UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the Quarterly Period Ended July 31, 2007
¨
|
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, 2007 were 19,414,101 and 6,634,319,
respectively.
MOVADO
GROUP, INC.
Index
to Quarterly Report on Form 10-Q
July
31, 2007
|
|
|
Page
|
Part
I
|
Financial
Information (Unaudited)
|
|
|
|
|
|
|
Item
1.
|
Consolidated
Balance Sheets at July 31, 2007, January 31, 2007 and July 31,
2006
|
3
|
|
|
|
|
|
|
Consolidated
Statements of Income for the three months and six months ended
July 31,
2007 and 2006
|
4
|
|
|
|
|
|
|
Consolidated
Statements of Cash Flows for the six months ended July 31, 2007
and
2006
|
5
|
|
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
6
|
|
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
11
|
|
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
21
|
|
|
|
|
|
Item
4.
|
Controls
and Procedures
|
22
|
|
|
|
Part
II
|
Other
Information
|
|
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
23
|
|
|
|
|
|
Item
1A.
|
Risk
Factors
|
23
|
|
|
|
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
23
|
|
|
|
|
|
Item
6.
|
Exhibits
|
24
|
|
|
|
Signature
|
|
25
|
|
|
|
|
|
|
|
|
|
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, 2007
|
|
|
January
31, 2007
|
|
|
July
31, 2006
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$ |
112,456
|
|
|
$ |
133,011
|
|
|
$ |
78,126
|
|
Trade
receivables, net
|
|
|
100,611
|
|
|
|
111,417
|
|
|
|
128,416
|
|
Inventories,
net
|
|
|
215,557
|
|
|
|
193,342
|
|
|
|
215,461
|
|
Other
current assets
|
|
|
37,443
|
|
|
|
35,109
|
|
|
|
34,712
|
|
Total
current assets
|
|
|
466,067
|
|
|
|
472,879
|
|
|
|
456,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
61,040
|
|
|
|
56,823
|
|
|
|
51,931
|
|
Deferred
income taxes
|
|
|
27,863
|
|
|
|
12,091
|
|
|
|
7,364
|
|
Other
non-current assets
|
|
|
37,417
|
|
|
|
35,825
|
|
|
|
33,100
|
|
Total
assets
|
|
$ |
592,387
|
|
|
$ |
577,618
|
|
|
$ |
549,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
portion of long-term debt
|
|
$ |
5,000
|
|
|
$ |
5,000
|
|
|
$ |
5,000
|
|
Accounts
payable
|
|
|
30,708
|
|
|
|
32,901
|
|
|
|
34,797
|
|
Accrued
liabilities
|
|
|
38,037
|
|
|
|
45,610
|
|
|
|
37,459
|
|
Deferred
and current taxes payable
|
|
|
5,717
|
|
|
|
5,946
|
|
|
|
2,550
|
|
Total
current liabilities
|
|
|
79,462
|
|
|
|
89,457
|
|
|
|
79,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
62,475
|
|
|
|
75,196
|
|
|
|
91,978
|
|
Deferred
and non-current income taxes
|
|
|
32,181
|
|
|
|
11,054
|
|
|
|
13,278
|
|
Other
non-current liabilities
|
|
|
24,384
|
|
|
|
23,087
|
|
|
|
20,112
|
|
Total
liabilities
|
|
|
198,502
|
|
|
|
198,794
|
|
|
|
205,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Note 7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
1,467
|
|
|
|
443
|
|
|
|
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; 24,176,802,
23,872,262 and 23,661,968 shares issued, respectively
|
|
|
242
|
|
|
|
239
|
|
|
|
237
|
|
Class
A Common Stock, $0.01 par value, 30,000,000 shares authorized;
6,634,319,
6,642,159 and 6,700,909 shares issued and outstanding,
respectively
|
|
|
66
|
|
|
|
66
|
|
|
|
67
|
|
Capital
in excess of par value
|
|
|
124,393
|
|
|
|
117,811
|
|
|
|
113,405
|
|
Retained
earnings
|
|
|
283,329
|
|
|
|
280,495
|
|
|
|
247,656
|
|
Accumulated
other comprehensive income
|
|
|
40,537
|
|
|
|
32,307
|
|
|
|
34,812
|
|
Treasury
Stock, 4,785,701, 4,678,244 and 4,676,117 shares, respectively,
at
cost
|
|
|
(56,149 |
) |
|
|
(52,537 |
) |
|
|
(52,486 |
) |
Total
shareholders’ equity
|
|
|
392,418
|
|
|
|
378,381
|
|
|
|
343,691
|
|
Total
liabilities and equity
|
|
$ |
592,387
|
|
|
$ |
577,618
|
|
|
$ |
549,110
|
|
See
Notes to Consolidated Financial Statements
MOVADO
GROUP, INC.
CONSOLIDATED
STATEMENTS OF INCOME
(In
thousands, except per share amounts)
(Unaudited)
|
|
Three
Months Ended July 31,
|
|
|
Six
Months Ended July 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
139,467
|
|
|
$ |
126,588
|
|
|
$ |
240,830
|
|
|
$ |
224,332
|
|
Cost
of sales
|
|
|
56,121
|
|
|
|
48,076
|
|
|
|
95,832
|
|
|
|
86,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
83,346
|
|
|
|
78,512
|
|
|
|
144,998
|
|
|
|
138,102
|
|
Selling,
general and administrative
|
|
|
67,009
|
|
|
|
64,438
|
|
|
|
125,889
|
|
|
|
120,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
16,337
|
|
|
|
14,074
|
|
|
|
19,109
|
|
|
|
17,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(872 |
) |
|
|
(919 |
) |
|
|
(1,751 |
) |
|
|
(1,862 |
) |
Interest
income
|
|
|
1,062
|
|
|
|
616
|
|
|
|
2,309
|
|
|
|
1,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes and minority interest
|
|
|
16,527
|
|
|
|
13,771
|
|
|
|
19,667
|
|
|
|
17,153
|
|
Provision
for income taxes (Note 2)
|
|
|
4,117
|
|
|
|
2,407
|
|
|
|
4,764
|
|
|
|
3,013
|
|
Minority
interest
|
|
|
146
|
|
|
|
15
|
|
|
|
239
|
|
|
|
(64 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
12,264
|
|
|
$ |
11,349
|
|
|
$ |
14,664
|
|
|
$ |
14,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share
|
|
$ |
0.47
|
|
|
$ |
0.44
|
|
|
$ |
0.56
|
|
|
$ |
0.56
|
|
Weighted
basic average shares outstanding
|
|
|
26,016
|
|
|
|
25,661
|
|
|
|
25,967
|
|
|
|
25,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share
|
|
$ |
0.45
|
|
|
$ |
0.43
|
|
|
$ |
0.54
|
|
|
$ |
0.54
|
|
Weighted
diluted average shares outstanding
|
|
|
27,272
|
|
|
|
26,584
|
|
|
|
27,259
|
|
|
|
26,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
paid per share
|
|
$ |
0.08
|
|
|
$ |
0.06
|
|
|
$ |
0.16
|
|
|
$ |
0.12
|
|
See
Notes to Consolidated Financial Statements
MOVADO
GROUP, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
(Unaudited)
|
|
Six
Months Ended July 31,
|
|
|
2007
|
|
|
2006
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
income
|
|
$ |
14,664
|
|
|
$ |
14,204
|
|
Adjustments
to reconcile net income to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
7,911
|
|
|
|
7,736
|
|
Deferred
income taxes
|
|
|
(2,505 |
) |
|
|
(1,351 |
) |
Provision
for losses on accounts receivable
|
|
|
754
|
|
|
|
1,739
|
|
Provision
for losses on inventory
|
|
|
312
|
|
|
|
319
|
|
Loss
on disposition of property, plant and equipment
|
|
|
1,075
|
|
|
|
-
|
|
Stock-based
compensation
|
|
|
2,253
|
|
|
|
1,340
|
|
Excess
tax benefit from stock-based compensation
|
|
|
(1,528 |
) |
|
|
(1,345 |
) |
Minority
interest
|
|
|
239
|
|
|
|
(64 |
) |
Changes
in assets and liabilities:
|
|
|
|
|
|
|
Trade
receivables
|
|
|
12,151
|
|
|
|
(17,858 |
) |
Inventories
|
|
|
(18,100 |
) |
|
|
(13,146 |
) |
Other
current assets
|
|
|
(1,290 |
) |
|
|
(5,575 |
) |
Accounts
payable
|
|
|
(2,705 |
) |
|
|
4,059
|
|
Accrued
liabilities
|
|
|
(7,001 |
) |
|
|
(8,893 |
) |
Current
taxes payable
|
|
|
1,237
|
|
|
|
(4,704 |
) |
Other
non-current assets
|
|
|
(1,804 |
) |
|
|
(1,448 |
) |
Other
non-current liabilities
|
|
|
1,291
|
|
|
|
616
|
|
Net
cash provided by (used in) operating activities
|
|
|
6,954
|
|
|
|
(24,371 |
) |
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(12,612 |
) |
|
|
(6,811 |
) |
Investments
from joint venture interest
|
|
|
787
|
|
|
|
-
|
|
Trademarks
|
|
|
(132 |
) |
|
|
(381 |
) |
Net
cash used in investing activities
|
|
|
(11,957 |
) |
|
|
(7,192 |
) |
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
Net
repayments of bank borrowings
|
|
|
(13,979 |
) |
|
|
(15,161 |
) |
Stock
options exercised and other changes
|
|
|
(808 |
) |
|
|
1,048
|
|
Excess
tax benefit from stock-based compensation
|
|
|
1,528
|
|
|
|
1,345
|
|
Dividends
paid
|
|
|
(4,155 |
) |
|
|
(3,063 |
) |
Net
cash used in financing activities
|
|
|
(17,414 |
) |
|
|
(15,831 |
) |
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
|
1,862
|
|
|
|
1,895
|
|
|
|
|
|
|
|
|
Net
decrease in cash
|
|
|
(20,555 |
) |
|
|
(45,499 |
) |
|
|
|
|
|
|
|
Cash
at beginning of period
|
|
|
133,011
|
|
|
|
123,625
|
|
|
|
|
|
|
|
|
Cash
at end of period
|
|
$ |
112,456
|
|
|
$ |
78,126
|
|
See
Notes to Consolidated Financial Statements
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 2007 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 – RECLASSIFICATIONS
Certain
reclassifications were made to prior year's financial statement amounts and
related note disclosures to conform to the fiscal 2008
presentation.
NOTE
2 - INCOME TAXES
The
Company adopted the provisions of FASB Interpretation No. 48, Accounting
for
Uncertainty in Income Taxes, on February 1, 2007. As a result of adoption,
the
Company recognized a charge of approximately $7.7 million to the February
1,
2007 retained earnings balance. As of the date of adoption, the Company had
gross unrecognized tax benefits of $30.0 million (exclusive of interest)
of
which $16.1 million, if recognized, would affect the effective tax
rate. Interest and penalties, if any, related to unrecognized tax
benefits are recorded in income tax expense. As of the date of
adoption, the Company had $2.5 million of accrued interest (net of tax) related
to unrecognized tax benefits. For the six months ended July 31, 2007,
the Company accrued an additional $0.4 million of interest (net of tax) and
reduced $0.4 million of unrecognized tax benefits as a result of a lapse
of the
applicable statute of limitations.
The
Company conducts business globally and, as a result, files income tax returns
in
the U.S. federal jurisdiction and various state and foreign
jurisdictions. In the normal course of business, the Company is
subject to examination by taxing authorities in many countries, including
such
major jurisdictions as Switzerland, Hong Kong, Canada and the United
States. The Company is no longer subject to U.S. federal income tax
examinations for years before the fiscal year ended January 31, 2004 and
with
few exceptions, is no longer subject to state and local or foreign income
tax
examinations by tax authorities for years before the fiscal year ended January
31, 2003.
The
Internal Revenue Service commenced examinations of the Company’s consolidated
U.S. federal income tax returns for fiscal years 2004 through 2006 in the
second
quarter of fiscal 2007. It is possible that the examination
phase of the audit may conclude in fiscal 2008 and it is reasonably possible
a
change in the unrecognized tax benefits may occur; however, quantification
of an
estimated range cannot be made at this time.
Tax
expense for the three months ended July 31, 2007 and 2006 was $4.1 million
and
$2.4 million, respectively. Taxes were recorded at a rate of 24.9% for the
three months ended July 31, 2007 as compared to 17.5% for the three months
ended
July 31, 2006. Tax expense for the six months ended July 31, 2007 and
2006 was $4.8 million and $3.0 million, respectively. Taxes were recorded
at a rate of 24.2% for the six months ended July 31, 2007 as compared to
17.6%
for the six months ended July 31, 2006. Taxes for both the three and
six months ended July 31, 2006 included a benefit related to the adoption
of tax
planning strategies in Switzerland which utilized a greater portion of the
Swiss
net operating loss carryforward.
NOTE
3 – COMPREHENSIVE INCOME
The
components of comprehensive income for the three months and six months ended
July 31, 2007 and 2006 are as follows (in thousands):
|
|
Three
Months Ended
July
31,
|
|
|
Six
Months Ended
July
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
12,264
|
|
|
$ |
11,349
|
|
|
$ |
14,664
|
|
|
$ |
14,204
|
|
Net
unrealized (loss) gain on investments,
net
of tax
|
|
|
(118 |
) |
|
|
13
|
|
|
|
(100 |
) |
|
|
20
|
|
Effective
portion of unrealized gain on
hedging
contracts, net of tax
|
|
|
211
|
|
|
|
157
|
|
|
|
1,017
|
|
|
|
2,062
|
|
Foreign
currency translation adjustments (1)
|
|
|
1,469
|
|
|
|
(100 |
) |
|
|
7,313
|
|
|
|
5,057
|
|
Total
comprehensive income
|
|
$ |
13,826
|
|
|
$ |
11,419
|
|
|
$ |
22,894
|
|
|
$ |
21,343
|
|
(1)
The
foreign currency translation adjustments are not adjusted for income taxes
as
they relate to permanent investments in international subsidiaries.
NOTE
4 – SEGMENT INFORMATION
The
Company follows Statement of Financial Accounting Standards (“SFAS”)
No. 131, "Disclosures about Segments of an Enterprise and Related
Information." This statement requires disclosure of segment data based on
how
management makes decisions about allocating resources to segments and measuring
their performance.
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, in addition to revenue generated from after sales service activities
and shipping. The Retail segment includes the Movado Boutiques and outlet
stores.
The
Company divides its business into two major geographic
segments: United States operations, and International, which includes
the results of all other Company operations. The allocation of
geographic revenue is based upon the location of the customer. The Company’s
international operations are principally conducted in Europe, Asia, Canada,
the
Middle East, South America and the Caribbean. The Company’s
international assets are substantially located in Switzerland.
Operating
Segment Data for the Three Months Ended July 31, 2007 and 2006 (in
thousands):
|
|
|
|
|
|
Net
Sales
|
|
|
Operating
Income
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$ |
116,311
|
|
|
$ |
106,108
|
|
|
$ |
15,970
|
|
|
$ |
13,210
|
|
Retail
|
|
|
23,156
|
|
|
|
20,480
|
|
|
|
367
|
|
|
|
864
|
|
Consolidated
total
|
|
$ |
139,467
|
|
|
$ |
126,588
|
|
|
$ |
16,337
|
|
|
$ |
14,074
|
|
Operating
Segment Data for the Six Months Ended July 31, 2007 and 2006 (in
thousands):
|
|
|
|
|
|
Net
Sales
|
|
|
Operating
Income (Loss)
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$ |
199,458
|
|
|
$ |
187,110
|
|
|
$ |
20,365
|
|
|
$ |
17,896
|
|
Retail
|
|
|
41,372
|
|
|
|
37,222
|
|
|
|
(1,256 |
) |
|
|
(388 |
) |
Consolidated
total
|
|
$ |
240,830
|
|
|
$ |
224,332
|
|
|
$ |
19,109
|
|
|
$ |
17,508
|
|
|
|
Total
Assets
|
|
|
|
July
31, 2007
|
|
|
January
31, 2007
|
|
|
July
31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$ |
525,916
|
|
|
$ |
510,380
|
|
|
$ |
487,413
|
|
Retail
|
|
|
66,471
|
|
|
|
67,238
|
|
|
|
61,697
|
|
Consolidated
total
|
|
$ |
592,387
|
|
|
$ |
577,618
|
|
|
$ |
549,110
|
|
Geographic
Segment Data for the Three Months Ended July 31, 2007 and 2006 (in
thousands):
|
|
|
|
|
|
Net
Sales
|
|
|
Operating Income
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$ |
81,228
|
|
|
$ |
84,119
|
|
|
$ |
2,003
|
|
|
$ |
2,637
|
|
International
|
|
|
58,239
|
|
|
|
42,469
|
|
|
|
14,334
|
|
|
|
11,437
|
|
Consolidated
total
|
|
$ |
139,467
|
|
|
$ |
126,588
|
|
|
$ |
16,337
|
|
|
$ |
14,074
|
|
United
States and International net sales are net of intercompany sales of $68.5
million and $60.5 million for the three months ended July 31, 2007 and 2006,
respectively.
Geographic
Segment Data for the Six Months Ended July 31, 2007 and 2006 (in
thousands):
|
|
|
|
|
|
Net
Sales
|
|
|
Operating
(Loss) Income
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$ |
142,103
|
|
|
$ |
148,495
|
|
|
$ |
(6,350 |
) |
|
$ |
(1,617 |
) |
International
|
|
|
98,727
|
|
|
|
75,837
|
|
|
|
25,459
|
|
|
|
19,125
|
|
Consolidated
total
|
|
$ |
240,830
|
|
|
$ |
224,332
|
|
|
$ |
19,109
|
|
|
$ |
17,508
|
|
United
States and International net sales are net of intercompany sales of $129.9
million and $110.0 million for the six months ended July 31, 2007 and 2006,
respectively.
|
|
Total
Assets
|
|
|
|
July
31, 2007
|
|
|
January
31, 2007
|
|
|
July
31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$ |
343,322
|
|
|
$ |
357,650
|
|
|
$ |
328,630
|
|
International
|
|
|
249,065
|
|
|
|
219,968
|
|
|
|
220,480
|
|
Consolidated
total
|
|
$ |
592,387
|
|
|
$ |
577,618
|
|
|
$ |
549,110
|
|
|
|
Long-Lived
Assets
|
|
|
|
July
31, 2007
|
|
|
January
31, 2007
|
|
|
July
31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$ |
45,293
|
|
|
$ |
42,702
|
|
|
$ |
36,556
|
|
International
|
|
|
15,747
|
|
|
|
14,121
|
|
|
|
15,375
|
|
Consolidated
total
|
|
$ |
61,040
|
|
|
$ |
56,823
|
|
|
$ |
51,931
|
|
NOTE
5 – INVENTORIES, NET
Inventories
consist of the following (in thousands):
|
|
July
31, 2007
|
|
|
January
31, 2007
|
|
|
July
31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
Finished
goods
|
|
$ |
138,777
|
|
|
$ |
129,082
|
|
|
$ |
142,594
|
|
Component
parts
|
|
|
66,345
|
|
|
|
55,930
|
|
|
|
65,392
|
|
Work-in-process
|
|
|
10,435
|
|
|
|
8,330
|
|
|
|
7,475
|
|
|
|
$ |
215,557
|
|
|
$ |
193,342
|
|
|
$ |
215,461
|
|
NOTE
6 – EARNINGS PER SHARE
The
Company presents net income per share on a basic and diluted
basis. Basic earnings per share are computed using weighted-average
shares outstanding during the period. Diluted earnings per share are
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
26,016,000 and 25,661,000 for the three months ended July 31, 2007 and 2006,
respectively. For diluted earnings per share, these amounts were
increased by 1,256,000 and 923,000 for the three months ended July 31, 2007
and
2006,
respectively,
due to potentially dilutive common stock equivalents issuable under the
Company’s stock compensation plans.
The
weighted-average number of shares outstanding for basic earnings per share
were
25,967,000 and 25,550,000 for the six months ended July 31, 2007 and 2006,
respectively. For diluted earnings per share, these amounts were
increased by 1,292,000 and 956,000 for the six months ended July 31, 2007
and
2006, respectively, due to potentially dilutive common stock equivalents
issuable under the Company’s stock compensation plans.
NOTE
7 – COMMITMENTS AND CONTINGENCIES
At
July
31, 2007, the Company had outstanding letters of credit totaling $1.2 million
with expiration dates through August 31, 2008. One bank in the
domestic bank group has 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.
As
of
July 31, 2007, two European banks have guaranteed obligations to third parties
on behalf of two of the Company’s foreign subsidiaries in the amount of $1.7
million in various foreign currencies.
The
Company is involved from time to time in legal claims involving trademarks
and
other 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
8 – RECENTLY ISSUED ACCOUNTING STANDARDS
In
September 2006, the FASB issued SFAS No. 157, ‘‘Fair Value
Measurements.’’ SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles
and expands disclosures about fair value measurements. This statement is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. The Company
is
currently evaluating the impact of SFAS No. 157 on the Company’s consolidated
financial statements.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities – Including an Amendment of FAS
115.” SFAS No. 159 permits entities to choose to measure many
financial instruments and certain other items at fair
value. Unrealized gains and losses on items for which the fair value
option has been elected will be recognized in earnings at each subsequent
reporting date. This statement is effective for financial statements
issued for fiscal years beginning after November 15, 2007. The
Company is currently evaluating the impact of SFAS No. 159 on the Company’s
consolidated financial statements.
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
(the “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, the 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 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 fiscal year ended January
31, 2007. 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, 2007, except as noted below, there have been no material changes
to any
of the critical accounting policies as disclosed in the Company’s Annual Report
on Form 10-K for the fiscal year ended January 31, 2007.
On
February 1, 2007, the Company adopted the provisions of FASB Interpretation
No.
48, Accounting for Uncertainty in Income Taxes (an interpretation of FASB
Statement No. 109). 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. As a result of adoption, the Company
recognized a charge of approximately $7.7 million to the February 1, 2007
retained earnings balance. As of the date of adoption, the Company had gross
unrecognized tax benefits of $30.0 million (exclusive of interest) of which
$16.1 million, if recognized, would affect the effective tax rate.
Overview
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 watch business into distinct categories. The
luxury category consists of the Ebel® and Concord® brands. The
accessible luxury category consists of the Movado® and ESQ®
brands. The licensed brands category represents brands distributed
under license agreements and includes Coach®, HUGO BOSS®, Juicy Couture®,
LACOSTE® and Tommy Hilfiger®.
Results
of operations for the three months ended July 31, 2007 as compared to the
three
months ended July 31, 2006
Net
Sales: Comparative net sales by business segment were as follows (in
thousands):
|
|
Three
Months Ended July 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Wholesale:
|
|
|
|
|
|
|
United
States
|
|
$ |
58,072
|
|
|
$ |
63,639
|
|
International
|
|
|
58,239
|
|
|
|
42,469
|
|
Total
Wholesale
|
|
|
116,311
|
|
|
|
106,108
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
|
23,156
|
|
|
|
20,480
|
|
|
|
|
|
|
|
|
|
|
Net
Sales
|
|
$ |
139,467
|
|
|
$ |
126,588
|
|
Net
sales
for the three months ended July 31, 2007 were $139.5 million, above prior
year
by $12.9 million or 10.2%. The liquidation of excess discontinued
inventory accounted for approximately $8.3 million of the
increase. Net sales excluding the liquidation of excess discontinued
inventory were $131.2 million, representing an increase of $4.6 million or
3.6%
over the prior year period. There were no liquidation sales in the prior
year period.
Net
sales
in the wholesale segment increased by $10.2 million or 9.6% to $116.3
million. The increase was driven by the licensed brand and luxury
categories. Net sales in the licensed brand category were above prior year
by
$7.9 million or 35.1%. The expansion of HUGO BOSS and the
introduction of the LACOSTE brand in the current fiscal year were the primary
drivers of the increase. Net sales in the luxury category were above
prior year by $6.7 million or 28.7%. Excluding the liquidation sales
of $8.1 million in the fiscal 2008 second quarter, net sales in the luxury
category were below prior year by $1.4 million or 6.0%. The decrease
was the result of reduced volume due to the repositioning of the Concord
brand. The accessible luxury category sales were below prior year by
$4.9 million or 8.7%. The principal reason for the decrease was the
shift in the retail calendar which shifted retailer purchases from the first
half to the second half of fiscal 2008. The retail calendar primarily
affects United States chain jewelers and department stores, which make up
a
larger portion of the accessible luxury brands’ customer base.
Net
sales
in the U.S. wholesale segment were $58.1 million for the three months ended
July
31, 2007, representing an 8.7% decrease when compared to prior year sales
of
$63.6 million. The decrease in net sales was primarily attributable
to lower sales in the accessible luxury category of $6.3
million. This decrease was primarily the result of the impact of the
shift in the retail calendar. Net sales in the luxury category were
above prior year by $1.3 million or 19.5%. Excluding sales of excess
discontinued inventory of approximately $2.7 million, net sales in the luxury
category were below prior year by 22.1% due to the repositioning of the Concord
brand. Net sales in the licensed brand category were relatively flat
year over year.
Net
sales
in the international wholesale segment were $58.2 million for the three months
ended July 31, 2007, representing an increase of $15.7 million or 37.1% above
prior year sales of $42.5 million. The increase was driven by the
licensed brand and luxury categories. Net sales in the licensed brand
category were above prior year by $8.5 million or 59.3%. The increase
was primarily the result of the launches and market expansion of the newer
licensed brands. The Tommy Hilfiger brand also continued to benefit from
strong
international
growth. Net
sales in the luxury category were above prior year by $5.5 million or
32.2%. Excluding the liquidation sales of $5.4 million in the fiscal
2008 second quarter, net sales in the luxury category were relatively flat
year
over year. This was the result of a strong demand for Ebel, offset by
reduced volume in Concord due to the repositioning of the brand. Net
sales in the accessible luxury category were $11.0 million or above prior
year
by $1.4 million or 15.1%. The increase was primarily driven by
stronger demand for the Movado brand in the Caribbean.
Net
sales
in the retail segment were $23.2 million for the three months ended July
31,
2007, representing a 13.1% increase above prior year sales of $20.5
million. The increase was driven by an overall increase in outlets
store sales, resulting from an 8.3% comparable store sales increase along
with
sales increases from non-comparable stores. Sales by the Movado Boutiques
were
above prior year by 4.8%, resulting from increases in sales from non-comparable
stores somewhat offset by a decrease of 2.3%, or $0.2 million, in comparable
store sales. The Company operated 31 Movado Boutiques and 31 outlet stores
at
July 31, 2007, compared to 28 Movado Boutiques and 29 outlet stores at July
31,
2006.
The
Company considers comparable store sales to be sales from stores that were
open
as of February 1 of last year through January 31 of the current year. The
Company had 25 comparable Movado Boutiques and 28 comparable outlet stores
for
the three months ended July 31, 2007. The sales from stores that have
been relocated, renovated or refurbished are included in the calculation
of
comparable store sales. The method of calculating comparable store
sales varies across the retail industry. As a result, the Company’s
calculation of comparable store sales may not be the same as measures reported
by other companies.
Gross
Profit. Gross profit for the three months ended July 31, 2007
was $83.3 million or 59.8% of net sales as compared to $78.5 million or 62.0%
of
net sales for the three months ended July 31, 2006. The increase in
gross profit of $4.8 million was primarily the result of a stronger gross
profit
percentage in base business sales excluding liquidation, as well as the increase
in sales. The gross profit percentage was negatively impacted by the
liquidation sales of $8.3 million. Excluding the liquidation sales,
the gross profit percentage was 63.6%. The increase was the result of
higher margins across most brands resulting from better margins on new model
introductions, the favorable impact of price increases, the mix of sales
by
market and the favorable impact of foreign exchange on the growing international
business. In addition, higher margins were recorded in the retail
segment resulting from better margins on jewelry and watches, as well as
favorable product mix.
Selling,
General and Administrative (“SG&A”). SG&A expenses for the three
months ended July 31, 2007 were $67.0 million as compared to $64.4 million
for
the three months ended July 31, 2006. The increase of $2.6 million includes
higher spending to support retail expansion of $2.2 million, higher payroll
and
related costs of $1.1 million reflecting compensation and benefit cost increases
and increased equity compensation expense of $0.5 million. These expenses
were somewhat offset by a decrease in accounts receivable related expenses
of
$1.1 million and reduced advertising expense of $0.8 million due to a shift
in
spending from the first to the second half of fiscal 2008 to coincide with
the
shift in sales between the two periods. In addition, as a result of
the consolidation of the Company’s majority-owned joint venture with Swico
Limited (“Swico”) established to distribute the licensed brands in the United
Kingdom, $0.3 million of expense was included in the consolidated
results.
Wholesale
Operating Income. Operating income in the wholesale segment increased by
$2.8 million to $16.0 million. The increase was the net result of
higher gross profit of $3.4 million offset by an increase in SG&A expenses
of $0.6 million. The higher gross profit of $3.4 million was
primarily the result of improved gross margin percentages achieved over the
prior year. The increase in SG&A expenses of $0.6 million related
principally to higher payroll and related costs of $1.1 million and increased
equity compensation expense of $0.5 million, somewhat offset by decreases
in
accounts receivable related expenses of $1.1 million and reduced advertising
expense of $0.5 million. In addition, as a result of the
consolidation of the Company’s majority-owned joint venture with Swico, $0.3
million of expense was recorded in the wholesale segment’s
results.
Retail
Operating Income. Operating income of $0.4 million and $0.9 million were
recorded in the retail segment for the three months ended July 31, 2007 and
2006, respectively. The $0.5 million decrease was the net result of
higher gross profit of $1.4 million more than offset by higher SG&A expenses
of $1.9 million. The increased gross profit was primarily
attributable to higher sales as well as an increase in the gross margin
percentage primarily due to higher gross profit on jewelry and
watches. The increase in SG&A expenses was primarily the result
of increased selling and occupancy expenses due to the increase in the number
of
stores.
Interest
Expense. Interest expense for the three months ended July 31,
2007 and 2006 was $0.9 million for both periods. Average borrowings
were $75.1 million at an average borrowing rate of 4.5% for the three months
ended July 31, 2007 compared to average borrowings of $99.3 million at an
average rate of 3.7% for the three months ended July 31, 2006.
Interest
Income. Interest income was $1.1 million for the three months
ended July 31, 2007 as compared to $0.6 million for the three months ended
July
31, 2006. The higher interest income resulted from greater cash
invested as well as a higher earned rate. The cash invested generated interest
income at the rate of 5.2% and 4.9% for the periods ending July 31, 2007
and
2006, respectively.
Income
Taxes. Tax expense for the three months ended July 31, 2007 and
2006 was $4.1 million and $2.4 million, respectively. Taxes were recorded
at a rate of 24.9% for the three months ended July 31, 2007 as compared to
17.5%
for the three months ended July 31, 2006. Taxes for the prior year
period included a benefit related to the adoption of tax planning strategies
in
Switzerland which utilized a greater portion of the Swiss net operating loss
carryforward.
Net
Income. For the three months ended July 31, 2007, the Company
recorded net income of $12.3 million as compared to $11.3 million for the
three
months ended July 31, 2006.
Results
of operations for the six months ended July 31, 2007 as compared to the six
months ended July 31, 2006
Net
Sales: Comparative net sales by business segment were as follows (in
thousands):
|
|
Six
Months Ended July 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Wholesale:
|
|
|
|
|
|
|
United
States
|
|
$ |
100,731
|
|
|
$ |
111,273
|
|
International
|
|
|
98,727
|
|
|
|
75,837
|
|
Total
Wholesale
|
|
|
199,458
|
|
|
|
187,110
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
|
41,372
|
|
|
|
37,222
|
|
|
|
|
|
|
|
|
|
|
Net
Sales
|
|
$ |
240,830
|
|
|
$ |
224,332
|
|
Net
sales
for the six months ended July 31, 2007 were $240.8 million, above prior year
by
$16.5 million or 7.4%. The liquidation of excess discontinued
inventory accounted for approximately $11.0 million of the
increase. Net sales excluding the liquidation of excess discontinued
inventory were $229.8 million, representing an increase of $5.5 million or
2.4%
over the prior year period. There were no liquidation sales in the prior
year period.
Net
sales
in the wholesale segment increased by $12.3 million or 6.6% to $199.5
million. The increase was driven by the licensed brand and luxury
categories. Net sales in the licensed brand category were above prior
year by $13.9 million or 36.5%. The increase was primarily the result
of the launches and market expansion of the newer licensed
brands. Net sales in the luxury category were above prior year by
$6.7 million or 16.1%. Excluding the liquidation sales of $9.5
million in fiscal 2008, net sales in the luxury category were below prior
year
by $2.8 million or 6.8%. The decrease was the result of reduced
volume due to the repositioning of the Concord brand. Net sales in
the accessible luxury category were below prior year by $8.8 million or
8.9%. Excluding the liquidation sales of $1.5 million, net sales in
the accessible luxury category were below prior year by 10.4%. The
principal reason for the decrease was the shift in the retail calendar which
shifted retailer purchases from the first half to the second half of fiscal
2008.
Net
sales
in the U.S. wholesale segment were $100.7 million for the six months ended
July
31, 2007, representing a 9.5% decrease when compared to prior year sales
of
$111.3 million. The decrease in net sales was primarily attributable
to lower net sales in the accessible luxury category of $11.4
million. This decrease was primarily the result of the impact of the
shift in the retail calendar. Net sales in the luxury category were
above prior year by $1.2 million or 11.5%. Excluding sales of excess
discontinued inventory of approximately $3.0 million, net sales in the luxury
category were below prior year by 18.4% due to the repositioning of the Concord
brand. Net sales in the licensed brand category were relatively flat
year over year.
Net
sales
in the international wholesale segment were $98.7 million for the six months
ended July 31, 2007, representing an increase of $22.9 million or 30.2% above
prior year sales of $75.8 million. The increase was primarily
attributable to higher net sales in the licensed brand category of $14.5
million, primarily the result of the launches and market expansion of the
newer
licensed brands. Net sales in the luxury category were 17.5% above
prior year. Excluding sales of excess discontinued inventory of
approximately $6.5 million, net sales in the luxury category were below prior
year by 3.0%. This decrease primarily reflects the repositioning of
the Concord brand. Net sales in the accessible luxury category were
$18.9 million or above prior year by $2.6 million or 15.8%. The
increase was primarily driven by stronger demand for the Movado brand in
the
Caribbean.
Net
sales
in the retail segment were $41.4 million for the six months ended July 31,
2007,
representing an 11.1% increase above prior year sales of $37.2
million. The increase was driven by an overall 16.2% increase in
outlet store sales, resulting from a 5.6% comparable store sales increase
along
with sales increases from non-comparable stores. Sales in the Movado
Boutiques were above prior year by 5.8%, resulting from increases in sales
from
non-comparable stores somewhat offset by a decrease of 1.9%, or $0.3 million,
in
comparable store sales. The Company operated 31 Movado Boutiques and
31 outlet stores at July 31, 2007, compared to 28 Movado Boutiques and 29
outlet
stores at July 31, 2006.
Gross
Profit. Gross profit for the six months ended July 31, 2007 was
$145.0 million or 60.2% of net sales as compared to $138.1 million or 61.6%
of
net sales for the six months ended July 31, 2006. The increase in
gross profit of $6.9 million was primarily the result of a stronger gross
profit
percentage in the base business sales excluding liquidation as well as the
increase in sales. The gross profit percentage was impacted by the
liquidation sales of $11.0 million. Excluding the liquidation sales,
the gross profit percentage was 63.3%. The increase was the result of
higher margins across most brands resulting from better margins on new model
introductions, the favorable impact of price increases, the mix of sales
by
market and the favorable impact of foreign exchange on the growing international
business. In addition, higher margins were recorded in the retail
segment resulting from better margins on jewelry and watches.
Selling,
General and Administrative. SG&A expenses for the six months ended July
31, 2007 were $125.9 million as compared to $120.6 million for the six months
ended July 31, 2006. The increase of $5.3 million
includes
higher spending to support retail expansion of $3.8 million, higher payroll
and
related costs of $1.5 million reflecting compensation and benefit cost
increases, increased equity compensation expense of $0.9 million and higher
costs related to the Baselworld watch and jewelry show of $0.5 million,
primarily due to the additional new brands displayed at the
show. These expenses were somewhat offset by a decrease in accounts
receivable related expenses of $1.4 million and reduced advertising expense
of
$1.0 million due to a shift in spending from the first to the second half
of
fiscal 2008 to coincide with the shift in sales between the two
periods. In addition, as a result of the consolidation of the
Company’s majority-owned joint venture with Swico established to distribute the
licensed brands in the United Kingdom, $0.3 million of expense was included
in
the consolidated results.
Wholesale
Operating Income. Operating income in the wholesale segment increased by
$2.5 million to $20.4 million. The increase was the net result of
higher gross profit of $4.3 million, somewhat offset by the increase in SG&A
expenses of $1.8 million. The higher gross profit of $4.3 million was
primarily the result of improved gross margin percentages achieved over the
prior year. The increase in SG&A expenses of $1.8 million related
principally to higher payroll and related costs of $1.5 million, increased
equity compensation expense of $0.9 million and higher costs related to the
Baselworld watch and jewelry show of $0.5 million. These expenses
were somewhat offset by a decrease in accounts receivable related expenses
of
$1.4 million and reduced advertising expense of $0.6 million. In
addition, as a result of the consolidation of the Company’s majority-owned joint
venture with Swico, $0.3 million of expense was recorded in the wholesale
segment’s results.
Retail
Operating Loss. Operating losses of $1.3 million and $0.4 million were
recorded in the retail segment for the six months ended July 31, 2007 and
2006,
respectively. The $0.9 million increase in the loss was the net
result of higher gross profit of $2.5 million more than offset by higher
SG&A expenses of $3.4 million. The increased gross profit was
primarily attributable to the higher sales as well as an increase in the
gross
margin percentage primarily due to higher gross profit on jewelry and
watches. The increase in SG&A expenses was primarily the result
of increased selling and occupancy expenses due to the increase in the number
of
stores.
Interest
Expense. Interest expense for the six months ended July 31, 2007
and 2006 was $1.8 million and $1.9 million, respectively. Average
borrowings were $77.8 million at an average borrowing rate of 4.4% for the
six
months ended July 31, 2007 compared to average borrowings of $102.8 million
at
an average rate of 3.6% for the six months ended July 31, 2006.
Interest
Income. Interest income was $2.3 million for the six months
ended July 31, 2007 as compared to $1.5 million for the six months ended
July
31, 2006. The higher interest income resulted from greater cash
invested as well as a higher earned rate. The cash invested generated interest
income at the rate of 5.2% and 4.7% for the periods ending July 31, 2007
and
2006, respectively.
Income
Taxes. Tax expense for the six months ended July 31, 2007 and
2006 was $4.8 million and $3.0 million, respectively. Taxes were recorded
at a rate of 24.2% for the six months ended July 31, 2007 as compared to
17.6%
for the six months ended July 31, 2006. Taxes for the prior year
period included a benefit related to the adoption of tax planning strategies
in
Switzerland which utilized a greater portion of the Swiss net operating loss
carryforward.
Net
Income. For the six months ended July 31, 2007, the Company
recorded net income of $14.7 million as compared to $14.2 million for the
six
months ended July 31, 2006.
LIQUIDITY
AND CAPITAL RESOURCES
Cash
provided by operating activities was $7.0 million for the six months ended
July
31, 2007 as compared to cash used of $24.4 million for the six months ended
July
31, 2006. The increase in cash provided by operating activities is
primarily attributed to improvements in accounts receivable. This is
principally the result of the
mix
of
business in the current year. The sales growth was primarily in the
licensed brand category where shorter payment terms are the norm and in the
retail segment which is a cash business.
Cash
used
in investing activities amounted to $12.0 million and $7.2 million for the
six
months ended July 31, 2007 and 2006, 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 computer
hardware and software, and construction of booths to be used at the Baselworld
watch and jewelry show.
Cash
used
in financing activities amounted to $17.4 million for the six months ended
July
31, 2007 compared to cash used of $15.8 million for the six months ended
July
31, 2006. Cash used in financing activities for both periods was
primarily used to pay down long-term debt and to pay out dividends.
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, 2007, the Company was in
compliance with all financial and non-financial covenants and $20.0 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. This agreement, which
expired on March 21, 2007, allowed for the issuance 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
outstanding. As of July 31, 2007, 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., PNC Bank 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 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, 2007, the Company was in compliance
with all financial and non-financial covenants and had 33.0 million Swiss
francs, with a dollar equivalent of $27.5 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., PNC Bank 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 an equivalent of $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, 2007, the Company was in
compliance with all financial and non-financial covenants, and there were
no
outstanding borrowings against this line.
On
June
15, 2007, 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 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, 2008. 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
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, 2007, there were no outstanding borrowings
against this line.
On
July
31, 2007, 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 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, 2008. 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 (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, 2008. As of July 31, 2007, 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 $6.7 million
and
$6.5 million at July 31, 2007 and 2006, respectively. As of July 31,
2007, two European banks have guaranteed obligations to third parties on
behalf
of two of the Company’s foreign subsidiaries in the amount of $1.7 million in
various foreign currencies. As of July 31, 2007, there were no
outstanding borrowings against these lines.
The
Company paid dividends of $0.16 per share or approximately $4.2 million,
for the
six months ended July 31, 2007 and $0.12 per share or approximately $3.1
million
for the six months ended July 31, 2006.
Cash
at
July 31, 2007 amounted to $112.5 million compared to $78.1 million at July
31,
2006. The increase in cash is a result of strong cash flow from operations
from
July 31, 2006 to the end of the current period.
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.
RECENTLY
ISSUED ACCOUNTING STANDARDS
In
September 2006, the FASB issued SFAS No. 157, ‘‘Fair Value
Measurements.’’ SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles
and expands disclosures about fair value measurements. This statement is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. The Company
is
currently evaluating the impact of SFAS No. 157 on the Company’s consolidated
financial statements.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities – Including an Amendment of FAS
115.” SFAS No. 159 permits entities to choose to measure many
financial instruments and certain other items at fair
value. Unrealized gains and losses on items for which the fair value
option has been elected will be recognized in earnings at each subsequent
reporting date. This statement is effective for financial statements
issued for fiscal years beginning after November 15, 2007. The
Company is currently evaluating the impact of SFAS No. 159 on the Company’s
consolidated financial statements.
Item
3. Quantitative and Qualitative Disclosures About Market Risk
Foreign
Currency and Commodity Price Risk
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 SFAS No. 133, "Accounting for Derivative Instruments and
Hedging
Activities", 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, 2007,
the Company’s entire net forward contracts hedging portfolio consisted of 141.0
million Swiss francs equivalent for various expiry dates ranging through
October
30, 2008. If the Company were to settle its Swiss franc forward
contracts at July 31, 2007, the net result would have been a gain of
$0.6 million, net of tax of $0.4 million. As of July 31, 2007,
the Company had 16.0 million Swiss franc option contracts related to cash
flow
hedges for various expiry dates ranging through April 30, 2008. If
the Company were to settle its Swiss franc option contracts at July 31, 2007,
the net result would have been a net gain of less than $0.1
million.
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, 2007, 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, 2007.
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, 2007, 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 $0.3 million.
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 six months ended July 31, 2007, that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART
II - OTHER INFORMATION
Item
1. Legal
Proceedings
The
Company is involved in pending legal proceedings and claims in the ordinary
course of 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.
Item
1A. Risk
Factors
As
of July 31, 2007,
there have been no material changes to any of the risk factors previously
reported in the Annual Report on Form 10-K for the fiscal year ended January
31,
2007.
Item
4. Submission of Matters
to a Vote of Security Holders
On
June
14, 2007, the Company held its annual meeting of shareholders at its New
York
office and showrooms in New York, New York.
The
following matters were voted upon
at the meeting:
(i)
|
Margaret
Hayes Adame, Richard Coté, Efraim Grinberg, Gedalio Grinberg, Alan H.
Howard, Richard Isserman, Nathan Leventhal, Donald Oresman and
Leonard L.
Silverstein were elected directors of the Company. The results
of the vote
were as follows:
|
Nominee
|
|
For
|
|
Withheld/
Against
|
|
|
|
|
|
Margaret
Hayes Adame
|
|
60,538,082
|
|
302,751
|
Richard
Coté
|
|
60,467,377
|
|
373,456
|
Efraim
Grinberg
|
|
60,539,735
|
|
301,098
|
Gedalio
Grinberg
|
|
60,466,926
|
|
373,907
|
Alan
H. Howard
|
|
60,721,141
|
|
119,692
|
Richard
Isserman
|
|
60,709,830
|
|
131,003
|
Nathan
Leventhal
|
|
60,710,346
|
|
130,487
|
Donald
Oresman
|
|
60,537,655
|
|
303,178
|
Leonard
L. Silverstein
|
|
54,677,952
|
|
6,162,881
|
(ii)
|
A
proposal to ratify the selection of PricewaterhouseCoopers LLP
as the
Company’s independent public accountants for the fiscal year ending
January 31, 2008 was approved. The results of the vote were as
follows:
|
For
|
|
Withheld/Against
|
|
Exception/Abstain
|
60,639,554
|
|
197,706
|
|
3,573
|
Item
6. Exhibits
10.1
|
Line
of Credit Letter Agreement dated as of June 15, 2007 between the
Registrant and Bank of America, N.A. and Amended and Restated Promissory
Note dated as of June 15, 2007 to Bank of America,
N.A. |
10.2
|
Promissory
Note dated as of July 31, 2007 to JPMorgan Chase Bank,
N.A. |