form10-k.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
one)
x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT
OF 1934
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For
fiscal year ended January 31, 2009,
OR
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¨ TRANSITION REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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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
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13-2595932
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(State
or Other Jurisdiction
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(IRS
Employer
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of
Incorporation or Organization)
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Identification
No.)
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650
From Road, Ste. 375
Paramus,
New Jersey
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07652-3556
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(Address
of Principal Executive Offices)
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(Zip
Code)
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Registrant's
Telephone Number, Including Area Code:(201) 267-8000
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Securities
Registered Pursuant to Section 12(b) of the Act:
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Name
of Each Exchange
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Title
of Each Class
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on
which Registered
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Common
stock, par value $0.01 per share
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New
York Stock Exchange
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Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes ¨ No
x
Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Exchange Act. Yes ¨ No
x
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 the past 90 days.
Yes x No
¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer,'' "accelerated filer'' and "smaller
reporting company''
in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨ Smaller
reporting company ¨
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
aggregate market value of the voting stock held by non-affiliates of the
registrant as of July 31, 2008 was approximately $414,787,000 (based on the
closing sale price of the registrant's Common Stock on that date as reported on
the New York Stock Exchange). For purposes of this computation, each share of
Class A Common Stock is assumed to have the same market value as one share of
Common Stock into which it is convertible and only shares of stock held by
directors and executive officers were excluded.
The
number of shares outstanding of the registrant's Common Stock and Class A Common
Stock as of March 31, 2009 were 17,768,629 and 6,634,319,
respectively.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the definitive proxy statement relating to registrant's 2009 annual meeting
of shareholders (the "Proxy Statement'') are incorporated by reference in Part
III hereof.
PART
I
FORWARD-LOOKING
STATEMENTS
Statements
in this annual report on Form 10-K, including, without limitation, statements
under Item 7 “Management’s Discussion and Analysis of Financial Condition and
Results of Operation” and elsewhere in this report, as well as statements in
future filings by the Company with the Securities and Exchange Commission, 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, uncertainty regarding
such economic and business conditions, trends in consumer debt levels and bad
debt write-offs, 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 this annual report on Form 10-K, should be considered in
evaluating any forward-looking statements contained in this report 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.
Item
1. Business
GENERAL
In this
Form 10-K, all references to the “Company”or “Movado Group” include Movado
Group, Inc. and its subsidiaries, unless the context requires
otherwise.
Movado
Group, Inc. designs, sources, markets and distributes fine watches and
jewelry. Its portfolio of brands is comprised of Movado®, Ebel®,
Concord®, ESQ®, Coach® Watches, HUGO BOSS® Watches, Juicy Couture® Watches,
Tommy Hilfiger® Watches and Lacoste® Watches. The Company is a leader
in the design, development, marketing and distribution of watch brands sold in
almost every major category comprising the watch industry. The
Company also designs, develops and markets proprietary Movado-branded jewelry
which it retails in its luxury Movado Boutiques.
The
Company was incorporated in New York in 1967 under the name North American Watch
Corporation, to acquire Piaget Watch Corporation and Corum Watch Corporation,
which had been, respectively, the exclusive importers and distributors of Piaget
and Corum watches in the United States since the 1950’s. The Company
sold its Piaget and Corum distribution businesses in 1999 and 2000,
respectively, to focus on its own portfolio of brands. Since its
incorporation, the Company has developed its brand-building reputation and
distinctive image across an expanding number of brands and geographic
markets. Strategic acquisitions of watch brands and their subsequent
growth, along with license agreements, have played an important role in the
expansion of the Company’s brand portfolio.
In 1970,
the Company acquired the Concord brand and the Swiss company that had been
manufacturing Concord watches since 1908. In 1983, the Company
acquired the U.S. distributor of Movado watches and substantially all of the
assets related to the Movado brand from the Swiss manufacturer of Movado
watches. The Company changed its name to Movado Group, Inc. in
1996. In March 2004, the Company completed its acquisition of Ebel,
one of the world’s premier luxury watch brands that was established in La
Chaux-de-Fonds, Switzerland in 1911.
The
Company is very selective in its licensing strategy and chooses to enter into
long-term partnerships with only powerful brands that are leaders in their
respective businesses. The following table sets forth the brands
licensed by the Company and the year in which the Company launched each licensed
brand for watches. All of the Company’s license agreements are
exclusive.
Brand
|
Licensor
|
Year
Launched
|
ESQ
|
Hearst
Communication, Inc.
|
1993
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Coach
|
Coach,
Inc.
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1999
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Tommy
Hilfiger
|
Tommy
Hilfiger Licensing, Inc.
|
2001
|
HUGO
BOSS
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HUGO
BOSS Trade Mark Management GmbH & Co KG
|
2006
|
Juicy
Couture
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L.C.
Licensing, Inc.
|
2007
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Lacoste
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Lacoste
S.A., Sporloisirs S.A. and Lacoste Alligator S.A.
|
2007
|
On
October 7, 1993, the Company completed a public offering of 2,666,667 shares of
common stock, par value $0.01 per share. On October 21, 1997, the Company
completed a secondary stock offering in
which
1,500,000 shares of common stock were issued. On May 21, 2001, the Company moved
from the NASDAQ National Market to the New York Stock Exchange
(“NYSE”). The Company’s common stock is traded on the NYSE under the
trading symbol MOV.
RECENT
DEVELOPMENTS
Economic
conditions both in the United States and around the world have deteriorated
since the beginning of fiscal 2009 and over the course of the last quarter ended
January 31, 2009. As the events that have caused this deterioration
continue to unfold, the Company does not have significant, meaningful visibility
into the further effects they could have on the U.S. and the global economy,
although they likely will continue to have a negative impact on the Company’s
sales and profits into fiscal 2010. Nevertheless, the Company intends to
continue to take actions to appropriately manage its business while
strategically positioning itself for long-term success, including:
·
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capitalizing
on the strength of the Company’s brands to gain market share across all
price categories;
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·
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the
expense reduction initiatives implemented throughout fiscal
2009;
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·
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working
with retail customers to help them better manage their inventory, improve
their productivity and reduce credit risk;
and
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·
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continuing
to tightly manage cash and inventory
levels.
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As a
result of the Company’s fourth quarter fiscal 2009 financial results, the
Company was not in compliance with one of its financial covenants under certain
of its current debt agreements, specifically the interest coverage ratio
covenant. As a result of the Company’s non-compliance with the
interest coverage ratio covenant, any amounts owed under these agreements have
been reclassified to current liabilities. Additionally, the Company
is prohibited from borrowing any additional funds under these agreements, and
the amounts owed as of January 31, 2009 may be declared immediately due and
payable by the lenders. The lenders have not taken any action in
respect to this default, but they may do so in the future.
Through
the date of this filing, the Company is in negotiations with banking
institutions for a new three year asset-based revolving credit facility for an
amount up to $110 million. To provide for available liquidity in the
event that the $110 million asset-based revolving credit facility is not
consummated, the Company has received a commitment for a three year $50 million
asset-based credit facility from Bank of America. The
commitment is subject to the completion of due diligence by Bank of America and
the satisfaction of a number of additional customary conditions precedent,
certain of which are at the sole discretion of Bank of America.
For more
information on current and proposed debt and credit arrangements, see Notes 4
and 5 to the Consolidated Financial Statements.
On April
9, 2009, the Company announced that its Board of Directors has decided to
discontinue the quarterly cash dividend. This decision was based on
the Company’s desire to retain capital during the current challenging economic
environment. The Board will evaluate the reinstitution of a quarterly
dividend once the economy has stabilized and the Company has returned to an
appropriate level of profitability.
During
the second half of fiscal 2009, the Company announced initiatives designed to
streamline operations, reduce expenses, and improve efficiencies and
effectiveness across the Company’s global organization. In fiscal
2009, the Company recorded a total pre-tax charge of $11.1 million related to
the
completion of these programs and a restructuring of certain
benefit arrangements. These expenses were recorded in SG&A
expenses in the Consolidated Statements of Income.
INDUSTRY
OVERVIEW
The
largest markets for watches are North America, Western Europe and
Asia. The Company divides the watch market into six principal
categories as set forth in the following table.
Market
Category
|
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Suggested
Retail Price Range
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Primary
Category of Movado Group, Inc. Brands
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Exclusive
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$10,000
and over
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Concord
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Luxury
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$1,500
to $9,999
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Ebel
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Premium
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$500
to $1,499
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Movado
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Moderate
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$100
to $499
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ESQ,
Coach, HUGO BOSS, Juicy Couture and Lacoste
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Fashion
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$55
to $99
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Tommy
Hilfiger
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Mass
Market
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Less
than $55
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-
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Exclusive
Watches
Exclusive
watches are usually made of precious metals, including 18 karat gold or
platinum, and are often set with precious gems. These watches are
primarily mechanical or quartz-analog watches. Mechanical watches keep time with
intricate mechanical movements consisting of an arrangement of wheels, jewels
and winding and regulating mechanisms. Quartz-analog watches have quartz
movements in which time is precisely calibrated to the regular frequency of the
vibration of quartz crystal. Exclusive watches are manufactured almost entirely
in Switzerland. In addition to the Company’s Concord watches,
well-known brand names of exclusive watches include Audemars Piguet, Patek
Philippe, Piaget and Vacheron Constantin.
Luxury
Watches
Luxury
watches are either quartz-analog watches or mechanical watches. These
watches typically are made with either 14 or 18 karat gold, stainless steel or a
combination of gold and stainless steel, and are occasionally set with precious
gems. Luxury watches are primarily manufactured in
Switzerland. In addition to a majority of the Company’s Ebel watches,
well-known brand names of luxury watches include Baume & Mercier, Breitling,
Cartier, Omega, Rolex and TAG Heuer.
Premium
Watches
The
majority of premium watches are quartz-analog watches. These watches
typically are made with gold finish, stainless steel or a combination of gold
finish and stainless steel. Premium watches are manufactured
primarily in Switzerland, although some are manufactured in Asia. In
addition to a majority of the Company’s Movado watches, well-known brand names
of premium watches include Gucci, Rado and Raymond Weil.
Moderate
Watches
Most
moderate watches are quartz-analog watches. Moderate watches are
manufactured primarily in Asia and Switzerland. These watches
typically are made with gold finish, stainless steel, brass or a combination of
gold finish and stainless steel. In addition to the Company’s ESQ,
Coach, HUGO BOSS, Juicy Couture and Lacoste brands, well-known brand names of
watches in the moderate category include Anne Klein, Bulova, Citizen, Guess,
Seiko and Wittnauer.
Fashion
Watches
Watches
comprising the fashion market are primarily quartz-analog watches but also
include some digital watches. Watches in the fashion category are
generally made with stainless steel, gold finish, brass and/or plastic and are
manufactured primarily in Asia. Fashion watches feature designs that
reflect current and emerging fashion trends. Many are sold under
licensed designer and brand names that are well-known principally in the apparel
industry. In addition to the Company’s Tommy Hilfiger brand,
well-known brands of fashion watches include Anne Klein II, DKNY, Fossil, Guess,
Kenneth Cole and Swatch.
Mass
Market Watches
Mass
market watches typically consist of digital watches and analog watches made from
stainless steel, brass and/or plastic and are manufactured in
Asia. Well-known brands include Casio, Citizen, Pulsar, Seiko and
Timex. The Company does not compete in the mass market watch
category.
BRANDS
The
Company designs, develops, sources, markets and distributes products under the
following watch brands:
Movado
Founded
in 1881 in La Chaux-de-Fonds, Switzerland, Movado is an icon of modern
design. Today the brand includes a line of watches, inspired by the
simplicity of the Bauhaus movement, including the world famous Movado Museum
watch and a number of other watch collections with more traditional dial
designs. The design for the Movado Museum watch was the first watch
design chosen by the Museum of Modern Art for its permanent collection. It has
since been honored by other museums throughout the world. The Movado
brand also includes Series 800, a sport watch collection that incorporates
Movado quality and craftsmanship with the characteristics of a true sport
watch. Movado watches have Swiss movements and are made with 14 or 18
karat gold, 18 karat gold finish, stainless steel or a combination of 18 karat
gold finish and stainless steel. The core collection of Movado
watches has suggested retail prices between $595 and $1,595, with select models
exceeding this range.
Ebel
The Ebel
brand, one of the world’s premier luxury watch brands, was established in La
Chaux-de-Fonds, Switzerland in 1911. Since acquiring Ebel, Movado
Group has returned Ebel to its roots as the “Architects of Time” through its
product development, marketing initiatives and global advertising campaigns. All
Ebel watches feature Swiss movements and are made with solid 18 karat gold,
stainless
steel or a combination of 18 karat gold and stainless steel. The
core collection of Ebel watches has suggested retail prices between $3,450 and
$21,500, with select models exceeding this range.
Concord
Concord
was founded in 1908 in Bienne, Switzerland. Inspired by its avant
garde roots, Concord is designed to be resolutely upscale with a modern, edgy
point of view and has been repositioned as a niche luxury brand with exclusive
distribution. The brand’s products center on its iconic C1
collection,
a
breakthrough in modern design. Concord watches have Swiss movements
and are made with solid 18 karat gold, stainless steel or a combination of 18
karat gold and stainless steel. The core collection of Concord
watches has suggested retail prices between $10,500 and $37,700, with select
models exceeding this range.
Coach
Watches
Coach
Watches are an extension of the Coach leathergoods brand and reflect the Coach
brand image. A distinctive American brand, Coach delivers stylish,
aspirational, well-made products that represent excellent
value. Coach watches contain Swiss movements and are made with
stainless steel, gold finish or a combination of stainless steel and gold finish
with leather straps, stainless steel bracelets or gold finish
bracelets. The core collection of Coach watches has suggested retail
prices between $298 and $558, with select models exceeding this
range.
ESQ
ESQ
competes in the entry level Swiss watch category and is defined by bold sport
and fashion designs. All ESQ watches contain Swiss movements and are
made with stainless steel, gold finish or a combination of stainless steel and
gold finish, with leather straps, stainless steel bracelets or gold finish
bracelets. The core collection of ESQ watches has suggested retail prices
between $195 and $595, with select models exceeding this range.
Tommy
Hilfiger Watches
Reflecting
the fresh, fun all-American style for which Tommy Hilfiger is known, Tommy
Hilfiger watches feature quartz, digital or analog-digital movements, with
stainless steel, titanium, aluminum, silver-tone, two-tone or gold-tone cases
and bracelets, and leather, fabric, plastic or rubber straps. The
line includes fashion and sport models with the core collection of Tommy
Hilfiger watches having suggested retail prices between $85 and $145, with
select models exceeding this range.
HUGO
BOSS Watches
HUGO BOSS
is a global market leader in the world of fashion. The HUGO BOSS
watch collection is an extension of the parent brand and includes classy,
sporty, elegant and fashion timepieces with distinctive features, giving this
collection a strong and coherent identity. The core collection of
HUGO BOSS watches has suggested retail prices between $225 and $550, with select
models exceeding this range.
Juicy
Couture Timepieces
Juicy
Couture is a premium designer, marketer and wholesaler of sophisticated, yet fun
fashion for women, men and children. Liz Claiborne, Inc. (NYSE: LIZ)
purchased Juicy Couture in the spring of 2003, and has facilitated Juicy
Couture’s growth into a powerhouse lifestyle brand. Juicy Couture
timepieces reflect the brand’s clear vision, unique identity and leading brand
position in the upscale contemporary category, encompassing both trend-right and
core styling contemporary watches having suggested retail prices for its core
collection between $150 and $395, with select models exceeding this
range.
Lacoste
Watches
The
Lacoste watch collection embraces the Lacoste lifestyle proposition which
encompasses elegance, refinement and comfort, as well as a dedication to quality
and innovation. Mirroring key attributes of the Lacoste brand, the
collection features stylish timepieces with a contemporary sport elegant feel,
having suggested retail prices for its core collection between $165 to $395,
with select models exceeding this range.
DESIGN
AND PRODUCT DEVELOPMENT
The
Company’s offerings undergo two phases before they are produced for sale to
customers: design and product development. The design phase includes the
creation of artistic and conceptual renderings while product development
involves the construction of prototypes. The Company’s ESQ and licensed
brands are designed by in-house design teams in Switzerland and the United
States in cooperation with outside sources, including (in the case of the
licensed brands except for ESQ) licensors’ design teams. Product
development for these watches takes place in the Company’s Asia
operations. For the Company’s Movado, Ebel and Concord brands, the design
phase is performed by a combination of in-house and freelance designers in
Europe while product development is carried out in the Company’s Swiss
operations. Senior management of the Company is actively involved in the
design and product development process.
MARKETING
The
Company’s marketing strategy is to communicate a consistent, brand-specific
message to the consumer. Recognizing that advertising is an integral
component to the successful marketing of its product offerings, the Company
devotes significant resources to advertising and, since 1972, has maintained its
own in-house advertising department. The Company’s advertising
department focuses primarily on the implementation and management of global
marketing and advertising strategies for each of its brands, ensuring
consistency of presentation. The Company utilizes outside agencies
for the creative development of advertising campaigns which are developed
individually for each of the Company’s brands and are directed primarily to the
end consumer rather than to trade customers. The Company’s
advertising targets consumers with particular demographic characteristics
appropriate to the image and price range of the brand. Most Company
advertising is placed predominantly in magazines and other print media but some
is also created for radio and television campaigns, catalogs, outdoor and other
promotional materials. Marketing expenses totaled 17.4%, 15.4% and
14.9% of net sales in fiscal 2009, 2008 and 2007, respectively.
OPERATING
SEGMENTS
The
Company conducts its business primarily in two operating segments: Wholesale and
Retail. For operating segment data and geographic segment data for the years
ended January 31, 2009, 2008 and 2007, see Note 15 to the Consolidated Financial
Statements regarding Segment Information.
The
Company’s wholesale segment includes the design, development, sourcing,
marketing and distribution of high quality watches, in addition to after-sales
service activities and shipping. The retail segment includes the Company’s
Movado Boutiques and its 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.
Wholesale
United
States Wholesale
The
Company sells all of its brands in the U.S. wholesale market primarily to major
jewelry store chains such as Helzberg Diamonds Corp., Sterling, Inc. and Zale
Corporation; department stores, such as Macy’s, Nordstrom and Saks Fifth Avenue,
as well as independent jewelers. Sales to trade customers in the
United States are made directly by the Company’s U.S. sales force of
approximately 90 employees. Of these employees, sales representatives
are responsible for a defined geographic territory, specialize in a particular
brand and sell to and service independent jewelers within their territory. Their
compensation is based on salary plus commission. The sales force also consists
of account executives and account representatives who, respectively, sell to and
service chain and department store accounts. The latter typically handle more
than one of the Company’s brands and are compensated based on salary and
incentives.
International
Wholesale
Internationally,
the Company’s brands are sold in department stores such as El Cortes Ingles in
Spain and Galeries Lafayette in France, jewelry chain stores such as Christ in
Switzerland and Germany and independent jewelers. The Company employs
its own international sales force of approximately 50 employees operating at the
Company’s sales and distribution offices in Canada, China, France, Germany, Hong
Kong, Japan, Singapore, Switzerland, the United Kingdom and the United Arab
Emirates. In addition, the Company sells all of its brands other than ESQ
through a network of independent distributors operating in numerous countries
around the world. Distribution of ESQ watches which, outside of the
United States are sold only in Canada and the Caribbean, is handled by the
Company’s Canadian subsidiary and Caribbean based sales team. A
majority of the Company’s arrangements with its international distributors are
long-term, generally require certain minimum purchases and minimum advertising
expenditures and restrict the distributor from selling competitive
products.
In France
and Germany, the Company’s licensed brands are marketed and distributed by
subsidiaries of a joint venture company owned 51% by the Company and 49% by
Financiere TWC SA ("TWC"), a French company with established distribution,
marketing and sales operations in France and Germany.
The terms of the joint venture agreement include financial performance
measures which, if not attained, give either party the right to terminate the
agreement after the fifth (5th) and the tenth (10th) years (January 31, 2011 and
January 31, 2016); restrictions on the transfer of shares in the joint venture
company; and a buy out right whereby the Company can purchase all of TWC's
shares in the joint venture company as of July 1, 2016 and every fifth (5th)
anniversary thereafter at a pre-determined price.
In the
UK, the Company signed a joint venture agreement (the "JV Agreement") on May 11,
2007, with Swico Limited ("Swico"), an English company with established
distribution, marketing and sales operations in the UK. Swico had been the
Company's exclusive distributor of HUGO BOSS watches in the UK
since 2005. Under the JV Agreement, the Company and Swico control 51% and 49%,
respectively, of MGS Distribution Limited, a newly formed English company
("MGS") that is responsible for the marketing, distribution and sale in the UK
of the Company's licensed HUGO BOSS, Tommy Hilfiger, Lacoste and Juicy Couture
brands, as well as future brands licensed to the Company, subject to the terms
of the applicable license agreement. Swico is responsible for the day to day
management of MGS, including staffing and providing logistical support,
inventory management, order fulfillment, distribution and after sale services,
systems and back office support. The terms of the JV Agreement
include financial performance measures which, if not attained, give either party
the right to terminate the JV Agreement after the fifth (5th) and the tenth
(10th) years (January 31, 2012 and January 31, 2017); restrictions on the
transfer of shares in MGS; and a buy out right whereby the Company can purchase
all of Swico's shares in MGS as of July 1, 2017 and every 5th anniversary
thereafter at a pre-determined price.
Retail
The
Company operates in two retail markets, the luxury boutique market and the
outlet market. Movado Boutiques reinforce the luxury image and are a
primary strategic focus of the Movado brand. The Company operates 29
Movado Boutiques in the United States that are located in upscale regional
shopping centers and metropolitan areas. Movado Boutiques are
merchandised with select models of Movado watches, as well as proprietary
Movado-branded jewelry and clocks. The modern store design creates a
distinctive environment that showcases these products and provides consumers
with the ability to fully experience the complete Movado design
philosophy. The Company’s 32 outlet stores are multi-branded and
serve as an effective vehicle to sell discontinued models and factory seconds of
all of the Company’s watches and jewelry.
SEASONALITY
The
Company’s U.S. sales are traditionally greater during the Christmas and holiday
season. Consequently, the Company’s net sales historically have been
higher during the second half of the fiscal years. The amount of net
sales and operating profit generated during the second half of each fiscal year
depends upon the general level of retail sales during the Christmas and holiday
season, as well as economic conditions and other factors beyond the Company’s
control. Major selling seasons in certain international markets
center on significant local holidays that occur in late winter or early
spring. The second half of each year accounted for 49.9%, 57.0%, and
57.9% of the Company’s net sales for the fiscal years ended January 31, 2009,
2008, and 2007, respectively. In fiscal 2009, the Company did not
experience the usual seasonality of its business due to the downturn in the
global economy, which resulted in the percentage of net sales for the second
half of the fiscal year not being comparable to that in previous
years.
BACKLOG
At March
25, 2009, the Company had unfilled orders of $36.0 million compared to $42.4
million at March 14, 2008 and $55.8 million at March 15,
2007. Unfilled orders include both confirmed orders and orders the
Company believes will be confirmed based on the historic experience with the
customers. It is customary for many of the Company’s customers not to
confirm their future orders with formal purchase orders until shortly before
their desired delivery dates.
CUSTOMER
SERVICE, WARRANTY AND REPAIR
The
Company has developed an approach to managing the retail sales process of its
wholesale customers that involves monitoring their sales and inventories by
product category and style. The Company also assists in the
conception, development and implementation of customers’ marketing vehicles. The
Company places considerable emphasis on cooperative advertising programs with
its major retail customers. The Company’s retail sales process has
resulted in close relationships with its principal customers, often allowing for
influence on the mix, quantity and timing of their purchasing
decisions. The Company believes that customers’ familiarity with its
sales approach has facilitated, and should continue to facilitate, the
introduction of new products through its distribution network.
The
Company permits the return of damaged or defective products. In addition,
although the Company has no obligation to do so, it accepts other returns from
customers in certain instances.
The
Company has service facilities around the world including seven Company-owned
service facilities and approximately 300 independent service centers which are
authorized to perform warranty repairs. In order to maintain
consistency and quality at its service facilities and authorized independent
service centers, the Company conducts training sessions for and distributes
technical information and updates to repair personnel. All watches
sold by the Company come with limited warranties covering the movement against
defects in material and workmanship for periods ranging from two to three years
from the date of purchase, with the exception of Tommy Hilfiger watches, for
which the warranty period is ten years. In addition, the warranty
period is five years for the gold plating on certain Movado watch cases and
bracelets. Products that are returned under warranty to the Company
are generally serviced by the Company’s employees at its service
facilities.
The
Company retains adequate levels of component parts to facilitate after-sales
service of its watches for an extended period of time after the discontinuance
of such watches.
The
Company makes available Customer Wins, a web-based system providing immediate
access for the Company’s retail partners and consumers to the information they
may want or need about after sales service issues. Customer Wins
allows the Company’s retailers and end consumers to track their repair status
online 24 hours a day. The system also permits customers to
authorize repairs, track repair status through the entire repair life cycle,
view repair information and obtain service order history. Customer
Wins can be accessed online at www.mgiservice.com.
SOURCING,
PRODUCTION AND QUALITY
The
Company does not own any product manufacturing facilities, with the exception of
limited in-house assembly operations in Bienne, Switzerland and a small
manufacturing facility for proprietary movements for its Ebel brand in La
Chaux-de-Fonds, Switzerland. The Company employs a flexible manufacturing model
that relies primarily on independent manufacturers to meet shifts in marketplace
demand and changes in consumer preferences. All product sources
must achieve and maintain the Company’s high quality standards and
specifications. With strong supply chain organizations in
Switzerland, China and Hong Kong, the Company maintains control over the quality
of its products, wherever they are manufactured. Compliance is monitored with
strictly implemented quality control standards, including on-site quality
inspections.
A
majority of the Swiss watch movements used in the manufacture of Movado, Ebel,
Concord and ESQ watches are purchased from two suppliers. Additionally, the
Company manufactures some proprietary movements
for its Ebel brand. The Company obtains other watch components for
all of its brands, including movements, cases, hands, dials, bracelets and
straps from a number of other suppliers. The Company does not have
long-term supply contract commitments with any of its component parts
suppliers.
Movado,
Ebel and Concord watches are generally manufactured in Switzerland by
independent third party assemblers with some in-house assembly in Bienne and La
Chaux-de-Fonds, Switzerland. Movado, Ebel and Concord watches are
manufactured using Swiss movements and other components obtained from third
party suppliers. Coach, ESQ, Tommy Hilfiger, HUGO BOSS, Juicy
Couture, and Lacoste watches are manufactured by independent contractors. Coach
and ESQ watches are manufactured using Swiss movements and other components
purchased from third party suppliers. Tommy Hilfiger, HUGO BOSS,
Juicy Couture, and Lacoste watches are manufactured using movements and other
components purchased from third party suppliers.
TRADEMARKS,
PATENTS AND LICENSE AGREEMENTS
The
Company owns the trademarks MOVADO®, EBEL® and CONCORD®, as well as trademarks
for the Movado Museum dial design, and related trademarks for watches and
jewelry in the United States and in numerous other countries.
The
Company licenses ESQUIRE®, ESQ® and related trademarks on an exclusive worldwide
basis for use in connection with the manufacture, distribution, advertising and
sale of watches pursuant to a license agreement with Hearst Magazine, a division
of Hearst Communications, Inc., dated as of January 1, 1992 (as amended, the
“Hearst License Agreement”). The current term of the Hearst License
Agreement expires December 31, 2012, but contains options for renewal at the
Company’s discretion through December 31, 2042.
The
Company licenses the trademark COACH® and related trademarks on an exclusive
worldwide basis for use in connection with the manufacture, distribution,
advertising and sale of watches pursuant to a license agreement with Coach,
Inc., dated December 9, 1996 (as amended, the “Coach License
Agreement”). The Coach License Agreement expires on June 30,
2015.
Under an
agreement with Tommy Hilfiger Licensing, Inc., dated June 3, 1999, as amended,
the Company has the exclusive license to use the trademark TOMMY HILFIGER® and
related trademarks in connection with the manufacture of watches worldwide and
in connection with the marketing, advertising, sale and distribution of watches
at wholesale (and at retail through its outlet stores) in the Western
Hemisphere, Europe, Pan Pacific (excluding Japan), Latin America, the Middle
East, China and Korea. The term of the license agreement with Tommy
Hilfiger Licensing, Inc. expires March 31, 2012.
Under its
2004 agreement with HUGO BOSS Trademark Management GmbH & Co, the Company
received a worldwide exclusive license to use the trademark HUGO BOSS® and any
other trademarks
containing the names “HUGO” or “BOSS”, in connection with the production,
promotion and sale of watches. The term of the license continues
through December 31, 2013, with an optional five-year renewal period.
On
November 21, 2005, the Company entered into an agreement with L.C. Licensing,
Inc., for the exclusive worldwide license to use the trademarks JUICY COUTURE®
and COUTURE COUTURE LOS ANGELES™, in connection with the manufacture,
advertising, merchandising, promotion, sale and distribution of timepieces and
components. The term of the license is through December 31, 2011,
with a
four-year renewal period at the option of the Company, provided that certain
sales thresholds are met.
On March
27, 2006, the Company entered into an exclusive worldwide license agreement with
Lacoste S.A., Sporloisirs, S.A. and Lacoste Alligator, S.A. to design, produce,
market and distribute Lacoste watches under the Lacoste® name and the
distinctive “alligator” logo beginning in the first half of 2007. The
agreement continues through December 31, 2014 and renews automatically for
successive five year periods unless either party notifies the other of
non-renewal at least six months before the end of the initial term or any
renewal period.
The
Company also owns, and has pending applications for, a number of design patents
in the United States and internationally for various watch designs, as well as
designs of watch dials, cases, bracelets and jewelry.
The
Company actively seeks to protect and enforce its intellectual property rights
by working with industry associations, anti-counterfeiting organizations,
private investigators and law enforcement authorities, including customs
authorities in the United States and internationally, and, when necessary, suing
infringers of its trademarks and patents. Consequently, the Company
is involved from time to time in litigation or other proceedings to determine
the enforceability, scope and validity of these rights. With respect to the
trademarks MOVADO®, EBEL®, CONCORD® and certain other related trademarks, the
Company has received exclusion orders that prohibit the importation of
counterfeit goods or goods bearing confusingly similar trademarks into the
United States and other countries. In accordance with customs
regulations, these exclusion orders, however, do not cover the importation of
genuine Movado, Ebel and Concord watches because the Company is the manufacturer
of such watches. All of the Company’s exclusion orders are
renewable.
COMPETITION
The
markets for each of the Company’s watch brands are highly
competitive. With the exception of Swatch Group, Ltd., a large
Swiss-based competitor, no single company competes with the Company across all
of its brands. Certain companies, however, compete with Movado Group, Inc. with
respect to one or more of its watch brands. Certain of these
companies have, and other companies that may enter the Company’s markets in the
future may have, greater financial, distribution, marketing and advertising
resources than the Company. The Company’s future success will depend,
to a significant degree, upon its continued ability to compete effectively with
regard to, among other things, the style, quality, price, advertising,
marketing, distribution and availability of supply of the Company’s watches and
other products.
EMPLOYEES
As of
January 31, 2009, the Company had approximately 1,300 full-time employees in its
global operations. The Company expects that the number of employees
will decrease to approximately 1,250 during the first quarter of fiscal
2010. This represents a reduction of approximately 250 employees when
compared to the approximately 1,500 employed as of January 31,
2008. No employee of the Company is represented by a labor union or
is subject to a collective bargaining agreement. The Company has
never experienced a work stoppage due to labor difficulties and believes that
its employee relations are good.
AVAILABLE
INFORMATION
The
Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and all amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended, are available free of charge on the Company’s website, located at www.movadogroup.com,
as soon as reasonably practicable after the same are electronically filed with,
or furnished to, the Securities and Exchange Commission. The public
may read any materials filed by the Company with the SEC at the SEC’s public
reference room at 100 F. Street, N.E., Washington, D.C., 20549. The
public may obtain information on the operation of the public reference room by
calling the SEC at 1-800-SEC-0330. The SEC maintains a website that
contains reports, proxy and information statements, and other information
regarding the Company at www.sec.gov.
The
Company has adopted a Code of Business Conduct and Ethics that applies to all
directors, officers and employees, including the Company’s Chief Executive
Officer, Chief Financial Officer and principal accounting and financial
officers, which is posted on the Company’s website. The Company will
post any amendments to the Code of Business Conduct and Ethics and any waivers
that are required to be disclosed by SEC regulations on the Company’s website.
In addition, the committee charters for the audit committee, the compensation
committee and the nominating/corporate governance committee of the Board of
Directors of the Company and the Company’s corporate governance guidelines have
been posted on the Company’s website.
Item
1A. Risk Factors
The
following risk factors and the forward-looking statements contained in this Form
10-K should be read carefully in connection with evaluating Movado Group, Inc.’s
business. These risks and uncertainties could cause actual results and
events to differ materially from those anticipated. Additional risks which
the Company does not presently consider material, or of which it is not
currently aware, may also have an adverse impact on the business. Please
also see “Forward-Looking Statements” on page 1.
The
deterioration of economic conditions in the U.S. and around the world, and the
resulting declines in consumer confidence and spending, could have a material
adverse effect on the Company’s operating results.
The
Company’s results are dependent on a number of factors impacting consumer
confidence and spending, including, but not limited to, general economic and
business conditions; wages and employment levels; volatility in the stock
market; falling home values; inflation; consumer debt levels; availability of
consumer credit; rising interest costs; solvency concerns of major financial
institutions;
fluctuations
in foreign currency exchange rates; fuel and energy costs; energy shortages; tax
issues; and general political conditions, both domestic and abroad.
The
current volatility and disruption to the capital and credit markets have reached
unprecedented levels and have significantly adversely impacted global economic
conditions, resulting in declines in employment levels, disposable income and
actual and/or perceived wealth and further declines in consumer confidence and
economic growth. These conditions have led and could further
lead to continuing substantial declines in consumer spending over the
foreseeable future. The current negative economic environment
has been characterized by a dramatic decline in consumer discretionary spending
and has disproportionately affected retailers and sellers of consumer goods,
particularly those whose goods are viewed as discretionary
purchases. The Company’s products fall into categories that are
considered
discretionary items. The current downturn and uncertain outlook in
the global economy will likely continue to have a material adverse impact on the
Company’s business, financial condition, liquidity and results of
operations. In addition, events such as war, terrorism, natural
disasters or outbreaks of disease could further dampen consumer spending on
discretionary items. If any of these events should occur, the
Company’s future sales could decline.
The
Company faces intense competition in the worldwide watch industry.
The watch
industry is highly competitive and the Company competes globally with numerous
manufacturers, importers and distributors, some of which are larger and have
greater financial, distribution, advertising and marketing
resources. The Company’s products compete on the basis of price,
features, perceived desirability, reliability and perceived
attractiveness. The Company also faces increased competition from
internet-based retailers. The Company’s future results of operations
may be adversely affected by these and other competitors.
Maintaining
favorable brand recognition is essential to the success of the Company, and
failure to do so could materially and adversely affect the Company’s results of
operations.
Favorable
brand recognition is an important factor to the future success of the
Company. The Company sells its products under a variety of owned and
licensed brands. Factors affecting brand recognition are often
outside the Company’s control, and the Company’s efforts to create or enhance
favorable brand recognition, such as making significant investments in marketing
and advertising campaigns, product design and anticipation of fashion trends,
may not have their desired effects. Additionally, the Company relies
on its license partners to maintain favorable brand recognition of their
respective parent brands, and the Company often has no control over the brand
management efforts of its license partners. Finally, although the
Company’s independent distributors are subject to contractual requirements to
protect the Company’s brands, it may be difficult to monitor or enforce such
requirements, particularly in foreign jurisdictions. Any decline in
perceived favorable recognition of the Company’s owned or licensed brands could
materially and adversely affect future results of operations and
profitability. If the Company is unable to respond to changes in
consumer demands and fashion trends in a timely manner, sales and profitability
could be adversely affected.
Fashion
trends and consumer demands and tastes often shift quickly. The
Company attempts to monitor these trends in order to adapt its product offerings
to suit customer demand. There is a risk that the Company will not
properly perceive changes in trends or tastes, which may result in the failure
to adapt the Company’s products accordingly. In addition, new model
designs are regularly introduced into the market for all brands to keep ahead of
evolving fashion trends as well as to initiate new trends of their
own. There is risk that the public may not favor these new models or
that the models may not be ready
for sale
until after the trend has passed. If the Company fails to respond to
and keep up to date with fashion trends and consumer demands and tastes, its
brand image, sales, profitability and results of operations could be materially
and adversely affected.
If
the Company misjudges the demand for its products, high inventory levels could
adversely affect future operating results and profitability.
Consumer
demand for the Company’s products can affect inventory levels. If
consumer demand is lower than expected, inventory levels can rise causing a
strain on operating cash flow. If the inventory cannot be sold
through the Company’s wholesale or retail outlets, additional reserves or
write-offs to future earnings could be necessary. Conversely, if consumer demand
is higher than expected, insufficient inventory levels could result in
unfulfilled customer orders, loss of revenue and an unfavorable impact on
customer relationships. Failure to properly judge consumer demand and
properly manage inventory could have a material adverse effect on profitability
and liquidity.
An
increase in product returns could negatively impact the Company’s operating
results and profitability.
The
Company recognizes revenue as sales when merchandise is shipped and title
transfers to the customer. The Company permits the return of damaged
or defective products and accepts limited amounts of product returns in certain
instances. Accordingly, the Company provides allowances for the
estimated amounts of these returns at the time of revenue recognition based on
historical experience. While such returns have historically been
within management’s expectations and the provisions established, future return
rates may differ from those experienced in the past. Any significant
increase in damaged or defective products or expected returns could have a
material adverse effect on the Company’s operating results for the period or
periods in which such returns materialize.
The
Company’s business relies on the use of independent parties to manufacture its
products. Any loss of an independent manufacturer, or the Company’s
inability to deliver quality goods in a timely manner, could have an adverse
effect on customer relations, brand image, net sales and results of
operations.
The
Company employs a flexible manufacturing model that relies primarily on
independent manufacturers to meet shifts in marketplace demand. All such
independent manufacturers must achieve and maintain the Company’s high quality
standards and specifications. The inability of a manufacturer to ship
orders in a timely manner or to meet the Company’s high quality standards and
specifications could cause the Company to miss committed delivery dates with
customers, which could result in cancellation of the customers’
orders. In addition, delays in delivery of satisfactory products
could have a material adverse effect on the Company’s profitability,
particularly if the delays cause the Company to be unable to market certain
products during the seasonal periods when its sales are typically
higher. See “Risk Factors – The Company’s business is seasonal, with
sales traditionally greater during certain holiday seasons, so events and
circumstances that adversely affect holiday consumer spending will have a
disproportionately adverse effect on the Company’s results of operations.”
A majority of the Swiss watch movements used in the manufacture of Movado, Ebel,
Concord and ESQ watches are purchased from two suppliers, one of which is a
wholly-owned subsidiary of one of the Company’s
competitors. Additionally, the Company does not have long-term supply
commitments with its manufacturers and thus competes for production facilities
with other organizations, some of which are larger and have greater
resources. Any loss of an independent manufacturer, or the Company’s
inability to deliver
quality
goods in a timely manner, could have an adverse effect on customer relations,
brand image, net sales and results of operations.
If the Company loses any of its
license agreements, there may be significant loss of revenues and a negative
effect on business.
The
Company has the right to produce, market and distribute watches under the brand
names of ESQ, Coach, Tommy Hilfiger, HUGO BOSS, Juicy Couture and Lacoste
pursuant to license agreements with the respective owners of those
trademarks. There are certain minimum royalty payments as well as
other requirements associated with these agreements. Failure to meet
any of these requirements could result in the loss of the
license. Additionally, after the term of any license agreement has
concluded, thelicensor may decide not to renew with the
Company. Any loss of one or more of the Company’s licenses could
result in loss of future revenues which could adversely affect its financial
condition.
Changes
in the sales mix of the Company’s products could impact gross profit
margins.
The
individual brands that are sold by the Company are sold at a wide range of price
points and yield a variety of gross profit margins. Thus, the mix of
sales by brand can have an impact on the gross profit margins of the
Company. If the Company’s sales mix shifts unfavorably toward brands
with lower gross profit margins than the Company’s historical consolidated gross
profit margin or if the mix of business changes significantly in the Movado
Boutiques, it could have an adverse effect on the results of
operations.
The
Company’s business is seasonal, with sales traditionally greater during certain
holiday seasons, so events and circumstances that adversely affect holiday
consumer spending will have a disproportionately adverse effect on the Company’s
results of operations.
The
Company’s sales are seasonal by nature. The Company’s U.S. sales are
traditionally greater during the Christmas and holiday
season. Internationally, major selling seasons center on significant
local holidays that occur in late winter or early spring. The amount
of net sales and operating income generated during these seasons depends upon
the general level of retail sales at such times, as well as economic conditions
and other factors beyond the Company’s control. The second half of
each year accounted for 49.9%, 57.0%, and 57.9% of the Company’s net sales for
the fiscal years ended January 31, 2009, 2008, and 2007,
respectively. In fiscal 2009, the Company did not experience the
usual seasonality of its business due to the downturn in the economy, which
resulted in the percentage of net sales for the second half of the fiscal year
not being comparable to that in previous years. If events or
circumstances were to occur that negatively impact consumer spending during such
holiday seasons, it could have a material adverse effect on the Company’s sales,
profitability and results of operations.
Sales
in the Company’s retail stores are dependent upon customer foot
traffic.
In the
United States, we are experiencing a significant slowdown in customer
traffic. The success of the Company’s retail stores is, to a certain
extent, dependent upon the amount of customer foot traffic generated by the mall
or outlet center in which those stores are located. The majority of
the Company’s Movado Boutiques are located in upscale regional shopping centers
throughout the United States, while the Company’s outlet stores are located
primarily near vacation destinations.
Factors that can affect customer foot traffic include:
·
|
the
location of the mall;
|
·
|
the
location of the Company’s store within the
mall;
|
·
|
the
other tenants in the mall;
|
·
|
the
occupancy rate of the mall;
|
·
|
the
success of mall and tenant advertising to attract
customers;
|
·
|
increased
competition in areas surrounding the mall;
and
|
·
|
increased
competition from shopping over the internet and other alternatives such as
mail-order.
|
Additionally,
since a number of the Company’s outlet stores are located near vacation
destinations, factors that affect travel could decrease mall
traffic. Such factors include the price and supply of fuel, travel
concerns and restrictions, international instability, terrorism and inclement
weather.
A
reduction in foot traffic in relevant malls or shopping centers could have a
material adverse effect on retail sales and profitability.
If
the Company is unable to maintain existing space or to lease new space for its
retail stores in prime mall and outlet center locations or is unable to complete
construction on a timely basis, the Company’s ability to achieve favorable
results in its retail business could be adversely affected.
The
Company’s Boutiques and outlet stores are strategically located in the United
States, respectively, in top malls and in outlet centers located primarily near
vacation destinations. If the Company cannot maintain and secure
locations in prime malls and outlet centers for both the Movado Boutiques and
outlet businesses, it could jeopardize the operations of the stores and business
plans for the future. Additionally, if the Company cannot complete construction
in new stores within the planned timeframes, cost overruns and lost revenue
could adversely affect the profitability of the retail segment.
If the Company is unable to
successfully implement its growth strategies, its future operating results could
suffer.
There are
certain risks involved as the Company continues expanding its business through
acquisitions, license agreements, joint ventures and new initiatives such as the
Movado Boutique business. There is risk involved with each of
these. Acquisitions and new license agreements require the Company to
ensure that new brands will successfully complement the other brands in its
portfolio. The Company assumes the risk that the new brand will not
be viewed by the public as favorably as its other brands. In
addition, the integration of an acquired company or licensed brand into the
Company’s existing business can strain the Company’s current infrastructure with
the additional work required and there can be no assurance that the integration
of acquisitions or licensed brands will be successful or that acquisitions or
licensed brands will generate sales increases. The Company needs to
ensure it has the adequate human resources and systems in place to allow for
successful assimilation of new businesses. The risk involved in the
Movado Boutique business is that the Company will not be able to successfully
implement its business model. In addition, the costs associated with
leasehold improvements to current Boutiques and the costs associated with
opening new Boutiques could have a material adverse effect on the Company’s
financial condition and results of operations. The inability to
successfully implement its growth strategies could adversely affect the
Company’s future financial condition and results of operations.
The
loss or infringement of the Company’s trademarks or other intellectual property
rights could have an adverse effect on future results of
operations.
The
Company believes that its trademarks and other intellectual property rights are
vital to the competitiveness and success of its business and therefore it takes
all appropriate actions to register and protect them. There can be no
assurance, however, that such actions will be adequate to prevent imitation of
the Company’s products or infringement of its intellectual property rights, or
that others will not challenge the Company’s rights, or that such rights will be
successfully defended. In addition, six of the Company’s nine brands
are subject to license agreements with third parties under which the Company is
required to make royalty payments and perform other
obligations. Default by the Company under any of these agreements
could result in the licensor terminating the agreement and the Company losing
its rights under the license. Moreover, the laws of some foreign
countries, including some in which the Company sells its products, may
not protect intellectual property rights to the same extent as do the laws of
the United States, which could make it more difficult to successfully defend
such challenges to them. The Company’s inability to obtain or
maintain rights in its trademarks, including its licensed marks, could have an
adverse effect on brand image and future results of operations.
Fluctuations
in the pricing of commodities or the cost of labor could adversely affect the
Company’s ability to produce products at favorable prices.
Some of
the Company’s higher-end watch offerings are made with materials such as
diamonds, precious metals and gold. The Company’s proprietary jewelry
is manufactured with silver, gold and platinum, semi-precious and precious
stones, and diamonds. The Company relies on independent contractors
to manufacture and assemble the majority of its watch brands and its entire
jewelry offering. A significant change in the prices of these
commodities or the cost of third-party labor could adversely affect the
Company’s business by:
|
·
|
reducing
gross profit margins;
|
|
·
|
forcing
an increase in suggested retail prices; which could lead
to
|
|
·
|
decreasing
consumer demand; which could lead
to
|
|
·
|
higher
inventory levels.
|
Any and
all of the above events could adversely affect the Company’s future cash flow
and results of operations.
The
Company’s business is subject to foreign currency exchange rate
risk.
The
majority of the Company’s inventory purchases are denominated in Swiss
francs. The Company operates under a hedging program which utilizes
forward exchange contracts and purchased foreign currency options to mitigate
foreign currency risk. If these hedge instruments are unsuccessful at
minimizing the risk or are deemed ineffective, any fluctuation of the Swiss
franc exchange rate could impact the future results of
operations. Changes in currency exchange rates may also affect
relative prices at which the Company and its foreign competitors sell products
in the same market. Additionally, a portion of the Company’s net
sales are recorded in its foreign subsidiaries in a currency other than the
local currency of that subsidiary. This predominantly occurs in the
Company’s Hong Kong and Swiss subsidiaries when they sell to Euro-based
customers. This exposure is not hedged by the Company. Any
fluctuation in the Euro exchange rate in relation to the Hong Kong dollar and
Swiss franc would have an effect on these sales that are recorded in
Euro. The currency effect on these Euro sales has an
equal
effect on their recorded gross profit since the costs of these sales are
recorded in the entities’ respective local currency. Furthermore,
since the Company’s consolidated financial statements are presented in U.S.
dollars, revenues, income and expenses, as well as assets and liabilities of
foreign currency denominated subsidiaries must be translated into U.S. dollars
at exchange rates in effect during or at the end of each reporting period.
Fluctuations in foreign currency exchange rates could adversely affect the
Company’s reported revenues, earnings, financial position and the comparability
of results of operations from period to period.
The
Grinberg family owns a majority of the voting power of the Company’s
stock.
Each
share of common stock of the Company is entitled to one vote per share while
each share of Class A Common Stock of the Company is entitled to ten votes per
share. While the members of the Grinberg family do not own a
majority of the Company’s outstanding common stock, by their significant
holdings of Class A Common Stock they control a majority of the voting power
represented by all outstanding shares of both classes of
stock. Consequently, the Grinberg family is in a position to
significantly influence any matters that are brought to a vote of the
shareholders including, but not limited to, the election of the Board of
Directors and any action requiring the approval of shareholders, including any
amendments to the Company’s certificate of incorporation, mergers or sales of
all or substantially all of the Company’s assets. This concentration of
ownership also may delay, defer or even prevent a change in control of the
Company and make some transactions more difficult or impossible without the
support of the Grinberg family. These transactions might include proxy contests,
tender offers, mergers or other purchases of common stock that could give
stockholders the opportunity to realize a premium over the then-prevailing
market price for shares of the Company’s common stock.
The
Company’s stock price could fluctuate and possibly decline due to changes in
revenue, operating results and cash flow.
The
Company’s revenue, results of operations and cash flow can be affected by
several factors, some of which are not within its control. Those
factors include, but are not limited to, those described as risk factors in this
Item 1A and under “Forward-Looking Statements” on page 1.
Any or
all of these factors could cause a decline in revenues or increased expenses,
both of which could have an adverse effect on the results of
operations. If the Company’s earnings failed to meet the expectations
of the public in any given period, the Company’s stock price could fluctuate and
possibly decline.
If
the Company were to lose its relationship with any of its key customers or
distributors or any of such customers or distributors were to experience
financial difficulties, there may be a significant loss of revenue and operating
results.
The
Company’s customer base covers a wide range of distribution including national
jewelry store chains, department stores, independent regional jewelers, licensed
partner retail stores and a network of distributors in many countries throughout
the world. The Company does not have long-term purchase contracts with its
customers, nor does it have a significant backlog of unfilled orders. Customer
purchasing decisions could vary with each selling season. A material change in
the Company’s customers’ purchasing decisions could have an adverse effect on
its revenue and operating results.
As part
of the Company’s unified Movado brand strategy announced on February 25, 2008,
the Company streamlined the Movado brand wholesale distribution in the United
States from 4,000
wholesale
customer doors to approximately 2,600 doors, representing a 35% reduction, by
the close of its fiscal year ending January 31, 2009. A wholesale
customer door could be either a single store within a department store chain or
an independent jewelry store. The strategy contemplated that a number
of wholesale customers would continue to do business with the Company through
their more profitable doors. There is a risk that these customers
will have a negative response to the strategy of reducing the number of their
doors that can sell Movado watches. This could potentially
damage current relationships and hinder future business done with these
customers.
The
Company extends credit to its customers based on an evaluation of each
customer's financial condition usually without requiring collateral. Should any
of the Company’s larger customers experience financial difficulties, it could
result in the Company’s curtailing doing business with them or
an
increase in its exposure related to its accounts receivable. The inability to
collect on these receivables could have an adverse effect on the Company’s
financial results.
The
current credit crisis could have a negative impact on the Company’s customers,
suppliers and business partners, which in turn could materially and adversely
affect its results of operations and liquidity.
The
current credit crisis is having a significant negative impact on businesses
around the world. The impact of this crisis on the Company’s
customers, suppliers and business partners cannot be predicted and may be quite
severe. The inability of the Company’s manufacturers to ship products
could impair the Company’s ability to meet delivery date
requirements. A disruption in the ability of the Company’s
significant customers, distributors or licensees to access liquidity could cause
serious disruptions or an overall deterioration of their businesses which could
lead to a significant reduction in their future orders of the Company’s products
and the inability or failure on their part to meet their payment obligations to
the Company, any of which could have a material adverse effect on the Company’s
results of operations and liquidity.
The
Company’s wholesale business could be negatively affected by changes of
ownership and consolidation in the retail industry.
A large
portion of the Company’s U.S. wholesale business is derived from major jewelry
store chains and department stores. In recent years, the retail
industry has experienced changes in ownership and consolidations, none of which
has had a material effect on the Company’s wholesale business. Future
reorganizations, changes of ownership and consolidations could reduce the number
of retail doors in which the Company’s products are sold and could increase the
concentration of sales for any customers involved in such
transactions. Future changes of ownership and structure in the retail
industry may have a material adverse effect on the Company’s wholesale
business.
If
the Company were to lose key members of management or be unable to attract and
retain the talent required for the business, operating results could
suffer.
The
Company’s ability to execute key operating initiatives as well as to deliver
product and marketing concepts appealing to target consumers depends largely on
the efforts and abilities of key executives and senior management’s
competencies. The unexpected loss of one or more of these individuals
could have an adverse effect on the future business. The Company cannot
guarantee that it will be able to attract and retain the talent and skills
needed in the future.
Recent
turmoil in the financial markets could affect credit availability and increase
the cost of borrowing. Additionally, as a result of its
non-compliance with the interest coverage ratio in its debt agreements, the
Company is in the process of securing other financing. If the Company
cannot secure financing and credit on favorable terms, the Company’s financial
condition and results of operation may be materially adversely
affected.
The
Company historically has been able to secure financing and credit facilities
with very favorable terms due to the Company’s financial stability and good
relationships with its lending partners. In the fourth quarter of
fiscal year 2009, the Company was not in compliance with the interest coverage
ratio covenant under certain of its current debt agreements. As a result
of the Company’s non-compliance with the interest coverage ratio covenant, any
amounts owed under these agreements have been reclassified to current
liabilities. Additionally, the Company is prohibited from borrowing
any additional funds under these agreements, and the amounts owed as of January
31, 2009 may be declared immediately due and payable by the
lenders. The lenders have not taken any action in respect to this
default, but they may do so in the future. Through the date of this
filing, the Company is in negotiations with banking institutions for a new three
year asset-based revolving credit facility for an amount up to $110
million. Additionally, to provide for available liquidity in the event the
$110 million asset-based revolving credit facility is not consummated, the
Company has received a commitment for a three year, $50 million asset-based
credit facility from Bank of America. The commitment is subject to the
completion of due diligence by Bank of America and the satisfaction of a number
of additional customary conditions precedent, certain of which are at the sole
discretion of Bank of America. The Company expects that the fees and the
interest rates under either of the above facilities will be at current
market rates which are significantly higher than those historically paid by the
Company, resulting in an increase in interest expense and an adverse impact on
financial results. In the event the $110 million asset-based
revolving credit facility or the $50 million asset-based credit facility is
not consummated, the Company’s financial condition and results of operations may
be materially adversely affected.
U.S. and
global credit and equity markets have recently undergone significant disruption,
making it difficult for many businesses to obtain financing on acceptable
terms. If these conditions continue or worsen, the Company’s cost of
borrowing may increase and it may be more difficult to obtain financing for the
Company’s operations or to refinance long-term obligations as they become
payable. In addition, the Company’s borrowing costs can be affected
by independent rating agencies’ short and long-term debt ratings which are based
largely on the Company’s performance as measured by credit metrics including
interest coverage and leverage ratios. A decrease in these ratings
would likely also increase the Company’s cost of borrowing and make it more
difficult for it to obtain financing. A significant increase in the
costs the Company incurs in order to finance its operations may have a material
adverse impact on its business results and financial condition.
A
significant portion of the Company’s business is conducted outside of the United
States. Many factors affecting business activities outside the United
States could adversely impact this business.
The
Company produces all of its watches and a portion of its proprietary jewelry
outside the United States and primarily in Europe and Asia. The Company also
generates approximately 45% of its revenue from international sources.
Factors that could affect the business activity vary by region and market
and generally include without limitation:
|
·
|
instability
or changes
in social, political and/or economic conditions that could disrupt the
trade activity in the countries where the Company’s manufacturers,
suppliers and customers are
located;
|
|
·
|
the
imposition of additional duties, taxes and other charges on imports and
exports;
|
|
·
|
changes
in foreign laws and regulations;
|
|
·
|
the
adoption or expansion of trade
sanctions;
|
|
·
|
recessions
in foreign economies; and
|
|
·
|
a
significant change in currency valuation in specific countries or
markets.
|
The
occurrence or consequences of any of these risks could affect the Company’s
ability to operate in the affected regions. This could have an adverse effect on
the Company’s financial results.
The
Company has implemented a new business enterprise system. Any difficulties
encountered with respect to such system could disrupt the Company’s operations
and data retrieval process.
On
February 1, 2009 the Company implemented SAP, which is an end-to-end business
enterprise solution, as its core enterprise system. The
implementation of SAP will support the Company’s growth strategy and integrate
its global sourcing, wholesale and retail operations, consolidating the
business
operating systems into a single
platform. Substantially all of the Company’s subsidiaries migrated
from the prior systems to SAP for all areas including finance, supply chain,
sales and distribution, human resources, quality control and customer
service. The point-of-sale and inventory systems of the retail
segment will be implemented separately. While there were no
significant difficulties encountered during the migration to SAP from the prior
systems, and the Company did not experience any major disruptions in its
operations or its ability to retrieve data or produce and ship product, the
implementation is still in its early stages and difficulties may still arise as
the Company ramps up operations in SAP during fiscal year 2010.
If the Company is unable to
successfully implement its expense reduction plans, its future operating results
could suffer.
During
the second half of fiscal 2009, the Company implemented expense reduction plans
designed to streamline operations, reduce expenses, and improve efficiencies and
effectiveness across the Company’s global organization. In fiscal
2009, the Company recorded a total pre-tax charge of $11.1 million related to
the completion of these programs and a restructuring of certain benefit
arrangements. The Company may not be able to fully realize its expense
reductions and sustain them in subsequent periods. In addition, the
Company could incur additional unforeseen expenses that may fully or partially
offset these expected expense savings. Furthermore, there are risks that
the Company’s human resources could be strained as a result of the streamlining
of operations and the reduction of its workforce. The inability to
successfully implement its expense reduction plans could adversely affect the
Company’s future financial condition and results of operations.
Item
1B. Unresolved Staff Comments
None.
Item
2. Properties
The
Company leases various facilities in North America, Europe, the Middle East and
Asia for its corporate, manufacturing, distribution and sales operations. As of
January 31, 2009, the Company’s leased facilities were as follows:
Location
|
Function
|
Square
Footage
|
Lease
Expiration
|
|
|
|
|
Moonachie,
New Jersey
|
Watch
assembly, distribution and repair
|
100,000
|
July
2019
|
Paramus,
New Jersey
|
Executive
offices
|
99,000
|
June
2013
|
Bienne,
Switzerland
|
Corporate
functions, watch sales, distribution, assembly and repair
|
53,560
|
January
2012
|
Kowloon,
Hong Kong
|
Watch
sales, distribution and repair
|
13,960
|
March
2013
|
Villers
le Lac, France
|
European
service and watch distribution
|
12,800
|
January
2016
|
Markham,
Canada
|
Office,
distribution and repair
|
11,200
|
August
2012
|
New
York, New York
|
Public
relations office, licensed brand showroom
|
9,900
|
August
2016
|
ChangAn
Dongguan, China
|
Quality
control and engineering
|
7,535
|
March
2009
|
Hackensack,
New Jersey
|
Warehouse
|
6,600
|
July
2009
|
Munich,
Germany
|
Watch
sales
|
4,290
|
January
2012
|
Shanghai,
China
|
Watch
sales
|
3,200
|
August
2011
|
Tokyo,
Japan
|
Watch
sales
|
2,970
|
July
2010
|
Coral
Gables, Florida
|
Caribbean
office, watch sales
|
2,880
|
January
2012
|
Grenchen,
Switzerland
|
Watch
sales
|
2,800
|
February
2010
|
Munich,
Germany
|
Watch
repair
|
2,200
|
December
2011
|
Singapore
|
Watch
sales, distribution and repair
|
970
|
June
2010
|
Crown
House, United Kingdom
|
Watch
sales
|
850
|
July
2009
|
Dubai,
United Arab Emirates
|
Watch
sales
|
730
|
July
2009
|
All of
the foregoing facilities are used exclusively in connection with the wholesale
segment of the Company’s business except that a portion of the Company’s
executive office space in Paramus, New Jersey is used in connection with
management of its retail business.
The
Company owns three properties totaling approximately 40,400 square feet located
in La Chaux-de-Fonds, Switzerland used for manufacturing, storage and public
relations. In addition, the Company acquired an architecturally
significant building in La Chaux-de-Fonds in 2004 as part of its acquisition of
Ebel.
The
Company also owns approximately 2,500 square feet of office space in Hanau,
Germany, which it previously used for sales, distribution and watch repair
functions.
The
Company also leases retail space for the operation of 29 Movado Boutiques in the
United States, each of which averages 2,200 square feet per store with leases
expiring from February 2009 to June 2017. In addition, the Company
leases retail space averaging 1,800 square feet per store with leases expiring
from June 2009 to January 2019 for the operation of the Company’s 32 outlet
stores in the United States.
The
Company believes that its existing facilities are suitable and adequate for its
current operations.
Item 3. Legal
Proceedings
From time
to time the Company is involved in routine litigation incidental to the conduct
of its business as both plaintiff and defendant, including proceedings to
protect its trademark rights, collection actions against customers for the
non-payment of goods sold and litigation with present and former employees.
Although litigation with present and former employees is routine and incidental
to the conduct of the Company’s business, as well as for any business employing
significant numbers of U.S.-based employees, such litigation can sometimes
result in large monetary awards when a civil jury is allowed to determine
compensatory and/or punitive damages.
In the
case of Bertha
V. Norman, et al. v. Movado Company Store, United States District Court, Central
District of California, 2008-cv-6691, plaintiffs seek unspecified damages
based on alleged claims against Movado Retail Group, Inc. (“MRG”) for: failure
to allow meal periods and rest periods; failure to pay minimum wages and
overtime wages; failure to provide itemized wage
statements; violation of the California business and professions
code; and failure to pay wages due at termination and seeking waiting time
penalties pursuant to the California labor code. The complaint, originally filed
in California state court, was served on MRG in September, 2008. MRG removed the
case to Federal court in October 2008. MRG has denied plaintiff’s allegations
and intends to vigorously defend the case. The
Company believes that the outcome of this claim,
and all other pending legal proceedings in the aggregate, will not have a
material adverse effect on the Company’s business or consolidated financial
statements.
Item
4. Submission of Matters to a Vote of Security Holders
No
matters were submitted to a vote of shareholders of the Company during the
fourth quarter of fiscal 2009.
PART
II
Item
5. Market for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
As of
March 23, 2009, there were 52 holders of record of Class A Common Stock and, the
Company estimates, 6,900 beneficial owners of the common stock represented by
514 holders of record. The common stock is traded on the New York
Stock Exchange under the symbol “MOV” and on March 23, 2009, the closing price
of the common stock was $7.72. The quarterly high and low split-adjusted closing
prices for the fiscal years ended January 31, 2009 and 2008 were as
follows:
|
|
Fiscal
Year Ended
|
|
|
Fiscal
Year Ended
|
|
|
|
January
31, 2009
|
|
|
January
31, 2008
|
|
Quarter
Ended
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April
30
|
|
$ |
17.38 |
|
|
$ |
26.02 |
|
|
$ |
27.53 |
|
|
$ |
34.58 |
|
July
31
|
|
$ |
18.91 |
|
|
$ |
23.09 |
|
|
$ |
28.24 |
|
|
$ |
34.66 |
|
October
31
|
|
$ |
12.06 |
|
|
$ |
25.59 |
|
|
$ |
27.55 |
|
|
$ |
34.48 |
|
January
31
|
|
$ |
6.64 |
|
|
$ |
15.09 |
|
|
$ |
21.41 |
|
|
$ |
30.97 |
|
In
connection with the October 7, 1993 public offering, each share of the then
currently existing Class A Common Stock was converted into 10.46 shares of new
Class A Common Stock, par value of $0.01 per share (the “Class A Common
Stock”). Each share of common stock is entitled to one vote per share
and each share of Class A Common Stock is entitled to 10 votes per share on all
matters submitted to a vote of the shareholders. Each holder of Class
A Common Stock is entitled to convert, at any time, any and all such shares into
the same number of shares of common stock. Each share of Class A
Common Stock is converted automatically into common stock in the event that the
beneficial or record ownership of such shares of Class A Common Stock is
transferred to any person, except to certain family members or affiliated
persons deemed “permitted transferees” pursuant to the Company’s Restated
Certificate of Incorporation as amended. The Class A Common Stock is not
publicly traded and consequently, there is currently no established public
trading market for these shares.
On March
27, 2007, the Board of Directors approved an increase in the quarterly cash
dividend rate from $0.06 to $0.08 per share. On January 15, 2009, the
Board approved a decrease in the quarterly cash dividend rate from $0.08 to
$0.05 per share. On April 9, 2009, the Company announced that the
Board has decided to discontinue the quarterly cash dividend. The
declaration and payment of future dividends, if any, needs to be approved by the
Board and will depend upon the Company’s profitability, financial condition,
capital and surplus requirements, future prospects, terms of indebtedness and
other factors deemed relevant by the Board. See Notes 4 and 5
to the Consolidated Financial Statements regarding contractual restrictions on
the Company’s ability to pay dividends.
Cash
dividends paid were $5.9 million, $8.3 million and $6.2 million in fiscal years
2009, 2008 and 2007, respectively. As of January 15, 2009, the
Company declared a $1.2 million cash dividend, which was subsequently paid in
February 2009.
On
December 4, 2007, the Board of Directors authorized a program to repurchase up
to one million shares of the Company’s common stock. Shares of common
stock were repurchased from time to time as market conditions warranted through
open market transactions. The objective of the program was to reduce
or eliminate earnings per share dilution caused by the shares of common stock
issued upon the
exercise
of stock options and in connection with other equity based compensation
plans. As of April 14, 2008, the Company had completed the one
million share repurchase during the fourth quarter of fiscal 2008 and the first
quarter of fiscal 2009, at a total cost of approximately $19.4 million, or
$19.41 per share.
On April
15, 2008, the Board of Directors announced a new authorization to repurchase up
to an additional one million shares of the Company’s common
stock. Under this authorization, the Company has the option to
repurchase shares over time, with the amount and timing of repurchases depending
on market conditions and corporate needs. The Company entered into a
Rule 10b5-1 plan to facilitate repurchases of its shares under this
authorization. A Rule 10b5-1 plan permits a company to repurchase
shares at times when it might otherwise be prevented from doing so, provided the
plan is adopted when the company is not aware of material non-public
information. The Company may suspend or discontinue the repurchase of
stock at any time. Under this share repurchase program, as of January
31, 2009, the Company had repurchased a total of 937,360 shares of common stock
in the open market during the first and second quarters of fiscal year 2009 at a
total cost of approximately $19.5 million or $20.79 per share.
In
addition to the shares repurchased pursuant to the Company’s share repurchase
programs, an aggregate of 102,662 shares have been repurchased during the twelve
months ended January 31, 2009, as a result of the surrender of shares in
connection with the vesting of certain stock awards and the exercise of certain
stock options. At the election of an employee, upon the vesting of a
stock award or the exercise of a stock option, shares having an aggregate value
on the vesting or the exercise date as the case may be, equal to the employee’s
withholding tax obligation may be surrendered to the Company by netting them
from the vested shares issued. Similarly, shares having an aggregate
value equal to the exercise price of an option may be tendered to the Company in
payment of the option exercise price and netted from the shares issued upon the
option exercise.
The
following table summarizes information about the Company’s purchases for the
year ended January 31, 2009 of equity securities that are registered by the
Company pursuant to Section 12 of the Securities Exchange Act of
1934:
Issuer
Repurchase of Equity Securities
|
|
Period
|
|
Total
Number of Shares Purchased
|
|
|
Average
Price Paid Per Share
|
|
|
Total
Number of Shares Purchased as Part of Publicly Announced Plans or
Programs
|
|
|
Maximum
Number of Shares that May Yet Be Purchased Under the Plans or
Programs
|
|
February
1, 2008 - February 29, 2008
|
|
|
148,500 |
|
|
$ |
20.14 |
|
|
|
148,500 |
|
|
|
807,543 |
|
March
1, 2008 - March 31, 2008
|
|
|
406,750 |
|
|
$ |
18.60 |
|
|
|
406,750 |
|
|
|
400,793 |
|
April
1, 2008 - April 14, 2008
|
|
|
422,066 |
|
|
$ |
19.51 |
|
|
|
400,793 |
|
|
|
- |
|
April
15, 2008 - April 30, 2008
|
|
|
238,491 |
|
|
$ |
20.30 |
|
|
|
238,115 |
|
|
|
761,885 |
|
May
1, 2008 - May 31, 2008
|
|
|
286,733 |
|
|
$ |
21.59 |
|
|
|
286,539 |
|
|
|
475,346 |
|
June
1, 2008 - June 30, 2008
|
|
|
396,006 |
|
|
$ |
20.55 |
|
|
|
396,006 |
|
|
|
79,340 |
|
July
1, 2008 - July 31, 2008
|
|
|
16,700 |
|
|
$ |
20.08 |
|
|
|
16,700 |
|
|
|
62,640 |
|
September
1, 2008 - September 30, 2008
|
|
|
78,884 |
|
|
$ |
23.22 |
|
|
|
- |
|
|
|
62,640 |
|
January
1, 2009 - January 31, 2009
|
|
|
1,935 |
|
|
$ |
22.27 |
|
|
|
- |
|
|
|
62,640 |
|
Total
|
|
|
1,996,065 |
|
|
$ |
20.12 |
|
|
|
1,893,403 |
|
|
|
62,640 |
|
PERFORMANCE
GRAPH
The
performance graph set forth below compares the cumulative total shareholder
return of the Company’s common stock for the last five fiscal years through the
fiscal year ended January 31, 2009 with that of the Broad Market (NYSE Stock
Market – U.S. Companies), the S&P SmallCap 600 index and the Russell 2000
index. Each index assumes an initial investment of $100 on January
31, 2004 and the reinvestment of dividends (where applicable).
Company
Name / Index
|
1/31/04
|
1/31/05
|
1/31/06
|
1/31/07
|
1/31/08
|
1/31/09
|
|
|
|
|
|
|
|
Movado
Group, Inc.
|
100.0
|
129.1
|
135.3
|
207.6
|
177.2
|
57.3
|
NYSE
(U.S. Companies)
|
100.0
|
108.4
|
121.7
|
140.7
|
137.4
|
89.6
|
S&P
SmallCap 600 Index
|
100.0
|
116.5
|
139.1
|
150.8
|
140.1
|
88.7
|
Russell
2000 Index
|
100.0
|
108.7
|
129.2
|
142.7
|
128.7
|
81.3
|
Item
6. Selected Financial Data
The
selected financial data presented below has been derived from the Consolidated
Financial Statements. This information should be read in conjunction
with, and is qualified in its entirety by, the Consolidated Financial Statements
and “Management’s Discussion and Analysis of Financial Condition and Results of
Operation” contained in Item 7 of this report. Amounts are in
thousands except per share amounts:
|
|
Fiscal
Year Ended January 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Statement
of income data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales (1)
|
|
$ |
460,857 |
|
|
$ |
559,550 |
|
|
$ |
532,865 |
|
|
$ |
470,941 |
|
|
$ |
418,966 |
|
Cost
of sales
|
|
|
173,225 |
|
|
|
222,868 |
|
|
|
209,922 |
|
|
|
184,621 |
|
|
|
168,818 |
|
Gross
profit (1)
|
|
|
287,632 |
|
|
|
336,682 |
|
|
|
322,943 |
|
|
|
286,320 |
|
|
|
250,148 |
|
Selling,
general and administrative (2) (3) (4) (5)
|
|
|
284,242 |
|
|
|
285,905 |
|
|
|
270,624 |
|
|
|
238,283 |
|
|
|
215,072 |
|
Operating
income (1) (2) (3) (4) (5)
|
|
|
3,390 |
|
|
|
50,777 |
|
|
|
52,319 |
|
|
|
48,037 |
|
|
|
35,076 |
|
Other
income, net (6) (7) (8) (9)
|
|
|
681 |
|
|
|
- |
|
|
|
1,347 |
|
|
|
1,008 |
|
|
|
1,444 |
|
Interest
expense
|
|
|
(2,915 |
) |
|
|
(3,472 |
) |
|
|
(3,785 |
) |
|
|
(4,574 |
) |
|
|
(3,544 |
) |
Interest
income
|
|
|
2,132 |
|
|
|
4,666 |
|
|
|
3,280 |
|
|
|
465 |
|
|
|
114 |
|
Income
before taxes and minority interests
|
|
|
3,288 |
|
|
|
51,971 |
|
|
|
53,161 |
|
|
|
44,936 |
|
|
|
33,090 |
|
Provision
/ (benefit) for income taxes (10) (11) (12) (13) (14)
|
|
|
736 |
|
|
|
(9,471 |
) |
|
|
2,890 |
|
|
|
18,319 |
|
|
|
6,783 |
|
Minority
interests
|
|
|
237 |
|
|
|
637 |
|
|
|
133 |
|
|
|
- |
|
|
|
- |
|
Net
income
|
|
$ |
2,315 |
|
|
$ |
60,805 |
|
|
$ |
50,138 |
|
|
$ |
26,617 |
|
|
$ |
26,307 |
|
Net
income per share-Basic (15)
|
|
$ |
0.09 |
|
|
$ |
2.33 |
|
|
$ |
1.95 |
|
|
$ |
1.05 |
|
|
$ |
1.06 |
|
Net
income per share-Diluted (15)
|
|
$ |
0.09 |
|
|
$ |
2.23 |
|
|
$ |
1.87 |
|
|
$ |
1.02 |
|
|
$ |
1.03 |
|
Basic
shares outstanding (15)
|
|
|
24,782 |
|
|
|
26,049 |
|
|
|
25,670 |
|
|
|
25,273 |
|
|
|
24,708 |
|
Diluted
shares outstanding (15)
|
|
|
25,554 |
|
|
|
27,293 |
|
|
|
26,794 |
|
|
|
26,180 |
|
|
|
25,583 |
|
Cash
dividends declared and paid per share (15)
|
|
$ |
0.29 |
|
|
$ |
0.32 |
|
|
$ |
0.24 |
|
|
$ |
0.20 |
|
|
$ |
0.16 |
|
Balance
sheet data (end of period):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working
capital (16)
|
|
$ |
306,168 |
|
|
$ |
419,632 |
|
|
$ |
383,422 |
|
|
$ |
366,530 |
|
|
$ |
303,225 |
|
Total
assets
|
|
$ |
563,990 |
|
|
$ |
646,216 |
|
|
$ |
577,618 |
|
|
$ |
549,919 |
|
|
$ |
477,074 |
|
Total
long-term debt (16)
|
|
$ |
- |
|
|
$ |
60,895 |
|
|
$ |
80,196 |
|
|
$ |
109,955 |
|
|
$ |
45,000 |
|
Shareholders’
equity
|
|
$ |
398,960 |
|
|
$ |
463,195 |
|
|
$ |
378,381 |
|
|
$ |
321,678 |
|
|
$ |
316,557 |
|
(1)
|
Fiscal
2008 net sales includes a non-cash charge for estimated returns in the
amount of $15.0 million and gross profit and operating income include a
non-cash charge of $11.0 million, related to the closing of certain
wholesale customer doors in the
U.S.
|
(2)
|
Fiscal
2009 includes a pre-tax charge of $11.1 million associated with the
Company’s expense reduction initiatives and a restructuring of certain
benefit arrangements.
|
(3)
|
Fiscal
2009 includes a non-cash impairment charge of $4.5 million recorded in
accordance with SFAS No. 144, “Accounting for Impairment of Long-Lived
Assets”.
|
(4)
|
Fiscal
2007 includes a one-time benefit of $2.2 million for an out-of-period
adjustment related to foreign
currency.
|
(5)
|
Fiscal
2005 includes a non-cash impairment charge of $2.0 million recorded in
accordance with SFAS No. 144, “Accounting for the Impairment or Disposal
of Long-Lived Assets”.
|
(6)
|
The
fiscal 2009 other income consists of a pre-tax gain of $0.7 million on the
collection of life insurance proceeds from policies covering the Company’s
former Chairman.
|
(7)
|
The
fiscal 2007 other income consists of a pre-tax gain of $0.8 million on the
sale of artwork, a pre-tax gain of $0.4 million on the sale of a building
and a pre-tax gain of $0.1 million on the sale of rights to a web domain
name.
|
(8)
|
The
fiscal 2006 other income consists of a pre-tax gain of $2.6 million on the
sale of a building offset by a pre-tax loss of $1.6 million representing
the impact of the discontinuation of foreign currency cash flow hedges
because it was not probable that the forecasted transactions would occur
by the end of the originally specified time
period.
|
(9)
|
The
fiscal 2005 other income consists of a $1.4 million litigation
settlement.
|
(10)
|
The
fiscal 2009 effective tax rate of 22.4% includes tax accrued on the future
repatriation of foreign earnings of $7.4 million somewhat offset by a
release of valuation allowances on foreign tax losses of $3.0
million.
|
(11)
|
The
fiscal 2008 effective tax benefit of $9.5 million, or rate of -18.2%,
reflects a result of the recognition of previously unrecognized tax
benefits due to the settlement of the IRS audit for fiscal years 2004
through 2006 ($12.5 million) and the release of valuation allowances in
whole or part on Swiss and UK tax losses ($7.6
million).
|
(12)
|
The
fiscal 2007 effective tax rate of 5.4% reflects a partial release of the
valuation allowance on Swiss tax
losses.
|
(13)
|
The
fiscal 2006 effective tax rate of 40.8% reflects a tax charge of $7.5
million associated with repatriated foreign earnings under the American
Jobs Creation Act of 2004.
|
(14)
|
The
fiscal 2005 effective tax rate of 20.5% reflects the adjustments in the
fourth quarter relating to refunds from a retroactive Swiss tax ruling and
a favorable U.S. tax accrual
adjustment.
|
(15)
|
For
all periods presented, basic and diluted shares outstanding, and the
related “per share” amounts reflect the effect of the fiscal 2005
two-for-one stock split.
|
(16)
|
The
Company defines working capital as current assets less current
liabilities. In fiscal 2009 the Company reclassified $65.0
million of outstanding debt from non-current liabilities to current
liabilities, due to the non-compliance with the interest coverage ratio
covenant under certain of its current debt
agreements.
|
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operation
GENERAL
Net sales. The
Company operates and manages its business in two principal business segments –
Wholesale and Retail. The Company also operates in two geographic
segments – United States and International. The Company divides its
watch brands into three distinct categories: luxury, accessible luxury and
licensed brands. 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.
The
primary factors that influence annual sales are general economic conditions in
the Company’s U.S. and international markets, new product introductions, the
level and effectiveness of advertising and marketing expenditures and product
pricing decisions. Economic conditions both in the United States and
around the world have deteriorated since the beginning of fiscal 2009 and over
the course of the last quarter ended January 31, 2009. As the events
that have caused this deterioration continue to unfold, the Company does not
have significant, meaningful visibility into the future effects they could have
on the U.S. and the global economy. A prolonged economic deterioration and its
impact on consumer spending will likely have a negative impact on the Company’s
sales and financial results into fiscal 2010.
Approximately
45% of the Company’s total sales are from international markets and therefore
reported sales made in those markets are affected by foreign exchange rates. The
Company’s international sales are billed in local currencies (predominantly
Euros and Swiss francs) and translated to U.S. dollars at average exchange rates
for financial reporting purposes.
The
Company’s business is seasonal. There are two major selling seasons
in the Company’s markets: the spring season, which includes school graduations
and several holidays and, most importantly, the Christmas and holiday season.
Major selling seasons in certain international markets center on significant
local holidays that occur in late winter or early spring. The
Company’s net sales historically have been higher during the second half of the
fiscal year. The second half of each year accounted for 49.9%, 57.0%,
and 57.9% of the Company’s net sales for the fiscal years ended January 31,
2009, 2008, and 2007, respectively. In fiscal 2009, the Company did
not experience the usual seasonality of its business due to the downturn in the
economy, which resulted in the percentage of net sales for the second half of
the fiscal year not being comparable to that in previous years.
The
Company’s retail operations consist of 29 Movado Boutiques and 32 outlet stores
located throughout the United States. The Company does not have any retail
operations outside of the United States.
The
significant factors that influence annual sales volumes in the Company’s retail
operations are similar to those that influence U.S. wholesale
sales. In addition, many of the Company’s outlet stores are located
near vacation destinations and, therefore, the seasonality of these stores is
driven by the peak tourist seasons associated with these locations.
In fiscal
year 2008, as part of the Company’s Movado brand strategy, the Company
streamlined the Movado brand wholesale distribution in the United States from
4,000 wholesale customer doors to approximately 2,600 doors, representing a 35%
reduction. A wholesale customer door could be either a single store
within a department store chain or an independent jewelry
store. These least productive
doors
represented approximately $10.0 million of Movado brand sales during the year
ended January 31, 2008, or less than 2% of the Company’s consolidated
revenue. The Company recorded a one-time accrual of $15.0 million
during its 2008 fiscal year related to future sales returns associated with the
reduction of these wholesale customer doors. These sales returns were
completed during fiscal 2009.
Gross Margins. The
Company’s overall gross margins are primarily affected by four major factors:
brand and product sales mix, product pricing strategy, manufacturing costs and
fluctuation in currency rates, in particular the relationship between the U.S.
dollar and the Swiss franc and the Euro. Gross margins for the
Company may not be comparable to those of other companies, since some companies
include all the costs related to their distribution networks in cost of sales
whereas the Company does not include the costs associated with its U.S. and Asia
warehousing and distribution facilities nor the occupancy costs for the retail
segment in the cost of sales line item.
Gross
margins vary among the brands included in the Company’s portfolio and also among
watch models within each brand. Watches in the luxury category
generally earn lower gross margin percentages than watches in the accessible
luxury category. Excluding liquidation sales of excess discontinued
inventory in the prior year, fiscal 2009 gross margins in the Company’s
wholesale segment declined as the accessible luxury category represented a
smaller percentage of total sales. Gross margins in the Company’s
outlet business are lower than those of the wholesale business since the outlets
primarily sell seconds and discontinued models that generally command lower
selling prices. Gross margins in the Movado Boutiques are affected by
the mix of product sold. The margins from the sale of watches are
greater than those from the sale of jewelry and accessories. Gross
margins from the sale of watches in the Movado Boutiques also exceed those of
the wholesale business since the Company earns margins from manufacture to point
of sale to the consumer. During the fourth quarter of fiscal 2009,
the Movado Boutiques recorded lower gross margins when compared to the prior
year resulting from more in-store promotions.
All of
the Company’s brands compete with a number of other brands on the basis of not
only styling but also wholesale and retail price. The Company’s
ability to improve margins through price increases is therefore, to some extent,
constrained by competitors’ actions.
Costs of
sales of the Company’s products consist primarily of component costs, assembly
costs and unit overhead costs associated with the Company’s supply chain
operations in Switzerland and Asia. The Company’s supply chain
operations consist of logistics management of assembly operations and product
sourcing in Switzerland and Asia and assembly in Switzerland. Through
productivity improvement efforts, the Company has controlled the level of
overhead costs and maintained flexibility in its cost structure by outsourcing a
significant portion of its component and assembly requirements.
Since a
substantial amount of the Company’s product costs are incurred in Swiss francs,
fluctuations in the U.S. dollar/Swiss franc exchange rate can impact the
Company’s cost of goods sold and, therefore, its gross margins. The
Company hedges a portion of its Swiss franc purchases using a combination of
forward contracts and purchased currency options. The Company’s
hedging program had the effect of minimizing the exchange rate impact on product
costs and gross margins for fiscal years 2009, 2008, and
2007. Additionally, a portion of the Company’s net sales are recorded
in its foreign subsidiaries in a currency other than the local currency of that
subsidiary. This predominantly occurs in the Company’s Hong Kong and Swiss
subsidiaries when they sell to Euro-based customers. This exposure is not
hedged by the Company. Any fluctuation in the Euro exchange rate in
relation to the Hong Kong dollar and Swiss franc would have an effect on these
sales that are recorded in Euro. The currency effect on
these
Euro sales has an equal effect on their recorded gross profit since the costs of
these sales are recorded in the entities’ respective local
currency.
Selling, General and Administrative
(“SG&A”) Expenses. The Company’s SG&A expenses consist primarily
of marketing, selling, distribution and general and administrative
expenses. During the second half of fiscal 2009, the Company
announced initiatives designed to streamline operations, reduce expenses, and
improve efficiencies and effectiveness across the Company’s global
organization. In fiscal 2009, the Company recorded a
total pre-tax charge of $11.1 million related to the completion of these
programs and a restructuring of certain benefit arrangements. See
Note 20 to the Consolidated Financial Statements included in this
report. Additionally, the Company recorded a non-cash pre-tax
impairment charge of $4.5 million consisting of property, plant and equipment,
related to five Movado Boutiques.
Annual
marketing expenditures are based principally on overall strategic considerations
relative to maintaining or increasing market share in markets that management
considers to be crucial to the Company’s continued success as well as on general
economic conditions in the various markets around the world in which the Company
sells its products. Marketing expenses include various forms of media
advertising, co-operative advertising with customers and distributors and other
point-of-sale marketing and promotion spending.
Selling
expenses consist primarily of salaries, sales commissions, sales force travel
and related expenses, expenses associated with Baselworld, the annual watch and
jewelry trade show and other industry trade shows and operating costs incurred
in connection with the Company’s retail business. Sales commissions vary with
overall sales levels. Retail selling expenses consist primarily of payroll
related and store occupancy costs.
Distribution
expenses consist primarily of salaries of distribution staff, rental and other
occupancy costs, security, depreciation and amortization of furniture and
leasehold improvements and shipping supplies.
General
and administrative expenses consist primarily of salaries and other employee
compensation, employee benefit plan costs, office rent, management information
systems costs, professional fees, bad debts, depreciation and amortization of
furniture and leasehold improvements, patent and trademark expenses and various
other general corporate expenses.
Interest
Expense. The Company records interest expense on its private
placement notes as well as on its revolving credit
facilities. Through the date of this filing, the Company is in
negotiations with banking institutions to establish a new asset-based credit
agreement which, if consummated, would replace current facilities that have
favorable interest rates when compared to rates generally available in the
current market. As a result, the Company expects that future levels
of interest expense will increase.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
The
Company’s consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States and those
significant policies are more fully described in Note 1 to the Company’s
Consolidated Financial Statements. The preparation of these financial
statements and the application of certain critical accounting policies require
management to make judgments based on estimates and assumptions that affect the
information reported. On an on-going basis, management evaluates its estimates
and judgments, including those related to sales discounts and markdowns, product
returns, bad debt, inventories, income taxes, warranty obligations, impairments
and
contingencies
and litigation. Management bases its estimates and judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources on historical experience, contractual commitments and on various
other factors that are believed to be reasonable under the circumstances. Actual
results could differ from these estimates. Management believes the
following are the critical accounting policies requiring significant judgments
and estimates used in the preparation of its consolidated financial
statements.
Revenue
Recognition
In the
wholesale segment, the Company recognizes revenue upon transfer of title and
risk of loss in accordance with its FOB shipping point terms of sale and after
the sales price is fixed and determinable and collectability is reasonably
assured. In the retail segment, transfer of title and risk of loss
occurs at the time of register receipt. The Company records estimates
for sales returns, volume-based programs and sales and cash discount allowances
as a reduction of revenue in the same period that the sales are
recorded. These estimates are based upon historical analysis,
customer agreements and/or currently known factors that arise in the normal
course of business. While returns have historically been within the
Company’s expectations and the provisions established, future return rates may
differ from those experienced in the past. In the event that returns
are authorized at a rate significantly higher than the Company’s historic rate,
the resulting returns could have an adverse impact on its operating results for
the period in which such results materialize. In the fourth quarter
of fiscal 2008, the Company recorded a one-time charge of $15.0 million related
to estimated sales returns associated with the streamlining of the Movado brand
wholesale distribution in the U.S. consisting of the planned reduction of
approximately 1,400 wholesale customer doors. These sales returns
were completed during fiscal 2009.
Allowance
for Doubtful Accounts
Accounts
receivable are reduced by an allowance for amounts that may be uncollectible in
the future. Estimates are used in determining the allowance for doubtful
accounts and are based on an analysis of the aging of accounts receivable,
assessments of collectability based on historic trends, the financial condition
of the Company’s customers and an evaluation of economic conditions. In
general, while the actual bad debt losses have historically been within the
Company’s expectations and the allowances established, there can be no guarantee
that the Company will continue to experience the same bad debt loss rates in the
future. As of January 31, 2009, except for those accounts provided for in the
reserve for doubtful accounts, the Company knew of no situations with any of the
Company’s major customers which would indicate the customer’s inability to make
their required payments.
Inventories
The
Company values its inventory at the lower of cost or market. The
Company’s U.S. inventory is valued using the first-in, first-out (FIFO)
method. The cost of finished goods and component inventories, held by
international subsidiaries, are determined using average cost. The Company’s
management regularly reviews its sales to customers and customers’ sell-through
at retail to evaluate the adequacy of inventory reserves. Inventory classified
as discontinued, together with the related component parts which can be
assembled into saleable finished goods, is sold primarily through the Company’s
outlet stores. When management determines that finished product is unsaleable or
that it is impractical to build the remaining components into watches for sale,
a reserve is established for the cost of those products and components to value
the inventory at the lower of cost or market. During the fiscal year ended
January 31, 2009, the Company went through a process of scrapping unsaleable
inventory and components which were reserved for and recorded as cost of sales
in previous fiscal years.
Additionally
in fiscal year 2009, the Company conducted its ongoing review of unsaleable
inventory and associated components resulting in no material changes to existing
reserves. During the fiscal years ended January 31, 2008 and 2007,
the Company conducted an in depth review of all its discontinued components and
watches. In doing so, the Company made an economic decision to
convert these excess quantities of discontinued inventory into
cash. As a result, the Company engaged in a liquidation through an
independent third party to sell the excess product for cash. In
addition, where it was not deemed economically feasible to invest the time,
effort and/or cost, the Company initiated efforts to cleanse the inventory and
scrap the product. The Company’s estimates, based on which it
establishes its inventory reserves, could vary significantly, either favorably
or unfavorably, from actual requirements depending on future economic
conditions, customer inventory levels or competitive conditions.
Long-Lived
Assets
The
Company periodically reviews the estimated useful lives of its depreciable
assets based on factors including historical experience, the expected beneficial
service period of the asset, the quality and durability of the asset and the
Company’s maintenance policy including periodic upgrades. Changes in useful
lives are made on a prospective basis unless factors indicate the carrying
amounts of the assets may not be recoverable and an impairment write-down is
necessary.
The
Company performs an impairment review of its long-lived assets once events or
changes in circumstances indicate, in management's judgment, that the carrying
value of such assets may not be recoverable in accordance with SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-Lived
Assets”. When such a determination has been made, management compares
the carrying value of the assets with their estimated future undiscounted cash
flows. If it is determined that an impairment loss has occurred, the loss is
recognized during that period. The impairment loss is calculated as the
difference between asset carrying values and the fair value of the long-lived
assets.
During
the fourth quarter of fiscal 2009, the Company determined that the carrying
value of its long-lived assets with respects to five Movado Boutiques was not
recoverable. The impairment review was performed pursuant to SFAS No. 144
because of the economic downturn in the U.S. that had a negative effect on the
Company’s fourth quarter ended January 31, 2009, the retail segment's largest
quarter of the year in terms of sales and profitability. The
deteriorating economy negatively affected the Boutiques' sales
volumes. As a result, the Company recorded a non-cash pre-tax
impairment charge of $4.5 million consisting of property, plant and equipment.
The charge was calculated as the difference between the assets’ carrying values
and their estimated fair value. For the purposes of this calculation,
fair value was determined using a discounted cash flow
calculation. The impairment charge is included in the selling,
general and administrative expenses in the fiscal 2009 Consolidated Statements
of Income.
Warranties
All
watches sold by the Company come with limited warranties covering the movement
against defects in material and workmanship for periods ranging from two to
three years from the date of purchase, with the exception of Tommy Hilfiger
watches, for which the warranty period is ten years. In addition, the
warranty period is five years for the gold plating on certain Movado watch cases
and bracelets. The Company records an estimate for future warranty
costs based on historical repair costs. Warranty costs have
historically been within the Company’s expectations and the provisions
established. If such costs were to substantially exceed estimates, this could
have an adverse effect on the Company’s operating results.
Stock-Based
Compensation
On
February 1, 2006, the Company adopted the provisions of SFAS No. 123(R),
“Share-Based Payment”, electing to use the modified prospective application
transition method, and accordingly, prior period financial statements have not
been restated. Under this method, the fair value of all stock
options granted after adoption and the unvested portion of previously granted
awards must be recognized in the Consolidated Statements of
Income. The Company utilizes the Black-Scholes option-pricing model
to calculate the fair value of each option at the grant date which requires that
certain assumptions be made. The expected life of stock option grants
is determined using historical data and represents the time period which the
stock option is expected to be outstanding until it is exercised. The
risk free interest rate is the yield on the grant date of U.S. Treasury constant
maturities with a maturity date closest to the expected life of the stock
option. The expected stock price volatility is derived from
historical volatility and calculated based on the estimated term structure of
the stock option grant. The expected dividend yield is calculated
using the expected annualized dividend which remains constant during the
expected term of the option.
SFAS No.
123(R) requires that compensation expense for equity instruments be accrued
based on the estimated number of instruments for which the requisite service is
expected to be rendered. Additionally, for performance based awards,
compensation expense should be accrued only if it is probable that the
performance condition will be achieved. The Company reviews the
estimates of forfeitures and the probability of performance conditions being
achieved at each reporting period. Any changes to compensation
expense as a result of a change in these estimates are reflected in the period
of change. During fiscal 2009, as a result of the deteriorating
global economy, it became apparent that the performance goals for certain Long
Term Incentive Plan grants would not be achieved. This resulted in
the reversal of previously accrued stock-based compensation expenses of
approximately $3.2 million.
Income
Taxes
The
Company follows SFAS No. 109, "Accounting for Income Taxes". Under
the asset and liability method of SFAS No. 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax laws and tax rates in each
jurisdiction where the Company operates, and applied to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities due to a change in
tax rates is recognized in income in the period that includes the enactment
date. In addition, the amounts of any future tax benefits are reduced by a
valuation allowance to the extent such benefits are not expected to be realized
on a more-likely-than-not basis. The Company calculates estimated income taxes
in each of the jurisdictions in which it operates. This process involves
estimating actual current tax expense along with assessing temporary differences
resulting from differing treatment of items for both book and tax
purposes.
The
Company adopted the provisions of the FIN 48, “Accounting for Uncertainty in
Income Taxes”, on February 1, 2007. FIN 48 clarifies the accounting
for uncertainty in income taxes recognized in an enterprise’s financial
statements in accordance with SFAS No. 109. FIN 48 also prescribes a
recognition threshold and measurement standard for the financial statement
recognition and measurement of an income tax position taken or expected to be
taken in a tax return. FIN 48 also provides guidance on
de-recognition, classification, interest and penalties, accounting in interim
periods, disclosures and transitions. The Company previously
recognized income tax positions based on management’s estimate of whether it was
reasonably possible that a liability had been incurred for
unrecognized
tax benefits by applying SFAS No. 5, Accounting for
Contingencies. The provisions of FIN 48 became effective for the
Company on February 1, 2007. For additional information related to
income taxes see Note 8 to the Consolidated Financial Statements.
RESULTS
OF OPERATIONS
The
following is a discussion of the results of operations for fiscal 2009 compared
to fiscal 2008 and fiscal 2008 compared to fiscal 2007 along with a discussion
of the changes in financial condition during fiscal 2009.
The
following are net sales by business segment (in thousands):
|
|
Fiscal
Year Ended January 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Wholesale:
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$ |
165,829 |
|
|
$ |
235,093 |
|
|
$ |
279,465 |
|
International
|
|
|
205,520 |
|
|
|
231,338 |
|
|
|
166,209 |
|
Retail
|
|
|
89,508 |
|
|
|
93,119 |
|
|
|
87,191 |
|
Net
sales
|
|
$ |
460,857 |
|
|
$ |
559,550 |
|
|
$ |
532,865 |
|
The
following table presents the Company’s results of operations expressed as a
percentage of net sales for the fiscal years indicated:
|
|
Fiscal
Year Ended January 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
%
of net sales
|
|
|
%
of net sales
|
|
|
%
of net sales
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Gross
margin
|
|
|
62.4 |
% |
|
|
60.2 |
% |
|
|
60.6 |
% |
Selling,
general and administrative expenses
|
|
|
61.7 |
% |
|
|
51.1 |
% |
|
|
50.8 |
% |
Operating
income
|
|
|
0.7 |
% |
|
|
9.1 |
% |
|
|
9.8 |
% |
Other
income
|
|
|
0.2 |
% |
|
|
0.0 |
% |
|
|
0.3 |
% |
Interest
expense
|
|
|
0.6 |
% |
|
|
0.6 |
% |
|
|
0.7 |
% |
Interest
income
|
|
|
0.5 |
% |
|
|
0.8 |
% |
|
|
0.6 |
% |
Provision
/ (benefit) for income taxes
|
|
|
0.2 |
% |
|
|
(1.7 |
)% |
|
|
0.5 |
% |
Minority
interests
|
|
|
0.1 |
% |
|
|
0.1 |
% |
|
|
0.1 |
% |
Net
income
|
|
|
0.5 |
% |
|
|
10.9 |
% |
|
|
9.4 |
% |
Fiscal
2009 Compared to Fiscal 2008
Net
Sales
Net sales
in fiscal 2009 were $460.9 million, below prior year by $98.7 million or
17.6%. For fiscal 2008, liquidation sales of excess discontinued
inventory were $31.1 million. In addition, net sales in fiscal 2008
included a one-time charge of $15.0 million related to estimated future sales
returns associated with the streamlining of the Movado brand wholesale
distribution in the U.S. which consisted of the reduction of approximately 1,400
wholesale customer doors. Excluding the liquidation of
excess
discontinued
inventory and the charge for the reduction of wholesale customer doors in fiscal
2008, fiscal 2009 net sales were below prior year by $82.6 million, or
15.2%. As a result of the weaker average U.S. dollar during fiscal
2009 when compared to the prior year, and the resulting translation of the
international subsidiaries’ financial results, the effect of foreign currency
translation increased fiscal 2009 net sales by $7.6 million when compared to the
prior year.
United
States Wholesale Net Sales
Net sales
in fiscal 2009 in the U.S. wholesale segment were $165.8 million, representing a
29.5% decrease from prior year sales of $235.1 million. For fiscal
2008, liquidation sales of excess discontinued inventory in the U.S. wholesale
segment were $14.2 million. In addition, net sales in fiscal 2008
included a one-time charge of $15.0 million related to estimated future sales
returns associated with the streamlining of the Movado brand wholesale
distribution in the U.S. which consisted of the reduction of wholesale customer
doors. Excluding the liquidation of excess discontinued inventory and
the charge for the reduction of the wholesale customer doors in fiscal 2008,
fiscal 2009 net sales were below prior year by $70.1 million, or
29.7%. (The remaining discussion in this paragraph excludes the
impact of the liquidation sales of excess discontinued inventory and the charge
for the reduction of wholesale customer doors in fiscal 2008). The
decrease in U.S. wholesale net sales of $70.1 million was primarily due to lower
sales in the accessible luxury category of $62.7 million, or 37.0% below the
prior year. Additionally, lower sales were recorded in the luxury
category of $7.1 million. The lower sales recorded in both the luxury
and accessible luxury categories are primarily attributable to the unfavorable
impact of the deteriorating global economy. Sales in the licensed
brand category were above prior year by $1.6 million. The increase in
licensed brand sales was primarily driven by market expansion and growth in the
newer licensed brands.
International
Wholesale Net Sales
Net sales
in fiscal 2009 in the international wholesale segment were $205.5 million,
representing an 11.2% decrease from prior year sales of $231.3
million. For fiscal 2008, liquidation sales of excess discontinued
inventory in the international wholesale segment were $16.9
million. Excluding the liquidation of excess discontinued inventory
in fiscal 2008, fiscal 2009 net sales were below prior year by $8.9 million, or
4.1%. (The remaining discussion in this paragraph excludes the impact
of the liquidation sales of excess discontinued inventory in fiscal
2008). The decrease in international net sales of $8.9 million was
primarily due to lower sales in the luxury category of $9.6 million or 15.0%
below the prior year. Lower sales were also recorded in the
accessible luxury category of $8.9 million or 19.6%. The lower sales
recorded in both the luxury and accessible luxury categories are primarily
attributable to the unfavorable impact of the deteriorating global
economy. Net sales in the licensed brand category were above prior
year by $9.3 million or 9.6%. This increase was primarily the result
of international market expansion as well as growth in the newer licensed
brands. As a result of the weaker average U.S. dollar during fiscal
2009 when compared to the prior year, and the resulting translation of the
international subsidiaries’ financial results, the effect of foreign currency
translation increased net sales for fiscal 2009 by $7.6 million when compared to
the prior year.
Retail
Net Sales
Net sales
in fiscal 2009 in the retail segment were $89.5 million, representing a 3.9%
decrease from prior year sales of $93.1 million. The decrease in
sales was the net result of lower sales in the Movado Boutiques, partially
offset by higher sales in the outlet stores. Sales in the Movado
Boutiques were below prior year by 16.4%. The decrease in sales was
driven by a decline in comparable store sales of
17.3%,
primarily attributable to the unfavorable impact of the deteriorating U.S.
economy. Sales in the outlet stores increased by 6.3%, driven by an
increase in comparable store sales of 6.9%. The Company operated 32
outlet stores and 29 Movado Boutiques as of January 31, 2009, compared to 32
outlet stores and 30 Movado Boutiques as of January 31, 2008.
The
Company considers comparable store sales to be sales of stores that were open as
of February 1st of the
last year through January 31st of the
current year. The Company had 27 comparable Movado Boutiques and 29
comparable outlet stores for the year ended January 31, 2009. 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 calculation of comparable store sales may not be the same as
measures reported by other companies.
Gross
Profit
Gross
profit for the 2009 fiscal year was $287.6 million or 62.4% of net sales as
compared to $336.7 million or 60.2% of net sales in the prior
year. The decrease in gross profit of $49.1 million was primarily the
result of the decrease in sales volume. The gross margin percentage
was negatively impacted in fiscal 2008 by the liquidation sales of excess
discontinued inventory. Excluding the liquidation sales of excess
discontinued inventory, the gross margin percentage was 64.0% for fiscal year
2008, compared to 62.4% in the current year. This decrease in gross
margin percentage was primarily the result of the mix of sales by business as
the high margin accessible luxury category represented a lower percentage of
total sales year-over-year. The decrease in gross margin percentage
can also be attributed to lower margins in the Movado Boutiques resulting from
in-store promotions in effect during the fourth quarter of fiscal
2009.
Selling,
General and Administrative
SG&A
expenses for fiscal 2009 were $284.2 million as compared to $285.9 million in
the prior year. The decrease of $1.7 million or 0.6% was driven by lower
performance-based compensation expense of $11.7 million which was the result of
paying no bonuses for fiscal 2009 as well as the reversal of previously accrued
performance-based grants. Expense reductions were also recorded as a
result of the Company’s initiatives to streamline operations and reduce
expenses. These included lower marketing expenses in fiscal 2009 of
$7.8 million, a reduction of discretionary spending on consulting and other
outside services of $2.5 million, lower payroll and related expenses of $2.3
million, primarily the result of headcount reductions, and lower travel and
related expenses of $1.1 million. These expense savings in fiscal
2009 were offset by $11.1 million of severance related costs associated with the
Company’s expense reduction initiatives and a restructuring of certain benefit
arrangements, the unfavorable impact of foreign exchange from translating the
European subsidiaries’ financial results of $5.0 million, increased expenses of
$2.1 million in the Company’s growing joint venture operations in Europe and
higher provisions for bad debt of $0.9 million. In addition, the
Company recorded a non-cash charge of $4.5 million in fiscal 2009 for the
impairment of long-lived assets associated with five Movado Boutique
locations.
Wholesale
Operating Income
Operating
income in the wholesale segment decreased by $41.5 million in fiscal 2009 to
$8.7 million. The decrease was the net result of a reduction in gross
profit of $45.5 million, partially offset by the decrease in SG&A expenses
of $4.0 million. The reduction in gross profit of $45.5 million was
primarily the result of the decrease in sales volume
year-over-year. The decrease in SG&A expenses of
$4.0
million related principally to a reduction in performance based compensation
expense of $11.7 million and expense reductions associated with the Company’s
initiatives to streamline operations. These included a reduction in
marketing expenses of $6.2 million, a reduction of discretionary spending on
consulting and other outside services of $2.5 million, a reduction in payroll
and related expenses of $2.3 million and a reduction in travel and related
expenses of $1.1 million. These expense savings were offset by $11.1
million of additional severance related costs in fiscal 2009 associated with the
Company’s expense reduction initiatives and a restructuring of certain benefit
arrangements, the unfavorable impact of foreign exchange from translating the
European subsidiaries’ financial results of $5.0 million, increased expenses of
$2.1 million in the Company’s growing joint ventures and higher provisions for
bad debt of $0.9 million.
Retail
Operating Income (Loss)
Operating
loss of $5.3 million was recorded in the retail segment in fiscal 2009 compared
to an operating income of $0.6 million recorded for fiscal 2008. The
$5.9 million decrease in profit was the result of a reduction in gross profit of
$3.6 million and an increase in SG&A expenses of $2.3
million. The decrease in gross profit was attributable to lower sales
volume, as well as the lower gross profit percentage achieved,
year-over-year. The lower sales volume was primarily the result of
the deteriorating U.S. economy. The lower gross profit percentage was
primarily the result of lower margins in the Movado Boutiques resulting from
in-store promotions in effect during the fourth quarter of fiscal
2009. The increase in SG&A expenses was primarily the result of a
non-cash charge of $4.5 million in fiscal 2009 for the impairment of long-lived
assets associated with five Movado Boutique locations, partially offset by
reductions in marketing and payroll and related expenses as a result of the
Company’s cost savings initiatives.
Interest
Expense
Interest
expense for fiscal 2009 was $2.9 million as compared to $3.5 million in the
prior year period. Interest expense declined due to lower borrowings
somewhat offset by a higher average borrowing rate. Average
borrowings were $59.9 million for fiscal 2009 compared to average borrowings of
$70.9 million for fiscal 2008.
For
borrowings data for the years ended January 31, 2009 and 2008, see Notes 4 and 5
to the Consolidated Financial Statements.
Interest
Income
Interest
income was $2.1 million for fiscal 2009 as compared to $4.7 million for the
prior year. The lower interest income resulted from a decrease in
cash balances invested and a lower average interest rate earned.
Other
Income
The
Company recorded other income for fiscal 2009 of $0.7 million resulting from a
pre-tax gain on the collection of life insurance proceeds from policies covering
the Company’s former Chairman.
Income
Taxes
Income
taxes recorded for the twelve months ended January 31, 2009 was an expense of
$0.7 million, compared to a benefit of $9.5 million recorded for the twelve
months ended January 31, 2008. The tax recorded for fiscal 2009
resulted in a 22.4% effective tax rate which included tax accrued on the future
repatriation of foreign earnings of $7.4 million somewhat offset by a release of
valuation allowances on foreign tax losses of $3.0 million. Excluding
the tax accrued on repatriated earnings and the effect of the release of the
valuation allowances on foreign tax losses, the provision for taxes was a
benefit of $3.7 million. This was primarily attributed to the income
and loss mix by tax jurisdiction as taxable losses were recorded in the U.S.
compared to net taxable income in the Company’s foreign entities. The
tax rates in the U.S. generally are higher in relation to foreign
jurisdictions. The tax on income for fiscal 2008 was the net result
of an effective tax rate on base business operations of 20.6%, which was more
than offset by the recognition of a $12.5 million previously unrecognized tax
benefit as a result of the effective settlement of the IRS audit (see Note 8 to
the Consolidated Financial Statements). The tax on income was also favorably
impacted by the Company’s expected utilization of a greater portion of its net
operating loss carryforwards.
Net
Income
For
fiscal 2009, the Company recorded net income of $2.3 million as compared to
$60.8 million for the prior year.
Fiscal
2008 Compared to Fiscal 2007
Net
Sales
Net sales
in fiscal 2008 were $559.6 million, above prior year by $26.7 million or
5.0%. For the years ended January 31, 2008 and 2007, liquidation
sales of excess discontinued inventory were $31.1 million and $16.6 million,
respectively. In addition, net sales in fiscal 2008 include a
one-time charge of $15.0 million related to estimated future sales returns
associated with the streamlining of the Movado brand wholesale distribution in
the U.S. for the planned reduction of approximately 1,400 wholesale customer
doors. Excluding the liquidation of excess discontinued inventory in
both periods and the charge for the planned reduction of approximately 1,400
wholesale customer doors in fiscal 2008, net sales were $543.3 million,
representing an increase of $27.0 million, or 5.2% over prior year.
United
States Wholesale Net Sales
Net sales
in the U.S. wholesale segment were $235.1 million, representing a 15.9% decrease
from prior year sales of $279.5 million. The decrease of $44.4
million was primarily due to lower sales in the accessible luxury category of
$37.7 million or 19.1% over the prior year. The lower sales is
attributable to a $20.5 million reduction in volume, which was primarily the
result of lower holiday replenishment sales, a one-time charge of $15.0 million
related to estimated future sales returns and lower liquidation sales of excess
discontinued inventory of $2.2 million. Additionally, lower sales
were recorded in the luxury category of $7.1 million due to the repositioning of
the Concord brand. The licensed brand category was flat year on
year.
International
Wholesale Net Sales
Net sales
in the international wholesale segment were $231.3 million, representing a 39.2%
increase over prior year sales of $166.2 million. All categories were
above prior year. The licensed brand category was above prior year by
$37.3 million or 63.1%. This increase was primarily the result of
market expansion in the HUGO BOSS and Tommy Hilfiger brands, as well as the
launches of the Lacoste and Juicy Couture brands. The luxury category
was above prior year by $22.3 million or 37.9%. This increase was
primarily due to higher liquidation sales of excess discontinued inventory of
$17.0 million, as well as sales increases in the Ebel brand primarily due to
sales of new product introductions. As a result of the weak U.S.
dollar, international wholesale net sales increased by $13.2
million.
Retail
Net Sales
Net sales
in the retail segment were $93.1 million, representing a 6.8% increase above
prior year sales of $87.2 million. The increase was driven by an
overall 8.9% increase in outlet store sales, resulting from higher sales from
non-comparable stores. Comparable outlet store sales were relatively
flat year over year. Sales in the Movado Boutiques were above prior
year by 4.3%, resulting from higher sales from non-comparable
stores. Comparable store sales in the Movado Boutiques decreased by
2.3% when compared to prior year. The Company operated 32 outlet
stores and 30 Movado Boutiques as of January 31, 2008, compared to 30 outlet
stores and 31 Movado Boutiques as of January 31, 2007.
Gross
Profit
Gross
profit for the 2008 fiscal year was $336.7 million or 60.2% of net sales as
compared to $322.9 million or 60.6% of net sales in the prior
year. The increase in gross profit of $13.7 million was primarily the
result of the increase in sales volume, in addition to a higher gross margin
percentage in the base business sales. These increases were somewhat
offset by the negative gross profit impact related to the one-time charge of
$15.0 million for the estimated future sales returns. The gross
margin percentage was negatively impacted in both years by the liquidation sales
of excess discontinued inventory. Excluding the liquidation sales of
excess discontinued inventory in both periods and the margin effect of the
one-time sales return reserve in fiscal 2008, the gross margin percentage was
64.0% for fiscal year 2008 compared to 62.5% in the prior year. This
increase in gross margin percentage was the result of higher margins across most
brands resulting from better margins on new model introductions, the favorable
impact of price increases, and the favorable impact of foreign currency exchange
on the growing international business.
Selling,
General and Administrative
SG&A
expenses for fiscal 2008 were $285.9 million as compared to $270.6 million in
the prior year. The increase of $15.3 million or 5.7% was the result of higher
marketing spending of $6.9 million as the Company continues to invest in brands,
higher spending in support of the retail business of $6.2 million, the negative
impact of foreign exchange from translating the European subsidiaries’ financial
results of $2.9 million, increased third party fees of $2.2 million primarily
related to the Movado brand strategy, the non-recurrence of the fiscal 2007
out-of-period adjustment of $2.2 million related to foreign currency and
increased expenses of $1.6 million in consolidating the Company’s joint venture
operations in France, Germany and the United Kingdom. These increases
were somewhat offset by lower accounts receivable related expense of $6.5
million.
Wholesale
Operating Income
Operating
income in the wholesale segment increased by $2.1 million to $50.2
million. The increase was the net result of an increase in gross profit of
$11.7 million, somewhat offset by the increase in SG&A expenses of $9.6
million. The increase in gross profit of $11.7 million was primarily the
result of an increase in sales volume over the prior year. The increase in
sales volume was primarily the net result of higher sales in the international
licensed brands and higher liquidation sales of excess discontinued
inventory, somewhat offset by the one-time charge related to estimated future
sales returns. The increase in SG&A expenses of $9.6 million related
principally to higher marketing spending of $7.3 million as the Company
continues to invest in brands, the negative impact of foreign exchange from
translating the European subsidiaries’ financial results of $2.9 million,
increased third party fees of $2.2 million primarily related to the Movado brand
strategy, the negative impact of the prior year out-of-period adjustment of $2.2
million related to foreign currency and increased expenses of $1.6 million in
consolidating the Company’s joint venture operations in France, Germany and the
United Kingdom. These increases were somewhat offset by lower
accounts receivable related expense of $6.5 million.
Retail
Operating Income
Operating
income of $0.6 million and $4.2 million was recorded in the retail segment for
the fiscal years ended January 31, 2008 and 2007, respectively. The
$3.6 million decrease was the net result of an increase in gross profit of $2.1
million, more than offset by an increase in SG&A expenses of $5.7
million. The increased gross profit was primarily attributable to
higher sales. The increase in SG&A expenses was primarily the
result of increased selling and occupancy expenses due to the opening of new
stores during fiscal 2008 and the full year impact of stores opened in the prior
fiscal year.
Interest
Expense
Interest
expense for fiscal 2008 was $3.5 million as compared to $3.8 million in the
prior year period. Interest expense declined due to lower borrowings
somewhat offset by a higher average borrowing rate. Average
borrowings were $70.9 million for fiscal 2008 compared to average borrowings of
$97.2 million for fiscal 2007.
Interest
Income
Interest
income was $4.7 million for fiscal 2008 as compared to $3.3 million for the
prior year. The higher interest income resulted from the increase in
cash invested. The increase in cash was the result of the Company’s
favorable cash flow from operations.
Other
Income
The
Company recorded other income for fiscal 2007 of $1.3 million resulting from a
pre-tax gain of $0.4 million on the sale of a building acquired on March 1, 2004
in the acquisition of Ebel, a pre-tax gain of $0.8 million on the sale of a
piece of artwork acquired in 1988, and a pre-tax gain of $0.1 million on the
sale of the rights to a web domain name.
Income
Taxes
Income
taxes for the twelve months ended January 31, 2008 was a benefit of $9.5 million
and for the twelve months ended January 31, 2007 was a provision of $2.9
million. The tax on income for fiscal
2008 was the net result of an effective tax rate on base business
operations of 20.6%, which was more than offset by the recognition of a $12.5
million previously unrecognized tax benefit as a result of the effective
settlement of the IRS audit (see Note 8 to the Consolidated Financial
Statements). The tax on income was also favorably impacted by the Company’s
expected utilization of a greater portion of its net operating loss
carryforwards. The tax expense for fiscal 2007 reflected an effective
tax rate on base business operations of 23.26% which excluded the benefit from
the release of the valuation allowance on the net operating loss
carryforwards.
Net
Income
For
fiscal 2008, the Company recorded net income of $60.8 million as compared to
$50.1 million for the prior year.
LIQUIDITY
AND CAPITAL RESOURCES
At
January 31, 2009, the Company had $86.6 million of cash and cash equivalents as
compared to $169.6 million at the end of the prior year.
Cash used
in operating activities was $20.9 million for the year ended January 31, 2009,
compared to cash generated by operating activities of $83.6 million in fiscal
2008. The change from fiscal 2008 to fiscal 2009 was primarily due to
a decrease in net income in fiscal 2009 of $58.5 million and an increase in
inventory of $36.1 million, partially offset by a decrease in accounts
receivable. Cash generated by operating activities in fiscal 2007 was
$67.8 million. In the fiscal years ended January 31, 2008 and 2007,
the Company generated cash from operations of $83.6 million and $67.8 million,
respectively. Historically, cash generated by operating activities
has been the Company’s primary source of cash to fund its growth initiatives,
pay down debt and to pay dividends. Cash flow from operations for
fiscal 2008 and 2007 was driven by net income of $60.8 million and $50.1
million, respectively.
Accounts
receivable at January 31, 2009 were $76.7 million as compared to $94.3 million
in the comparable prior year period. Foreign currency
translation had the effect of decreasing the accounts receivable at January 31,
2009 by $3.9 million. Excluding this decrease, accounts receivable
was below prior year by $13.7 million. The decrease in receivables is
attributed to the effect of a lower sales volume due to the downturn in the
economy. The accounts receivable days outstanding were 71 days and 60
days for the fiscal years ended January 31, 2009 and 2008,
respectively. This change was the result of customers managing their
cash levels closely.
Inventories
at January 31, 2009 were $228.9 million as compared to $205.1 million in the
comparable prior year period. Foreign currency translation had the effect
of decreasing the value of the inventory at January 31, 2009 by $10.0
million. Excluding this decrease, the value of the inventory was
above prior year by $33.8 million. All brands experienced an increase
in overall inventory levels. Historically, the inventory levels of
the Company increase during the first nine months of the fiscal year to prepare
for the holiday selling season. Due to the lead times required when
purchasing inventory, orders were placed well in advance of the downturn in the
economy that began during the third fiscal quarter. The decrease in
sales volumes that resulted from the economic downturn caused these purchased
goods to remain in inventory. In particular, the luxury and
accessible luxury brands inventory increased as these categories were affected
the hardest by the global recession. As a result of the current
economic conditions, the Company has taken actions to curtail inventory
purchases and lower inventory levels.
Cash used
in investing activities amounted to $22.5 million, $28.0 million and $19.1
million in fiscal 2009, 2008 and 2007, respectively. Cash used in
investing activities for each of these three years was
primarily
related to the acquisition of computer hardware and software, renovations and
expansions of the Company’s retail stores and other fixed asset additions for
facility related automation and improvements. During fiscal years
2009 and 2008, the acquisition of computer hardware and software included $9.2
million and $7.6 million, respectively, related to the development and
implementation of the new enterprise resource planning system from
SAP. In the fiscal year ended January 31, 2009, the use of cash was
partially offset by the collection of life insurance proceeds from policies
covering the Company’s former Chairman. In the fiscal year ended
January 31, 2007 the use of cash was partially offset by proceeds from the sale
of assets, primarily buildings acquired in connection with the acquisition of
Ebel.
Cash used
in financing activities for the years ended January 31, 2009, 2008 and 2007
amounted to $39.9 million, $29.6 million and $32.8 million
respectively. For fiscal year ended January 31, 2009, the use in cash
was primarily to repurchase stock and pay dividends. For fiscal years
ended January 31, 2008 and 2007, the use of cash was primarily to pay down
long-term debt and to pay dividends.
During
fiscal 1999, the Company issued $25.0 million of Series A Senior Notes (“Series
A Senior Notes”) under a Note Purchase and Private Shelf Agreement, dated
November 30, 1998 (the “1998 Note Purchase Agreement”), between the Company and
The Prudential Insurance Company of America (“Prudential”). 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 contained certain financial covenants including an
interest coverage ratio and maintenance of consolidated net worth and certain
non-financial covenants that restricted 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. On June 5, 2008, the Company amended its
Series A Senior Notes under an amendment to the 1998 Note Purchase Agreement (as
amended, the “First Amended 1998 Note Purchase Agreement”) with Prudential and
an affiliate of Prudential. No additional senior promissory notes are
issuable by the Company pursuant to the First Amended 1998 Note Purchase
Agreement. Certain provisions and covenants were modified to be aligned with
covenants in the Company’s other credit agreements. These included the
interest coverage ratio, elimination of the maintenance of consolidated net
worth and the addition of a debt coverage ratio. At January 31, 2009,
$10.0 million of the Series A Senior 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 (as amended, the “First Amended 2001
Note Purchase Agreement”), among the Company, Prudential and certain affiliates
of Prudential (together, the “Purchasers”). This agreement 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
First Amended 2001 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 contained certain financial covenants,
including an interest coverage ratio and maintenance of consolidated net worth
and certain non-financial covenants that restricted 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.
On June
5, 2008, the Company amended the First Amended 2001 Note Purchase Agreement (as
amended, the “Second Amended 2001 Note Purchase Agreement”), with Prudential and
the Purchasers. The Second Amended 2001 Note Purchase Agreement
permits the Company to issue senior promissory notes for purchase by Prudential
and the Purchasers, in an aggregate principal amount of up to $70.0 million
inclusive of the Senior Series A-2004 Notes described above, until June 5, 2011,
with maturities up to 12 years from their original date of issuance. The
remaining aggregate principal amount of senior promissory notes issuable by the
Company that may be purchased by Prudential and the Purchasers pursuant to the
Second Amended 2001 Note Purchase Agreement is $55.0 million. Certain provisions
and covenants were modified to be aligned with covenants in the Company’s other
credit agreements. These included the interest coverage ratio,
elimination of the maintenance of consolidated net worth and addition of a debt
coverage ratio. As of January 31, 2009, $15.0 million of the Senior Series
A-2004 Notes were issued and outstanding.
The
credit agreement dated as of December 15, 2005, as amended, by and between the
Company as parent guarantor, its Swiss subsidiaries, MGI Luxury Group S.A.,
Movado Watch Company SA, Concord Watch Company S.A. and Ebel Watches S.A. as
borrowers, and JPMorgan Chase Bank, N.A. (“Chase”), JPMorgan
Securities, Inc., Bank of America, N.A., PNC Bank and Citibank, N.A. (as
amended, the "Swiss Credit Agreement"), provides for a revolving credit facility
of 33.0 million Swiss francs and matures on December 15, 2010. The
obligations of the Company’s 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 January 31, 2009, there were no outstanding borrowings under this
revolving credit facility.
The
credit agreement dated as of December 15, 2005, as amended, by and between the
Company, MGI Luxury Group S.A. and Movado Watch Company SA, as borrowers, and
Chase, JPMorgan Securities, Inc., Bank of America, N.A., PNC Bank, Bank Leumi
and Citibank, N.A. (as amended, the "US Credit Agreement"), provides for a
revolving credit facility of $90.0 million (including a sublimit for borrowings
in Swiss francs of up to an equivalent of $25.0 million) with a provision to
allow for a further increase of up to an additional $10.0 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 January 31, 2009, $40.0 million
was outstanding under this revolving credit facility.
On June
16, 2008, 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, 2009. The Company has the
right to prepay all or part of any outstanding amounts under the amended and
restated 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 January 31, 2009, there
were no outstanding borrowings against this line.
On July
31, 2008, 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 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, 2009. 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 for Canadian payroll to the Royal Bank of
Canada totaling $1.2 million with expiration dates through March 18, 2010. As of
January 31, 2009, 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 $6.9 million and
$7.4 million at January 31, 2009 and 2008, respectively. As of
January 31, 2009, two European banks have guaranteed obligations to third
parties on behalf of two of the Company’s foreign subsidiaries in the amount of
$1.3 million in various foreign currencies. As of January 31, 2009,
there were no outstanding borrowings against these lines.
For the
fiscal year ending January 31, 2009 and 2008, the calculation of the financial
covenants for the Series A Senior Notes, Senior Series A-2004 Notes, the Swiss
Credit Agreement and US Credit Agreement (together the “Debt Facilities”) were
as follows (dollars in thousands):
|
|
Required
|
|
|
Required
|
|
|
Actual
|
|
|
Actual
|
|
|
|
Senior
|
|
|
Credit
|
|
|
January
31,
|
|
|
January
31,
|
|
Covenant
|
|
Notes
|
|
|
Facilities
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Coverage Ratio
|
|
Min.
3.50x
|
|
|
Min.
3.50x
|
|
|
|
2.45 |
x |
|
|
16.09 |
x |
Average
Debt Coverage Ratio
|
|
Max.
3.25x
|
|
|
Max.
3.25x
|
|
|
|
2.72 |
x |
|
|
0.93 |
x |
Capital
Expenditures Limit
|
|
|
n/a |
|
|
$ |
42,608 |
|
|
$ |
22,681 |
|
|
$ |
27,392 |
|
Priority
Debt Limit
|
|
$ |
79,095 |
|
|
|
n/a |
|
|
$ |
40,000 |
|
|
$ |
25,907 |
|
Lien
Limit
|
|
$ |
79,095 |
|
|
|
n/a |
|
|
$ |
- |
|
|
$ |
- |
|
As of
January 31, 2009, the Company was in compliance with all non-financial covenants
under the Debt Facilities. Due to the reported financial results for
fiscal 2009, the Company was in compliance with all financial covenants with the
exception of the interest coverage ratio covenant under these Debt
Facilities. The
current results included certain charges for severance related costs associated
with the Company’s expense reduction initiatives and a restructuring of certain
benefit arrangements of $11.1 million and for asset impairments of $4.5
million. The Company believes that it would have been in compliance
with all covenants if these charges, which it deems to
be non-recurring in nature, were excluded from the covenant
calculations. As a result of the Company’s projections in light
of the global economic downturn, without an amendment or waiver, the Company
believes that it will continue to be in non-compliance with the interest
coverage ratio covenant, and potentially additional financial covenants under
the Debt Facilities, for the upcoming reporting periods in fiscal year
2010. The Company has not requested a waiver as it is currently in
negotiations for a new credit facility discussed in more detail
below. Additionally, the Company has received a commitment, subject
to certain limitations described more fully below, for a three year $50 million
asset-based credit facility from Bank of America to provide available liquidity
if a new credit facility is not consummated.
As a
result of the Company’s non-compliance with the interest coverage ratio
covenant, amounts owed under the Debt Facilities have been reclassified to
current liabilities. Additionally, the Company is prohibited from
borrowing any additional funds under the Debt Facilities and the amounts owed as
of January 31, 2009 may be declared immediately due and payable by the
lenders. The lenders have not taken any action in respect to this
default, but they may do so in the future. Should the debt
be declared immediately due and payable by the lenders, the Company would
be able to satisfy such obligations through obtaining alternative financing,
cash on hand and conversion of working capital to cash.
Through
the date of this filing, the Company is in negotiations with banking
institutions for a new three year asset-based revolving credit facility for an
amount up to $110 million (the “New Facility”). Consummation of the
New Facility is subject to (a) syndication, (b) completion of due diligence by
the banking institutions, and (c) the satisfaction of a number of additional
customary conditions precedent, certain of which are at the sole discretion of
the banking institution. The New Facility will likely include limited
financial covenants that are effective only if a minimum availability threshold
is not maintained. The New Facility will be collateralized
by substantially all of the assets of Movado Group, Inc. and its U.S.
subsidiaries, including accounts receivable and inventory, and 65% of the
capital stock of first-tier foreign subsidiaries. The New Facility
will contain various restrictions including limitations on additional debt, the
payment of dividends and repurchasing stock. The Company expects that
the
fees and the interest rates under the New Facility, if consummated,
will increase to current market rates. The Company anticipates that
the New Facility will be finalized in May of 2009 and will have a term of three
years, expiring in May 2012.
As
previously mentioned, to provide for available liquidity in the event that the
New Facility is not consummated, the Company has received a commitment for a
three year $50 million asset-based credit facility from Bank of
America. The commitment is subject to the completion of due diligence
by Bank of America and the satisfaction of a number of additional customary
conditions precedent, certain
of which are at the sole discretion of Bank of America. In the
event the New Facility is consummated, this commitment will be
canceled.
The
Company anticipates that the New Facility or the $50 million asset-based credit
facility, if consummated, would replace the Debt Facilities. In the event
the New Facility or the $50 million asset-based credit facility is
not consummated, the Company’s financial condition and results of operations may
be materially adversely affected.
On
December 4, 2007, the Board of Directors authorized a program to repurchase up
to one million shares of the Company’s common stock. Shares of common
stock were repurchased from time to time as market conditions warranted either
through open market transactions, block purchases, private transactions or other
means. The objective of the program was to reduce or eliminate
earnings per share dilution caused by the shares of common stock issued upon the
exercise of stock options and in connection with other equity based compensation
plans. As of April 14, 2008, the Company had completed the one
million share repurchase during the fourth quarter of fiscal 2008 and the first
quarter of fiscal 2009, at a total cost of approximately $19.4 million, or
$19.41 per share.
On April
15, 2008, the Board of Directors announced a new authorization to repurchase up
to an additional one million shares of the Company’s common
stock. Under this authorization, the Company has the option to
repurchase shares over time, with the amount and timing of repurchases depending
on market conditions and corporate needs. The Company entered into a
Rule 10b5-1 plan to facilitate repurchases of its shares under this
authorization. A Rule 10b5-1 plan permits a company to repurchase
shares at times when it might otherwise be prevented from doing so, provided the
plan is adopted when the company is not aware of material non-public
information. The Company may suspend or discontinue the repurchase of
stock at any time. Under this share repurchase program, as of January
31, 2009, the Company had repurchased a total of 937,360 shares of common stock
in the open market during the first and second quarters of fiscal year 2009 at a
total cost of approximately $19.5 million or $20.79 per share.
Cash
dividends paid were $5.9 million, $8.3 million and $6.2 million in fiscal years
2009, 2008 and 2007, respectively. As of January 15, 2009, the
Company declared a $1.2 million cash dividend, which was subsequently paid in
February 2009. On April
9, 2009, the Company announced that its Board of Directors has decided to
discontinue the quarterly cash dividend. This decision was based on
the Company’s desire to retain capital during the current challenging economic
environment. The Board will evaluate the reinstitution of a quarterly
dividend once the economy has stabilized and the Company has returned to an
appropriate level of profitability.
At
January 31, 2009, the Company had working capital of $306.2 million as compared
to $419.6 million in the prior year. The Company defines working capital
as the difference between current assets and current liabilities. The
decrease in working capital was primarily attributed to a decrease in cash, an
increase in the current portion of long-term debt, partially offset by an
increase in inventory. The
increase in the current portion of
long-term debt was the result of classifying all outstanding debt as current,
due to the non-compliance with the interest coverage ratio covenant in the Debt
Facilities,
permitting
the lenders to declare the debt immediately due and payable.
The
Company expects that annual capital expenditures in fiscal 2010 will be
approximately $10.0 million as compared to $22.7 million in fiscal
2009. The Company plans to reduce its capital spending in fiscal 2010
resulting from the completion of the SAP implementation and current economic
conditions. The Company has the ability to manage a portion of its
capital expenditures on discretionary projects. Although management
believes that the cash on hand and the cash from conversion of working capital
will be sufficient to meet the needs of its business for the foreseeable future,
obtaining the $50 million asset-based credit facility will provide
additional flexibility in meeting the Company’s liquidity
needs.
CONTRACTUAL
OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS
Payments
due by period (in thousands):
|
|
Total
|
|
|
Less
than 1 year
|
|
|
2-3
years
|
|
|
4-5
years
|
|
|
More
than 5 years
|
|
Contractual
Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
Obligations (1)
|
|
$ |
65,000 |
|
|
$ |
65,000 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Interest
Payments on Debt (1)
|
|
|
2,566 |
|
|
|
2,566 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Operating
Lease Obligations (2)
|
|
|
85,591 |
|
|
|
15,013 |
|
|
|
28,259 |
|
|
|
20,257 |
|
|
|
22,062 |
|
Purchase
Obligations (3)
|
|
|
35,909 |
|
|
|
35,909 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Other
Long-Term Obligations (4)
|
|
|
100,800 |
|
|
|
20,328 |
|
|
|
41,000 |
|
|
|
27,971 |
|
|
|
11,501 |
|
Total
Contractual Obligations
|
|
$ |
289,866 |
|
|
$ |
138,816 |
|
|
$ |
69,259 |
|
|
$ |
48,228 |
|
|
$ |
33,563 |
|
(1) The
Company has debt obligations and related interest payments of $67.6 million
related to the Debt Facilities further discussed in “Liquidity and Capital
Resources”.
(2)
Includes store operating leases, which generally provide for payment of direct
operating costs in addition to rent. These obligation amounts include
future minimum lease payments and exclude direct operating costs.
(3) The
Company had outstanding purchase obligations with suppliers at the end of fiscal
2009 for raw materials, finished watches, jewelry and packaging in the normal
course of business. These purchase obligation amounts do not
represent total anticipated purchases but represent only amounts to be paid for
items required to be purchased under agreements that are enforceable, legally
binding and specify minimum quantity, price and term.
(4)
Other long-term obligations primarily consist of two items: minimum commitments
related to the Company’s license agreements and endorsement agreements with
brand ambassadors. The Company sources, distributes, advertises and
sells watches pursuant to its exclusive license agreements with unaffiliated
licensors. Royalty amounts are generally based on a stipulated
percentage of revenues, although most of these agreements contain provisions for
the payment of minimum annual royalty amounts. The license agreements
have various terms and some have additional renewal options, provided that
minimum sales levels are achieved. Additionally, the license
agreements require the Company to pay minimum annual advertising
amounts.
Off-Balance
Sheet Arrangements
The
Company does not have off-balance sheet financing or unconsolidated
special-purpose entities.
RECENTLY
ISSUED ACCOUNTING STANDARDS
In
December 2007, the FASB issued SFAS No. 141 (revised 2007) “Business
Combinations” (“SFAS No. 141(R)”). SFAS No. 141(R) states that all
business combinations (whether full, partial or step acquisitions) will result
in all assets and liabilities of an acquired business being recorded at their
acquisition date fair values. Earn-outs and other forms of contingent
consideration and certain acquired
contingencies
will also be recorded at fair value at the acquisition date. SFAS No.
141(R) also states acquisition costs will generally be expensed as incurred;
in-process research and development will be recorded at fair value as an
indefinite-lived intangible asset at the acquisition date; changes in deferred
tax asset valuation allowances and income tax uncertainties after the
acquisition date generally will affect income tax expense; and restructuring
costs will be expensed in periods after the acquisition date. This
statement is effective for financial statements issued for fiscal years
beginning after December 15, 2008. The Company will apply the
provisions of this standard to any acquisitions that it completes on or after
February 1, 2009.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51”. This
statement amends ARB No. 51 to
establish accounting and reporting standards for the noncontrolling
interest (minority interest) in a subsidiary and for the deconsolidation of a
subsidiary. Upon its adoption, noncontrolling interests will be classified as
equity in the consolidated balance sheets. This statement also
provides guidance on a subsidiary deconsolidation as well as stating that
entities need to provide sufficient disclosures that clearly identify and
distinguish between the interests of the parent and the interests of the
noncontrolling owners. This statement is effective for financial statements
issued for fiscal years beginning after December 15, 2008. The Company is
currently evaluating the impact of SFAS No. 160 on the Company’s consolidated
financial statements.
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities, an amendment of FASB Statement No. 133”. This
statement requires enhanced disclosures about (a) how and why an entity uses
derivative instruments, (b) how derivative instruments and related hedged items
are accounted for under SFAS No. 133 and its related interpretations, and (c)
how derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows. SFAS No. 161 also
requires that objectives for using derivative instruments be disclosed in terms
of underlying risk and accounting designation and requires cross-referencing
within the footnotes. This statement also suggests disclosing the
fair values of derivative instruments and their gains and losses in a tabular
format. This statement is effective for financial statements issued
for fiscal years and interim periods beginning after November 15,
2008. The Company is currently evaluating the impact of SFAS No. 161
on the Company’s consolidated financial statements.
Item
7A. Quantitative and Qualitative Disclosure about Market Risk
Foreign
Currency Exchange Rate Risk
The
Company’s primary market risk exposure relates to foreign currency exchange risk
(see Note 6 to the Consolidated Financial Statements). The majority
of the Company’s purchases are denominated in Swiss francs. The
Company reduces its exposure to the Swiss franc exchange rate risk through a
hedging program. Under the hedging program, the Company 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, as defined in issued SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities” with the gains and losses on this latter
hedging activity first reflected in other comprehensive income, and then later
classified into earnings. 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 January 31,
2009, the Company’s entire net forward contracts hedging portfolio consisted of
54.0 million Swiss francs equivalent for various expiry dates ranging through
July 17, 2009 compared to a portfolio of 115.0 million Swiss francs equivalent
for various expiry dates ranging through November 14, 2008 as of January 31,
2008. If the Company were to settle its Swiss franc forward contracts
at January 31, 2009, the net result would be a loss of $0.7 million, net of tax
benefit of $0.4 million. The Company had no Swiss franc option contracts
related to cash flow hedges as of January 31, 2009 compared to a 5.0 million
Swiss franc option contract with an expiry date of April 30, 2008 as of January
31, 2008.
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 January 31, 2009 and 2008, the
Company did not hold a purchased option hedge portfolio related to net
investment hedging.
Commodity
Risk
Additionally,
the Company has the ability under the hedging program to reduce its exposure to
fluctuations in commodity prices, primarily related to gold used in the
manufacturing of the Company’s watches. Under this hedging program, the Company
can purchase 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. The Company did not hold any futures contracts in its gold
hedge portfolio related to cash flow hedges as of January 31, 2009 and 2008,
thus any changes in the gold price will have an equal effect on the Company’s
cost of sales.
Debt
and Interest Rate Risk
In
addition, the Company has certain debt obligations with variable interest rates,
which are based on 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 January 31, 2009, 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 $0.4
million. For additional information concerning potential
changes to future interest obligations, see Liquidity and Capital Resources in
Item 7. Management’s Discussion and Analysis of Financial Condition
and Results of Operations.
Item
8. Financial Statements and Supplementary Data
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
Schedule
Number
|
Page
Number
|
Management’s
Annual Report on Internal Control Over Financial Reporting
|
|
F-1
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
|
F-2
|
|
|
|
Consolidated
Statements of Income for the fiscal years ended January 31, 2009, 2008 and
2007
|
|
F-4
|
|
|
|
Consolidated
Balance Sheets at January 31, 2009 and 2008
|
|
F-5
|
|
|
|
Consolidated
Statements of Cash Flows for the fiscal years ended January 31, 2009, 2008
and 2007
|
|
F-6
|
|
|
|
Consolidated
Statements of Changes in Shareholders’ Equity for the fiscal years ended
January 31, 2009, 2008 and 2007
|
|
F-7
to F-8
|
|
|
|
Notes
to Consolidated Financial Statements
|
|
F-9
to F-39
|
|
|
|
Valuation
and Qualifying Accounts and Reserves
|
II
|
S-1
|
Item
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item
9A. 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 of 1934,
as amended (the “Exchange Act”). Based on that evaluation, the Chief Executive
Officer and the Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective at a
reasonable assurance level as of the end of the period covered by this
report.
The
Company’s Chief Executive Officer and Chief Financial Officer have furnished the
Sections 302 and 906 certifications required by the U.S. Securities and Exchange
Commission in this annual report on Form 10-K. In addition, the
Company’s Chief Executive Officer certified to the NYSE in July 2008 that
he was not aware of any violation by the Company of the NYSE's corporate
governance listing standards.
Changes in Internal Control
Over Financial Reporting
There has
been no change in the Company's internal control over financial reporting (as
defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended
January 31, 2009, that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial
reporting.
The
Company’s disclosure controls and procedures are designed to provide reasonable
assurance of achieving their objectives, and the Company’s Chief Executive
Officer and Chief Financial Officer have concluded that such disclosure controls
and procedures are effective at that reasonable assurance level. However, it
should be noted that a control system, no matter how well conceived or operated,
can only provide reasonable, not absolute, assurance that its objectives will be
met and may not prevent all errors or instances of fraud.
See
Consolidated Financial Statements and Supplementary Data for Management’s Annual
Report on Internal Control Over Financial Reporting and the Report of
Independent Registered Public Accounting Firm.
Item
9B. Other Information
None.
PART
III
Item
10. Directors, Executive Officers and Corporate
Governance
The
information required by this item is included in the Company’s Proxy Statement
for the 2009 annual meeting of shareholders under the captions “Election of
Directors” and “Management” and is incorporated herein by
reference.
Information
on the beneficial ownership reporting for the Company’s directors and executive
officers is contained in the Company’s Proxy Statement for the 2009 annual
meeting of shareholders under the caption “Section 16(a) Beneficial
Ownership Reporting Compliance” and is incorporated herein by
reference.
Information
on the Company’s Audit Committee and Audit Committee Financial Expert is
contained in the Company’s Proxy Statement for the 2009 annual meeting of
shareholders under the caption “Information Regarding the Board of Directors and
Its Committees” and is incorporated herein by reference.
The
Company has adopted and posted on its website at www.movadogroup.com a
Code of Business Conduct and Ethics that applies to all directors, officers and
employees, including the Company’s Chief Executive Officer, Chief Financial
Officer and principal financial and accounting officers. The Company will post
any amendments to the Code of Business Conduct and Ethics, and any waivers that
are required to be disclosed by SEC regulations, on the Company’s
website.
Item
11. Executive Compensation
The
information required by this item is included in the Company’s Proxy Statement
for the 2009 annual meeting of shareholders under the captions “Executive
Compensation” and “Compensation of Directors” and is incorporated herein by
reference.
Item
12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
The
information required by this item is included in the Company’s Proxy Statement
for the 2009 annual meeting of shareholders under the caption “Security
Ownership of Certain Beneficial Owners and Management” and is incorporated
herein by reference.
Item
13. Certain Relationships and Related Transactions and Director
Independence
The
information required by this item is included in the Company’s Proxy Statement
for the 2009 annual meeting of shareholders under the caption “Certain
Relationships and Related Transactions” and is incorporated herein by
reference.
Item 14.
Principal Accounting Fees and Services
The
information required by this item is included in the Company’s Proxy Statement
for the 2009 annual meeting of shareholders under the caption “Fees Paid to
PricewaterhouseCoopers LLP” and is incorporated herein by
reference.
PART
IV
Item
15. Exhibits and Financial Statement Schedules
(a) Documents filed as part of
this report
1. Financial
Statements:
See Financial
Statements Index on page 53 included in Item 8 of Part II of this annual
report.
2. Financial
Statement Schedule:
Schedule
II Valuation
and Qualifying Accounts and Reserves
|
All
other schedules are omitted because they are not applicable, or not
required, or because the required information is included in the
Consolidated Financial Statements or notes
thereto.
|
3. Exhibits:
|
Incorporated
herein by reference is a list of the Exhibits contained in the Exhibit
Index on pages 59 through 67
of this annual
report.
|
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities 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:
April 9, 2009
|
By:
|
/s/ Efraim Grinberg
|
|
|
Efraim
Grinberg
|
|
|
Chairman
of the Board of Directors,
|
|
|
President
and Chief Executive Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the date indicated.
|
|
|
Dated:
April 9, 2009
|
|
/s/ Efraim Grinberg
|
|
|
Efraim
Grinberg
|
|
|
Chairman
of the Board of Directors,
|
|
|
President
and Chief Executive Officer
|
|
|
|
Dated:
April 9, 2009
|
|
/s/ Richard J. Coté
|
|
|
Richard
J. Coté
|
|
|
Executive
Vice President and
|
|
|
Chief
Operating Officer
|
|
|
|
Dated:
April 9, 2009
|
|
/s/ Sallie A. DeMarsilis
|
|
|
Sallie
A. DeMarsilis
|
|
|
Senior
Vice President, Chief Financial Officer
|
|
|
and
Principal Accounting Officer
|
|
|
|
Dated:
April 9, 2009
|
|
/s/ Margaret Hayes Adame
|
|
|
Margaret
Hayes Adame
|
|
|
Director
|
|
|
|
Dated:
April 9, 2009
|
|
/s/ Alan H. Howard
|
|
|
Alan
H. Howard
|
|
|
Director
|
|
|
|
Dated:
April 9, 2009
|
|
/s/ Richard D. Isserman
|
|
|
Richard
D. Isserman
|
|
|
Director
|
|
|
|
Dated:
April 9, 2009
|
|
/s/ Nathan Leventhal
|
|
|
Nathan
Leventhal
|
|
|
Director
|
|
|
|
Dated:
April 9, 2009
|
|
/s/ Donald Oresman
|
|
|
Donald
Oresman
|
|
|
Director
|
|
|
|
Dated:
April 9, 2009
|
|
/s/ Leonard L.
Silverstein
|
|
|
Leonard
L. Silverstein
|
|
|
Director
|
EXHIBIT
INDEX
Exhibit
|
|
Sequentially
|
Number
|
Description
|
Numbered Page
|
|
|
|
3.1
|
Restated
By-Laws of the Registrant. Incorporated by reference to Exhibit
3.1 to the Registrant’s Current Report on Form 8-K filed on February 8,
2008.
|
|
|
|
|
3.2
|
Restated
Certificate of Incorporation of the Registrant as amended. Incorporated
herein by reference to Exhibit 3(i) to the Registrant's Quarterly Report
on Form 10-Q filed for the quarter ended July 31, 1999.
|
|
|
|
|
4.1
|
Specimen
Common Stock Certificate. Incorporated herein by reference to
Exhibit 4.1 to the Registrant’s Annual Report on Form 10-K for the year
ended January 31, 1998.
|
|
|
|
|
4.2
|
Note
Purchase and Private Shelf Agreement dated as of November 30, 1998 between
the Registrant and The Prudential Insurance Company of America.
Incorporated herein by reference to Exhibit 10.31 to the Registrant’s
Annual Report on Form 10-K for the year ended January 31,
1999.
|
|
|
|
|
4.3
|
Note
Purchase and Private Shelf Agreement dated as of March 21, 2001 between
the Registrant and The Prudential Insurance Company of
America. Incorporated herein by reference to Exhibit 4.4 to the
Registrant’s Annual Report on Form 10-K for the year ended January 31,
2001.
|
|
|
|
|
4.4
|
Amendment
dated as of March 21, 2004 to Note Purchase and Private Shelf Agreement
dated as of March 21, 2001 between the Registrant and The Prudential
Insurance Company of America. Incorporated herein by reference
to Exhibit 4.5 to the Registrant’s Annual Report on Form 10-K for the year
ended January 31, 2004.
|
|
|
|
|
4.5
|
Omnibus
Amendment entered into as of June 5, 2008 to (i) Note Purchase and Private
Shelf Agreement dated as of March 21, 2001 (as amended by
amendment dated as of March 21, 2004) between the Registrant and The
Prudential Insurance Company of America and (ii) Note Purchase and Private
Shelf Agreement dated as of November 30, 1998. Incorporated herein by
reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form
10-Q for the quarter ended July 31, 2008.
|
|
Exhibit
|
|
Sequentially
|
Number
|
Description
|
Numbered Page
|
|
|
|
10.1
|
Amendment
Number 1 to License Agreement dated December 9, 1996 between the
Registrant as Licensee and Coach, a division of Sara Lee Corporation as
Licensor, dated as of February 1, 1998. Incorporated herein by
reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form
10-Q for the quarter ended October 31, 1998.
|
|
|
|
|
10.2
|
Agreement
dated January 1, 1992, between The Hearst Corporation and the Registrant,
as amended on January 17, 1992. Incorporated herein by reference to
Exhibit 10.8 filed with the Company’s Registration Statement on Form S-1
(Registration No. 33-666000).
|
|
|
|
|
10.3
|
Letter
Agreement between the Registrant and The Hearst Corporation dated October
24, 1994 executed October 25, 1995 amending License Agreement dated as of
January 1, 1992, as amended. Incorporated herein by reference
to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended October 31, 1995.
|
|
|
|
|
10.4
|
Registrant's
1996 Stock Incentive Plan amending and restating the 1993 Employee Stock
Option Plan. Incorporated herein by reference to Exhibit 10.5 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended October
31, 1996. *
|
|
|
|
|
10.5
|
Lease
dated August 10, 1994 between Rockefeller Center Properties, as landlord
and SwissAm, Inc., as tenant for space at 630 Fifth Avenue, New York, New
York. Incorporated herein by reference to Exhibit 10.4 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended July 31,
1994.
|
|
|
|
|
10.6
|
Registrant's
amended and restated Deferred Compensation Plan for Executives effective
June 17, 2004. Incorporated herein by reference to Exhibit 10.7
to the Registrant’s Annual Report on Form 10-K for the year ended January
31, 2005. *
|
|
|
|
|
10.7
|
License
Agreement dated December 9, 1996 between the Registrant and Sara Lee
Corporation. Incorporated herein by reference to Exhibit 10.32
to the Registrant’s Annual Report on Form 10-K for the year ended January
31, 1997.
|
|
Exhibit
|
|
Sequentially
|
Number
|
Description
|
Numbered Page
|
|
|
|
10.8
|
First
Amendment to Lease dated April 8, 1998 between RCPI Trust, successor in
interest to Rockefeller Center Properties (“Landlord”) and Movado Retail
Group, Inc., successor in interest to SwissAm, Inc. (“Tenant”) amending
lease dated August 10, 1994 between Landlord and Tenant for space at 630
Fifth Avenue, New York, New York. Incorporated herein by
reference to Exhibit 10.37 to the Registrant’s Annual Report on Form 10-K
for the year ended January 31, 1998.
|
|
|
|
|
10.9
|
Second
Amendment dated as of September 1, 1999 to the December 1, 1996 License
Agreement between Sara Lee Corporation and
Registrant. Incorporated herein by reference to Exhibit 10.1 to
the Registrant’s Quarterly Report on Form 10-Q for the quarter ended
October 31, 1999.
|
|
|
|
|
10.10
|
License
Agreement entered into as of June 3, 1999 between Tommy Hilfiger
Licensing, Inc. and Registrant. Incorporated herein by
reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form
10-Q for the quarter ended October 31, 1999.
|
|
|
|
|
10.11
|
Severance
Agreement dated December 15, 1999, and entered into December 16, 1999
between the Registrant and Richard J. Coté. Incorporated herein by
reference to Exhibit 10.35 to the Registrant’s Annual Report on Form 10-K
for the year ended January 31, 2000. *
|
|
|
|
|
10.12
|
Lease
made December 21, 2000 between the Registrant and Mack-Cali Realty, L.P.
for premises in Paramus, New Jersey together with First Amendment thereto
made December 21, 2000. Incorporated herein by reference to
Exhibit 10.22 to the Registrant’s Annual Report on Form 10-K for the year
ended January 31, 2000.
|
|
|
|
|
10.13
|
Lease
Agreement dated May 22, 2000 between Forsgate Industrial Complex and the
Registrant for premises located at 105 State Street, Moonachie, New
Jersey. Incorporated herein by reference to Exhibit 10.1 to the
Registrant’s Quarterly Report on Form 10-Q filed for the quarter ended
April 30, 2000.
|
|
Exhibit
|
|
Sequentially
|
Number
|
Description
|
Numbered Page
|
|
|
|
10.14
|
Second
Amendment of Lease dated July 26, 2001 between Mack-Cali Realty, L.P., as
landlord, and Movado Group, Inc., as tenant, further amending lease dated
as of December 21, 2000. Incorporated herein by reference to Exhibit 10.2
to the Registrant’s Quarterly Report on Form 10-Q filed for the quarter
ended October 31, 2001.
|
|
|
|
|
10.15
|
Third
Amendment of Lease dated November 6, 2001 between Mack-Cali Realty, L.P.,
as lessor, and Movado Group, Inc., as lessee, for additional space at
Mack-Cali II, One Mack Drive, Paramus, New Jersey. Incorporated herein by
reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form
10-Q filed for the quarter ended October 31, 2001.
|
|
|
|
|
10.16
|
Amendment
Number 2 to Registrant’s 1996 Stock Incentive Plan dated March 16, 2001.
Incorporated herein by reference to Exhibit 10.27 to the Registrant’s
Annual Report on Form 10-K for the year ended January 31,
2002.*
|
|
|
|
|
10.17
|
Amendment
Number 3 to Registrant’s 1996 Stock Incentive Plan approved June 19, 2001.
Incorporated herein by reference to Exhibit 10.28 to the Registrant’s
Annual Report on Form 10-K for the year ended January 31,
2002.*
|
|
|
|
|
10.18
|
Amendment
Number 3 to License Agreement dated December 9, 1996, as previously
amended, between the Registrant, Movado Watch Company S.A. and Coach, Inc.
dated as of January 30, 2003. Incorporated herein by reference to Exhibit
10.29 to the Registrant’s Annual Report on Form 10-K for the year ended
January 31, 2002.
|
|
|
|
|
10.19
|
First
Amendment to the License Agreement dated June 3, 1999 between Tommy
Hilfiger Licensing, Inc., Registrant and Movado Watch Company S.A. entered
into January 16, 2002. Incorporated herein by reference to Exhibit 10.1 to
the Registrant’s Quarterly Report on Form 10-Q for the quarter ended July
31, 2002.
|
|
Exhibit
|
|
Sequentially
|
Number
|
Description
|
Numbered Page
|
|
|
|
10.20
|
Second
Amendment to the License Agreement dated June 3, 1999 between Tommy
Hilfiger Licensing, Inc., Registrant and Movado Watch Company S.A. entered
into August 1, 2002. Incorporated herein by reference to Exhibit 10.2 to
the Registrant’s Quarterly Report on Form 10-Q for the quarter ended July
31, 2002.
|
|
|
|
|
10.21
|
Endorsement
Agreement dated as of April 4, 2003 between the Registrant and The
Grinberg Family Trust. Incorporated herein by reference to Exhibit 10.28
to the Registrant’s Annual Report on Form 10-K for the year ended January
31, 2003.
|
|
|
|
|
10.22
|
Third
Amendment to License Agreement dated June 3, 1999 between Tommy Hilfiger
Licensing, Inc. and the Registrant entered into as of May 7, 2004.
Incorporated herein by reference to Exhibit 10.1 to the Registrant’s
Quarterly Report on Form 10-Q for the quarter ended April 30,
2004.
|
|
|
|
|
10.23
|
Employment
Agreement dated August 27, 2004 between the Registrant and Mr. Eugene J.
Karpovich. Incorporated herein by reference to Exhibit 10.2 the
Registrant’s Quarterly Report on Form 10-Q for the quarter ended October
31, 2004. *
|
|
|
|
|
10.24
|
Employment
Agreement dated August 27, 2004 between the Registrant and Mr. Timothy F.
Michno. Incorporated herein by reference to Exhibit 10.4 to the
Registrant’s Quarterly Report on Form 10-Q for the quarter ended October
31, 2004. *
|
|
|
|
|
10.25
|
Master
Credit Agreement dated August 17, 2004 and August 20, 2004 between MGI
Luxury Group S.A. and UBS AG. Incorporated herein by reference to Exhibit
10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter
ended July 31, 2004.
|
|
|
|
|
10.26
|
Fourth
Amendment to License Agreement dated June 3, 1999 between Tommy Hilfiger
Licensing, Inc. and the Registrant entered into as of June 25, 2004.
Incorporated herein by reference to Exhibit 10.4 to the Registrant’s
Quarterly Report on Form 10-Q for the quarter ended July 31,
2004.
|
|
Exhibit
|
|
Sequentially
|
Number
|
Description
|
Numbered Page
|
|
|
|
10.27
|
Fifth
Amendment of Lease dated October 20, 2003 between Mack-Cali Realty, L.P.
as landlord, and the Registrant as tenant further amending the lease dated
as of December 21, 2000. Incorporated herein by reference to Exhibit 10.29
to the Registrant’s Annual Report on Form 10-K for the year ended January
31, 2004.
|
|
|
|
|
10.28
|
Registrant’s
1996 Stock Incentive Plan, amended and restated as of April 8,
2004. Incorporated herein by reference to Exhibit 10.37 to the
Registrant’s Annual Report on Form 10-K for the year ended January 31,
2005.*
|
|
|
|
|
10.29
|
License
Agreement entered into December 15, 2004 between MGI Luxury Group S.A. and
HUGO BOSS Trade Mark Management GmbH & Co. Incorporated
herein by reference to Exhibit 10.38 to the Registrant’s Annual Report on
Form 10-K for the year ended January 31, 2005.
|
|
|
|
|
10.30
|
$50
million Credit Agreement dated as of December 15, 2005 between the
Registrant, MGI Luxury Group S.A. and Movado Watch Company S.A., as
borrowers, the Lenders signatory thereto and JPMorgan Chase Bank, N.A. as
Administrative Agent, Swingline Bank and Issuing
Bank. Incorporated herein by reference to Exhibit 10.34 to the
Registrant’s Annual Report on Form 10-K for the year ended January 31,
2006.
|
|
|
|
|
10.31
|
CHF
90 million Credit Agreement dated as of December 15, 2005 between MGI
Luxury Group S.A. and Movado Watch Company S.A., as borrowers, the
Registrant as Parent, each of the lenders signatory thereto and JPMorgan
Chase Bank as administrative agent. Incorporated herein by
reference to Exhibit 10.35 to the Registrant’s Annual Report on Form 10-K
for the year ended January 31, 2006.
|
|
|
|
|
10.32
|
License
Agreement dated as of November 18, 2005 by and between the Registrant,
Swissam Products Limited and L.C. Licensing, Inc. Incorporated
herein by reference to Exhibit 10.37 to the Registrant’s Annual Report on
From 10-K for the year ended January 31, 2006.
|
|
Exhibit
|
|
Sequentially
|
Number
|
Description
|
Numbered Page
|
|
|
|
10.33
|
License
Agreement entered into effective March 27, 2006 between MGI Luxury Group
S.A. and Lacoste S.A., Sporloisirs S.A. and Lacoste Alligator
S.A. Incorporated herein by reference to Exhibit 10.1 to the
Registrant’s Quarterly Report on Form 10-Q for the quarter ended April 30,
2006.
|
|
|
|
|
10.34
|
Third
Amendment to License Agreement dated as of January 1, 1992 between the
Registrant and Hearst Magazines, a Division of Hearst Communications,
Inc., effective February 15, 2007. Incorporated herein by reference to
Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended April 30, 2007.
|
|
|
|
|
10.35
|
Fifth
Amendment to License Agreement dated December 9, 1996 between the
Registrant and Coach, Inc., effective March 9, 2007. Incorporated herein
by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form
10-Q for the quarter ended April 30, 2007.
|
|
|
|
|
10.36
|
Sixth
Amendment to License Agreement dated June 3, 1999 between the Registrant
and Tommy Hilfiger Licensing, Inc., effective April 11, 2007. Incorporated
herein by reference to Exhibit 10.3 to the Registrant’s Quarterly Report
on Form 10-Q for the quarter ended April 30, 2007.
|
|
|
|
|
10.37
|
Form
of Long-Term Incentive Plan Award Notice under the Registrant’s Executive
Long-Term Incentive Plan. Incorporated herein by reference to Exhibit 10.1
to the Registrant’s Current Report on Form 8-K filed May 4, 2007.
*
|
|
|
|
|
10.38
|
Line
of Credit Letter Agreement dated as of June 16, 2008 between the
Registrant and Bank of America, N.A. and Amended and Restated Promissory
Note dated as of June 16, 2008 to Bank of America, N.A. Incorporated
herein by reference to Exhibit 10.1 to the Registrant’s Quarterly Report
on Form 10-Q for the quarter ended July 31, 2008.
|
|
Exhibit
|
|
Sequentially
|
Number
|
Description
|
Numbered Page
|
|
|
|
10.
39
|
Promissory
Note dated as of July 31, 2008 to JPMorgan Chase Bank, N.A. Incorporated
herein by reference to Exhibit 10.2 to the Registrant’s Quarterly Report
on Form 10-Q for the quarter ended July 31, 2008.
|
|
|
|
|
10.40
|
Movado
Group, Inc. Long-Term Incentive Plan. Incorporated herein by reference to
Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed June 6,
2006. *
|
|
|
|
|
10.41
|
Movado
Group, Inc. Long-Term Incentive Plan form of award agreement. Incorporated
herein by reference to Exhibit 10.2 to the Registrant’s Current Report on
Form 8-K filed June 6, 2006. *
|
|
|
|
|
10.42
|
First
Amendment dated as of February 27, 2009 to Lease dated May 22, 2000
between Forsgate Industrial Complex as Landlord and Movado Group, Inc. as
Tenant for the premises known as 105 State Street, Moonachie, New
Jersey.
|
|
|
|
|
10.43
|
Amendment
Number 1 to the April 8, 2004 Amendment and Restatement of the Movado
Group, Inc. 1996 Stock Incentive Plan. Incorporated herein by reference to
Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended July 31, 2008. *
|
|
|
|
|
10.44
|
Movado
Group, Inc. Amended and Restated Deferred Compensation Plan for
Executives, Effective January 1, 2008. Incorporated herein by reference to
Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended July 31, 2008. *
|
|
|
|
|
10.45
|
Letter
Agreement, dated as of September 23, 2008, by and among Movado Group, Inc.
as Borrower and Guarantor, Movado Watch Company SA and MGI Luxury Group
S.A. , as Borrowers, Movado Retail Group, Inc. and Movado LLC, as
Guarantors, JP Morgan Chase Bank, N.A. as Lender, Administrative Agent,
Swingline Bank and Issuing Bank, Bank of America, N.A., PNC Bank, National
Association and Citibank, N.A.. Incorporated herein by reference to
Exhibit 99.1 to the Registrant’s Current Report on Form 8-K filed
September 29, 2008.
|
|
Exhibit
|
|
Sequentially
|
Number
|
Description
|
Numbered Page
|
|
|
|
10.46
|
Transition
and Retirement Agreement dated as of December 19, 2008 by and between the
Registrant and Gedalio Grinberg. Incorporated herein by reference to
Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed December
23, 2008. *
|
|
|
|
|
10.47
|
Joint
Venture Agreement dated May 11, 2007 by and between Swico Limited, Movado
Group, Inc. and MGS Distribution Limited. **
|
|
|
|
|
21.1
|
Subsidiaries
of the Registrant.
|
|
|
|
|
23.2
|
Consent
of PricewaterhouseCoopers LLP.
|
|
|
|
|
31.1
|
Certification
of Chief Executive Officer.
|
|
|
|
|
31.2
|
Certification
of Chief Financial Officer.
|
|
|
|
|
32.1
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
32.2
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
*
Constitutes a compensatory plan or arrangement.
** Confidential
portions of Exhibit 10.47 have been omitted and filed separately with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.
Management’s
Annual Report on Internal Control Over Financial Reporting
The
management of the Company is responsible for establishing and maintaining
internal control over financial reporting, as such term is defined in Rule
13a-15(f) under the Exchange Act, for the Company. With the participation of the
Chief Executive Officer and the Chief Financial Officer, the Company’s
management conducted an evaluation of the effectiveness of the Company’s
internal control over financial reporting based on the framework and criteria
established in Internal
Control – Integrated Framework, issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this evaluation, the
Company’s management has concluded that the Company’s internal control over
financial reporting was effective as of January 31, 2009.
Our
internal control over financial reporting as of January 31, 2009 has been
audited by PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report which appears
herein.
Report of
Independent Registered Public Accounting Firm
To the
Board of Directors and Shareholders of Movado Group, Inc.:
In our
opinion, the consolidated financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of Movado
Group, Inc. and its subsidiaries at January 31, 2009 and 2008, and the results of their operations and their cash flows for each of the three
years in the period ended January 31, 2009 in conformity with accounting
principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement
schedule listed in the accompanying index presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. Also
in our opinion, the Company maintained, in
all material respects, effective internal control over financial reporting as of
January 31, 2009, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company's management is responsible
for these financial statements and financial statement schedule, for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in
"Management's Annual Report on Internal Control Over Financial Reporting"
appearing in the accompanying index. Our responsibility is to express
opinions on these financial statements, on the financial statement schedule, and
on the Company's internal control over financial reporting based on our
integrated audits. We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements are free
of material misstatement and whether effective internal control over financial
reporting was maintained in all material respects. Our audits of the
financial statements included examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. Our audit of
internal control over financial reporting included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audits provide a reasonable basis for
our opinions.
As
discussed in Note 1 to the consolidated financial statements, the Company
changed the manner in which it accounts for uncertain income tax positions in
2008 and share-based compensation in 2007.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and
(iii) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers
LLP
Florham
Park, New Jersey
April 9,
2009
MOVADO
GROUP, INC.
CONSOLIDATED
STATEMENTS OF INCOME
(in
thousands, except per share amounts)
|
|
Fiscal
Year Ended January 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
460,857 |
|
|
$ |
559,550 |
|
|
$ |
532,865 |
|
Cost
of sales
|
|
|
173,225 |
|
|
|
222,868 |
|
|
|
209,922 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
287,632 |
|
|
|
336,682 |
|
|
|
322,943 |
|
Selling,
general and administrative
|
|
|
284,242 |
|
|
|
285,905 |
|
|
|
270,624 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
3,390 |
|
|
|
50,777 |
|
|
|
52,319 |
|
Other
income, net (Note 18)
|
|
|
681 |
|
|
|
- |
|
|
|
1,347 |
|
Interest
expense
|
|
|
(2,915 |
) |
|
|
(3,472 |
) |
|
|
(3,785 |
) |
Interest
income
|
|
|
2,132 |
|
|
|
4,666 |
|
|
|
3,280 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes and minority interests
|
|
|
3,288 |
|
|
|
51,971 |
|
|
|
53,161 |
|
Provision
/ (benefit) for income taxes (Note 8)
|
|
|
736 |
|
|
|
(9,471 |
) |
|
|
2,890 |
|
Minority
interests
|
|
|
237 |
|
|
|
637 |
|
|
|
133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
2,315 |
|
|
$ |
60,805 |
|
|
$ |
50,138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share
|
|
$ |
0.09 |
|
|
$ |
2.33 |
|
|
$ |
1.95 |
|
Weighted
basic average shares outstanding
|
|
|
24,782 |
|
|
|
26,049 |
|
|
|
25,670 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share
|
|
$ |
0.09 |
|
|
$ |
2.23 |
|
|
$ |
1.87 |
|
Weighted
diluted average shares outstanding
|
|
|
25,554 |
|
|
|
27,293 |
|
|
|
26,794 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
declared and paid per share
|
|
$ |
0.29 |
|
|
$ |
0.32 |
|
|
$ |
0.24 |
|
See
Notes to Consolidated Financial Statements
MOVADO
GROUP, INC.
CONSOLIDATED
BALANCE SHEETS
(in
thousands, except share and per share amounts)
|
|
January
31,
|
|
|
|
2009
|
|
|
2008
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
86,621 |
|
|
$ |
169,551 |
|
Trade
receivables, net
|
|
|
76,710 |
|
|
|
94,328 |
|
Inventories,
net
|
|
|
228,884 |
|
|
|
205,129 |
|
Other
current assets
|
|
|
47,863 |
|
|
|
50,317 |
|
Total
current assets
|
|
|
440,078 |
|
|
|
519,325 |
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
66,749 |
|
|
|
68,513 |
|
Other
non-current assets
|
|
|
57,163 |
|
|
|
58,378 |
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
563,990 |
|
|
$ |
646,216 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Loans
payable to banks
|
|
$ |
40,000 |
|
|
$ |
- |
|
Current
portion of long-term debt
|
|
|
25,000 |
|
|
|
10,000 |
|
Accounts
payable
|
|
|
20,794 |
|
|
|
38,397 |
|
Accrued
liabilities
|
|
|
42,754 |
|
|
|
29,591 |
|
Accrued
payroll and benefits
|
|
|
4,932 |
|
|
|
13,179 |
|
Deferred
and current income taxes payable
|
|
|
430 |
|
|
|
8,526 |
|
Total
current liabilities
|
|
|
133,910 |
|
|
|
99,693 |
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
- |
|
|
|
50,895 |
|
Deferred
and non-current income taxes payable
|
|
|
6,856 |
|
|
|
6,363 |
|
Other
non-current liabilities
|
|
|
22,459 |
|
|
|
24,205 |
|
Total
liabilities
|
|
|
163,225 |
|
|
|
181,156 |
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Notes 10 and 11)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interests
|
|
|
1,805 |
|
|
|
1,865 |
|
|
|
|
|
|
|
|
|
|
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; 24,592,682 and
24,266,873 shares issued, respectively
|
|
|
246 |
|
|
|
243 |
|
Class
A Common Stock, $0.01 par value, 30,000,000 shares authorized; 6,634,319
and 6,634,319 shares issued and outstanding, respectively
|
|
|
66 |
|
|
|
66 |
|
Capital
in excess of par value
|
|
|
131,796 |
|
|
|
128,902 |
|
Retained
earnings
|
|
|
320,481 |
|
|
|
325,296 |
|
Accumulated
other comprehensive income
|
|
|
43,742 |
|
|
|
65,890 |
|
Treasury
Stock, 6,826,734 and 4,830,669 shares at cost,
respectively
|
|
|
(97,371 |
) |
|
|
(57,202 |
) |
Total
shareholders’ equity
|
|
|
398,960 |
|
|
|
463,195 |
|
|
|
|
|
|
|
|
|
|
Total
liabilities and equity
|
|
$ |
563,990 |
|
|
$ |
646,216 |
|
See
Notes to Consolidated Financial Statements
MOVADO
GROUP, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands)
|
|
Fiscal
Year Ended January 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
2,315 |
|
|
$ |
60,805 |
|
|
$ |
50,138 |
|
Adjustments
to reconcile net income to net cash (used) / provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
18,457 |
|
|
|
16,684 |
|
|
|
16,580 |
|
Utilization
of NOL
|
|
|
- |
|
|
|
- |
|
|
|
210 |
|
Deferred
income taxes
|
|
|
327 |
|
|
|
(8,717 |
) |
|
|
(10,655 |
) |
Provision
for losses on accounts receivable
|
|
|
3,210 |
|
|
|
2,302 |
|
|
|
9,698 |
|
Provision
for losses on inventory
|
|
|
2,282 |
|
|
|
2,809 |
|
|
|
1,953 |
|
Gain
on proceeds from insurance
|
|
|
(681 |
) |
|
|
- |
|
|
|
- |
|
Stock-based
compensation
|
|
|
226 |
|
|
|
4,911 |
|
|
|
3,227 |
|
Impairment
of long-lived assets
|
|
|
4,525 |
|
|
|
- |
|
|
|
- |
|
Excess
tax / (benefit) from stock-based compensation
|
|
|
151 |
|
|
|
(1,883 |
) |
|
|
(1,968 |
) |
Loss
on disposition of property, plant and equipment
|
|
|
164 |
|
|
|
1,208 |
|
|
|
- |
|
Gain
on sale of assets
|
|
|
- |
|
|
|
- |
|
|
|
(1,347 |
) |
Minority
interest
|
|
|
237 |
|
|
|
637 |
|
|
|
133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade
receivables
|
|
|
10,549 |
|
|
|
18,976 |
|
|
|
(1,244 |
) |
Inventories
|
|
|
(36,068 |
) |
|
|
666 |
|
|
|
7,627 |
|
Other
current assets
|
|
|
(13,073 |
) |
|
|
(1,470 |
) |
|
|
(5,990 |
) |
Accounts
payable
|
|
|
(16,922 |
) |
|
|
3,495 |
|
|
|
(473 |
) |
Accrued
liabilities
|
|
|
12,546 |
|
|
|
(1,914 |
) |
|
|
(3,429 |
) |
Accrued
payroll and benefits
|
|
|
(8,247 |
) |
|
|
(1,572 |
) |
|
|
4,584 |
|
Income
taxes payable
|
|
|
(2,925 |
) |
|
|
(12,006 |
) |
|
|
(731 |
) |
Other
non-current assets
|
|
|
3,800 |
|
|
|
(2,408 |
) |
|
|
(4,072 |
) |
Other
non-current liabilities
|
|
|
(1,740 |
) |
|
|
1,111 |
|
|
|
3,593 |
|
Net
cash (used) / provided by operating activities
|
|
|
(20,867 |
) |
|
|
83,634 |
|
|
|
67,834 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(22,681 |
) |
|
|
(27,392 |
) |
|
|
(20,178 |
) |
Proceeds
from sale of assets
|
|
|
- |
|
|
|
- |
|
|
|
1,791 |
|
Trademarks
|
|
|
(851 |
) |
|
|
(641 |
) |
|
|
(711 |
) |
Proceeds
from insurance
|
|
|
1,006 |
|
|
|
- |
|
|
|
- |
|
Net
cash used in investing activities
|
|
|
(22,526 |
) |
|
|
(28,033 |
) |
|
|
(19,098 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
of bank borrowings
|
|
|
40,000 |
|
|
|
- |
|
|
|
- |
|
Repayments
of bank borrowings
|
|
|
(26,175 |
) |
|
|
(18,618 |
) |
|
|
(26,512 |
) |
Repayment
of Senior Notes
|
|
|
(10,000 |
) |
|
|
(5,000 |
) |
|
|
(5,000 |
) |
Repurchase
of treasury stock
|
|
|
(37,871 |
) |
|
|
(1,030 |
) |
|
|
- |
|
Stock
options exercised and other changes
|
|
|
522 |
|
|
|
666 |
|
|
|
2,894 |
|
Investment
from JV interest
|
|
|
- |
|
|
|
787 |
|
|
|
- |
|
Excess
(tax) / benefit from stock-based compensation
|
|
|
(151 |
) |
|
|
1,883 |
|
|
|
1,968 |
|
Distribution
of minority interest earnings
|
|
|
(298 |
) |
|
|
- |
|
|
|
- |
|
Dividends
paid
|
|
|
(5,909 |
) |
|
|
(8,327 |
) |
|
|
(6,158 |
) |
Net
cash used in financing activities
|
|
|
(39,882 |
) |
|
|
(29,639 |
) |
|
|
(32,808 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
345 |
|
|
|
10,578 |
|
|
|
(6,542 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(decrease) / increase in cash and cash equivalents
|
|
|
(82,930 |
) |
|
|
36,540 |
|
|
|
9,386 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of year
|
|
|
169,551 |
|
|
|
133,011 |
|
|
|
123,625 |
|
Cash
and cash equivalents at end of year
|
|
$ |
86,621 |
|
|
$ |
169,551 |
|
|
$ |
133,011 |
|
See
Notes to Consolidated Financial Statements
MOVADO
GROUP, INC.
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(in
thousands, except per share amounts)
|
|
|
|
|
|
|
|
Class
A
|
|
|
Capital
in
Excess
of
Par
Value
|
|
|
|
|
|
Accumulated
Other
Comprehensive
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 31, 2006
|
|
$ |
- |
|
|
$ |
232 |
|
|
$ |
68 |
|
|
$ |
107,965 |
|
|
$ |
236,515 |
|
|
$ |
27,673 |
|
|
$ |
(50,775 |
) |
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,138 |
|
|
|
|
|
|
|
|
|
Dividends
($0.24 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,158 |
) |
|
|
|
|
|
|
|
|
Stock
options exercised, net of tax of $2,603
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
6,497 |
|
|
|
|
|
|
|
|
|
|
|
(1,762 |
) |
Supplemental
executive retirement plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,227 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of Class A Stock to Common
Stock
|
|
|
|
|
|
|
2 |
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized gain on investments, net of tax
of
$50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42 |
|
|
|
|
|
Net
change in effective portion of hedging
contracts,
net of tax of $771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,246 |
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,346 |
|
|
|
|
|
Balance,
January 31, 2007
|
|
|
- |
|
|
|
239 |
|
|
|
66 |
|
|
|
117,811 |
|
|
|
280,495 |
|
|
|
32,307 |
|
|
|
(52,537 |
) |
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,805 |
|
|
|
|
|
|
|
|
|
Dividends
($0.32 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,327 |
) |
|
|
|
|
|
|
|
|
FIN
48 transition adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,677 |
) |
|
|
|
|
|
|
|
|
Stock
repurchase
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,030 |
) |
Stock
options exercised, net of tax of $2,343
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
6,051 |
|
|
|
|
|
|
|
|
|
|
|
(3,635 |
) |
Supplemental
executive retirement plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,911 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized loss on investments, net of tax
benefit
of $72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(176 |
) |
|
|
|
|
Net
change in effective portion of hedging
contracts,
net of tax of $2,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,942 |
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,817 |
|
|
|
|
|
Balance,
January 31, 2008
|
|
|
- |
|
|
|
243 |
|
|
|
66 |
|
|
|
128,902 |
|
|
|
325,296 |
|
|
|
65,890 |
|
|
|
(57,202 |
) |
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,315 |
|
|
|
|
|
|
|
|
|
Dividends
($0.29 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,130 |
) |
|
|
|
|
|
|
|
|
Stock
repurchase
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(37,871 |
) |
Stock
options exercised, net of tax benefit of
$234
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
2,524 |
|
|
|
|
|
|
|
|
|
|
|
(2,298 |
) |
Supplemental
executive retirement plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
144 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
226 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized loss on investments, net of tax
benefit
of $128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(190 |
) |
|
|
|
|
Net
change in effective portion of hedging
contracts,
net of tax benefit of $1,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,266 |
) |
|
|
|
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,692 |
) |
|
|
|
|
Balance,
January 31, 2009
|
|
$ |
- |
|
|
$ |
246 |
|
|
$ |
66 |
|
|
$ |
131,796 |
|
|
$ |
320,481 |
|
|
$ |
43,742 |
|
|
$ |
(97,371 |
) |
See
Notes to Consolidated Financial Statements
(Shares
information in thousands)
|
|
Common
Stock
|
|
|
Class
A Common Stock
|
|
|
Treasury
Stock
|
|
Balance,
January 31, 2006
|
|
|
23,216 |
|
|
|
6,767 |
|
|
|
(4,614 |
) |
Stock
issued to employees exercising stock options
|
|
|
428 |
|
|
|
- |
|
|
|
(48 |
) |
Conversion
of Class A Common Stock
|
|
|
125 |
|
|
|
(125 |
) |
|
|
- |
|
Restricted
stock and other stock plans, less cancellations
|
|
|
103 |
|
|
|
- |
|
|
|
(16 |
) |
Balance,
January 31, 2007
|
|
|
23,872 |
|
|
|
6,642 |
|
|
|
(4,678 |
) |
Stock
issued to employees exercising stock options
|
|
|
274
|
|
|
|
- |
|
|
|
(71 |
) |
Conversion
of Class A Common Stock
|
|
|
8 |
|
|
|
(8 |
) |
|
|
- |
|
Stock
repurchase
|
|
|
- |
|
|
|
- |
|
|
|
(44 |
) |
Restricted
stock and other stock plans, less cancellations
|
|
|
113 |
|
|
|
- |
|
|
|
(38 |
) |
Balance,
January 31, 2008
|
|
|
24,267 |
|
|
|
6,634 |
|
|
|
(4,831 |
) |
Stock
issued to employees exercising stock options
|
|
|
229 |
|
|
|
- |
|
|
|
(79) |
|
Stock
repurchase
|
|
|
- |
|
|
|
- |
|
|
|
(1,893 |
) |
Restricted
stock and other stock plans, less cancellations
|
|
|
97 |
|
|
|
- |
|
|
|
(24 |
) |
Balance,
January 31, 2009
|
|
|
24,593 |
|
|
|
6,634 |
|
|
|
(6,827 |
) |
See
Notes to Consolidated Financial Statements
NOTES
TO MOVADO GROUP, INC.’S CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 - SIGNIFICANT ACCOUNTING POLICIES
Organization
and Business
Movado
Group, Inc. (the "Company") designs, sources, markets and distributes quality
watches with prominent brands in almost every price category comprising the
watch industry. In fiscal 2009, the Company marketed nine distinctive brands of
watches: Movado, Ebel, Concord, ESQ, Coach, HUGO BOSS, Juicy Couture, Tommy
Hilfiger and Lacoste, which compete in most segments of the watch
market.
Movado,
Ebel and Concord watches are generally manufactured in Switzerland by
independent third party assemblers with some in-house assembly in Bienne and La
Chaux-de-Fonds, Switzerland. Movado, Ebel and Concord watches are
manufactured using Swiss movements and other components obtained from third
party suppliers. Coach, ESQ, Tommy Hilfiger, Juicy Couture, HUGO BOSS
and Lacoste watches are manufactured by independent contractors. Coach and ESQ
watches are manufactured using Swiss movements and other components purchased
from third party suppliers. Tommy Hilfiger, Juicy Couture, HUGO BOSS and Lacoste
watches are manufactured using movements and other components purchased from
third party suppliers.
In
addition to its sales to trade customers and independent distributors, through a
wholly-owned domestic subsidiary, the Company sells select models of Movado
watches, as well as proprietary Movado-branded jewelry and clocks directly to
consumers in its Movado Boutiques and operates outlet stores throughout the
United States, through which it sells discontinued models and factory
seconds.
Principles
of Consolidation
The
consolidated financial statements include the accounts of the Company and its
wholly and majority-owned subsidiaries. Intercompany transactions and
balances have been eliminated.
Use
of Estimates in the Preparation of Financial Statements
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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 financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. The Company uses estimates when accounting for sales
discounts, rebates, allowances and incentives, warranty, income taxes,
depreciation, amortization, contingencies, impairments and asset and liability
valuations.
Reclassification
Certain
reclassifications were made to prior years’ financial statement amounts and
related note disclosures to conform to the fiscal 2009
presentation.
Translation
of Foreign Currency Financial Statements and Foreign Currency
Transactions
The
financial statements of the Company's international subsidiaries have been
translated into United States dollars by translating balance sheet accounts at
year-end exchange rates and statement of operations accounts at average exchange
rates for the year. Foreign currency transaction gains and losses are
charged or credited to earnings as incurred. Foreign currency translation gains
and losses are reflected in the equity section of the Company's consolidated
balance sheet in Accumulated Other Comprehensive Income. The balance
of the foreign currency translation adjustment, included in Accumulated Other
Comprehensive Income, was $42.3 million and $62.0 million as of January 31, 2009
and 2008, respectively.
Cash
and Cash Equivalents
Cash
equivalents are considered all highly liquid investments with original
maturities at date of purchase of three months or less.
Trade
Receivables
Trade
receivables as shown on the consolidated balance sheet are net of
allowances. The allowance for doubtful accounts is determined through
an analysis of the aging of accounts receivable, assessments of collectability
based on historic trends, the financial condition of the Company’s customers and
an evaluation of economic conditions. The Company writes off
uncollectible trade receivables once collection efforts have been exhausted and
third parties confirm the balance is not recoverable.
The
Company's trade customers include department stores, jewelry store chains and
independent jewelers. All of the Company’s watch brands, except ESQ, are also
marketed outside the U.S. through a network of independent distributors.
Accounts receivable are stated net of doubtful accounts, returns and allowances
of $19.6 million, $36.3 million and $26.1 million at January 31, 2009, 2008 and
2007, respectively. In the fourth quarter of fiscal 2008, the Company
recorded a one-time charge of $15.0 million related to estimated sales returns
associated with the closing of certain wholesale doors in the U.S.
The
Company's concentrations of credit risk arise primarily from accounts receivable
related to trade customers during the peak selling seasons. The Company has
significant accounts receivable balances due from major national chain and
department stores. The Company's results of operations could be materially
adversely affected in the event any of these customers or a group of these
customers defaulted on all or a significant portion of their obligations to the
Company as a result of financial difficulties. As of January 31, 2009, except
for those accounts provided for in the reserve for doubtful accounts, the
Company knew of no situations with any of the Company’s major customers which
would indicate any such customer’s inability to make its required
payments.
Inventories
The
Company values its inventory at the lower of cost or market. The
Company’s U.S. inventory is valued using the first-in, first-out (FIFO)
method. The cost of finished goods and component inventories, held by
international subsidiaries, are determined using average cost. The Company’s
management regularly reviews its sales to customers and customers’ sell through
at retail to determine excess or obsolete inventory. Inventory
classified as discontinued and, together with the related
component
parts which can be assembled into saleable finished goods, is sold primarily
through the Company’s outlet stores. When management determines that finished
product is unsaleable or when it is impractical to build the remaining
components into watches for sale, a reserve is established for the cost of those
products and components to value the inventory at the lower of cost or
market. During the fiscal year ended January 31, 2009, the Company
went through a process of scrapping unsaleable inventory and components which
were reserved for and recorded as cost of sales in previous fiscal
years. Additionally in fiscal year 2009, the Company conducted its
ongoing review of unsaleable inventory and associated components resulting in no
material changes to existing reserves. During the fiscal years ended
January 31, 2008 and 2007, the Company conducted an in depth review of all its
discontinued components and watches. In doing so, the Company made an
economic decision to convert these excess quantities of discontinued inventory
into cash. As a result, the Company engaged in a liquidation through
an independent third party to sell the excess product for cash. In
addition, where it was not deemed economically feasible to invest the time,
effort and/or cost, the Company initiated efforts to cleanse the inventory and
scrap the product. The Company’s estimates, based on which it
establishes its inventory reserves, could vary significantly, either favorably
or unfavorably, from actual requirements depending on future economic
conditions, customer inventory levels, expected usage or competitive
conditions.
Property,
Plant and Equipment
Property,
plant and equipment are stated at cost less accumulated
depreciation. Depreciation of buildings is amortized using the
straight-line method based on the useful life of 40
years. Depreciation of furniture and equipment is provided using the
straight-line method based on the estimated useful lives of assets, which range
from four to ten years. Computer software is amortized using the straight-line
method over the useful life of five to ten years. Leasehold
improvements are amortized using the straight-line method over the lesser of the
term of the lease or the estimated useful life of the leasehold
improvement. Design fees and tooling costs are amortized using the
straight-line method based on the useful life of three years. Upon
the disposition of property, plant and equipment, the accumulated depreciation
is deducted from the original cost and any gain or loss is reflected in current
earnings.
Long-Lived
Assets
The
Company periodically reviews the estimated useful lives of its depreciable
assets based on factors including historical experience, the expected beneficial
service period of the asset, the quality and durability of the asset and the
Company’s maintenance policy including periodic upgrades. Changes in useful
lives are made on a prospective basis unless factors indicate the carrying
amounts of the assets may not be recoverable and an impairment write-down is
necessary.
The
Company performs an impairment review of its long-lived assets once events or
changes in circumstances indicate, in management's judgment, that the carrying
value of such assets may not be recoverable. When such a determination has been
made, management compares the carrying value of the assets with their estimated
future undiscounted cash flows. If it is determined that an impairment loss has
occurred, the loss is recognized during that period. The impairment loss is
calculated as the difference between asset carrying values and the fair value of
the long-lived assets.
During
the fourth quarter of fiscal 2009, the Company determined that the carrying
value of its long-lived assets with respect to five Movado Boutique retail
locations was not recoverable. The impairment review was performed pursuant to
SFAS No. 144 because of the economic downturn in the U.S. that
had
a
negative effect on the Company’s fourth quarter ended January 31, 2009, the
retail segments largest quarter of the year in terms of sales and
profitability. The deteriorating economy negatively affected the
Boutiques’ sales volumes. As a result, the Company recorded a non-cash pre-tax
impairment charge of $4.5 million consisting of property, plant and
equipment. The charge was calculated as the difference between the
assets’ carrying values and their estimated fair value. For the
purposes of this calculation, fair value was determined using a discounted cash
flow calculation. The impairment charge is included in the selling,
general and administrative expenses in the fiscal 2009 Consolidated Statements
of Income.
Deferred
Rent Obligations and Contributions from Landlords
The
Company accounts for rent expense under non-cancelable operating leases with
scheduled rent increases on a straight-line basis over the lease
term. The excess of straight-line rent expense over scheduled
payments is recorded as a deferred liability. In addition, the
Company receives build out contributions from landlords primarily as an
incentive for the Company to lease retail store space from the
landlords. This is also recorded as a deferred
liability. Such amounts are amortized as a reduction of rent expense
over the life of the related lease.
Capitalized
Software Costs
The
Company capitalizes certain computer software costs after technological
feasibility has been established. The costs are amortized utilizing the
straight-line method over the economic lives of the related products ranging
from five to seven years. Additionally, the Company is in the process
of implementing SAP, a business enterprise solution as the core enterprise
system. As of January 31, 2009 and January 31, 2008, $19.7 million
and $10.5 million of costs related to SAP have been capitalized,
respectively. When the SAP system goes live, it will begin to be
amortized over a period of 10 years, utilizing the straight-line
method.
Intangibles
Intangible
assets consist primarily of trademarks and are recorded at
cost. Trademarks are amortized over ten years. The Company
periodically reviews intangible assets to evaluate whether events or changes
have occurred that would suggest an impairment of carrying value. An
impairment would be recognized when expected undiscounted future operating cash
flows are lower than the carrying value. At January 31, 2009 and
2008, intangible assets at cost were $10.3 million and $11.3 million,
respectively, and related accumulated amortization of intangibles was $6.3
million and $6.9 million, respectively. Amortization expense for fiscal 2009,
2008 and 2007 was $1.0 million, $0.8 million and $0.7 million,
respectively.
Derivative
Financial Instruments
The
Company utilizes derivative financial instruments to reduce foreign currency
fluctuation risks. The Company accounts for its derivative financial instruments
in accordance with SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities", (“SFAS No. 133”) as amended and interpreted, which
establishes accounting and reporting standards for derivative instruments and
hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
condition and measure those instruments at fair value. Changes in the fair value
of those instruments will be reported in earnings or other comprehensive income
depending on the use of the
derivative
and whether it qualifies for hedge accounting. The accounting for gains and
losses associated with changes in the fair value of the derivative and the
effect on the consolidated financial statements will depend on its hedge
designation and whether the hedge is highly effective in achieving offsetting
changes in the fair value of cash flows of the asset or liability
hedged.
The
Company’s risk management policy is to enter into forward exchange contracts and
purchase foreign currency options, under certain limitations, to reduce exposure
to adverse fluctuations in foreign exchange rates and, to a lesser extent, in
commodity prices related to its purchases of watches. When entered into, the
Company designates and documents these derivative instruments as a cash flow
hedge of a specific underlying exposure, as well as the risk management
objectives and strategies for undertaking the hedge
transactions. Changes in the fair value of a derivative that is
designated and documented as a cash flow hedge and is highly effective, are
recorded in other comprehensive income until the underlying transaction affects
earnings, and then are later reclassified into earnings in the same account as
the hedged transaction. The Company formally assesses, both at the
inception and at each financial quarter thereafter, the effectiveness of the
derivative instrument hedging the underlying forecasted cash flow
transaction. Any ineffectiveness related to the derivative financial
instruments’ change in fair value will be recognized in the period in which the
ineffectiveness was calculated.
The
Company uses forward exchange contracts to offset its exposure to certain
foreign currency liabilities. These forward contracts are not designated as SFAS
No. 133 hedges and, therefore, changes in the fair value of these derivatives
are recognized into earnings, thereby offsetting the current earnings effect of
the related foreign currency liabilities.
The
Company’s risk management policy includes net investment hedging of the
Company’s Swiss franc-denominated investment in its wholly-owned subsidiaries
located in Switzerland using purchased foreign currency options under certain
limitations. When entered into for this purpose, the Company designates and
documents the derivative instrument as a net investment hedge of a specific
underlying exposure, as well as the risk management objectives and strategies
for undertaking the hedge transactions. Changes in the fair value of a
derivative that is designated and documented as a net investment hedge are
recorded in other comprehensive income in the same manner as the cumulative
translation adjustment of the Company’s Swiss franc-denominated investment. The
Company formally assesses, both at the inception and at each financial quarter
thereafter, the effectiveness of the derivative instrument hedging the net
investment.
All of
the Company’s derivative instruments have liquid markets to assess fair
value. The Company does not enter into any derivative instruments for
trading purposes.
Revenue
Recognition
In the
wholesale segment, the Company recognizes its revenues upon transfer of title
and risk of loss in accordance with its FOB shipping point terms of sale and
after the sales price is fixed and determinable and collectability is reasonably
assured. In the retail segment, transfer of title and risk of loss
occurs at the time of register receipt. The Company records estimates
for sales returns, volume-based programs and sales and cash discount allowances
as a reduction of revenue in the same period that the sales are
recorded. These estimates are based upon historical analysis,
customer agreements and/or currently known factors that arise in the normal
course of business. In the fourth quarter of fiscal 2008, the Company
recorded a one-time accrual of $15.0 million related to estimated future sales
returns associated with the streamlining of the Movado brand wholesale
distribution in the U.S. for the planned
reduction
of approximately 1,400 wholesale customer doors. These sales returns
were completed during fiscal 2009.
Cost
of Sales
Costs of
sales of the Company’s products consist primarily of component costs, assembly
costs and unit overhead costs associated with the Company’s supply chain
operations in Switzerland and Asia. The Company’s supply chain
operations consist of logistics management of assembly operations and product
sourcing in Switzerland and Asia and minor assembly in Switzerland.
Selling,
General and Administrative Expenses
The
Company’s SG&A expenses consist primarily of marketing, selling,
distribution and general and administrative expenses. During the
second half of fiscal year 2009, the Company announced initiatives designed to
streamline operations, reduce expenses, and improve efficiencies and
effectiveness across the Company’s global organization. In
fiscal year 2009, the Company recorded a total pre-tax charge of $11.1 million
related to the completion of these programs and a restructuring of certain
benefit arrangements. Additionally, the Company recorded a
non-cash pretax impairment charge of $4.5 million consisting of property,
plant and equipment, related to five Movado Boutiques.
Annual
marketing expenditures are based principally on overall strategic considerations
relative to maintaining or increasing market share in markets that management
considers to be crucial to the Company’s continued success as well as on general
economic conditions in the various markets around the world in which the Company
sells its products.
Selling
expenses consist primarily of salaries, sales commissions, sales force travel
and related expenses, expenses associated with Baselworld, the annual watch and
jewelry trade show and other industry trade shows and operating costs incurred
in connection with the Company’s retail business. Sales commissions vary with
overall sales levels. Retail selling expenses consist primarily of payroll
related and store occupancy costs.
Distribution
expenses consist primarily of salaries of distribution staff, rental and other
occupancy costs, security, depreciation and amortization of furniture and
leasehold improvements and shipping supplies.
General
and administrative expenses consist primarily of salaries and other employee
compensation, employee benefit plan costs, office rent, management information
systems costs, professional fees, bad debts, depreciation and amortization of
furniture and leasehold improvements, patent and trademark expenses and various
other general corporate expenses.
Warranty
Costs
All
watches sold by the Company come with limited warranties covering the movement
against defects in material and workmanship for periods ranging from two to
three years from the date of purchase, with the exception of Tommy Hilfiger
watches, for which the warranty period is ten years. In addition, the
warranty period is five years for the gold plating for Movado watch cases and
bracelets. When changes in warranty costs are experienced, the
Company will adjust the warranty accrual as required.
Warranty
liability for the fiscal years ended January 31, 2009, 2008 and 2007 was as
follows (in thousands):
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
beginning of year
|
|
$ |
2,193 |
|
|
$ |
1,954 |
|
|
$ |
2,185 |
|
Provision
charged to operations
|
|
|
1,864 |
|
|
|
2,193 |
|
|
|
1,954 |
|
Settlements
made
|
|
|
(2,193 |
) |
|
|
(1,954 |
) |
|
|
(2,185 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
end of year
|
|
$ |
1,864 |
|
|
$ |
2,193 |
|
|
$ |
1,954 |
|
Pre-opening
Costs
Costs
associated with the opening of new boutique and outlet stores, including
pre-opening rent, are expensed in the period incurred.
Marketing
The
Company expenses the production costs of an advertising campaign at the
commencement date of the advertising campaign. Included in marketing
expenses are costs associated with co-operative advertising, media advertising,
production costs and costs of point-of-sale materials and
displays. These costs are recorded as SG&A
expenses. The Company participates in cooperative advertising
programs on a voluntary basis and receives a “separately identifiable benefit in
exchange for the consideration”. Since the amount of consideration
paid to the retailer does not exceed the fair value of the benefit received by
the Company, these costs are recorded as SG&A expenses as opposed to being
recorded as a reduction of revenue. Marketing expense for fiscal
2009, 2008 and 2007 amounted to $80.3 million, $86.2 million and $79.4 million,
respectively.
Included
in the other current assets in the consolidated balance sheets as of January 31,
2009 and 2008 are prepaid advertising costs of $2.0 million and $2.6 million,
respectively. These prepaid costs represent advertising costs paid to
licensors in advance, pursuant to the Company’s licensing agreements and
sponsorships.
Shipping
and Handling Costs
Amounts
charged to customers and costs incurred by the Company related to shipping and
handling are included in net sales and cost of goods sold,
respectively. The amounts recorded for the fiscal years ended January
31, 2009, 2008 and 2007 were insignificant.
Income
Taxes
The
Company follows SFAS No. 109, "Accounting for Income Taxes". Under the asset and
liability method of SFAS No. 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax laws and tax rates, in each jurisdiction the Company operates,
and applies to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets and
liabilities due to a change in tax rates is recognized in income in the period
that
includes
the enactment date. In addition, the amounts of any future tax benefits are
reduced by a valuation allowance to the extent such benefits are not expected to
be realized on a more-likely-than-not basis. The Company calculates estimated
income taxes in each of the jurisdictions in which it operates. This process
involves estimating actual current tax expense along with assessing temporary
differences resulting from differing treatment of items for both book and tax
purposes.
The
Company adopted the provisions of FIN 48, “Accounting for Uncertainty in Income
Taxes”, on February 1, 2007. FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprise’s financial statements
in accordance with SFAS No. 109. FIN 48 also prescribes a recognition
threshold and measurement standard for the financial statement recognition and
measurement of an income tax position taken or expected to be taken in a tax
return. FIN 48 also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods,
disclosures and transitions. The Company previously recognized income
tax positions based on management’s estimate of whether it was reasonably
possible that a liability had been incurred for unrecognized tax benefits by
applying SFAS No. 5, Accounting for Contingencies. The provisions of
FIN 48 became effective for the Company on February 1, 2007.
Earnings
Per Share
The
Company presents net income per share on a basic and diluted
basis. Basic earnings per share is computed using weighted-average
shares outstanding during the period. Diluted earnings per share is
computed using the weighted-average number of shares outstanding adjusted for
dilutive common stock equivalents.
The
weighted-average number of shares outstanding for basic earnings per share were
24,782,000, 26,049,000 and 25,670,000 for fiscal 2009, 2008 and 2007,
respectively. For diluted earnings per share, these amounts were
increased by 772,000, 1,244,000 and 1,124,000 in fiscal 2009, 2008 and 2007,
respectively, due to potentially dilutive common stock equivalents issuable
under the Company’s stock compensation plans.
For the
year ended January 31, 2009, approximately 75,000 of potentially dilutive common
stock equivalents were excluded from the computation of dilutive earnings per
share because their effect would have been antidilutive. There were no
antidilutive shares for the year-ended January 31, 2008.
Stock-Based
Compensation
On
February 1, 2006, the Company adopted the provisions of SFAS No. 123(R),
“Share-Based Payment” (“SFAS No. 123(R)”), electing to use the modified
prospective application transition method, and accordingly, prior period
financial statements have not been restated. Under this method, the fair
value of all employee stock options granted after adoption and the unvested
portion of previously granted awards must be recognized in the Consolidated
Statements of Income. Prior to February 1, 2006, employee stock option
grants were accounted for under the intrinsic value method, which measures
compensation cost as the excess, if any, of the quoted market price of the stock
at grant date over the amount an employee must pay to acquire the
stock. Accordingly, compensation expense had not been recognized for
employee stock options granted at or above fair value. Prior to
February 1, 2006, compensation expense for restricted stock grants was reduced
as actual forfeitures of the awards occurred. SFAS No. 123(R)
requires forfeitures to be estimated at the time of grant in order to estimate
the amount of share-based awards that will ultimately vest and thus, current
period compensation
expense
for both stock options and restricted stock have been adjusted for estimated
forfeitures. See Note 12 to the Company’s Consolidated Financial
Statements for further information regarding stock-based
compensation.
Recently
Issued Accounting Standards
In
December 2007, the FASB issued SFAS No. 141(R) “Business
Combinations.” SFAS No. 141(R) states that all business combinations
(whether full, partial or step acquisitions) will result in all assets and
liabilities of an acquired business being recorded at their acquisition date
fair values. Earn-outs and other forms of contingent consideration
and certain acquired contingencies will also be recorded at fair value at the
acquisition date. SFAS No. 141(R) also states acquisition costs will
generally be expensed as incurred; in-process research and development will be
recorded at fair value as an indefinite-lived intangible asset at the
acquisition date; changes in deferred tax asset valuation allowances and income
tax uncertainties after the acquisition date generally will affect income tax
expense; and restructuring costs will be expensed in periods after the
acquisition date. This statement is effective for financial
statements issued for fiscal years beginning after December 15,
2008. The Company will apply the provisions of this standard to any
acquisitions that it completes on or after February 1, 2009.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51.” This
statement amends ARB No. 51 to establish accounting and
reporting standards for the noncontrolling interest (minority interest) in a
subsidiary and for the deconsolidation of a subsidiary. Upon its adoption,
noncontrolling interests will be classified as equity in the consolidated
balance sheets. This statement also provides guidance on a subsidiary
deconsolidation as well as stating that entities need to provide sufficient
disclosures that clearly identify and distinguish between the interests of the
parent and the interests of the noncontrolling owners. This statement is
effective for financial statements issued for fiscal years beginning after
December 15, 2008. The Company is currently evaluating the impact of
SFAS No. 160 on the Company’s consolidated financial statements.
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities, an amendment of FASB Statement No. 133”. This
statement requires enhanced disclosures about (a) how and why an entity uses
derivative instruments, (b) how derivative instruments and related hedged items
are accounted for under SFAS No. 133 and its related interpretations, and (c)
how derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows. SFAS No. 161 also
requires that objectives for using derivative instruments be disclosed in terms
of underlying risk and accounting designation and requires cross-referencing
within the footnotes. This statement also suggests disclosing the
fair values of derivative instruments and their gains and losses in a tabular
format. This statement is effective for financial statements issued
for fiscal years and interim periods beginning after November 15,
2008. The Company is currently evaluating the impact of SFAS No. 161
on the Company’s consolidated financial statements.
NOTE
2 – INVENTORIES, NET
Inventories,
net at January 31, consisted of the following (in thousands):
|
|
Fiscal
Year Ended January 31,
|
|
|
|
2009
|
|
|
2008
|
|
Finished
goods
|
|
$ |
146,073 |
|
|
$ |
117,027 |
|
Component
parts
|
|
|
81,423 |
|
|
|
76,222 |
|
Work-in-process
|
|
|
1,388 |
|
|
|
11,880 |
|
|
|
$ |
228,884 |
|
|
$ |
205,129 |
|
NOTE
3 – PROPERTY, PLANT AND EQUIPMENT
Property,
plant and equipment at January 31, at cost, consisted of the following (in
thousands):
|
|
Fiscal
Year Ended January 31,
|
|
|
|
2009
|
|
|
2008
|
|
Land
and buildings
|
|
$ |
3,995 |
|
|
$ |
4,285 |
|
Furniture
and equipment
|
|
|
60,592 |
|
|
|
62,434 |
|
Computer
software
|
|
|
37,953 |
|
|
|
41,529 |
|
Leasehold
improvements
|
|
|
40,660 |
|
|
|
42,930 |
|
Design
fees and tooling costs
|
|
|
10,010 |
|
|
|
10,690 |
|
|
|
|
153,210 |
|
|
|
161,868 |
|
Less:
accumulated depreciation
|
|
|
86,461 |
|
|
|
93,355 |
|
|
|
$ |
66,749 |
|
|
$ |
68,513 |
|
Depreciation
and amortization expense related to property, plant and equipment for fiscal
2009, 2008 and 2007 was $17.2 million, $15.8 million and $15.7 million,
respectively, which includes computer software amortization expense for fiscal
2009, 2008 and 2007 of $1.0 million, $2.0 million and $3.7 million,
respectively. Additionally, the Company recorded a non-cash pre-tax
impairment charge of $4.5 million consisting of property, plant and equipment,
related to five Movado Boutique locations.
NOTE
4 – SENIOR DEBT, PROPOSED AND COMMITTED LINES OF CREDIT
During
fiscal 1999, the Company issued $25.0 million of Series A Senior Notes (“Series
A Senior Notes”) under a Note Purchase and Private Shelf Agreement, dated
November 30, 1998 (the “1998 Note Purchase Agreement”), between the Company and
The Prudential Insurance Company of America (“Prudential”). 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 contained certain financial covenants including an
interest coverage ratio and maintenance of consolidated net worth and certain
non-financial covenants that restricted 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. On June 5, 2008, the Company amended its
Series A Senior Notes under an amendment to the 1998 Note Purchase Agreement (as
amended, the “First Amended 1998 Note Purchase Agreement”) with Prudential and
an affiliate of Prudential. No
additional
senior promissory notes are issuable by the Company pursuant to the First
Amended 1998 Note Purchase Agreement. Certain provisions and covenants were
modified to be aligned with covenants in the Company’s other credit
agreements. These included the interest coverage ratio, elimination of the
maintenance of consolidated net worth and the addition of a debt coverage
ratio. At January 31, 2009, $10.0 million of the Series A Senior
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 (as amended, the “First Amended 2001
Note Purchase Agreement”), among the Company, Prudential and certain affiliates
of Prudential (together, the “Purchasers”). This agreement 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
First Amended 2001 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 contained certain financial covenants,
including an interest coverage ratio and maintenance of consolidated net worth
and certain non-financial covenants that restricted 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.
On June
5, 2008, the Company amended the First Amended 2001 Note Purchase Agreement (as
amended, the “Second Amended 2001 Note Purchase Agreement”), with Prudential and
the Purchasers. The Second Amended 2001 Note Purchase Agreement
permits the Company to issue senior promissory notes for purchase by Prudential
and the Purchasers, in an aggregate principal amount of up to $70.0 million
inclusive of the Senior Series A-2004 Notes described above, until June 5, 2011,
with maturities up to 12 years from their original date of issuance. The
remaining aggregate principal amount of senior promissory notes issuable by the
Company that may be purchased by Prudential and the Purchasers pursuant to the
Second Amended 2001 Note Purchase Agreement is $55.0 million. Certain provisions
and covenants were modified to be aligned with covenants in the Company’s other
credit agreements. These included the interest coverage ratio,
elimination of the maintenance of consolidated net worth and addition of a debt
coverage ratio. As of January 31, 2009, $15.0 million of the Senior Series
A-2004 Notes were issued and outstanding.
The
credit agreement dated as of December 15, 2005, as amended, by and between the
Company as parent guarantor, its Swiss subsidiaries, MGI Luxury Group S.A.,
Movado Watch Company SA, Concord Watch Company S.A. and Ebel Watches S.A. as
borrowers, and JPMorgan Chase Bank, N.A. (“Chase”), JPMorgan
Securities, Inc., Bank of America, N.A., PNC Bank and Citibank, N.A. (as
amended, the "Swiss Credit Agreement"), provides for a revolving credit facility
of 33.0 million Swiss francs and matures on December 15, 2010. The
obligations of the Company’s 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 January 31, 2009, there were no outstanding borrowings under
this revolving credit facility.
The
credit agreement dated as of December 15, 2005, as amended, by and between the
Company, MGI Luxury Group S.A. and Movado Watch Company SA, as borrowers, and
JPMorgan Chase Bank, N.A., JPMorgan Securities, Inc., Bank of America, N.A., PNC
Bank, Bank Leumi and Citibank, N.A. (as amended, the "US Credit Agreement"),
provides for a revolving credit facility of $90.0 million (including a sublimit
for borrowings in Swiss francs of up to an equivalent of $25.0 million) with a
provision to allow for a further increase of up to an additional $10.0 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 January 31, 2009, $40.0 million
was outstanding under this revolving credit facility.
For the
fiscal years ending January 31, 2009 and 2008, the calculation of the financial
covenants for the Series A Senior Notes, Senior Series A-2004 Notes, the Swiss
Credit Agreement and US Credit Agreement (together the "Debt Facilities”) were
as follows (dollars in thousands):
|
|
Required
|
|
|
Required
|
|
|
Actual
|
|
|
Actual
|
|
|
|
Senior
|
|
|
Credit
|
|
|
January
31,
|
|
|
January
31,
|
|
Covenant
|
|
Notes
|
|
|
Facilities
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Coverage Ratio
|
|
Min.
3.50x
|
|
|
Min.
3.50x
|
|
|
|
2.45 |
x |
|
|
16.09 |
x |
Average
Debt Coverage Ratio
|
|
Max.
3.25x
|
|
|
Max.
3.25x
|
|
|
|
2.72 |
x |
|
|
0.93 |
x |
Capital
Expenditures Limit
|
|
|
n/a |
|
|
$ |
42,608 |
|
|
$ |
22,681 |
|
|
$ |
27,392 |
|
Priority
Debt Limit
|
|
$ |
79,095 |
|
|
|
n/a |
|
|
$ |
40,000 |
|
|
$ |
25,907 |
|
Lien
Limit
|
|
$ |
79,095 |
|
|
|
n/a |
|
|
$ |
- |
|
|
$ |
- |
|
As of
January 31, 2009, the Company was in compliance with all non-financial covenants
under the Debt Facilities. Due to the reported financial results for
fiscal 2009, the Company was in compliance with all financial covenants with the
exception of the interest coverage ratio covenant under these Debt
Facilities. The
current results included certain charges for severance related costs associated
with the Company’s expense reduction initiatives and a restructuring of
certain benefit arrangements of $11.1 million and for asset
impairments of $4.5 million. The Company believes that it would
have been in compliance with all covenants if these charges, which it
deems to be non-recurring in nature, were excluded from the covenant
calculations. As a result of the Company’s projections in light
of the global economic downturn, without an amendment or waiver, the Company
believes that it will continue to be in non-compliance with the interest
coverage ratio covenant, and potentially additional financial
covenants
under the Debt Facilities, for the upcoming reporting periods in fiscal year
2010. The Company has not requested a waiver as it is currently in
negotiations for a new credit facility discussed in more detail
below. Additionally, the Company has received a commitment, subject
to certain limitations described more fully below, for a three year $50 million
asset-based credit facility from Bank of America to provide available liquidity
if a new credit facility is not consummated.
As a
result of the Company’s non-compliance with the interest coverage ratio
covenant, amounts owed under the Debt Facilities have been reclassified to
current liabilities. Additionally, the Company is prohibited from
borrowing any additional funds under the Debt Facilities and the amounts owed as
of January 31, 2009 may be declared immediately due and payable by the
lenders. The lenders have not taken any action in respect to this
default, but they may do so in the future. Should the debt be
declared immediately due and payable by the lenders, the Company would be
able to satisfy such obligations through obtaining alternative financing, cash
on hand and conversion of working capital to cash.
The
components of debt as of January 31, were as follows (in
thousands):
|
|
Fiscal
Year Ended January 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Swiss
Revolving Credit Facility
|
|
$ |
- |
|
|
$ |
25,895 |
|
U.S.
Revolving Credit Facility
|
|
|
40,000 |
|
|
|
- |
|
Series
A Senior Notes
|
|
|
10,000 |
|
|
|
15,000 |
|
Senior
Series A-2004 Notes
|
|
|
15,000 |
|
|
|
20,000 |
|
|
|
|
65,000 |
|
|
|
60,895 |
|
Less:
current portion
|
|
|
65,000 |
|
|
|
10,000 |
|
Long-term
debt
|
|
$ |
- |
|
|
$ |
50,895 |
|
The
Company pays a facility fee on the unused portion of the committed lines of the
Swiss Credit Agreement and the US Credit Agreement. The unused
portion of the committed lines was $78.5 million at January 31, 2009, however,
as noted above, the Company is unable to access such amounts due to its
non-compliance with the interest coverage ratio covenants under the Debt
Facilities.
Aggregate
maximum and average monthly outstanding borrowings against the Company's lines
of credit, including uncommitted lines of credit, and related weighted-average
interest rates during fiscal 2009 and 2008 were as follows (dollars in
thousands):
|
|
Fiscal
Year Ended January 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Maximum
borrowings
|
|
$ |
44,800 |
|
|
$ |
40,900 |
|
Average
monthly borrowings
|
|
$ |
27,800 |
|
|
$ |
32,200 |
|
Weighted-average
interest rate
|
|
|
3.0 |
% |
|
|
2.9 |
% |
Weighted-average
interest rates were computed based on average month-end outstanding borrowings
and applicable average month-end interest rates. For information
about the Company’s uncommitted lines of credit, see Note 5 – Uncommitted Lines
of Credit.
Through
the date of this filing, the Company is in negotiations with banking
institutions for a new three year asset-based revolving credit facility for an
amount up to $110 million (the “New Facility”). Consummation of the
New Facility is subject to (a) syndication, (b) completion of due diligence by
the banking institutions, and (c) the satisfaction of a number of additional
customary conditions precedent, certain of which are at the sole discretion of
the banking institution. The New Facility will likely include limited
financial covenants that are effective only if a minimum availability threshold
is not maintained. The New Facility will be collateralized by
substantially all of the assets of Movado Group, Inc. and its U.S. subsidiaries,
including accounts receivable and inventory, and 65% of the capital stock of
first-tier foreign subsidiaries. The New Facility will contain
various restrictions including limitations on additional debt, the payment of
dividends and repurchasing stock. The Company expects that the fees
and the interest rates under the New Facility, if consummated, will
increase to current market rates. The Company anticipates that the
New Facility will be finalized in May of 2009 and will have a term of three
years, expiring in May 2012.
As
previously mentioned, to provide for available liquidity in the event that the
New Facility is not consummated, the Company has received a commitment for a
three year $50 million asset-based credit facility from Bank of
America. The commitment is subject to the completion of due diligence
by Bank of America and the satisfaction of a number of additional customary
conditions precedent, certain
of which are at the sole discretion of Bank of America. In
the event the New Facility is consummated, this commitment will be
canceled.
The
Company anticipates that the New Facility or the $50 million asset-based credit
facility, if consummated, would replace the Debt Facilities . In the event
the New Facility or the $50 million asset-based credit facility is not
consummated, the Company’s financial condition and results of operations may be
materially adversely affected.
NOTE 5 – UNCOMMITTED LINES OF
CREDIT
On June
16, 2008, 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, 2009. The Company has the right to
prepay all or part of any outstanding amounts under the amended and restated
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
January 31, 2009, there were no outstanding borrowings against this line.
On July
31, 2008, 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 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, 2009. 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 for Canadian payroll to the Royal Bank of
Canada totaling $1.2 million with expiration dates through March 18, 2010. As of
January 31, 2009, 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 $6.9 million and
$7.4 million at January 31, 2009 and 2008, respectively. As of
January 31, 2009, two European banks have guaranteed obligations to third
parties on behalf of two of the Company’s foreign subsidiaries in the amount of
$1.3 million in various foreign currencies. As of January 31, 2009,
there were no outstanding borrowings against these lines.
NOTE
6 – DERIVATIVE FINANCIAL INSTRUMENTS
As of
January 31, 2009, the balance of deferred net gains on derivative financial
instruments documented as cash flow hedges included in accumulated other
comprehensive income (“AOCI”) was $1.5 million in net gains, net of tax of $1.0
million, compared to $3.8 million in net gains at January 31, 2008, net of tax
of $2.5 million and $0.1 million in net losses at January 31, 2007, net of tax
benefit of $0.1 million. The Company estimates that a substantial portion of the
deferred net gains at January 31, 2009 will be realized into earnings over the
next 12 to 24 months as a result of transactions that are expected to occur over
that period. The primary underlying transaction which will cause the amount in
AOCI to affect cost of goods sold consists of the Company’s sell through of
inventory purchased 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. For the years ended January 31, 2009, 2008 and 2007,
the Company reclassified from AOCI to earnings $2.4 million of net gains, net of
tax of $1.6 million, $0.6 million in net gains, net of tax of $0.4 million, and
$0.1 million in net losses, net of tax benefit of $0.1 million,
respectively.
During
fiscal 2009, 2008 and 2007, the Company recorded no charge related to its
assessment of the effectiveness of its derivative hedge portfolio because of the
high degree of effectiveness between the hedging instrument and the underlying
exposure being hedged.
Changes in the contracts’ fair value due to spot-forward differences are
excluded from the designated hedge relationship. The Company records
these transactions in the cost of sales of the Consolidated Statements of
Income.
The
balance of the net loss included in the cumulative foreign currency translation
adjustment associated with derivatives documented as net investment hedges was
$1.5 million, net of a tax benefit of $0.9 million as of January 31,
2009, 2008 and 2007. Under SFAS No. 133, changes in fair value of
these instruments are recognized in currency translation adjustment, a component
of AOCI, to offset the change in the value of the net investment being
hedged.
The
following presents fair value and maturities of the Company’s foreign currency
derivatives outstanding as of January 31, 2009 (in millions):
|
|
Fair
Value of Liability
|
|
Maturities
|
|
|
|
|
|
Forward
exchange contracts
|
|
$ |
1.1 |
|
Fiscal
2010
|
|
|
|
|
|
|
The
Company estimates the fair value of its foreign currency derivatives based on
quoted market prices or pricing models using current market
rates. These derivative financial instruments are currently reflected
in accrued liabilities.
NOTE
7 - FAIR VALUE MEASUREMENTS
As of
February 1, 2008, the Company adopted SFAS No. 157, “Fair Value
Measurements”, for financial assets and liabilities. FSP No. FAS
157-2, “Effective Date of FASB Statement No. 157”, delays, for one year, the
effective date of SFAS No. 157 for non-financial assets and liabilities, except
those that are recognized or disclosed in the financial statements on at least
an annual basis. SFAS No. 157 defines fair value, establishes a
framework for measuring fair value, and expands disclosures about fair value
measurements. Fair value is defined as the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. SFAS No. 157 establishes
a fair value hierarchy which prioritizes the inputs used in measuring fair value
into three broad levels as follows:
· Level
1 - Quoted prices in active markets for identical assets or
liabilities.
|
·
|
Level
2 - Inputs, other than the quoted prices in active markets, that are
observable either directly or
indirectly.
|
|
·
|
Level
3 - Unobservable inputs based on the Company’s
assumptions.
|
SFAS No.
157 requires the use of observable market data if such data is available without
undue cost and effort. The Company’s adoption of SFAS No. 157
did not result in any changes to the accounting for its financial assets and
liabilities. Therefore, the primary impact to the Company upon its
adoption of SFAS No. 157 was to expand its fair value measurement
disclosures.
The
following table presents the fair value hierarchy for those assets and
liabilities measured at fair value on a recurring basis as of January 31, 2009
(in thousands):
|
|
Fair Value at January
31, 2009
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities
|
|
$ |
135 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
135 |
|
SERP
assets - employer
|
|
|
750 |
|
|
|
- |
|
|
|
- |
|
|
|
750 |
|
SERP
assets - employee
|
|
|
13,429 |
|
|
|
- |
|
|
|
- |
|
|
|
13,429 |
|
Total
|
|
$ |
14,314 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
14,314 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedge
derivatives
|
|
$ |
- |
|
|
$ |
1,120 |
|
|
$ |
- |
|
|
$ |
1,120 |
|
SERP
liabilities - employee
|
|
|
13,429 |
|
|
|
- |
|
|
|
- |
|
|
|
13,429 |
|
Total
|
|
$ |
13,429 |
|
|
$ |
1,120 |
|
|
$ |
- |
|
|
$ |
14,549 |
|
The fair
values of the Company’s available-for-sale securities are based on quoted
prices. Fair values of the Company’s hedge derivatives are calculated
based on quoted foreign exchange rates, quoted interest rates and market
volatility factors. The assets related to the Company’s defined
contribution supplemental executive retirement plan (“SERP”) consist of both
employer (employee unvested) and employee assets which are invested in
investment funds with fair values calculated based on quoted market
prices. The SERP liability represents the Company’s liability to the
employees in the plan for their vested balances.
NOTE
8 - INCOME TAXES
The
provision / (benefit) for income taxes for the fiscal years ended January 31,
2009, 2008 and 2007 consists of the following components (in
thousands):
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Current:
|
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
$ |
(7,891 |
) |
|
$ |
3,414 |
|
|
$ |
8,168 |
|
U.S. State and
Local
|
|
|
249 |
|
|
|
1,681 |
|
|
|
1,147 |
|
Non-U.S.
|
|
|
4,001 |
|
|
|
5,672 |
|
|
|
4,168 |
|
|
|
|
(3,641 |
) |
|
|
10,767 |
|
|
|
13,483 |
|
Noncurrent:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
|
450 |
|
|
|
(10,635 |
) |
|
|
509 |
|
U.S. State and
Local
|
|
|
- |
|
|
|
- |
|
|
|
(89 |
) |
Non-U.S.
|
|
|
- |
|
|
|
(963 |
) |
|
|
- |
|
|
|
|
450 |
|
|
|
(11,598 |
) |
|
|
420 |
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
|
4,386 |
|
|
|
(5,214 |
) |
|
|
(3,972 |
) |
U.S. State and
Local
|
|
|
294 |
|
|
|
(1,307 |
) |
|
|
(366 |
) |
Non-U.S.
|
|
|
(753 |
) |
|
|
(2,119 |
) |
|
|
(6,675 |
) |
|
|
|
3,927 |
|
|
|
(8,640 |
) |
|
|
(11,013 |
) |
Provision
/ (benefit) for income taxes
|
|
$ |
736 |
|
|
$ |
(9,471 |
) |
|
$ |
2,890 |
|
(Loss) /
income before taxes for U.S. operations was ($29.0 million), ($4.3 million), and
$12.9 million for periods ended January 31, 2009, 2008 and 2007,
respectively. Income before taxes for non-U.S. operations was $32.3
million, $56.2 million, and $39.8 million for periods ended January 31, 2009,
2008 and 2007, respectively.
Significant
components of the Company's deferred income tax assets and liabilities for the
fiscal year ended January 31, 2009 and 2008 consist of the following (in
thousands):
|
|
2009
Deferred Taxes
|
|
|
2008
Deferred Taxes
|
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Assets
|
|
|
Liabilities
|
|
Net
operating loss carryforwards
|
|
$ |
15,948 |
|
|
$ |
- |
|
|
$ |
17,364 |
|
|
$ |
- |
|
Inventory
|
|
|
4,829
|
|
|
|
- |
|
|
|
5,957
|
|
|
|
- |
|
Unprocessed
returns |
|
|
1,366 |
|
|
|
- |
|
|
|
5,703 |
|
|
|
- |
|
Receivable
allowance
|
|
|
2,188 |
|
|
|
493 |
|
|
|
2,396 |
|
|
|
715 |
|
Deferred
compensation
|
|
|
12,853
|
|
|
|
-
|
|
|
|
10,435
|
|
|
|
- |
|
Unrepatriated
earnings |
|
|
- |
|
|
|
7,135 |
|
|
|
- |
|
|
|
- |
|
Hedge
derivatives
|
|
|
- |
|
|
|
958 |
|
|
|
- |
|
|
|
2,533 |
|
Depreciation/amortization
|
|
|
8,264 |
|
|
|
3,122 |
|
|
|
1,641 |
|
|
|
1,124 |
|
Other
|
|
|
2,507 |
|
|
|
30 |
|
|
|
2,392 |
|
|
|
53 |
|
|
|
|
47,955 |
|
|
|
11,738 |
|
|
|
45,888 |
|
|
|
4,425 |
|
Valuation
allowance
|
|
|
(7,641 |
) |
|
|
- |
|
|
|
(10,689 |
) |
|
|
- |
|
Total
deferred tax assets and liabilities
|
|
$ |
40,314 |
|
|
$ |
11,738 |
|
|
$ |
35,199 |
|
|
$ |
4,425 |
|
As of
January 31, 2009, the Company had foreign net operating loss carryforwards of
approximately $32.3 million, which are available to offset taxable income in
future years. Carryforward tax losses of $15.8 million were incurred
in Switzerland, primarily in the Ebel business prior to the Company’s
acquisition of the Ebel business on March 1, 2004. Effective March 1,
2004, Ebel S.A. was merged into another wholly-owned Swiss subsidiary, and a
Swiss tax ruling was obtained that allows the Ebel tax losses to offset taxable
income in the surviving entity. As part of purchase accounting, the
Company recorded net deferred tax assets for the Swiss tax losses and for the
temporary differences between the Swiss tax basis and the assigned values of the
net Ebel assets. The Company has established a partial valuation
allowance on the deferred tax assets as a result of an evaluation of expected
utilization of such tax benefits within the expiry of the tax losses through
fiscal 2016. The recognition of the tax benefit had been applied to reduce the
carrying value of acquired intangible assets to zero during fiscal 2007;
thereafter releases of the valuation allowance have been recorded as a reduction
to income tax expense. The Company recognized cash tax savings of $10.0 million
on the utilization of the Swiss tax losses during the year, and released an
additional $4.2 million valuation allowance, primarily due to the Company’s
decision to implement a tax planning strategy.
The
remaining foreign tax losses of $16.5 million are primarily related to the
Company’s operations in Japan, Germany, and the United Kingdom. A full valuation
allowance has been established on the deferred tax assets resulting from the
losses attributable to Japan due to the Company’s assessment that it is
more-likely-than-not the deferred tax assets will not be utilized within the 7
year expiry period. The Company has three subsidiaries in Germany.
Two subsidiaries are inactive; as a result the Company has determined that a
full valuation allowance is appropriate for the losses of these two
subsidiaries, even though there is no time limitation for utilization of the
losses. The third German subsidiary is currently not profitable and
further, certain expected changes in the business prevent management
from
concluding
it is more-likely-than-not the subsidiary will return to profitability in the
future. During fiscal 2009 the Company’s United Kingdom operations returned to a
loss position and the Company concluded it was more-likely-than-not the deferred
tax assets would not be realized. As a result, the Company reinstated
a full valuation allowance.
As of
January 31, 2009, the Company had domestic net operating loss carryforwards of
approximately $20.2 million, of which $2.3 million relates to excess tax
deductions associated with stock option plans which have yet to reduce income
taxes payable. Upon the utilization of these carryforwards, the
associated tax benefits of approximately $0.9 million will be recorded to
Additional Paid-in Capital.
At
January 31, 2009, the Company’s net domestic deferred tax assets amounted to
$20.8 million. Management has considered the realizability of the
deferred tax assets and has concluded that no valuation allowance should be
recorded, as it is not-more-likely-than-not that some portion or all of the
deferred tax assets will not be fully realized. In the
assessment for a valuation allowance, appropriate consideration is given to all
positive and negative evidence related to the realization of the deferred tax
assets. This assessment considers, among other matters, the nature,
frequency and severity of current and cumulative losses, forecasts of future
profitability, excess of appreciated asset value over the tax basis of net
assets, the duration of statutory carryforward periods, the Company’s experience
with operating loss and tax credit carryforwards not expiring unused, and tax
planning alternatives. The Company’s analysis of the need for a
valuation allowance recognizes that the Company has incurred a cumulative loss
for its domestic operations over its evaluation period (current year and the two
previous years), including a substantial loss for fiscal 2009. A
majority of the current loss was the result of the difficult market conditions,
as well as restructuring and impairment charges. The Company believes
it will be able to realize all of its deferred tax
assets. Consideration has also been given to the period over which
these net deferred tax assets can be realized, and the Company’s history of not
having federal tax loss carryforwards expire unused. In addition,
Management has considered a tax planning strategy that is both prudent and
feasible that will be implemented in a timely manner, if necessary, which will
allow the Company to recognize the future tax attributes by increasing taxable
income in the United States.
Management
will continue to evaluate the appropriate level of allowance on all deferred tax
assets, considering such factors as prior earnings history, expected future
earnings, carryback and carryforward periods, and tax and business strategies
that could potentially enhance the likelihood of realization of a deferred tax
asset.
The
provision / (benefit) for income taxes differ from the amount determined by
applying the U.S. federal statutory rate as follows (in thousands):
|
|
Fiscal
Year Ended January 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes at the U.S. statutory rate
|
|
$ |
1,151 |
|
|
$ |
18,188 |
|
|
$ |
18,607 |
|
Lower
effective foreign income tax rate
|
|
|
(5,458 |
) |
|
|
(9,303 |
) |
|
|
(5,359 |
) |
Change
in valuation allowance
|
|
|
(2,611 |
) |
|
|
(7,292 |
) |
|
|
(11,182 |
) |
Tax
provided on repatriated earnings of foreign subsidiaries
|
|
|
165 |
|
|
|
- |
|
|
|
- |
|
Tax
provided on unrepatriated earnings of foreign subsidiaries
|
|
|
7,388 |
|
|
|
- |
|
|
|
- |
|
Change
in unrecognized tax benefits, net
|
|
|
450 |
|
|
|
(11,598 |
) |
|
|
- |
|
State
and local taxes, net of federal benefit
|
|
|
456 |
|
|
|
(214 |
) |
|
|
379 |
|
Change
in investment
|
|
|
(785 |
) |
|
|
- |
|
|
|
- |
|
Other,
net
|
|
|
(20 |
) |
|
|
748 |
|
|
|
445 |
|
Total
provision / (benefit) for income taxes
|
|
$ |
736 |
|
|
$ |
(9,471 |
) |
|
$ |
2,890 |
|
A
provision of approximately $7.4 million has been made for federal income and
withholding taxes, net of foreign tax credits, on the future remittance of
approximately $30.0 million total undistributed retained earnings of two foreign
subsidiaries. No provision has been made for federal income or
withholding taxes which may be payable on the remittance of the remaining
undistributed retained earnings of foreign subsidiaries approximating $210.1
million at January 31, 2009, as those earnings are considered permanently
reinvested. It is not practical to estimate the amount of tax, if
any, that may be payable on the eventual distribution of these
earnings.
During
the year, the effective tax rate increased to 22.38%, primarily as a result of
the tax accrued on the future repatriation of foreign earnings, and a smaller
net benefit compared to prior years on the release of valuation allowances on
foreign tax losses. The effective tax rate excluding the benefit from the net
release of valuation allowances and the tax accrued on the future repatriation
of foreign earnings was -122.89%, primarily attributable to the income (loss)
mix. The effective tax rate for fiscal 2008 was -18.23%, primarily as a result
of the recognition of previously unrecognized tax benefits due to the settlement
of the IRS audit for fiscal years 2004 through 2006, and the release of
valuation allowances in whole or in part on Swiss, German and UK tax losses. The
effective tax rate excluding the benefits from release of the valuation
allowances and the settlement of the IRS audit was 20.62%. The
effective tax rate for fiscal 2007 was 5.44%, primarily as a result of a partial
release of the valuation allowance on the Swiss tax losses. The
effective tax rate excluding the benefit from release of the valuation allowance
was 23.26%.
The
Company adopted the provisions of FIN 48, “Accounting for Uncertainty in Income
Taxes”, on February 1, 2007. FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprise’s financial statements
in accordance with FASB Statement No. 109, Accounting for Income
Taxes. FIN 48 also prescribes a recognition threshold and measurement
standard for the financial statement recognition and measurement of an income
tax position taken or expected to be taken in a tax return. FIN 48
also provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosures and transitions.
The
Internal Revenue Service (“IRS”) commenced examinations of the Company’s
consolidated U.S. federal income tax returns for fiscal years 2004 through 2006
in September 2006. The examination phase concluded in January 2008,
when the Company and the IRS came to a final agreement that resulted in the
effective settlement of all three years. Pursuant to the settlement, the Company
agreed to a total tax assessment for the three years of $3.3 million ($4.8
million gross less $1.5 million foreign tax credits). During the
first quarter of fiscal 2009, the Company settled the liability with a cash
payment.
A
reconciliation of the beginning and ending amounts of gross unrecognized tax
benefits (exclusive of interest) for January 31, 2009 and 2008 are as follows
(in thousands):
|
|
2009
|
|
|
2008
|
|
Beginning
balance
|
|
$ |
10,089 |
|
|
$ |
30,052 |
|
Additions
based on tax positions related to the current year
|
|
|
- |
|
|
|
477 |
|
Additions
for tax positions of prior years
|
|
|
184 |
|
|
|
1,915 |
|
Lapse
of statute of limitations
|
|
|
(6 |
) |
|
|
(1,051 |
) |
Decreases
for tax positions of prior years
|
|
|
(65 |
) |
|
|
(21,153 |
) |
Cash
settlements
|
|
|
(4,761 |
) |
|
|
(186 |
) |
F/X
fluctuations
|
|
|
(22 |
) |
|
|
35 |
|
Ending
balance
|
|
$ |
5,419 |
|
|
$ |
10,089 |
|
Included
in the balance at January 31, 2009 is $2.8 million of unrecognized tax benefits
which would impact the Company’s effective tax rate, if
recognized. Interest and penalties, if any, related to unrecognized
tax benefits are recorded in income tax expense. As of January 31,
2009 and January 31, 2008, the Company had $1.0 million and $1.3 million of
accrued interest (net of tax benefit) related to unrecognized tax benefits.
During fiscal years 2009 and 2008, the Company accrued $0.3 million and $1.0
million of interest (net of tax benefit).
The
Company conducts business globally and, as a result, files income tax returns in
the U.S. federal jurisdiction and various state, local 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, with few exceptions, is no longer subject to
income tax examinations by tax authorities in state, local and foreign taxing
jurisdictions for years before the fiscal year ended January 31,
2005.
NOTE
9 - OTHER ASSETS
In fiscal
1996, the Company entered into an agreement with a trust which owned an
insurance policy issued on the lives of the Company's Chairman, Mr. Gedalio
Grinberg (“Mr. G. Grinberg”), and his spouse. Under this agreement, the trust
assigned the insurance policy to the Company as collateral to secure repayment
by the trust of interest-free loans made by the Company to the trust in amounts
equal to the premiums on said insurance policy (approximately $0.7 million per
annum). The agreement required the trust to repay the loans from the proceeds of
the policy. At January 31, 2003, the Company had outstanding loans from the
trust of $5.2 million. On April 4, 2003, the agreement was amended and restated
to transfer the policy from the trust to the Company in partial repayment of the
loan balance. The Company is the beneficiary of the policy insofar as upon the
death of Mr. G. Grinberg and his spouse, the proceeds of the policy would first
be distributed to the Company to repay the premiums paid by the Company with the
remaining proceeds distributed to the trust. On January 5, 2009, the
Company
announced
the passing of Mr. G. Grinberg. As of January 31, 2009, total
premiums paid were $10.4 million, recorded as an Other Non-Current Asset in the
Company’s Consolidated Balance Sheets, and the cash surrender value of the
policy was $11.6 million.
NOTE
10 – LEASES
The
Company leases office, distribution, retail and manufacturing facilities, and
office equipment under operating leases, which expire at various dates through
January 2019. Certain leases include renewal options and the payment
of real estate taxes and other occupancy costs. Some leases also contain
rent escalation clauses (step rents) that require additional rent amounts in the
later years of the term. Rent expense for leases with step rents is
recognized on a straight-line basis over the minimum lease term. Likewise,
capital funding and other lease concessions that are occasionally provided to
the Company, are recorded as deferred rent and amortized on a straight-line
basis over the minimum lease term as adjustments to rent
expense. Rent expense for equipment and distribution, factory and
office facilities under operating leases was approximately $17.4 million, $16.8
million and $14.4 million in fiscal 2009, 2008 and 2007,
respectively. Minimum annual rentals at January 31, 2009 under
noncancelable operating leases, which do not include real estate taxes and
operating costs, are as follows (in thousands):
Fiscal
Year Ended January 31,
|
|
|
|
|
|
2010
|
|
$ |
15,013 |
|
2011
|
|
|
14,512 |
|
2012
|
|
|
13,747 |
|
2013
|
|
|
11,512 |
|
2014
|
|
|
8,745 |
|
Thereafter
|
|
|
22,062 |
|
|
|
$ |
85,591 |
|
NOTE
11 – COMMITMENTS AND CONTINGENCIES
At
January 31, 2009, the Company had outstanding letters of credit totaling $1.2
million with expiration dates through March 18, 2010 compared to $1.2 million
with expiration dates through March 18, 2009 as of January 31,
2008. One bank in the domestic bank group has issued irrevocable
standby letters of credit for retail and operating facility leases to various
landlords, for the administration of the Movado Boutique private-label credit
card and for Canadian payroll to the Royal Bank of Canada.
As of
January 31, 2009, two European banks have guaranteed obligations to third
parties on behalf of two of the Company’s foreign subsidiaries in the amount of
$1.3 million in various foreign currencies compared to $2.1 million as of
January 31, 2008.
Pursuant
to the Company’s agreements with its licensors, the Company is required to pay
minimum royalties and advertising. As of January 31, 2009, the
Company’s minimum commitments related to its license agreements was $93.7
million.
The
Company had outstanding purchase obligations of $35.9 million with suppliers at
the end of fiscal 2009 for raw materials, finished watches and packaging in the
normal course of business. These purchase obligation amounts do not
represent total anticipated purchases but represent only amounts to be paid for
items required to be purchased under agreements that are enforceable, legally
binding and specify minimum quantity, price and term.
The
Company is involved from time to time in legal claims involving trademarks and
intellectual property, licensing, employee relations and other matters
incidental to the Company’s business. Although the outcome of such
items cannot be determined with certainty, the Company’s general counsel and
management believe that the final outcome would not have a material effect on
the Company’s consolidated financial position, results of operations or cash
flows.
NOTE
12 – STOCK-BASED COMPENSATION
Effective
concurrently with the consummation of the Company's public offering in the
fourth quarter of fiscal 1994, the Board of Directors and the shareholders of
the Company approved the adoption of the Movado Group, Inc. 1993 Employee Stock
Option Plan (the "Employee Stock Option Plan") for the benefit of certain
officers, directors and key employees of the Company. The Employee Stock Option
Plan was amended in fiscal 1997 and restated as the Movado Group, Inc. 1996
Stock Incentive Plan (the "Plan"). Under the Plan, as amended and restated as of
April 8, 2004, the Compensation Committee of the Board of Directors, which
consists of four of the Company's outside directors, has the authority to grant
incentive stock options and nonqualified stock options to purchase, as well as
stock appreciation rights and stock awards, up to 9,000,000 shares of common
stock. Options granted to participants under the Plan generally become
exercisable in equal installments over three or five years and remain
exercisable until the tenth anniversary of the date of grant. The option price
may not be less than the fair market value of the stock at the time the options
are granted.
On
February 1, 2006, the Company adopted the provisions of SFAS No. 123(R),
“Share-Based Payment”, electing to use the modified prospective application
transition method, and accordingly, prior period financial statements have not
been restated. Under this method, the fair value of all stock options
granted after adoption and the unvested portion of previously granted awards
must be recognized in the Consolidated Statements of Income. The
Company utilizes the Black-Scholes option-pricing model to calculate the fair
value of each option at the grant date which requires certain assumptions be
made. The expected life of stock option grants is determined using
historical data and represents the time period which the stock option is
expected to be outstanding until it is exercised. The risk free
interest rate is the yield on
the grant date of U.S. Treasury constant maturities with a maturity date closest
to the expected life of the stock option. The expected stock price
volatility is derived from historical volatility and calculated based on the
estimated term structure of the stock option grant. The expected
dividend yield is calculated using the expected annualized dividend which
remains constant during the expected term of the option.
The
weighted-average assumptions used with the Black-Scholes option-pricing model
for the calculation of the fair value of stock option grants during the fiscal
years 2009 and 2008 were: expected term of 6.9 years for fiscal 2009 and 6.0
years for fiscal 2008; risk-free interest rate of 3.41% for fiscal 2009 and
4.32% for fiscal 2008; expected volatility of 37.83% for fiscal 2009 and 35.32%
for fiscal 2008 and dividend yield of 1.45% for fiscal 2009 and 1.03% for fiscal
2008. The weighted-average grant date fair value of options granted
during the fiscal years ended January 31, 2009 and 2008 was $8.45 and $12.06,
respectively.
Total
compensation expense for unvested stock option grants recognized during the
fiscal years ended January 31, 2009 and 2008 was approximately $0.5 million, net
of a tax benefit of $0.3 million and $1.1 million, net of a tax benefit of $0.7
million, respectively. Expense related to stock option compensation
is recognized on a straight-line basis over the vesting term. As of
January 31, 2009, there was approximately $1.3 million of unrecognized
compensation cost related to unvested stock options. These costs are
expected to be recognized over a weighted-average period of 1.6
years. Total cash received for stock option exercises during the
fiscal year ended January 31, 2009 amounted to approximately $2.5
million. Windfall tax benefits realized on these exercises were
approximately $0.5 million.
Transactions
for stock options under the Plan since fiscal 2006 are summarized as
follows:
|
|
Outstanding
|
|
|
Weighted-Average
|
|
|
|
Options
|
|
|
Exercise
Price
|
|
|
|
|
|
|
|
|
January
31, 2006
|
|
|
3,169,613 |
|
|
$ |
12.96 |
|
Options
granted
|
|
|
144,000 |
|
|
$ |
19.86 |
|
Options
exercised
|
|
|
(430,873 |
) |
|
$ |
8.96 |
|
Options
cancelled
|
|
|
(28,800 |
) |
|
$ |
13.85 |
|
January
31, 2007
|
|
|
2,853,940 |
|
|
$ |
13.91 |
|
Options
granted
|
|
|
89,500 |
|
|
$ |
31.57 |
|
Options
exercised
|
|
|
(269,319 |
) |
|
$ |
12.64 |
|
Options
cancelled
|
|
|
(20,666 |
) |
|
$ |
14.18 |
|
January
31, 2008
|
|
|
2,653,455 |
|
|
$ |
14.63 |
|
Options
granted
|
|
|
109,250 |
|
|
$ |
21.78 |
|
Options
exercised
|
|
|
(229,307 |
) |
|
$ |
11.97 |
|
Options
cancelled
|
|
|
(85,832 |
) |
|
$ |
12.45 |
|
January
31, 2009
|
|
|
2,447,566 |
|
|
$ |
15.27 |
|
The total
intrinsic value of stock options exercised for the fiscal years ended January
31, 2009 and 2008 was approximately $2.4 million and $5.3 million,
respectively. The total fair value of the stock options vested for
the fiscal years ended January 31, 2009 and 2008 was approximately $5.2 million
and $8.7 million, respectively.
The
following table summarizes outstanding and exercisable stock options as of
January 31, 2009:
Range
of Exercise Prices
|
|
|
Number
Outstanding
|
|
|
Weighted-Average
Remaining Contractual Life (years)
|
|
|
Weighted-Average
Exercise Price
|
|
|
Number
Exercisable
|
|
|
Weighted-Average
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3.02 |
|
|
|
- |
|
|
$ |
6.01 |
|
|
|
98,740 |
|
|
|
1.3 |
|
|
$ |
4.25 |
|
|
|
98,740 |
|
|
$ |
4.25 |
|
$ |
6.02 |
|
|
|
- |
|
|
$ |
9.01 |
|
|
|
78,066 |
|
|
|
2.1 |
|
|
$ |
7.25 |
|
|
|
78,066 |
|
|
$ |
7.25 |
|
$ |
9.02 |
|
|
|
- |
|
|
$ |
12.01 |
|
|
|
490,122 |
|
|
|
1.2 |
|
|
$ |
10.44 |
|
|
|
490,122 |
|
|
$ |
10.44 |
|
$ |
12.02 |
|
|
|
- |
|
|
$ |
15.01 |
|
|
|
301,044 |
|
|
|
4.6 |
|
|
$ |
13.69 |
|
|
|
224,382 |
|
|
$ |
13.69 |
|
$ |
15.02 |
|
|
|
- |
|
|
$ |
18.01 |
|
|
|
703,417 |
|
|
|
2.7 |
|
|
$ |
15.65 |
|
|
|
675,088 |
|
|
$ |
15.59 |
|
$ |
18.02 |
|
|
|
- |
|
|
$ |
21.01 |
|
|
|
568,427 |
|
|
|
4.3 |
|
|
$ |
18.47 |
|
|
|
532,096 |
|
|
$ |
18.45 |
|
$ |
21.02 |
|
|
|
- |
|
|
$ |
24.01 |
|
|
|
108,750 |
|
|
|
9.2 |
|
|
$ |
22.27 |
|
|
|
3,918 |
|
|
$ |
23.55 |
|
$ |
24.02 |
|
|
|
- |
|
|
$ |
27.01 |
|
|
|
25,000 |
|
|
|
7.7 |
|
|
$ |
25.85 |
|
|
|
16,667 |
|
|
$ |
25.85 |
|
$ |
27.02 |
|
|
|
- |
|
|
|
+ |
|
|
|
74,000 |
|
|
|
8.3 |
|
|
$ |
32.92 |
|
|
|
31,001 |
|
|
$ |
32.90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,447,566 |
|
|
|
3.5 |
|
|
$ |
15.27 |
|
|
|
2,150,080 |
|
|
$ |
14.45 |
|
The total
intrinsic value of outstanding stock options for the fiscal years ended January
31, 2009 and 2008 was approximately $0.4 million and $25.4 million,
respectively. The total intrinsic value of exercisable stock options
for the fiscal years ended January 31, 2009 and 2008 was approximately $0.4
million and $23.2 million, respectively.
Under the
Plan, the Company has the ability to grant restricted stock to certain
employees. Restricted stock grants generally vest three to five years
from the date of grant. Expense for these grants is recognized on a
straight-line basis over the vesting period. The fair value of
restricted stock grants is equal to the closing price of the Company’s
publicly-traded common stock on the grant date.
On May
31, 2006, the Compensation Committee of the Board of Directors adopted the
Executive Long Term Incentive Plan (the “LTIP”) authorized by section 9 of the
Plan. The LTIP provides for the award of “Performance Share Units”
that are equivalent, one for one, to shares of the Company’s common stock and
that vest based on the Company’s achievement of its operating margin goal for a
target fiscal year. The number of actual shares earned by a
participant is based on the Company’s actual performance at the end of the award
period and can range from 0% to 150% of the participant’s target
award. Total target awards of 189,500, 119,375, and 176,200
Performance Share Units were granted by the Compensation Committee on May 31,
2006, April 30, 2007, and April 30, 2008, respectively, that vest over three and
five year periods.
During
fiscal 2009, as a result of the Company’s performance, it became apparent that
the performance goals for certain LTIP grants would not be achieved. This
resulted in the reversal of previously accrued stock-based compensation expenses
of approximately $3.2 million. Total compensation expense for restricted
stock grants and for grants of Performance Share Units under the LTIP (together
“restricted stock”) recognized during the fiscal year ended January 31, 2009,
including the reversal of the aforementioned LTIP grants, was a benefit of
approximately $0.4 million, net of a tax of $0.2 million. For the fiscal
year ended January 31, 2008, compensation expense for restricted stock was
approximately $1.9 million, net of a tax benefit of $1.2 million. Prior to
February 1, 2006, compensation expense for restricted stock grants was reduced
as actual forfeitures of the awards
occurred.
SFAS No. 123(R) requires forfeitures to be estimated at the time of grant in
order to estimate the amount of share-based awards that will ultimately vest and
thus, current period compensation expense has been adjusted for estimated
forfeitures based on historical data. As of January 31, 2009, there was
approximately $3.4 million of unrecognized compensation cost related to unvested
restricted stock. These costs are expected to be recognized over a
weighted-average period of 2.8 years.
Transactions
for restricted stock under the Plan since fiscal 2006 are summarized as
follows:
|
|
Number
of Restricted Stock Units
|
|
|
Weighted-
Average Grant Date Fair Value
|
|
|
|
|
|
|
|
|
January
31,2006
|
|
|
321,090 |
|
|
$ |
14.39 |
|
Units
granted
|
|
|
255,450 |
|
|
$ |
19.02 |
|
Units
vested
|
|
|
(102,940 |
) |
|
$ |
10.01 |
|
Units
forfeited
|
|
|
(10,255 |
) |
|
$ |
16.78 |
|
January
31, 2007
|
|
|
463,345 |
|
|
$ |
17.87 |
|
Units
granted
|
|
|
164,185 |
|
|
$ |
32.06 |
|
Units
vested
|
|
|
(113,410 |
) |
|
$ |
15.28 |
|
Units
forfeited
|
|
|
(17,390 |
) |
|
$ |
18.84 |
|
January
31, 2008
|
|
|
496,730 |
|
|
$ |
23.12 |
|
Units
granted
|
|
|
220,521 |
|
|
$ |
21.69 |
|
Units
vested
|
|
|
(95,226 |
) |
|
$ |
18.74 |
|
Units
forfeited
|
|
|
(55,571 |
) |
|
$ |
25.20 |
|
January
31, 2009
|
|
|
566,454 |
|
|
$ |
23.09 |
|
Restricted
stock units are exercised simultaneously when they vest and are issued from the
pool of authorized shares. The total intrinsic value of restricted stock
units that vested during the fiscal years ended January 31, 2009 and 2008 was
approximately $1.7 million and $3.5 million, respectively. The windfall tax
realized on the vested restricted stock grants for fiscal year ended January 31,
2009 were $0.2 million. The weighted-average grant date fair values for
restricted stock grants for the years ended January 31, 2009 and 2008 were
$21.69 and $32.06, respectively. Outstanding restricted stock units
had a total intrinsic value of approximately $4.4 million and $12.0 million for
fiscal years ended January 31, 2009 and 2008.
NOTE
13 – OTHER EMPLOYEE BENEFITS PLANS
The
Company maintains an Employee Savings Plan under Section 401(k) of the Internal
Revenue Code. In addition, the Company maintains defined contribution
employee benefit plans for its employees located in
Switzerland. Company contributions and expenses of administering the
plans amounted to $2.8 million, $2.5 million and $2.4 million in fiscal 2009,
2008 and 2007, respectively.
Effective
June 1, 1995, the Company adopted a defined contribution SERP. The SERP provides
eligible executives with supplemental pension benefits in addition to amounts
received under the Company's other retirement plan. The Company makes a matching
contribution which vests equally over five years. During fiscal 2009, 2008 and
2007, the Company recorded an expense related to the SERP of $0.8 million, $0.8
million and $0.7 million, respectively.
During
fiscal 1999, the Company adopted a Stock Bonus Plan for all employees not in the
SERP. Under the terms of this Stock Bonus Plan, the Company
contributes a discretionary amount to the trust established under the
plan. Each plan participant vests after five years in 100% of their
respective prorata portion of such contribution. Effective for fiscal
2006, in lieu of making any further contributions to the Stock Bonus Plan, the
Company increased the maximum amount of its 401(k) match.
On
September 23, 1994, the Company entered into a Death and Disability Benefit Plan
Agreement (the “Prior Agreement”) with the Company's Chairman, Mr. Gedalio
Grinberg. Under the terms of the agreement, in the event of Mr. G.
Grinberg's death or disability, the Company was required to make an annual
benefit payment of approximately $0.3 million to his spouse for the lesser of
ten years or her remaining lifetime. Neither the agreement nor the benefits
payable thereunder were assignable and no benefits were payable to the estates
or heirs of Mr. G. Grinberg or his spouse. On December 19, 2008, the
Company entered into a Transition and Retirement Agreement (the “Agreement”)
with Mr. G. Grinberg. Upon the effective date of the Agreement, the
Prior Agreement was terminated. The Agreement stipulates that upon
his retirement on January 31, 2009, Mr. G. Grinberg, or his spouse if he
predeceases her, would receive a payment of $0.6 million for the year ending
January 31, 2010, and annual payments of $0.5 million for each year thereafter
through the life of Mr. G. Grinberg and, if he predeceases his spouse, through
the life of his spouse. On January 5, 2009, the Company announced the
passing of Mr. G. Grinberg. For the year ending January 31, 2009, the
Company recorded an actuarially determined charge of $2.4 million related to the
Agreement. This charge was included as part of the $11.1 million
severance related charge associated with the Company’s streamlining
initiatives. Results of operations for fiscal 2008 and 2007 include
an actuarially determined charge related to the Prior Agreement of $0.3 million
and $0.2 million, respectively. As of January 31, 2009, a $4.5
million liability was recorded in the Company’s Consolidated Balance Sheets
related to the Agreement, of which $0.6 million was recorded in Accrued
Liabilities, and $3.9 million was recorded in Other Non-Current
Liabilities. As of January 31, 2008, a $1.8 million liability was
recorded in Other Non-Current Liabilities in the Company’s Consolidated Balance
Sheets related to the Prior Agreement.
NOTE
14 – COMPREHENSIVE (LOSS) / INCOME
The
components of comprehensive (loss) / income for the twelve months ended January
31, 2009, 2008 and 2007 are as follows (in thousands):
|
|
Fiscal
Year Ended January 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Net
income
|
|
$ |
2,315 |
|
|
$ |
60,805 |
|
|
$ |
50,138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized (loss) / gain on investments, net of tax
|
|
|
(190 |
) |
|
|
(176 |
) |
|
|
42 |
|
Net
change in effective portion of hedging contracts, net of
tax
|
|
|
(2,266 |
) |
|
|
3,942 |
|
|
|
1,246 |
|
Foreign
currency translation adjustment (1)
|
|
|
(19,692 |
) |
|
|
29,817 |
|
|
|
3,346 |
|
Total
comprehensive (loss) / income
|
|
$ |
(19,833 |
) |
|
$ |
94,388 |
|
|
$ |
54,772 |
|
(1) The
currency translation adjustment is not adjusted for income taxes as they relate
to permanent investments in international subsidiaries.
The
components of accumulated other comprehensive income at January 31, consisted of
the following (in thousands):
|
|
Fiscal
Year Ended
|
|
|
|
January
31,
|
|
|
|
2009
|
|
|
2008
|
|
Net
unrealized (loss) / gain on investments, net of tax
|
|
$ |
(34 |
) |
|
$ |
156 |
|
Net
unrealized gain on hedging contracts, net of tax
|
|
|
1,485 |
|
|
|
3,751 |
|
Cumulative
foreign currency translation adjustment
|
|
|
42,291 |
|
|
|
61,983 |
|
Accumulated
other comprehensive income
|
|
$ |
43,742 |
|
|
$ |
65,890 |
|
NOTE
15 – SEGMENT INFORMATION
The
Company follows SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information." The 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 as of and for the Fiscal Year Ended January 31, (in
thousands):
|
|
Net
Sales
|
|
|
Operating
Income / (Loss) (1) (2)
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Wholesale
|
|
$ |
371,349 |
|
|
$ |
466,431 |
|
|
$ |
445,674 |
|
|
$ |
8,702 |
|
|
$ |
50,210 |
|
|
$ |
48,132 |
|
Retail
|
|
|
89,508 |
|
|
|
93,119 |
|
|
|
87,191 |
|
|
|
(5,312 |
) |
|
|
567 |
|
|
|
4,187 |
|
Consolidated
total
|
|
$ |
460,857 |
|
|
$ |
559,550 |
|
|
$ |
532,865 |
|
|
$ |
3,390 |
|
|
$ |
50,777 |
|
|
$ |
52,319 |
|
|
|
Total
Assets
|
|
|
Capital
Expenditures
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Wholesale
|
|
$ |
515,517 |
|
|
$ |
580,665 |
|
|
$ |
20,051 |
|
|
$ |
19,684 |
|
|
$ |
12,757 |
|
Retail
|
|
|
48,473 |
|
|
|
65,551 |
|
|
|
2,630 |
|
|
|
7,708 |
|
|
|
7,421 |
|
Consolidated
total
|
|
$ |
563,990 |
|
|
$ |
646,216 |
|
|
$ |
22,681 |
|
|
$ |
27,392 |
|
|
$ |
20,178 |
|
|
|
Depreciation
and Amortization
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Wholesale
|
|
$ |
12,047 |
|
|
$ |
11,466 |
|
|
$ |
11,617 |
|
Retail
|
|
|
6,410 |
|
|
|
5,218 |
|
|
|
4,963 |
|
Consolidated
total
|
|
$ |
18,457 |
|
|
$ |
16,684 |
|
|
$ |
16,580 |
|
Geographic
Segment Data as of and for the Fiscal Year Ended January 31, (in
thousands):
|
|
Net
Sales (3)
|
|
|
Operating
(Loss) Income (1) (2)
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
United
States
|
|
$ |
255,337 |
|
|
$ |
328,212 |
|
|
$ |
366,656 |
|
|
$ |
(31,264 |
) |
|
$ |
(18,066 |
) |
|
$ |
7,704 |
|
International
|
|
|
205,520 |
|
|
|
231,338 |
|
|
|
166,209 |
|
|
|
34,654 |
|
|
|
68,843 |
|
|
|
44,615 |
|
Consolidated
total
|
|
$ |
460,857 |
|
|
$ |
559,550 |
|
|
$ |
532,865 |
|
|
$ |
3,390 |
|
|
$ |
50,777 |
|
|
$ |
52,319 |
|
|
|
Total
Assets
|
|
|
Long-Lived
Assets
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
United
States
|
|
$ |
289,567 |
|
|
$ |
341,846 |
|
|
$ |
50,369 |
|
|
$ |
51,544 |
|
International
|
|
|
274,423 |
|
|
|
304,370 |
|
|
|
16,380 |
|
|
|
16,969 |
|
Consolidated
total
|
|
$ |
563,990 |
|
|
$ |
646,216 |
|
|
$ |
66,749 |
|
|
$ |
68,513 |
|
(1)
|
Fiscal
2009 Wholesale Operating Income included an $11.1 million charge related
to the Company’s cost savings initiatives and a restructuring of certain
benefit arrangements, of which $7.4 million was recorded in the United
States and $3.7 million was recorded in the International
segment.
|
(2)
|
Fiscal
2009 United States and Retail Operating Loss includes a non-cash
impairment charge of $4.5 million recorded in accordance with SFAS No.
144, “Accounting for the Impairment or Disposal of Long-Lived
Assets”.
|
(3)
|
The
United States and international net sales are net of intercompany sales of
$253.3 million, $275.2 million and $258.3 million for the twelve months
ended January 31, 2009, 2008 and 2007,
respectively.
|
NOTE
16 - QUARTERLY FINANCIAL DATA (UNAUDITED)
The
following table presents unaudited selected interim operating results of the
Company for fiscal 2009 and 2008 (in thousands, except per share
amounts):
|
|
Quarter
|
|
|
|
1st
|
|
|
2nd
|
|
|
3rd
|
|
|
4th
|
|
Fiscal
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
101,353 |
|
|
$ |
129,689 |
|
|
$ |
135,846 |
|
|
$ |
93,969 |
|
Gross
profit
|
|
$ |
65,020 |
|
|
$ |
83,903 |
|
|
$ |
86,202 |
|
|
$ |
52,507 |
|
Net
income / (loss)
|
|
$ |
1,249 |
|
|
$ |
8,136 |
|
|
$ |
15,729 |
|
|
$ |
(22,799 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income / (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.05 |
|
|
$ |
0.33 |
|
|
$ |
0.64 |
|
|
$ |
(0.93 |
) |
Diluted
|
|
$ |
0.05 |
|
|
$ |
0.32 |
|
|
$ |
0.62 |
|
|
$ |
(0.92 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
101,363 |
|
|
$ |
139,467 |
|
|
$ |
180,153 |
|
|
$ |
138,567 |
|
Gross
profit
|
|
$ |
61,652 |
|
|
$ |
83,346 |
|
|
$ |
109,887 |
|
|
$ |
81,797 |
|
Net
income
|
|
$ |
2,400 |
|
|
$ |
12,264 |
|
|
$ |
26,528 |
|
|
$ |
19,613 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.09 |
|
|
$ |
0.47 |
|
|
$ |
1.02 |
|
|
$ |
0.75 |
|
Diluted
|
|
$ |
0.09 |
|
|
$ |
0.45 |
|
|
$ |
0.97 |
|
|
$ |
0.72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As each quarter is
calculated as a discrete period, the sum of the four quarters may not equal the
calculated full year amount. This is in accordance with prescribed
reporting requirements.
NOTE
17 - SUPPLEMENTAL CASH FLOW INFORMATION
The
following is provided as supplemental information to the consolidated statements
of cash flows (in thousands):
|
|
Fiscal
Year Ended January 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
2,434 |
|
|
$ |
3,407 |
|
|
$ |
3,760 |
|
Income taxes
|
|
$ |
13,042 |
|
|
$ |
11,542 |
|
|
$ |
13,751 |
|
Additionally,
as of January 15, 2009, the Company declared a $1.2 million cash dividend, which
was subsequently paid in February 2009.
NOTE
18 – OTHER INCOME, NET
The
components of other income, net for fiscal 2009, 2008 and 2007 are as follows
(in thousands):
|
|
Fiscal
Year Ended January 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Gain
on proceeds from insurance premiums (a)
|
|
$ |
681 |
|
|
$ |
- |
|
|
$ |
- |
|
Gain
on sale of building (b)
|
|
|
- |
|
|
|
- |
|
|
|
374 |
|
Sale
of artwork (c)
|
|
|
- |
|
|
|
- |
|
|
|
848 |
|
Sale
of rights to web domain (d)
|
|
|
- |
|
|
|
- |
|
|
|
125 |
|
Other
income, net
|
|
$ |
681 |
|
|
$ |
- |
|
|
$ |
1,347 |
|
(a) The
Company recorded a pre-tax gain for the fiscal year ended January 31, 2009 of
$0.7 million on the collection of life insurance proceeds from policies covering
the Company’s former Chairman.
(b) The
Company recorded a pre-tax gain for the fiscal year ended January 31, 2007 of
$0.4 million on the sale of a building acquired on March 1, 2004 in the
acquisition of Ebel. The Company received cash proceeds from the sale
of $0.7 million. The building was classified as an asset held for sale in other
current assets.
(c) The
Company recorded a pre-tax gain for the fiscal year ended January 31, 2007 of
$0.8 million on the sale of a piece of artwork acquired in February
1988. The Company received cash proceeds from the sale of $1.0
million. The artwork was classified as a non-current
asset.
(d) The
Company recorded a pre-tax gain for the fiscal year ended January 31, 2007 of
$0.1 million on the sale of the rights to a web domain name. The
Company received cash from the sale of $0.1 million. There was no
cost basis on the balance sheet for the domain name.
NOTE
19 – TREASURY STOCK
On
December 4, 2007, the Board of Directors authorized a program to repurchase up
to one million shares of the Company’s common stock. Shares of common
stock were repurchased from time to time
as market
conditions warranted either through open market transactions, block purchases,
private transactions or other means. The objective of the program was
to reduce or eliminate earnings per share dilution caused by the shares of
common stock issued upon the exercise of stock options and in connection with
other equity based compensation plans. As of April 14, 2008, the
Company had completed the one million share repurchase during the fourth quarter
of fiscal 2008 and the first quarter of fiscal 2009, at a total cost of
approximately $19.4 million, or $19.41 per share.
On April
15, 2008, the Board of Directors announced a new authorization to repurchase up
to an additional one million shares of the Company’s common
stock. Under this authorization, the Company has the option to
repurchase shares over time, with the amount and timing of repurchases depending
on market conditions and corporate needs. The Company entered into a
Rule 10b5-1 plan to facilitate repurchases of its shares under this
authorization. A Rule 10b5-1 plan permits a company to repurchase
shares at times when it might otherwise be prevented from doing so, provided the
plan is adopted when the company is not aware of material non-public
information. The Company may suspend or discontinue the repurchase of
stock at any time. Under this share repurchase program, as of January
31, 2009, the Company had repurchased a total of 937,360 shares of common stock
in the open market during the first and second quarters of fiscal year 2009 at a
total cost of approximately $19.5 million or $20.79 per share.
In
addition to the shares repurchased pursuant to the Company’s share repurchase
programs, an aggregate of 102,662 shares have been repurchased during the twelve
months ended January 31, 2009 as a result of the surrender of shares in
connection with the vesting of certain restricted stock awards and the exercise
of certain stock options. At the election of an employee, shares
having an aggregate value on the vesting date equal to the employee’s
withholding tax obligation may be surrendered to the Company.
NOTE
20 – STREAMLINING INITIATIVES
During
the second half of fiscal 2009, the Company announced initiatives designed to
streamline operations, reduce expenses, and improve efficiencies and
effectiveness across the Company’s global organization. Throughout
fiscal 2009, the Company recorded a total pre-tax charge of $11.1 million, of
which $8.7 million related to severance related accruals and $2.4 million
related to the “Transition and Retirement Agreement” with the Company's former
Chairman (see Note 13 – Other Employee Benefits Plans). These
expenses were recorded in SG&A expenses in the Consolidated Statements of
Income. The Company expects that substantially all of the severance
related liability will be paid during fiscal 2010.
A summary
rollforward of severance related accruals is as follows (in
thousands):
|
|
Severance related
|
|
Balance
at April 30, 2008
|
|
$ |
- |
|
Provision
charged
|
|
|
2,192 |
|
Balance
at July 31, 2008
|
|
|
2,192 |
|
Provision
charged
|
|
|
3,393 |
|
Severance
paid
|
|
|
(2,759 |
) |
Balance
at October 31, 2008
|
|
|
2,826 |
|
Provision
charged
|
|
|
3,094 |
|
Severance
paid
|
|
|
(1,511 |
) |
Balance
at January 31, 2009
|
|
$ |
4,409 |
|
Schedule
II
MOVADO
GROUP, INC.
VALUATION
AND QUALIFYING ACCOUNTS AND RESERVES
(in
thousands)
Description
|
|
Balance
at beginning of year
|
|
|
Net
provision charged to operations
|
|
|
Currency
revaluation
|
|
|
Net
write-offs
|
|
|
Balance
at end of year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended January 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Doubtful accounts, returns and
allowances (1)
|
|
$ |
36,348 |
|
|
$ |
35,628 |
|
|
$ |
(456 |
) |
|
$ |
(51,922 |
) |
|
$ |
19,598 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended January 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Doubtful accounts, returns and
allowances (1)
|
|
$ |
26,079 |
|
|
$ |
49,091 |
|
|
$ |
657 |
|
|
$ |
(39,479 |
) |
|
$ |
36,348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended January 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Doubtful accounts, returns and
allowances
|
|
$ |
25,693 |
|
|
$ |
41,184 |
|
|
$ |
91 |
|
|
$ |
(40,889 |
) |
|
$ |
26,079 |
|
(1) The
net write-offs in fiscal 2009 and net provision charged to operations in fiscal
2008 include a non-cash charge of $11.0 million, related to the closing of certain
wholesale customer doors in the
U.S.
Description
|
|
Balance
at beginning of year
|
|
|
Net
provision charged to operations
|
|
|
Currency
revaluation
|
|
|
Net
write-offs
|
|
|
Balance
at end of year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended January 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory
reserve
|
|
$ |
21,170 |
|
|
$ |
2,282 |
|
|
$ |
(737 |
) |
|
$ |
(6,751 |
) |
|
$ |
15,964 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended January 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory reserve
(2)
|
|
$ |
48,575 |
|
|
$ |
2,809 |
|
|
$ |
3,754 |
|
|
$ |
(33,968 |
) |
|
$ |
21,170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended January 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory
reserve
|
|
$ |
49,250 |
|
|
$ |
1,953 |
|
|
$ |
2,348 |
|
|
$ |
(4,976 |
) |
|
$ |
48,575 |
|
(2)
The inventory reserve net write-offs in fiscal 2008 were the result of
efforts to cleanse discontinued component and watch inventory by scrapping
the product, resulting in a reduction to existing reserves with no impact
to the consolidated statement of
income.
|
Description
|
|
Balance
at beginning of year
|
|
|
Net
benefit to operations
|
|
|
Currency
revaluation
|
|
|
Adjustment
|
|
|
Balance
at end of year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended January 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax asset valuation
(3)
|
|
$ |
10,689 |
|
|
$ |
(2,625 |
) |
|
$ |
(588 |
) |
|
$ |
165 |
|
|
$ |
7,641 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended January 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax asset valuation
(4)
|
|
$ |
16,741 |
|
|
$ |
(7,407 |
) |
|
$ |
2,391 |
|
|
$ |
(1,036 |
) |
|
$ |
10,689 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended January 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax asset valuation
(5)
|
|
$ |
29,555 |
|
|
$ |
(9,544 |
) |
|
$ |
976 |
|
|
$ |
(4,246 |
) |
|
$ |
16,741 |
|
(3)
The detail of adjustments is as follows:
|
|
|
|
(5)
The detail of adjustments is as follows:
|
|
|
|
Prior
year adjustments
|
|
$ |
164 |
|
Release
of valuation allowance – Ebel NOL’s
|
|
$ |
(273 |
) |
Statutory
tax rate changes
|
|
|
1 |
|
Ebel
NOL’s expired
|
|
|
(2,541 |
) |
|
|
$ |
165 |
|
Ebel
Germany pre-acquisition NOL’s
|
|
|
(1,017 |
) |
|
|
|
|
|
Prior
year adjustments
|
|
|
(415 |
) |
|
|
|
|
|
|
|
$ |
(4,246 |
) |
(4)
The detail of adjustments is as follows:
|
|
|
|
Statutory
tax rate changes
|
|
$ |
(731 |
) |
Ebel
NOL’s expired
|
|
|
(609 |
) |
Prior
year adjustments
|
|
|
304 |
|
|
|
$ |
(1,036 |
) |