- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q ------------------------ [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED APRIL 30, 2002 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 0-22378 MOVADO GROUP, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MOVADO GROUP, INC. INDEX TO QUARTERLY REPORT ON FORM 10-Q APRIL 30, 2002 Page ---- Part I Financial Information Item 1. Consolidated Balance Sheets at April 30, 2002, January 31, 2002 and April 30, 2001 3 Consolidated Statements of Operations for the three months ended April 30, 2002 and 2001 4 Consolidated Statements of Cash Flows for the three months ended April 30, 2002 and 2001 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Part II Other Information Item 6. Exhibits and Reports on Form 8-K 12 Signatures 13 Exhibit Index 14 2
PART 1 - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS MOVADO GROUP, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts) (Unaudited) APRIL 30, JANUARY 31, APRIL 30, 2002 2002 2001 ASSETS Current assets: Cash and cash equivalents $ 21,407 $ 16,971 $ 12,042 Trade receivables, net 94,223 92,014 96,414 Inventories, net 106,272 98,589 104,428 Other 26,063 19,467 25,231 --------- --------- --------- Total current assets 247,965 227,041 238,115 Property, plant and equipment, net 37,897 38,726 33,224 Other 24,304 24,909 22,071 --------- --------- --------- Total assets $ 310,166 $ 290,676 $ 293,410 ========= ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Loans payable to banks $ 31,000 $ 6,500 $ 38,725 Current portion of long-term debt 5,000 5,000 5,000 Accounts payable 15,951 23,824 15,182 Accrued liabilities 20,691 25,417 21,845 Current taxes payable 6,444 8,646 7,818 Deferred taxes payable 4,593 3,722 2,950 --------- --------- --------- Total current liabilities 83,679 73,109 91,520 Long-term debt 35,000 35,000 40,000 Deferred and non-current foreign income taxes 1,591 1,513 3,329 Other liabilities 7,766 8,584 5,945 --------- --------- --------- Total liabilities 128,036 118,206 140,794 --------- --------- --------- Shareholders' equity: Preferred Stock, $0.01 par value, 5,000,000 shares authorized; no shares issued -- -- -- Common Stock, $0.01 par value, 20,000,000 shares authorized; 9,889,550, 9,797,776 and 9,687,960 shares issued, respectively 98 98 97 Class A Common Stock, $0.01 par value, 10,000,000 shares authorized; 3,473,123, 3,509,733 and 3,509,733 shares issued and outstanding, respectively 35 35 35 Capital in excess of par value 69,898 69,484 68,302 Retained earnings 157,539 153,830 137,589 Accumulated other comprehensive loss (17,749) (23,286) (25,497) Treasury stock, 1,544,487, 1,544,487 and 1,556,670 shares, respectively, at cost (27,691) (27,691) (27,910) --------- --------- --------- Total shareholders' equity 182,130 172,470 152,616 --------- --------- --------- Total liabilities and shareholders' equity $ 310,166 $ 290,676 $ 293,410 ========= ========= ========= SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3
MOVADO GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) (Unaudited) THREE MONTHS ENDED APRIL 30, 2002 2001 -------- -------- Net sales $ 57,271 $ 56,512 Costs and expenses: Cost of sales 22,092 21,568 Selling, general and administrative 33,791 33,890 -------- -------- Operating income 1,388 1,054 Net interest expense 927 1,232 -------- -------- Income (loss) before income taxes and cumulative effect of a change in accounting principle 461 (178) Provision (tax benefit) for income taxes 129 (50) -------- -------- Income (loss) before cumulative effect of a change in accounting principle 332 (128) Cumulative effect of a change in accounting principle, net of a tax benefit of $42 -- (109) -------- -------- Net income (loss) $ 332 ($ 237) -------- -------- Basic income (loss) per share Income (loss) before cumulative effect of a change in accounting principle $ 0.03 ($ 0.01) Cumulative effect of a change in accounting principle -- (0.01) -------- -------- Net income (loss) per share $ 0.03 ($ 0.02) ======== ======== Weighted basic average shares outstanding 11,762 11,629 ======== ======== Diluted income (loss) per share Income (loss) before cumulative effect of a change in accounting principle $ 0.03 ($ 0.01) Cumulative effect of a change in accounting principle -- (0.01) -------- -------- Net income (loss) per share $ 0.03 ($ 0.02) ======== ======== Weighted diluted average shares outstanding 12,146 11,853 ======== ======== SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4
MOVADO GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited) THREE MONTHS ENDED APRIL 30, 2002 2001 -------- -------- Cash flows from operating activities: Net income (loss) $ 332 ($ 237) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 2,089 1,675 Provision for losses on accounts receivable 273 307 Provision for losses on inventory 312 572 Changes in current assets and liabilities: Trade receivables (2,024) 814 Inventories (5,793) (11,330) Other current assets (708) (6,136) Accounts payable (8,338) (13,060) Accrued liabilities (5,018) (5,941) Deferred & current taxes payable (1,655) (4,622) Other non-current assets 1,463 (1,650) Other non-current liabilities (818) 2,020 -------- -------- Net cash used in operating activities (19,885) (37,588) -------- -------- Cash flows from investing activities: Capital expenditures (306) (2,649) Trademarks and other intangibles (102) (128) -------- -------- Net cash used in investing activities (408) (2,777) -------- -------- Cash flows from financing activities: Net proceeds from bank borrowings 24,500 29,925 Stock options exercise & other 418 777 Dividends paid (354) (349) -------- -------- Net cash provided by financing activities 24,564 30,353 -------- -------- Effect of exchange rate changes on cash and cash equivalents 165 (1,005) -------- -------- Net increase (decrease) in cash and cash equivalents 4,436 (11,017) Cash and cash equivalents at beginning of period 16,971 23,059 -------- -------- Cash and cash equivalents at end of period $ 21,407 $ 12,042 ======== ======== SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5
MOVADO GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared by Movado Group, Inc. (the "Company") in a manner consistent with that used in the preparation of the financial statements included in the Company's fiscal 2002 Annual Report filed on Form 10-K. In the opinion of management, the accompanying financial statements reflect all adjustments, consisting of only normal and recurring adjustments, necessary for a fair presentation of the financial position and results of operations for the periods presented. These consolidated financial statements should be read in conjunction with the aforementioned annual report. Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for the full year. NOTE 1 - RECLASSIFICATION Certain prior year amounts have been reclassified to conform to the current presentation. NOTE 2 - INVENTORIES Inventories consist of the following (in thousands): APRIL 30, JANUARY 31, APRIL 30, 2002 2002 2001 --------- ----------- --------- Finished goods $ 69,304 $ 63,956 $ 67,714 Component parts 33,827 32,531 31,707 Work-in-process 3,141 2,102 5,007 -------- -------- -------- $106,272 $ 98,589 $104,428 ======== ======== ======== NOTE 3 - DERIVATIVES AND FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's policy is to enter into forward exchange contracts and purchase foreign currency options to reduce exposure to adverse fluctuations in foreign exchange rates and, to a lesser extent, in commodity prices. When entered into, the Company formally documents these derivative instruments as a hedge of a specific underlying exposure, as well as the risk management objectives and strategies for undertaking the hedge transactions. The Company formally assesses, both at the inception and at each financial quarter thereafter, the effectiveness of the derivative instrument hedging the underlying cash flow transaction which is being hedged. Any ineffectiveness related to the derivative financial instruments' change in fair value will be recognized in the period in which the ineffectiveness was calculated. All of our derivative instruments have liquid markets to assess fair value. The Company does not enter into any derivative instruments for trading purposes. On February 1, 2001, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137 and SFAS No. 138. These Statements require that an entity recognizes all derivative instruments as either assets or liabilities measured at fair value. Changes in derivative fair values will either be recognized in earnings as offsets to the changes in fair value of related hedged assets, 6
liabilities and firm commitments or, for forecasted transactions, deferred and recorded as a component of other stockholders' equity until the hedged transactions occur and are recognized in earnings. The ineffective portion of a hedging derivative's change in fair value will be immediately recognized in earnings. The adoption of SFAS No. 133 resulted in the Company recording a transition adjustment in the first quarter of fiscal 2002 to recognize its derivative instruments at fair value. This transition adjustment was an after-tax reduction to net income of approximately $0.1 million and an after-tax increase to accumulated other comprehensive loss ("AOCL") of approximately $0.4 million. As of April 30, 2002 and 2001, the balance of deferred net gains (losses) on derivative instruments included in AOCL was $1.0 million and ($0.4) million, net of tax. The Company expects that $0.7 million of the deferred net gains will be realized into earnings over the next 12 months as a result of transactions that are expected to occur over that period. The primary underlying transaction, which will cause the amount in AOCL to affect net earnings, consists of the Company's sale of inventory purchased predominantly in Swiss francs. The maximum length of time the Company is hedging its exposure to the fluctuation in future cash flows for forecasted transactions is 24 months. NOTE 4 - SUPPLEMENTAL CASH FLOW INFORMATION The following is provided as supplemental information to the consolidated statements of cash flows (in thousands): THREE MONTHS ENDED APRIL 30, 2002 2001 ---- ---- Cash paid during the period for: Interest $ 949 $1,238 Income taxes $2,433 $4,619 NOTE 5 - OTHER COMPREHENSIVE INCOME (LOSS) The components of other comprehensive income (loss) for the three months ended April 30, 2002 and 2001 are as follows (in thousands): 2002 2001 ---- ---- Accounting change, net of tax (See note 3) $ -- $ 367 Net unrealized loss on investment, net of tax (11) -- Effective portion of unrealized income (loss) on hedging contracts, net of tax 1,002 (816) Foreign currency translation adjustment 4,546 (6,879) ------- ------- Other comprehensive income (loss) $ 5,537 ($7,328) ======= ======= 7
NOTE 6 - SEGMENT INFORMATION The Company conducts its business primarily in three operating segments: "Wholesale," "Retail" and "Other." The Company's Wholesale segment includes the designing, manufacturing and distribution of quality watches. Retail includes the Movado Boutiques and outlet stores. Other includes the Company's service center operations and shipping. Operating segment data as of April 30, 2002 and 2001 are as follows (in thousands). NET SALES OPERATING INCOME 2002 2001 2002 2001 Wholesale $45,463 $47,065 $ 2,400 $ 2,289 Retail 9,837 7,529 (1,319) (1,368) Other 1,971 1,918 307 133 ------- ------- ------- ------- Consolidated total $57,271 $56,512 $ 1,388 $ 1,054 ======= ======= ======= ======= NOTE 7 - RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS On February 1, 2002, the Company adopted Emerging Issues Task Force ("EITF") No. 01-09, "Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor's Products." Upon adoption of EITF 01-09, the Company is required to reclassify certain operating expenses as a reduction of sales. The adoption of this EITF did not have a material effect on the Company's financial position or results of operations for the quarter ended April 30, 2002 and 2001. On February 1, 2002, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets." Under SFAS No. 142, goodwill and intangible assets deemed to have indefinite lives are no longer amortized, but are subject to an annual impairment test. Other intangible assets continue to be amortized over their useful lives. The adoption of this Statement did not have a material effect on the Company's financial position or results of operations. The Company currently has no goodwill or intangible assets with indefinite lives. On February 1, 2002, the Company also adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This Statement supersedes SFAS No. 121, "Accounting for the impairment of Long-Lived Assets and for Long-Lived Assets to be disposed of." This SFAS requires that one accounting model be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and broadens the presentation of discontinued operations to include more disposal transactions. The adoption of this Statement had no effect on the Company's financial position or results of operations. 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations FORWARD LOOKING STATEMENTS Statements included under Management's Discussion and Analysis of Financial Condition and Results of Operations, in this report, as well as statements in future filings by the Company with the Securities and Exchange Commission ("SEC"), in the Company's press releases and oral statements made by or with the approval of an authorized executive officer of the Company, which are not historical in nature, are intended to be, and are hereby identified as, "forward looking statements" for purposes of the safe harbor provided by Section 21E of the Securities Exchange Act of 1934. The Company cautions readers that forward looking statements include, without limitation, those relating to the Company's future business prospects, revenues, working capital, liquidity, capital needs, plans for future operations, 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, 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 loss of any significant supplier, the loss of significant customers, the Company's dependence on key officers, the continuation of licensing arrangements with third parties, ability to secure and protect trademarks, patents and other intellectual property rights, ability to lease new stores on suitable terms in desired markets and to complete construction on a timely basis, continued availability to the Company of financing and credit on favorable terms, business disruptions, general risks associated with doing business outside the United States including, without limitations, import duties, tariffs, quotas, political and economic stability and success of hedging strategies in respect of currency exchange rate fluctuations. RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED APRIL 30, 2002 AS COMPARED TO THE THREE MONTHS ENDED APRIL 30, 2001. Net sales: Comparative net sales by product class were as follows: Three Months Ended April 30, 2002 2001 Concord, Movado, Coach, ESQ and Tommy Hilfiger Domestic $36,460 $36,430 International 9,003 10,635 Retail 9,837 7,529 Other 1,971 1,918 ------- ------- Net Sales $57,271 $56,512 ======= ======= 9
Net sales increased by $0.8 million or 1.3% for the three months ended April 30, 2002 as compared to the three months ended April 30, 2001. Domestic sales of our watch brands remained at the same sales level as compared to the prior year. International watch brand sales decreased by $1.6 million or 15.3% due to adverse economic conditions in the Far East, Middle East and portions of Europe. Retail sales increased by $2.3 million or 30.7%. Growth in the retail sales category was primarily attributable to comparable store sales increases in the Movado Boutiques of 8.8% and the outlets of 12.7% and new store openings. As of April 30, 2002, there were ten Movado Boutiques and 25 outlets as compared to seven Movado Boutiques and 23 outlets open as of April 30, 2001. Other net sales, which include sales from the Company's service center operations and shipping, increased by $0.1 million or 2.8%. Gross Margin. The gross profit for the three months ended April 30, 2002 was $35.2 million (61.4% of net sales) as compared to $34.9 million (61.8% of net sales) for the three months ended April 30, 2001. Gross margin increase of $0.3 million for the quarter ended April 30, 2002 primarily relates to the increase in sales. Selling, General and Administrative. Selling, general and administrative expenses for the quarter were $33.8 million or 59.0% of net sales as compared to $33.9 million or 60.0% of net sales in the first quarter of last year. The $0.1 million or 0.3% decrease was primarily attributable to the Company's ongoing productivity improvements offset by spending in the Company's growth initiatives at the Movado Boutiques. Interest Expense. Net interest expense for the three months ended April 30, 2002 was $0.9 million as compared to $1.2 million for three months ended April 30, 2001. Interest decreased due to a decline in short-term bank borrowings and a reduction of interest rates. Income Taxes. The Company recorded a tax expense of $0.1 million for the three months ended April 30, 2002 as compared to a benefit of $0.1 million for the three months ended April 30, 2001. Taxes were recorded at a 28% rate for both the first quarter of fiscal 2003 and fiscal 2002. The Company's effective tax rate reflects the current expectation of overall foreign to domestic earnings mix, local statutory tax rates and the Company's ability to utilize net operating loss carryforwards in certain jurisdictions. LIQUIDITY AND FINANCIAL POSITION Cash used in operating activities amounted to $19.9 million and $37.6 million for the three months ended April 30, 2002 and 2001, respectively. The decrease of cash flow used in operating activities for the comparative three months ended April 30, 2002 and 2001 was mainly due to the timing of inventory purchases, operating expense and tax payments and the result of positive income for fiscal 2003. Cash used in investing activities amounted to $0.4 million and $2.8 million for the three months ended April 30, 2002 and 2001, respectively, were primarily for capital expenditures. For the three months ended April 30, 2002, capital expenditures were mainly for various information systems projects. Expenditures for the three months ended April 30, 2001 relate primarily to the build-out of the Paramus, N.J. corporate offices and management information systems projects. Cash provided by financing activities amounted to $24.6 million and $30.4 million for the three months ended April 30, 2002 and 2001, respectively, which were due to seasonal short-term bank borrowings. 10
At April 30, 2002, the Company had two series of Senior Notes outstanding. Senior Notes due January 31, 2005 were originally issued in a private placement completed in fiscal 1994. These notes have required annual principal payments of $5.0 million since January 1998 and bear interest of 6.56% per annum. During fiscal 1999, the Company issued $25.0 million of Series A Senior Notes under a Note Purchase and Private Shelf Agreement dated November 30, 1998. These notes bear interest at 6.90%, mature on October 30, 2010 and are subject to annual repayments of $5.0 million commencing October 31, 2006. On March 21, 2001, the Company entered into a new Note Purchase and Private Shelf Agreement, which allows for the issuance for up to three years after the date thereof of senior promissory notes in the aggregate principal amount of up to $40.0 million with maturities up to 12 years from their original date of issuance. In June 2000, the Company completed the renewal of its revolving credit and working capital lines with its bank group. The new agreement provides for a three year $100.0 million unsecured revolving line of credit and $15.0 million of uncommitted working capital lines. At April 30, 2002, the Company had $31.0 million of outstanding borrowings under its bank lines as compared to $38.7 million at April 30, 2001. Under a series of share repurchase authorizations approved by the Board of Directors, the Company has maintained a discretionary share buy-back program. There were no purchases during the current year under the repurchase program. The Company paid dividends of approximately $350,000 for the first quarter of both fiscal 2003 and fiscal 2002. Cash and cash equivalents at April 30, 2002 amounted to $21.4 million compared to $12.0 million at April 30, 2001. The increase in cash relates primarily to the timing of payment for inventory and income taxes and a reduction in capital expenditures during fiscal 2003. Net debt to total capitalization at April 30, 2002 was 27.2% as compared to 47.0% at April 30, 2001. In summary, the Company made significant progress in the first quarter of fiscal 2003 in maintaining its liquidity primarily through the success of its operating expense reduction initiatives and management of working capital. 11
PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits None (b) Reports on Form 8-K None 12
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: June 14, 2002 By: /s/ Eugene J. Karpovich ---------------------------- Eugene J. Karpovich Senior Vice President and Chief Financial Officer (Chief Financial Officer and Principal Accounting Officer) 13
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