized gain (loss)
on hedging contracts, net of tax 1,393 3,181 (3,734) 907
Foreign currency translation adjustment 925 13,981 (20,812) 11,410
------- ------- -------- -------
Total comprehensive income (loss) $16,334 $28,522 ($828) $31,490
======= ======= ======== =======
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 areas: 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 October 31, 2005 and 2004:
Net Sales Operating Income (Loss)
------------------- ------------------------
2005 2004 2005 2004
-------- -------- ------- -------
Wholesale $121,932 $110,818 $18,459 $16,737
Retail 19,804 16,205 551 (753)
-------- -------- ------- -------
Consolidated total $141,736 $127,023 $19,010 $15,984
======== ======== ======= =======
Operating Segment Data for the Nine Months Ended October 31, 2005 and 2004:
Net Sales Operating Income (Loss)
------------------- -----------------------
2005 2004 2005 2004
-------- -------- ------- -------
Wholesale $290,196 $252,418 $34,370 $27,902
Retail 54,622 46,580 (936) (1,463)
-------- -------- ------- -------
Consolidated total $344,818 $298,998 $33,434 $26,439
======== ======== ======= =======
8
Total Assets
------------------------------------------------------
October 31, 2005 January 31, 2005 October 31, 2004
---------------- ---------------- ----------------
Wholesale $460,930 $415,739 $436,328
Retail 67,240 61,211 62,831
-------- -------- --------
Consolidated total $528,170 $476,950 $499,159
======== ======== ========
Geographic Area Data for the Three Months Ended October 31, 2005 and 2004:
Net Sales Operating Income
------------------- -----------------
2005 2004 2005 2004
-------- -------- ------- -------
Domestic $113,128 $ 99,211 $11,847 $ 6,513
International 28,608 27,812 7,163 9,471
-------- -------- ------- -------
Consolidated total $141,736 $127,023 $19,010 $15,984
======== ======== ======= =======
Geographic Area Data for the Nine Months Ended October 31, 2005 and 2004:
Net Sales Operating Income
------------------- -----------------
2005 2004 2005 2004
-------- -------- ------- -------
Domestic $270,435 $235,697 $16,132 $12,485
International 74,383 63,301 17,302 13,954
-------- -------- ------- -------
Consolidated total $344,818 $298,998 $33,434 $26,439
======== ======== ======= =======
Domestic and International net sales are net of intercompany sales of $74.4
million and $70.4 million for the three months ended October 31, 2005 and 2004,
respectively.
Domestic and International net sales are net of intercompany sales of $179.7
million and $186.3 million for the nine months ended October 31, 2005 and 2004,
respectively.
Total Assets
------------------------------------------------------
October 31, 2005 January 31, 2005 October 31, 2004
---------------- ---------------- ----------------
Domestic $318,238 $282,018 $301,377
International 209,932 194,932 197,782
-------- -------- --------
Consolidated total $528,170 $476,950 $499,159
======== ======== ========
9
Long-Lived Assets
------------------------------------------------------
October 31, 2005 January 31, 2005 October 31, 2004
---------------- ---------------- ----------------
Domestic $36,546 $35,010 $34,889
International 12,563 15,273 15,216
------- ------- -------
Consolidated total $49,109 $50,283 $50,105
======= ======= =======
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 over five years. For the three months ended October 31, 2005 and
2004, the Company recorded an expense related to the SERP of $0.2 million and
$0.1 million, respectively. For the nine months ended October 31, 2005 and 2004,
the Company recorded an expense related to the SERP of $0.5 million and $0.4
million, respectively.
NOTE 7 - INVENTORIES, NET
Inventories, net consist of the following (in thousands):
October 31, January 31, October 31,
2005 2005 2004
----------- ----------- -----------
Finished goods $130,950 $111,468 $110,071
Component parts 74,945 71,761 74,278
Work-in-process 5,547 4,661 8,462
-------- -------- --------
$211,442 $187,890 $192,811
======== ======== ========
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 25,328,000 and 24,756,000 for the three months ended October 31, 2005 and
2004, respectively. For diluted earnings per share, these amounts were increased
by 883,000 and 865,000 for the three months ended October 31, 2005 and 2004,
respectively, due to potentially dilutive common stock equivalents issuable
under the Company's stock option plans and restricted stock grants.
10
The weighted-average number of shares outstanding for basic earnings per share
were 25,209,000 and 24,646,000 for the nine months ended October 31, 2005 and
2004, respectively. For diluted earnings per share, these amounts were increased
by 914,000 and 851,000 for the nine months ended October 31, 2005 and 2004,
respectively, due to potentially dilutive common stock equivalents issuable
under the Company's stock option plans and restricted stock grants.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
At October 31, 2005, the Company had outstanding letters of credit totaling $1.2
million with expiration dates through August 31, 2006 compared to $0.6 million
with expiration dates through June 30, 2005 as of October 31, 2004. One bank in
the domestic bank group has issued irrevocable standby letters of credit for
retail and operating facility leases to various landlords and for Canadian
payroll to the Royal Bank of Canada.
As of October 31, 2005, a Swiss bank guaranteed one of the Company's Swiss
subsidiary's obligations to certain Swiss third parties in the amount of
approximately $3.1 million in various foreign currencies compared to $2.2
million as of October 31, 2004.
The Company is involved from time to time in legal claims involving trademarks
and intellectual property, licensing, employee relations and other matters
incidental to the Company's business. Although the outcome of such items 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 10 - OTHER INCOME, NET
The components of other income, net for the three months and nine months
ended October 31, 2005 and 2004 are as follows (in thousands):
Three Months Ended Nine Months Ended
October 31, October 31,
------------------ -----------------
2005 2004 2005 2004
------- ------- ------- -------
Gain on sale of building (a) $ 2,630 $ -- $ 2,630 $ --
Discontinued cash flow hedges (b) (1,622) -- (1,622) --
Litigation settlement (c) -- -- -- 1,444
------- ------- ------- ------
Other income, net $ 1,008 $ -- $ 1,008 $1,444
======= ======= ======= ======
(a) The Company recorded a pre-tax gain for the three months and nine months
ended October 31, 2005 of $2.6 million on the sale of a building acquired
on March 1, 2004 in the acquisition of Ebel. The building was classified
as an asset held for sale in other current assets.
(b) The Company recorded a pre-tax loss for the three months and nine months
ended October 31, 2005 of $1.6 million in other expense, representing the
impact of the discontinuation of foreign currency cash flow hedges because
it was not probable that the forecasted transactions would occur by the end
of the originally specified time period.
(c) The Company recognized income for the nine months ended October 31, 2004
from a litigation settlement with Swiss Army Brands, Inc. in the amount of
$1.4 million.
11
NOTE 11 - SUBSEQUENT EVENT
On November 21, 2005, the Company entered into a License Agreement with L.C.
Licensing, Inc. ("L.C. Licensing"), with an effective date of November 18, 2005.
The Company received an exclusive license to use the trademarks "Juicy Couture"
and "Couture Couture Los Angeles", in connection with the manufacture,
advertising, merchandising, promotion, sale and distribution of timepieces and
components. The term of the license is November 18, 2005 through December 31,
2011, with a four-year renewal period at the option of the Company, provided
that certain sales thresholds are met.
NOTE 12 - AMERICAN JOBS CREATION ACT OF 2004
The American Jobs Creation Act of 2004 ("the Act"), as enacted on October 22,
2004, provides for a temporary 85% dividends received deduction on certain
foreign earnings repatriated during a one-year period. The deduction would
result in an approximate 5.25% U.S. federal tax rate on any repatriated
earnings. To qualify for the deduction, the earnings must be reinvested in the
United States pursuant to a domestic reinvestment plan established by the
Company's Chief Executive Officer and approved by the Company's Board of
Directors. Certain other criteria in the Act, applicable Treasury Regulations
and guidance published (or that may subsequently be published) by the Internal
Revenue Service or Treasury Department, must be satisfied as well.
The Company is in the process of evaluating whether it will repatriate any
foreign earnings under the repatriation provisions of the Act and, if so, the
amount that it will repatriate. The range of reasonably possible amounts that
the Company is currently considering for repatriation, which would be eligible
for the temporary deduction, is zero to approximately $150 million. Repatriation
would result in additional income tax expense, which the Company currently
estimates to be between 4.50% and 8.50% of the repatriated amount. The Company
expects to determine the amounts and sources of foreign earnings to be
repatriated, if any, during the fourth quarter of fiscal 2006.
NOTE 13 - RECENTLY ISSUED ACCOUNTING STANDARDS
In November 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 151, "Inventory Costs", an
amendment of ARB No. 43, Chapter 4 ("SFAS No. 151"). The amendments made by SFAS
No. 151 clarify that abnormal amounts of idle facility expense, freight,
handling costs, and wasted materials (spoilage) should be recognized as
current-period charges by requiring the allocation of fixed production overheads
to inventory based on the normal capacity of the production facilities. The
guidance is effective for inventory costs incurred during fiscal years beginning
after June 15, 2005, and is not expected to have a material impact on the
Company's consolidated financial position, results of operations or cash flows.
In December 2004, the FASB issued Statement of Financial Accounting Standards
No. 123(R), "Share-Based Payment", which is a revision of FASB Statement No.
123, "Accounting for Stock-Based Compensation" ("SFAS No. 123(R)"). SFAS No.
123(R) supersedes APB Opinion No. 25, "Accounting for Stock Issued to
Employees", and amends FASB Statement No. 95, "Statement of Cash Flows".
Generally, the approach in SFAS No. 123(R) is similar to the approach described
in SFAS No. 123. SFAS No. 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the income
statement based on their fair values. Pro forma disclosure is no longer an
alternative. Public entities are required to apply SFAS No. 123(R) as of the
first annual reporting period that begins after June 15, 2005.
12
The Company continues to use the intrinsic value based method of accounting for
share-based payments. The Company uses the Black-Scholes valuation model to
estimate the value of stock options granted to employees. SFAS No. 123(R)
requires the benefits of tax deductions in excess of recognized compensation
cost to be reported as a financing cash flow, rather than as an operating cash
flow as required under current literature. This requirement may reduce net
operating cash flows and increase net financing cash flows in periods after
adoption. The Company is currently assessing the impact of SFAS No. 123(R) on
its consolidated financial position, results of operations and cash flows.
In December 2004, the FASB issued Statement of Financial Accounting Standards
No. 153, "Exchanges of Nonmonetary Assets--An Amendment of APB Opinion No. 29,
Accounting for Nonmonetary Transactions" ("SFAS No. 153"). SFAS No. 153
eliminates the exception from fair value measurement for nonmonetary exchanges
of similar productive assets in paragraph 21(b) of APB Opinion No. 29,
"Accounting for Nonmonetary Transactions", and replaces it with an exception for
exchanges that do not have commercial substance. SFAS No. 153 specifies that a
nonmonetary exchange has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the exchange. SFAS
No. 153 is effective for the fiscal periods beginning after June 15, 2005. The
adoption of SFAS No. 153 is not expected to have a material impact on the
Company's consolidated financial position, results of operations or cash flows.
In March 2005, the FASB issued Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations" ("FIN 47"). FIN 47 clarifies that the
term "conditional asset retirement obligation" as used in SFAS No. 143,
"Accounting for Asset Retirement Obligations," refers to a legal obligation to
perform an asset retirement activity in which the timing and (or) method of
settlement are conditional on a future event that may or may not be within the
control of the entity. FIN 47 is effective no later than the end of fiscal years
ending after December 15, 2005. The Company is currently assessing the impact of
FIN 47 on its consolidated financial position, results of operations and cash
flows.
In June 2005, the Emerging Issues Task Force ("EITF") reached consensus on EITF
05-6, "Determining the Amortization Period for Leasehold Improvements". Under
EITF 05-6, leasehold improvements placed in service significantly after and not
contemplated at or near the beginning of the lease term, should be amortized
over the lesser of the useful life of the assets or a term that includes
renewals that are reasonably assured at the date the leasehold improvements are
purchased. EITF 05-6 is effective for periods beginning after June 29, 2005. The
adoption of EITF 05-6 did not have a material impact on the Company's
consolidated financial position, results of operations or cash flows.
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, 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
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the 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
14
for the year ended January 31, 2005. 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 October 31, 2005, 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, 2005.
Results of operations for the three months ended October 31, 2005 as compared to
the three months ended October 31, 2004
Net Sales: Comparative net sales by business segment were as follows (in
thousands):
Three Months Ended
October 31,
-------------------
2005 2004
-------- --------
Wholesale:
Domestic $ 93,324 $ 83,006
International 28,608 27,812
Retail 19,804 16,205
-------- --------
Net Sales $141,736 $127,023
======== ========
Net sales increased by $14.7 million or 11.6% for the three months ended October
31, 2005 as compared to the three months ended October 31, 2004. Sales in the
wholesale segment increased 10.0% to $121.9 million versus $110.8 million in the
prior year.
The domestic wholesale business was $93.3 million for the three months ended
October 31, 2005, representing an increase of $10.3 million or 12.4% above prior
year. Movado and ESQ brand sales increased by $4.4 million and $3.1 million,
respectively, primarily the result of increased demand. Ebel sales increased by
$2.6 million primarily due to sales of newly introduced products.
Net sales in the international wholesale business were $28.6 million for the
three months ended October 31, 2005, representing an increase of $0.8 million or
2.9% above prior year. Tommy Hilfiger and Ebel recorded increases of $1.7
million and $0.6 million, respectively. These increases were primarily in
Europe. Concord was below prior year by $1.4 million primarily due to reduced
sales in the Middle East.
Net sales in the retail segment rose 22.2% to $19.8 million for the three months
ended October 31, 2005. Movado Boutique sales increased by 33.1%. This was the
result of a 10.6% comparable store sales increase along with the sales volume
from non-comparable stores year over year. The Company's outlet stores recorded
a sales increase of 16.4% above prior year. The comparable store sales increase
for the outlet stores was 17.0%. The Company operated 27 Boutiques and 29 outlet
stores at October 31, 2005 compared to 24 Boutiques and 27 outlet stores at
October 31, 2004.
Gross Profit. The gross profit for the three months ended October 31, 2005 was
$86.2 million or 60.8% of net sales as compared to $77.1 million or 60.7% of net
sales for the three months ended October 31, 2004. Gross profit increased by
$9.1 million primarily as the result of the higher sales volume.
15
Selling, General and Administrative ("SG&A") Expenses. Selling, general and
administrative expenses for the three months ended October 31, 2005 were $67.2
million as compared to $61.2 million for the three months ended October 31,
2004. The increase of $6.0 million reflects added spending primarily to invest
in the Company's strategic growth initiatives. This amount included higher
marketing expenditures of $2.1 million, added spending of $1.6 million in
support of the retail expansion and increased personnel related infrastructure
costs of $1.1 million.
Wholesale Operating Income. The operating income in the wholesale segment
increased by $1.7 million to $18.5 million for the three months ended October
31, 2005. The increase was the net result of higher gross profit of $6.1
million, partially offset by the increase in SG&A expenses of $4.4 million. The
higher gross profit of $6.1 million was primarily the result of the increase in
net sales of $11.1 million. The increase in the SG&A expenses of $4.4 million
was primarily due to spending to invest in the Company's strategic growth
initiatives. This amount included higher marketing spending of $2.0 million,
increased personnel related infrastructure costs of $1.1 million and an increase
in depreciation and rent expense of $0.3 million.
Retail Operating Income (Loss). An operating income of $0.6 million and
operating loss of ($0.8) million were recorded in the retail segment for the
periods ended October 31, 2005 and October 31, 2004, respectively. The increase
in operating income was the net result of higher gross profit of $2.9 million
partially offset by higher SG&A expenses of $1.5 million. The increased gross
profit was primarily the result of the increase in net sales of $3.6 million.
The higher SG&A expenses were primarily due to the retail expansion. This
included higher staff expense of $0.9 million, increased occupancy costs of $0.3
million and increased depreciation expenses of $0.3 million.
Interest Expense. Net interest expense for the three months ended October 31,
2005 increased by $0.3 million to $1.2 million as compared to $0.9 million for
the three months ended October 31, 2004. The average debt for the quarter was
$88.8 million or $25.5 million above last year. The Company's average borrowing
rate was 5.2% compared to 4.7% in the prior year. The higher average borrowing
rate is the result of the general increase in short term interest rates.
Other Income. The Company recorded other income for the three months ended
October 31, 2005 of $1.0 million. The Company recorded a pre-tax gain of $2.6
million on the sale of a building acquired on March 1, 2004 in the acquisition
of Ebel. The building was classified as an asset held for sale in other current
assets. Additionally, the Company recorded a pre-tax loss of $1.6 million
representing the impact of the discontinuation of foreign currency cash flow
hedges because it was not probable that the forecasted transactions would occur
by the end of the originally specified time period.
Income Taxes. The Company recorded a tax expense of $4.7 million for the three
months ended October 31, 2005 as compared to a tax expense of $3.8 million for
the three months ended October 31, 2004. Taxes were recorded at an effective tax
rate of 25.0% for both periods.
Net Income. For the three months ended October 31, 2005, the Company recorded
net income of $14.1 million as compared to $11.3 million for the three months
ended October 31, 2004.
16
Results of operations for the nine months ended October 31, 2005 as compared to
the nine months ended October 31, 2004
Net Sales: Comparative net sales by business segment were as follows (in
thousands):
Nine Months Ended
October 31,
-------------------
2005 2004
-------- --------
Wholesale:
Domestic $215,813 $189,117
International 74,383 63,301
Retail 54,622 46,580
-------- --------
Net Sales $344,818 $298,998
======== ========
Net sales increased by $45.8 million or 15.3% for the nine months ended October
31, 2005 as compared to the nine months ended October 31, 2004. Sales in the
wholesale segment increased 15.0% to $290.2 million versus $252.4 million in the
prior year.
The domestic wholesale business was $215.8 million for the nine months ended
October 31, 2005, representing an increase of $26.7 million or 14.1% above prior
year. Ebel sales grew $9.3 million, which reflects the full integration of nine
months rather than eight months in the prior year, in addition to the increased
sell-in of new products. Movado and ESQ brand sales increased by $8.7 million
and $5.8 million, respectively.
Net sales in the international wholesale business were $74.4 million for the
nine months ended October 31, 2005, representing an increase of $11.1 million or
17.5% above prior year. Ebel and Tommy Hilfiger recorded increases of $6.7
million and $4.2 million, respectively. The increase in Ebel is due to the full
integration of nine months rather than eight months in the prior year, in
addition to the increased sell-in of new products. The increase in Tommy
Hilfiger sales was primarily in Europe. Concord was $1.2 million below prior
year, primarily due to weaker sales in the Middle East.
Net sales in the retail segment rose 17.3% to $54.6 million for the nine months
ended October 31, 2005. The increase was driven by an overall 29.0% increase in
Movado Boutique sales. The comparable store sales increase for the Movado
Boutiques was 5.0% for the nine months ended October 31, 2005. The Company's
outlet stores recorded an overall sales increase of 10.0% above prior year. The
comparable store sales increase for the outlet stores was 8.7% for the nine
months ended October 31, 2005. The Company operated 27 Boutiques and 29 outlet
stores at October 31, 2005 compared to 24 Boutiques and 27 outlet stores at
October 31, 2004.
Gross Profit. The gross profit for the nine months ended October 31, 2005 was
$209.0 million or 60.6% of net sales as compared to $178.5 million or 59.7% of
net sales for the nine months ended October 31, 2004. Gross profit increased by
$30.5 million primarily as the result of the higher sales volume.
17
Selling, General and Administrative ("SG&A") Expenses. Selling, general and
administrative expenses for the nine months ended October 31, 2005 were $175.6
million as compared to $152.1 million for the nine months ended October 31,
2004. The increase of $23.5 million reflects spending primarily to invest in the
Company's strategic growth initiatives, including higher marketing spending of
$8.1 million, added spending of $4.9 million in support of the retail expansion,
higher compensation and related costs of $4.0 million, an increase of $1.6
million in depreciation and amortization expense and increased spending for
outside services of $1.4 million.
Wholesale Operating Income. The operating income in the wholesale segment
increased by $6.5 million to $34.4 million for the nine months ended October 31,
2005. The increase was the net result of higher gross profit of $24.6 million,
partially offset by the increase in SG&A expenses of $18.1 million. The higher
gross profit of $24.6 million was primarily the result of the increase in net
sales of $37.8 million. The increase in the SG&A expenses of $18.1 million was
primarily due to increased spending in support of the Company's strategic growth
initiatives. This increased spending included higher marketing spending of $7.7
million, higher compensation and related costs of $4.0 million, higher outside
service fees of $1.4 million and an increase of $0.7 million in depreciation
and amortization expense.
Retail Operating Loss. Operating losses of $0.9 million and $1.5 million were
recorded in the retail segment for the periods ended October 31, 2005 and
October 31, 2004, respectively. The decrease in the operating loss for the nine
months ended October 31, 2005 was the net result of higher gross profit of $5.9
million partially offset by higher SG&A expenses of $5.3 million. The increased
gross profit was primarily attributed to the increase in net sales of $8.0
million. The higher SG&A expenses were primarily due to the retail expansion.
This amount included higher staff expense of $2.3 million, increased occupancy
costs of $1.3 million and increased depreciation expense of $0.9 million.
Interest Expense. Net interest expense for the nine months ended October 31,
2005 increased by 21.9% to $2.9 million as compared to $2.4 million for the nine
months ended October 31, 2004. The average debt for the quarter was $71.0
million or $14.3 million above last year. The higher borrowings were primarily
the result of the issuance of $20.0 million of new senior promissory notes in
the third quarter of fiscal 2005. The Company's average borrowing rate was 5.3%
compared to 4.7% in the prior year. The higher average borrowing rate is the
result of the general increase in short-term interest rates.
Other Income. The Company recorded other income for the nine months ended
October 31, 2005 of $1.0 million. The Company recorded a pre-tax gain of $2.6
million on the sale of a building acquired on March 1, 2004 in the acquisition
of Ebel. The building was classified as an asset held for sale in other current
assets. Additionally, the Company recorded a pre-tax loss of $1.6 million
representing the impact of the discontinuation of foreign currency cash flow
hedges because it was not probable that the forecasted transactions would occur
by the end of the originally specified time period.
The Company recognized other income for the nine months ended October 31, 2004
from a litigation settlement with Swiss Army Brands, Inc. in the amount of
$1.4 million.
Income Taxes. The Company recorded a tax expense of $7.9 million for the nine
months ended October 31, 2005 as compared to a tax expense of $6.4 million for
the nine months ended October 31, 2004. Taxes were recorded at an effective tax
rate of 25.0% for both periods.
Net Income. For the nine months ended October 31, 2005, the Company recorded net
income of $23.7 million as compared to $19.1 million for the nine months ended
October 31, 2004.
18
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities amounted to $28.0 million for the nine months
ended October 31, 2005 and $17.9 million for the nine months ended October 31,
2004. The increase in the cash used during the nine months ended October 31,
2005 of $10.1 million is primarily the net result of higher working capital
needs of $17.0 million partially offset by higher net income of $4.5 million.
The principle reasons for the increase in working capital are lower accounts
payable of $9.2 million primarily related to the timing of payments, higher
accounts receivable of $4.7 million primarily due to the sales increase and
lower accrued liabilities of $3.7 million primarily due to the payment of
severance and other accruals. This increase was slightly offset by lower
inventory of $0.6 million.
Cash used in investing activities amounted to $6.5 million and $54.8 million for
the nine months ended October 31, 2005 and 2004, respectively. The cash used
during the nine months ended October 31, 2005 was primarily for capital
expenditures related to the build out of the new Movado Boutiques, renovations
of existing retail operations and the acquisition of machinery and equipment to
further automate distribution activities offset by proceeds received from the
sale of a building. The cash used during the nine months ended October 31, 2004
was primarily to fund the acquisition of Ebel and capital expenditures related
to the build out of the new Movado Boutiques opened during the period.
Cash provided by financing activities amounted to $41.9 million and $26.1
million for the nine months ended October 31, 2005 and 2004, respectively, which
was the result of seasonal short-term borrowings.
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. At
October 31, 2005, $25.0 million was 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, pursuant to the Note Purchase Agreement, the Company issued
4.79% Senior Series A-2004 Notes due 2011 (the "Senior 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 Notes will be used by the Company for capital
expenditures, repayment of certain of its debt obligations and general corporate
purposes. As of October 31, 2005, $20.0 million was issued and outstanding.
The Company maintains a revolving credit line with its bank group which provides
for a three year $75.0 million unsecured revolving line of credit and $17.0
million of uncommitted working capital lines, of which a maximum of $15.0
million may be drawn under the terms of the Company's revolving credit line with
its bank group. The unsecured revolving line of credit expires on June 17, 2006.
At October 31, 2005, the Company had $44.0 million of outstanding borrowings
under its bank lines as compared to $16.3 million at October 31, 2004. In
addition, one bank in the domestic bank group issued irrevocable standby letters
of credit for retail and operating facility leases to various landlords and for
Canadian payroll to the Royal Bank of Canada. As of October 31, 2005, these 11
standby letters of credit totaled $1.2 million with expiration dates through
August 31, 2006. As of October 31, 2004, there were seven standby letters of
credit that totaled $0.6 million with expiration dates through June 30, 2005.
19
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 $6.7 million at October 31, 2005 and 2004, 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 October 31, 2005, there were no borrowings
against these lines. As of October 31, 2005, the Swiss bank guaranteed the Swiss
subsidiary's obligations to certain Swiss third parties in the amount of
approximately $3.1 million in various foreign currencies.
During the nine months ended October 31, 2005, treasury shares increased by
180,092 as the result of cashless exercises of stock options for 495,379 shares
of stock.
The Company paid dividends of $0.05 per share for each of the first, second and
third quarter, or $3.8 million, for the nine months ended October 31, 2005 and
$0.04 per share for each of the first, second and third quarter, or $3.0 million
for the nine months ended October 31, 2004.
Cash and cash equivalents at October 31, 2005 amounted to $56.1 million compared
to $35.9 million at October 31, 2004. The increase in cash and cash equivalents
relates to the Company's higher borrowings.
RECENTLY ISSUED ACCOUNTING STANDARDS
In November 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 151, "Inventory Costs", an
amendment of ARB No. 43, Chapter 4 ("SFAS No. 151"). The amendments made by SFAS
No. 151 clarify that abnormal amounts of idle facility expense, freight,
handling costs, and wasted materials (spoilage) should be recognized as
current-period charges by requiring the allocation of fixed production overheads
to inventory based on the normal capacity of the production facilities. The
guidance is effective for inventory costs incurred during fiscal years beginning
after June 15, 2005, and is not expected to have a material impact on the
Company's consolidated financial position, results of operations or cash flows.
In December 2004, the FASB issued Statement of Financial Accounting Standards
No. 123(R), "Share-Based Payment", which is a revision of FASB Statement No.
123, "Accounting for Stock-Based Compensation" ("SFAS No. 123(R)"). SFAS No.
123(R) supersedes APB Opinion No. 25, "Accounting for Stock Issued to
Employees", and amends FASB Statement No. 95, "Statement of Cash Flows".
Generally, the approach in SFAS No. 123(R) is similar to the approach described
in SFAS No. 123. SFAS No. 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the income
statement based on their fair values. Pro forma disclosure is no longer an
alternative. Public entities are required to apply SFAS No. 123(R) as of the
first annual reporting period that begins after June 15, 2005.
The Company continues to use the intrinsic value based method of accounting for
share-based payments. The Company uses the Black-Scholes valuation model to
estimate the value of stock options granted to employees. SFAS No. 123(R)
requires the benefits of tax deductions in excess of recognized compensation
cost to be reported as a financing cash flow, rather than as an operating cash
flow as required under current literature. This requirement may reduce net
operating cash flows and increase net financing cash flows in periods after
adoption. The Company is currently assessing the impact of SFAS No. 123(R) on
its consolidated financial position, results of operations and cash flows.
20
In December 2004, the FASB issued Statement of Financial Accounting Standards
No. 153, "Exchanges of Nonmonetary Assets--An Amendment of APB Opinion No. 29,
Accounting for Nonmonetary Transactions" ("SFAS No. 153"). SFAS No. 153
eliminates the exception from fair value measurement for nonmonetary exchanges
of similar productive assets in paragraph 21(b) of APB Opinion No. 29,
"Accounting for Nonmonetary Transactions", and replaces it with an exception for
exchanges that do not have commercial substance. SFAS No. 153 specifies that a
nonmonetary exchange has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the exchange. SFAS
No. 153 is effective for the fiscal periods beginning after June 15, 2005. The
adoption of SFAS No. 153 is not expected to have a material impact on the
Company's consolidated financial position, results of operations or cash flows.
In March 2005, the FASB issued Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations" ("FIN 47"). FIN 47 clarifies that the
term "conditional asset retirement obligation" as used in SFAS No. 143,
"Accounting for Asset Retirement Obligations," refers to a legal obligation to
perform an asset retirement activity in which the timing and (or) method of
settlement are conditional on a future event that may or may not be within the
control of the entity. FIN 47 is effective no later than the end of fiscal years
ending after December 15, 2005. The Company is currently assessing the impact of
FIN 47 on its consolidated financial position, results of operations and cash
flows.
In June 2005, the Emerging Issues Task Force ("EITF") reached consensus on EITF
05-6, "Determining the Amortization Period for Leasehold Improvements". Under
EITF 05-6, leasehold improvements placed in service significantly after and not
contemplated at or near the beginning of the lease term, should be amortized
over the lesser of the useful life of the assets or a term that includes
renewals that are reasonably assured at the date the leasehold improvements are
purchased. EITF 05-6 is effective for periods beginning after June 29, 2005. The
adoption of EITF 05-6 did not have a material impact on the Company's
consolidated financial position, results of operations or cash flows.
21
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 accumulated other
comprehensive income 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 October 31, 2005 (in millions):
October 31, 2005
Fair Value Maturities
---------------- ----------
Forward exchange contracts ($5.0) 2005-2006
Purchased foreign currency options 0.5 2005-2006
-----
($4.5)
=====
The Company's international business accounts for 20.2% and 21.6% of the
Company's sales for the three months and nine months ended October 31, 2005
respectively. 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 and
nine months ended October 31, 2005 and 2004, 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 October 31, 2005, the Company had $44.0 million in short-term bank debt
obligations with variable interest rates based on LIBOR plus an applicable loan
spread. The Company does not hedge these interest rate risks. The Company also
has $45.0 million Senior Note debt bearing fixed interest rates per annum. The
difference between the market based interest rates at October 31, 2005 and the
fixed rates was unfavorable.
22
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 (the "Exchange Act"). Based on that evaluation, the Chief Executive
Officer and the Chief Financial Officer concluded that the Company's disclosure
controls and procedures were effective as of the end of the period covered by
this report.
Changes in Internal Control Over Financial Reporting
There has been no change in the Company's internal control over financial
reporting during the quarter ended October 31, 2005, 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.
23
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 6. Exhibits
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.
24
SIGNATURES
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: December 8, 2005 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)
25