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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended January 31, 2013
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 1-14229
QUIKSILVER, INC.
(Exact name of registrant as specified in its charter)
Delaware | 33-0199426 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | |
15202 Graham Street Huntington Beach, California | 92649 | |
(Address of principal executive offices) | (Zip Code) |
(714) 889-2200
(Registrant’s telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
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 (Check one):
Large accelerated filer | ¨ | Accelerated filer | x | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | 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 number of shares outstanding of Registrant’s Common Stock, par value $0.01 per share, at February 28, 2013 was 167,295,287.
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QUIKSILVER, INC.
FORM 10-Q
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QUIKSILVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
First Quarter ended January 31, | ||||||||
In thousands, except per share amounts | 2013 | 2012 | ||||||
Revenues, net | $ | 431,018 | $ | 449,621 | ||||
Cost of goods sold | 211,311 | 221,671 | ||||||
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Gross profit | 219,707 | 227,950 | ||||||
Selling, general and administrative expense | 225,259 | 230,415 | ||||||
Asset impairments | 3,168 | — | ||||||
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Operating loss | (8,720 | ) | (2,465 | ) | ||||
Interest expense | 15,507 | 15,045 | ||||||
Foreign currency loss/(gain) | 3,173 | (1,850 | ) | |||||
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Loss before provision for income taxes | (27,400 | ) | (15,660 | ) | ||||
Provision for income taxes | 3,224 | 5,250 | ||||||
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Net loss | (30,624 | ) | (20,910 | ) | ||||
Less: net income attributable to non-controlling interest | (505 | ) | (1,695 | ) | ||||
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Net loss attributable to Quiksilver, Inc. | $ | (31,129 | ) | $ | (22,605 | ) | ||
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Net loss per share attributable to Quiksilver, Inc., basic | $ | (0.19 | ) | $ | (0.14 | ) | ||
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Net loss per share attributable to Quiksilver, Inc., diluted | $ | (0.19 | ) | $ | (0.14 | ) | ||
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Weighted average common shares outstanding, basic and diluted | 165,767 | 163,363 | ||||||
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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
First Quarter ended January 31, | ||||||||
In thousands | 2013 | 2012 | ||||||
Net loss | $ | (30,624 | ) | $ | (20,910 | ) | ||
Other comprehensive loss: | ||||||||
Foreign currency translation adjustment | 11,758 | (33,704 | ) | |||||
Net unrealized (loss)/gain on derivative instruments, net of tax of $1,628 (2013) and $(7,076) (2012) | (3,648 | ) | 13,944 | |||||
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Comprehensive loss | (22,514 | ) | (40,670 | ) | ||||
Comprehensive income attributable to non-controlling interest | (505 | ) | (1,695 | ) | ||||
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Comprehensive loss attributable to Quiksilver, Inc. | $ | (23,019 | ) | $ | (42,365 | ) | ||
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See Notes to Condensed Consolidated Financial Statements
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QUIKSILVER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
In thousands, except share amounts | January 31, 2013 | October 31, 2012 | ||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 68,361 | $ | 41,823 | ||||
Trade accounts receivable, less allowances of $46,378 (2013) and $45,147 (2012) | 339,580 | 433,743 | ||||||
Other receivables | 31,869 | 32,818 | ||||||
Income taxes receivable | 1,010 | — | ||||||
Inventories, net | 419,191 | 344,746 | ||||||
Deferred income taxes - current | 27,612 | 26,368 | ||||||
Prepaid expenses and other current assets | 37,915 | 26,371 | ||||||
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Total current assets | 925,538 | 905,869 | ||||||
Fixed assets, less accumulated depreciation and amortization of $244,478 (2013) and $233,441 (2012) | 239,950 | 238,313 | ||||||
Intangible assets, net | 140,090 | 139,449 | ||||||
Goodwill | 277,250 | 273,167 | ||||||
Other assets | 45,463 | 47,789 | ||||||
Deferred income taxes - long-term | 119,661 | 113,653 | ||||||
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Total assets | $ | 1,747,952 | $ | 1,718,240 | ||||
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LIABILITIES AND EQUITY | ||||||||
Current liabilities: | ||||||||
Lines of credit | $ | 11,897 | $ | 18,147 | ||||
Accounts payable | 221,696 | 203,572 | ||||||
Accrued liabilities | 109,842 | 114,891 | ||||||
Current portion of long-term debt | 42,358 | 18,647 | ||||||
Income taxes payable | — | 1,359 | ||||||
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Total current liabilities | 385,793 | 356,616 | ||||||
Long-term debt, net of current portion | 734,191 | 721,175 | ||||||
Other long-term liabilities | 37,592 | 38,213 | ||||||
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Total liabilities | 1,157,576 | 1,116,004 | ||||||
Equity: | ||||||||
Preferred stock, $.01 par value, (5,000,000 shares authorized; none outstanding) | — | — | ||||||
Common stock, $.01 par value, (285,000,000 shares authorized; 170,175,487 (2013) and 169,066,161 (2012) outstanding) | 1,702 | 1,691 | ||||||
Additional paid-in capital | 555,905 | 545,306 | ||||||
Treasury stock (2,885,200 shares) | (6,778 | ) | (6,778 | ) | ||||
Accumulated deficit | (74,450 | ) | (43,321 | ) | ||||
Accumulated other comprehensive income | 94,522 | 86,412 | ||||||
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Total Quiksilver, Inc. stockholders’ equity | 570,901 | 583,310 | ||||||
Non-controlling interest | 19,475 | 18,926 | ||||||
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Total equity | 590,376 | 602,236 | ||||||
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Total liabilities and equity | $ | 1,747,952 | $ | 1,718,240 | ||||
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See Notes to Condensed Consolidated Financial Statements
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QUIKSILVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
First Quarter ended January 31, | ||||||||
In thousands | 2013 | 2012 | ||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (30,624 | ) | $ | (20,910 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 12,219 | 12,962 | ||||||
Stock-based compensation | 7,336 | 6,977 | ||||||
Provision for doubtful accounts | 1,331 | (1,682 | ) | |||||
Loss on disposal of fixed assets | 2 | 45 | ||||||
Foreign currency loss/(gain) | 2,754 | (1,172 | ) | |||||
Asset impairments | 3,168 | — | ||||||
Non-cash interest expense | 911 | 1,063 | ||||||
Equity in earnings | (11 | ) | (195 | ) | ||||
Deferred income taxes | 1,135 | 3,354 | ||||||
Changes in operating assets and liabilities, net of the effects from business acquisitions: | ||||||||
Trade accounts receivable | 99,661 | 67,206 | ||||||
Other receivables | 3,563 | 6,022 | ||||||
Inventories | (68,479 | ) | (71,153 | ) | ||||
Prepaid expenses and other current assets | (11,848 | ) | (9,534 | ) | ||||
Other assets | 3,330 | 712 | ||||||
Accounts payable | 13,624 | 24,140 | ||||||
Accrued liabilities and other long-term liabilities | (13,582 | ) | (15,785 | ) | ||||
Income taxes payable | (1,174 | ) | 1,826 | |||||
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Net cash provided by operating activities | 23,316 | 3,876 | ||||||
Cash flows from investing activities: | ||||||||
Capital expenditures | (12,778 | ) | (16,486 | ) | ||||
Business acquisitions, net of acquired cash | — | (9,117 | ) | |||||
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Net cash used in investing activities | (12,778 | ) | (25,603 | ) | ||||
Cash flows from financing activities: | ||||||||
Borrowings on lines of credit | 1,963 | — | ||||||
Payments on lines of credit | (8,042 | ) | (11,448 | ) | ||||
Borrowings on long-term debt | 47,879 | 47,442 | ||||||
Payments on long-term debt | (23,200 | ) | (22,628 | ) | ||||
Stock option exercises and employee stock purchases | 3,319 | 779 | ||||||
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Net cash provided by financing activities | 21,919 | 14,145 | ||||||
Effect of exchange rate changes on cash | (5,919 | ) | (7,736 | ) | ||||
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Net increase/(decrease) in cash and cash equivalents | 26,538 | (15,318 | ) | |||||
Cash and cash equivalents, beginning of period | 41,823 | 109,753 | ||||||
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Cash and cash equivalents, end of period | $ | 68,361 | $ | 94,435 | ||||
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Supplementary cash flow information: | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | 13,431 | $ | 12,357 | ||||
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Income taxes | $ | 2,731 | $ | 2,871 | ||||
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Non-cash investing activities: | ||||||||
Capital expenditures accrued at period end | $ | 5,750 | $ | 4,103 | ||||
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See Notes to Condensed Consolidated Financial Statements
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Notes to Condensed Consolidated Financial Statements
1. | Basis of Presentation |
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statement presentation.
Quiksilver, Inc. and its subsidiaries (the “Company”) has included all adjustments, consisting only of normal and recurring adjustments, necessary for a fair presentation of the results of operations for the first quarter (three months) ended January 31, 2013 and 2012. References to any particular fiscal year refer to the year ended October 31 of that year (for example, “fiscal 2013” refers to the year ending October 31, 2013). The condensed consolidated financial statements and notes thereto should be read in conjunction with the audited financial statements and notes for the fiscal year ended October 31, 2012 included in the Company’s most recent Annual Report on Form 10-K. Interim results are not necessarily indicative of results for the full year.
2. | New Accounting Pronouncements |
In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-05,“Presentation of Comprehensive Income.” ASU 2011-05 requires the components of net income and other comprehensive income to be either presented in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements. In December 2011, the FASB issued ASU 2011-12, which indefinitely defers the requirement to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented, while the FASB further deliberates this aspect of the proposal. While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance. Both issuances on the presentation of comprehensive income became effective for the Company on November 1, 2012. As this guidance only amends the presentation of the components of comprehensive income, the adoption did not have an impact on the Company’s consolidated financial position or results of operations.
In September 2011, the FASB issued ASU 2011-08, “Testing Goodwill for Impairment.” ASU 2011-08 allows entities testing goodwill for impairment the option of performing a qualitative assessment to determine the likelihood of goodwill impairment and whether it is necessary to perform the two-step impairment test currently required. The updated guidance became effective for the Company on November 1, 2012. The adoption of this standard did not have a material impact on the Company’s consolidated financial position or results of operations.
In February 2013, the FASB issued ASU 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” ASU 2013-02 requires presentation, either on the face of the financial statements or in the notes, of amounts reclassified out of accumulated other comprehensive income by component and by net income line item. This new guidance is effective on a prospective basis for the Company on November 1, 2013. As this guidance only impacts the presentation and disclosure of amounts reclassified out of accumulated other comprehensive income, the adoption will not have an impact on the Company’s consolidated financial position or results of operations.
3. | Segment Information |
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the Company’s chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company operates in the outdoor market of the action sports industry in which the Company designs, markets and distributes apparel, footwear, accessories and related products. The Company currently operates in four
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segments: the Americas, EMEA, and APAC, each of which sells a full range of the Company’s products, as well as Corporate Operations. The Americas segment, consisting of North, South and Central America, includes revenues primarily from the United States, Canada, Brazil and Mexico. The EMEA segment, consisting of Europe, the Middle East and Africa, includes revenues primarily from continental Europe, the United Kingdom, and South Africa. The APAC segment, consisting of Australia, New Zealand, and Asia, includes revenues primarily from Australia, Japan, New Zealand and Indonesia. Royalties earned from various licensees in other international territories are categorized in Corporate Operations, along with revenues from sourcing services to the Company’s licensees.
Information related to the Company’s operating segments for the first quarter of fiscal 2013 and 2012 is as follows:
In thousands | 2013 | 2012 | ||||||
Revenues, net: | ||||||||
Americas | $ | 186,284 | $ | 205,408 | ||||
EMEA | 171,174 | 168,874 | ||||||
APAC | 72,876 | 74,593 | ||||||
Corporate Operations | 684 | 746 | ||||||
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$ | 431,018 | $ | 449,621 | |||||
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Gross profit: | ||||||||
Americas | $ | 80,859 | $ | 87,928 | ||||
EMEA | 98,889 | 101,772 | ||||||
APAC | 39,277 | 38,140 | ||||||
Corporate Operations | 682 | 110 | ||||||
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$ | 219,707 | $ | 227,950 | |||||
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SG&A expense: | ||||||||
Americas | $ | 88,074 | $ | 89,481 | ||||
EMEA | 83,234 | 86,096 | ||||||
APAC | 37,206 | 37,239 | ||||||
Corporate Operations | 16,745 | 17,599 | ||||||
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$ | 225,259 | $ | 230,415 | |||||
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Asset impairments: | ||||||||
Americas | $ | 1,621 | $ | — | ||||
EMEA | 1,547 | — | ||||||
APAC | — | — | ||||||
Corporate Operations | — | — | ||||||
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$ | 3,168 | $ | — | |||||
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Operating (loss)/income: | ||||||||
Americas | $ | (8,836 | ) | $ | (1,553 | ) | ||
EMEA | 14,108 | 15,676 | ||||||
APAC | 2,071 | 901 | ||||||
Corporate Operations | (16,063 | ) | (17,489 | ) | ||||
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$ | (8,720 | ) | $ | (2,465 | ) | |||
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January 31, | October 31, | |||||||
2013 | 2012 | |||||||
Identifiable assets: | ||||||||
Americas | $ | 544,895 | $ | 576,179 | ||||
EMEA | 775,279 | 718,537 | ||||||
APAC | 215,254 | 224,149 | ||||||
Corporate Operations | 212,524 | 199,375 | ||||||
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$ | 1,747,952 | $ | 1,718,240 | |||||
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4. | Earnings per Share and Stock-Based Compensation |
The Company reports basic and diluted earnings per share (“EPS”). Basic EPS is based on the weighted average number of shares outstanding during the period, while diluted EPS additionally includes the dilutive effect of the Company’s outstanding stock options, warrants and shares of restricted stock computed using the treasury stock method.
The table below sets forth the reconciliation of the denominator of each net loss per share calculation for the first quarter of fiscal 2013 and 2012:
In thousands | 2013 | 2012 | ||||||
Shares used in computing basic net loss per share | 165,767 | 163,363 | ||||||
Dilutive effect of stock options and restricted stock(1) | — | — | ||||||
Dilutive effect of stock warrants(1) | — | — | ||||||
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Shares used in computing diluted net loss per share | 165,767 | 163,363 | ||||||
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(1) For the first quarter of fiscal 2013 and 2012, the shares used in computing diluted net loss per share do not include 3,391,000 and 3,755,000, respectively, of dilutive stock options and shares of restricted stock, nor 15,140,000 and 12,195,000, respectively, of dilutive warrant shares, as the effect is anti-dilutive given the Company’s net loss. For the first quarter of fiscal 2013 and 2012, additional stock options outstanding of 7,932,000 and 10,774,000, respectively, and additional warrant shares outstanding of 10,514,000 and 13,459,000, respectively, were excluded from the calculation of diluted EPS, as their effect would have been anti-dilutive based on the application of the treasury stock method. |
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The Company accounts for stock-based compensation under the fair value recognition provisions of ASC 718 “Stock Compensation.” Stock-based compensation expense is included in selling, general and administrative expense.
The Company has previously granted performance based restricted stock units and options to certain key employees and executives. The vesting of the restricted stock units is contingent upon a required service period as well as the Company’s achievement of a specified common stock price threshold. The vesting of the options is contingent upon a required service period as well as a combination of the Company’s achievement of specified annual performance targets and specified common stock price thresholds. The Company believes that the granting of these awards serves to further align the interests of its employees and executives with those of its stockholders. Based on the vesting contingencies in the awards, the Company uses a Monte-Carlo simulation in order to determine the grant date fair values of the awards. For the first quarter of fiscal 2013, the assumptions used in the Monte-Carlo simulations for the restricted stock units granted included a risk-free interest rate of 0.5%, volatility of 73% to 89%, and zero dividend yield. The weighted average fair value of the restricted stock units granted in the first quarter of fiscal 2013 was $3.39. There were no restricted stock unit grants in the first quarter of fiscal 2012. There were no performance options granted in the first quarter of fiscal 2013 or 2012.
Activity related to these performance based equity instruments for the first quarter of fiscal 2013 was as follows:
Performance Options | Performance Restricted Stock Units | |||||||
Non-vested, October 31, 2012 | 856,000 | 7,929,375 | ||||||
Granted | — | 2,800,000 | ||||||
Vested | — | — | ||||||
Canceled | (56,000 | ) | (2,050,312 | ) | ||||
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Non-vested, January 31, 2013 | 800,000 | 8,679,063 | ||||||
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As of January 31, 2013, the Company had unrecognized compensation expense, net of estimated forfeitures, of approximately $2 million related to the performance based options and approximately $4 million related to restricted stock units. This unrecognized compensation expense is expected to be recognized over a weighted average period of approximately 2.7 years and 1.1 years, respectively.
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For non-performance based options, the Company uses the Black-Scholes option-pricing model to value compensation expense. Forfeitures are estimated at the date of grant based on historical rates and reduce the compensation expense recognized. The expected term of options granted is derived from historical data on employee exercises. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the date of grant. Expected volatility is based on the historical volatility of the Company’s stock. For the first quarter of fiscal 2013 and 2012, there were no options granted. The Company records stock-based compensation expense using the graded vested method over the vesting period, which is generally three years. As of January 31, 2013, the Company had approximately $2 million of unrecognized compensation expense for non-performance based options expected to be recognized over a weighted average period of approximately 1.5 years.
Changes in shares under option, excluding performance based options, for the first quarter of fiscal 2013 were as follows:
Dollar amounts in thousands, except per share amounts | Shares | Weighted Average Price | Weighted Average Life | Aggregate Intrinsic Value | ||||||||||||
Outstanding, October 31, 2012 | 12,325,499 | $ | 4.49 | |||||||||||||
Granted | — | — | ||||||||||||||
Exercised | (826,294 | ) | 3.34 | $ | 1,396 | |||||||||||
Canceled | (977,572 | ) | 6.48 | |||||||||||||
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Outstanding, January 31, 2013 | 10,521,633 | $ | 4.39 | 5.5 | $ | 27,842 | ||||||||||
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Options exercisable, January 31, 2013 | 7,366,037 | $ | 4.70 | 5.0 | $ | 18,829 | ||||||||||
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Changes in non-vested shares under option, excluding performance based options, for the first quarter of fiscal 2013 were as follows:
Shares | Weighted- Average Grant Date Fair Value | |||||||
Non-vested, October 31, 2012 | 4,422,172 | $ | 1.92 | |||||
Granted | — | — | ||||||
Vested | (1,189,675 | ) | 2.30 | |||||
Canceled | (76,901 | ) | 1.55 | |||||
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Non-vested, January 31, 2013 | 3,155,596 | $ | 1.87 | |||||
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The Company also grants restricted stock and restricted stock units under its 2000 Stock Incentive Plan. Stock issued under this plan generally vests in three years. In March 2010, the Company’s stockholders approved a grant of 3 million shares of restricted stock to a Company sponsored athlete, Kelly Slater. In accordance with the terms of the related restricted stock agreement, 2,400,000 shares have already vested, with the remaining 600,000 shares to vest in April 2013. Changes in restricted stock for the first quarter of fiscal 2013 were as follows:
Restricted Stock | ||||
Outstanding, October 31, 2012 | 801,667 | |||
Granted | — | |||
Vested | — | |||
Forfeited | — | |||
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Outstanding, January 31, 2013 | 801,667 | |||
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Compensation expense for restricted stock is determined using the intrinsic value method and forfeitures are estimated at the date of grant based on historical rates and reduce the compensation expense recognized. The Company monitors the probability of meeting the restricted stock performance criteria, if any, and adjusts the amortization period as appropriate. As of January 31, 2013, there had been no acceleration of amortization periods and the Company had approximately $0.4 million of unrecognized compensation expense expected to be recognized over a weighted average period of approximately one year.
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5. | Inventories, net |
Inventories, net consisted of the following as of the dates indicated:
In thousands | January 31, 2013 | October 31, 2012 | ||||||
Raw materials | $ | 6,471 | $ | 6,736 | ||||
Work in-process | 745 | 1,969 | ||||||
Finished goods | 411,975 | 336,041 | ||||||
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$ | 419,191 | $ | 344,746 | |||||
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6. | Intangible Assets and Goodwill |
Intangible assets consisted of the following as of the dates indicated:
January 31, 2013 | October 31, 2012 | |||||||||||||||||||||||
In thousands | Gross Amount | Amorti- zation | Net Book Value | Gross Amount | Amorti- zation | Net Book Value | ||||||||||||||||||
Non-amortizable trademarks | $ | 124,069 | $ | — | $ | 124,069 | $ | 124,053 | $ | — | $ | 124,053 | ||||||||||||
Amortizable trademarks | 24,955 | (11,430 | ) | 13,525 | 23,543 | (10,866 | ) | 12,677 | ||||||||||||||||
Amortizable licenses | 14,036 | (14,036 | ) | — | 13,919 | (13,803 | ) | 116 | ||||||||||||||||
Other amortizable intangibles | 8,098 | (5,602 | ) | 2,496 | 8,083 | (5,480 | ) | 2,603 | ||||||||||||||||
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$ | 171,158 | $ | (31,068 | ) | $ | 140,090 | $ | 169,598 | $ | (30,149 | ) | $ | 139,449 | |||||||||||
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Certain trademarks will continue to be amortized by the Company using estimated useful lives of 10 to 25 years with no residual values. Intangible amortization expense for each of the first quarters of fiscal 2013 and 2012 was approximately $1 million. Annual amortization expense is estimated to be approximately $2 million through fiscal 2018. Licenses will no longer be amortized as they are fully amortized.
Goodwill related to the Company’s operating segments as of the dates indicated was as follows:
In thousands | January 31, 2013 | October 31, 2012 | ||||||
EMEA | $ | 195,082 | $ | 190,986 | ||||
Americas | 75,961 | 75,974 | ||||||
APAC | 6,207 | 6,207 | ||||||
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$ | 277,250 | $ | 273,167 | |||||
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Goodwill increased by approximately $4 million during the first quarter of fiscal 2013 due to changes in foreign currency exchange rates.
7. | Income Taxes |
Each reporting period, the Company evaluates the realizability of all of its deferred tax assets in each tax jurisdiction. As of January 31, 2013, the Company continued to maintain a full valuation allowance against its net deferred tax assets in the United States as well as certain jurisdictions in its APAC and Corporate Operations segments due to sustained taxable losses. As a result of the valuation allowances recorded, no tax benefits have been recognized for losses incurred in those tax jurisdictions.
As of January 31, 2013, the Company’s liability for uncertain tax positions was approximately $11 million resulting from unrecognized tax benefits, excluding interest and penalties.
If the Company’s positions are favorably sustained by the relevant taxing authority, approximately $10 million, excluding interest and penalties, of uncertain tax position liabilities would favorably impact the Company’s effective tax rate in future periods.
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During the next 12 months, it is reasonably possible that the Company’s liability for uncertain tax positions may change by a significant amount as a result of the resolution or payment of uncertain tax positions related to intercompany transactions between foreign affiliates and certain foreign withholding tax exposures. Conclusion of these matters could result in settlement for different amounts than the Company has accrued as uncertain tax benefits. If a position that the Company concluded was more likely than not is subsequently reversed, the Company would need to accrue and ultimately pay an additional amount. Conversely, the Company could settle positions with the tax authorities for amounts lower than have been accrued or extinguish a position through payment. The Company believes the outcomes which are reasonably possible within the next 12 months range from a reduction of the liability for unrecognized tax benefits of $8 million to an increase of the liability of $2 million, excluding penalties and interest for its existing tax positions.
8. | Restructuring Charges |
In connection with its cost reduction efforts, the Company formulated the Fiscal 2011 Cost Reduction Plan (the “2011 Plan”). The 2011 Plan covers the global operations of the Company, but is primarily concentrated in the United States. The Company no longer expects to incur any charges under the 2011 Plan, however, the Company continues to evaluate its facilities, as well as its overall cost structure, and may implement additional cost reduction plans in the future. Activity and liability balances recorded as part of the 2011 Plan were as follows:
In thousands | Workforce | Facility & Other | Total | |||||||||
Balance, November 1, 2010 | $ | — | $ | — | $ | — | ||||||
Charged to expense | 1,389 | 6,649 | 8,038 | |||||||||
Cash payments | (313 | ) | (417 | ) | (730 | ) | ||||||
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Balance, October 31, 2011 | $ | 1,076 | $ | 6,232 | $ | 7,308 | ||||||
Charged to expense | 9,721 | 3,881 | 13,602 | |||||||||
Cash payments | (5,462 | ) | (3,257 | ) | (8,719 | ) | ||||||
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| |||||||
Balance, October 31, 2012 | $ | 5,335 | $ | 6,856 | $ | 12,191 | ||||||
Charged to expense | — | — | — | |||||||||
Cash payments | (2,641 | ) | (1,623 | ) | (4,264 | ) | ||||||
Adjustments to accrual | — | (531 | ) | (531 | ) | |||||||
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Balance, January 31, 2013 | $ | 2,694 | $ | 4,702 | $ | 7,396 | ||||||
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The Company also recorded additional severance charges of approximately $3 million within selling, general and administrative expense during the first quarter of fiscal 2013 which were unrelated to the 2011 Plan.
9. | Debt |
A summary of borrowings under lines of credit and long-term debt as of the dates indicated is as follows:
In thousands | January 31, 2013 | October 31, 2012 | ||||||
APAC Credit Facility | $ | 11,897 | $ | 18,147 | ||||
Americas Credit Facility | 48,000 | 46,700 | ||||||
Americas Term Loan | 14,000 | 15,500 | ||||||
EMEA lines of credit | 33,429 | 7,742 | ||||||
Senior Notes | 400,000 | 400,000 | ||||||
European Senior Notes | 270,453 | 258,732 | ||||||
Capital lease obligations and other borrowings | 10,667 | 11,148 | ||||||
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$ | 788,446 | $ | 757,969 | |||||
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As of January 31, 2013, the Company’s credit facilities allowed for total cash borrowings and letters of credit of $346 million. The total maximum borrowings and actual availability fluctuate with the amount of assets comprising the borrowing base under certain of the credit facilities. At January 31, 2013, the Company had a total of $93 million of direct borrowings and $61 million in letters of credit outstanding. As of January 31, 2013, the effective availability for borrowings remaining under the Company’s credit facilities was $114 million, $35 million of which could also be used for letters of credit in the United States. In addition to the $114 million of effective availability for borrowings,
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the Company also had $77 million in additional capacity for letters of credit in EMEA and APAC as of January 31, 2013. Many of the Company’s debt agreements contain customary default provisions and restrictive covenants, including certain cross default provisions between the Americas Credit Facility and the Americas Term Loan. The Company is currently in compliance with such covenants.
The estimated fair values of the Company’s borrowings under lines of credit and long-term debt as of January 31, 2013 were as follows:
In thousands | Carrying Amount | Fair Value | ||||||
Lines of credit | $ | 11,897 | $ | 11,897 | ||||
Long-term debt | 776,549 | 792,776 | ||||||
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$ | 788,446 | $ | 804,673 | |||||
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The fair value of the Company’s long-term debt is calculated based on the market price of the Company’s publicly traded Senior Notes, the trading price of the Company’s European Senior Notes and the carrying values of the Company’s other debt obligations.
The carrying value of the Company’s trade accounts receivable and accounts payable approximates fair value due to their short-term nature. The fair value of fixed assets is determined using a discounted cash flow model which requires level 3 inputs.
10. | Derivative Financial Instruments |
The Company is exposed to gains and losses resulting from fluctuations in foreign currency exchange rates relating to certain sales, royalty income and product purchases of its international subsidiaries that are denominated in currencies other than their functional currencies. The Company is also exposed to foreign currency gains and losses resulting from domestic transactions that are not denominated in U.S. dollars. Furthermore, the Company is exposed to gains and losses resulting from the effect that fluctuations in foreign currency exchange rates have on the reported results in the Company’s consolidated financial statements due to the translation of the operating results and financial position of the Company’s international subsidiaries. As part of its overall strategy to manage the level of exposure to the risk of fluctuations in foreign currency exchange rates, the Company uses various foreign currency exchange contracts and intercompany loans.
The Company accounts for all of its cash flow hedges under ASC 815, “Derivatives and Hedging,” which requires companies to recognize all derivative instruments as either assets or liabilities at fair value in the consolidated balance sheet. In accordance with ASC 815, the Company designates forward contracts as cash flow hedges of forecasted purchases of commodities.
For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income (“OCI”) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. As of January 31, 2013, the Company was hedging forecasted transactions expected to occur through October 2013. Assuming January 31, 2013 exchange rates remain constant, $2 million of gains, net of tax, related to hedges of these transactions are expected to be reclassified into earnings over the next nine months.
For the first quarter of fiscal 2013 and 2012, the effective portions of gains and losses on derivative instruments in the condensed consolidated statements of operations and the condensed consolidated statements of comprehensive loss were as follows:
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In thousands | 2013 | 2012 | Location | |||||||||
(Loss)/gain recognized in OCI on derivatives | $ | (3,015 | ) | $ | 16,690 | Other comprehensive income | ||||||
Gain/(loss) reclassified from accumulated OCI into income | 1,866 | (3,075 | ) | Cost of goods sold | ||||||||
Loss reclassified from accumulated OCI into income | (135 | ) | (20 | ) | Foreign currency gain | |||||||
Gain recognized in income on derivatives | — | 181 | Foreign currency gain |
On the date the Company enters into a derivative contract, management designates the derivative as a hedge of the identified exposure. Before entering into various hedge transactions, the Company formally documents all relationships between hedging instruments and hedged items, as well as the risk-management objective and strategy. In this documentation, the Company identifies the asset, liability, firm commitment, or forecasted transaction that has been designated as a hedged item and indicates how the hedging instrument is expected to hedge the risks related to the hedged item. The Company formally measures effectiveness of its hedging relationships both at the hedge inception and on an ongoing basis in accordance with its risk management policy. The Company would discontinue hedge accounting prospectively (i) if management determines that the derivative is no longer effective in offsetting changes in the cash flows of a hedged item, (ii) when the derivative expires or is sold, terminated, or exercised, (iii) if it becomes probable that the forecasted transaction being hedged by the derivative will not occur, (iv) if a hedged firm commitment no longer meets the definition of a firm commitment, or (v) if management determines that designation of the derivative as a hedge instrument is no longer appropriate.
The Company enters into forward exchange and other derivative contracts with major banks and is exposed to exchange rate losses in the event of nonperformance by these banks. The Company anticipates, however, that these banks will be able to fully satisfy their obligations under the contracts. Accordingly, the Company does not require collateral or other security to support the contracts.
As of January 31, 2013, the Company had the following outstanding derivative contracts that were entered into to hedge forecasted purchases and future cash receipts:
In thousands | Commodity | Notional Amount | Maturity | Fair Value | ||||||||||
United States dollars | Inventory | $ | 175,930 | Feb 2013 – Oct 2013 | $ | 2,477 | ||||||||
British pounds | Accounts receivable | 11,983 | Feb 2013 – Oct 2013 | 472 | ||||||||||
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$ | 187,913 | $ | 2,949 | |||||||||||
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ASC 820, “Fair Value Measurements and Disclosures,” defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. ASC 820 also establishes a fair value hierarchy which prioritizes the valuation inputs into three broad levels. Based on the underlying inputs, each fair value measurement in its entirety is reported in one of the three levels. These levels are:
• | Level 1 – Valuation is based upon quoted prices for identical instruments traded in active markets. Level 1 assets and liabilities include debt and equity securities traded in an active exchange market, as well as U.S. Treasury securities. |
• | Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model based valuation techniques for which all significant assumptions are observable in the |
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market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
• | Level 3 – Valuation is determined using model-based techniques with significant assumptions not observable in the market. These unobservable assumptions reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of third party pricing services, option pricing models, discounted cash flow models and similar techniques. |
The Company’s derivative assets and liabilities include foreign exchange derivatives that are measured at fair value using observable market inputs such as forward rates, interest rates, the Company’s credit risk and the Company’s counterparties’ credit risks. Based on these inputs, the Company’s derivative assets and liabilities are classified within Level 2 of the valuation hierarchy.
The following tables reflect the fair values of assets and liabilities measured and recognized at fair value on a recurring basis on the accompanying condensed consolidated balance sheets as of the dates indicated:
Fair Value Measurements Using | ||||||||||||||||
In thousands | Level 1 | Level 2 | Level 3 | Fair Value | ||||||||||||
January 31, 2013: | ||||||||||||||||
Derivative assets: | ||||||||||||||||
Other receivables | $ | — | $ | 6,734 | $ | — | $ | 6,734 | ||||||||
Derivative liabilities: | ||||||||||||||||
Accrued liabilities | — | (3,785 | ) | — | (3,785 | ) | ||||||||||
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Total fair value | $ | — | $ | 2,949 | $ | — | $ | 2,949 | ||||||||
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October 31, 2012: | ||||||||||||||||
Derivative assets: | ||||||||||||||||
Other receivables | $ | — | $ | 11,356 | $ | — | $ | 11,356 | ||||||||
Derivative liabilities: | ||||||||||||||||
Accrued liabilities | — | (3,860 | ) | — | (3,860 | ) | ||||||||||
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Total fair value | $ | — | $ | 7,496 | $ | — | $ | 7,496 | ||||||||
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11. | Litigation, Indemnities and Guarantees |
As part of its global operations, the Company may be involved in legal claims involving trademarks, intellectual property, licensing, employment matters, compliance, contracts and other matters incidental to its business. The Company believes the resolution of any such matter currently threatened or pending will not have a material adverse effect on its financial condition, results of operations or liquidity.
During its normal course of business, the Company has made certain indemnities, commitments and guarantees under which it may be required to make payments in relation to certain transactions. These include (i) intellectual property indemnities to the Company’s customers and licensees in connection with the use, sale and/or license of the Company’s products, (ii) indemnities to various lessors in connection with facility leases for certain claims arising from such facilities or leases, (iii) indemnities to vendors and service providers pertaining to claims based on the negligence or willful misconduct of the Company, and (iv) indemnities involving the accuracy of representations and warranties in certain contracts. The duration of these indemnities, commitments and guarantees varies and, in certain cases, may be indefinite. The majority of these indemnities, commitments and guarantees do not provide for any limitation of the maximum potential for future payments the Company could be obligated to make. The Company has not recorded any liability for these indemnities, commitments and guarantees in the accompanying consolidated balance sheets.
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12. | Accumulated Other Comprehensive Income |
The components of accumulated other comprehensive income include changes in fair value of derivative instruments qualifying as cash flow hedges and foreign currency translation adjustments. The components of accumulated other comprehensive income, net of tax, as of the dates indicated were as follows:
In thousands | January 31, 2013 | October 31, 2012 | ||||||
Foreign currency translation adjustment | $ | 92,414 | $ | 80,656 | ||||
Gain on cash flow hedges | 2,108 | 5,756 | ||||||
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$ | 94,522 | $ | 86,412 | |||||
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13. | Condensed Consolidating Financial Information |
The Company has $400 million in publicly registered Senior Notes. Obligations under the Company’s Senior Notes are fully and unconditionally guaranteed by certain of its existing domestic subsidiaries.
The Company is required to present condensed consolidating financial information for Quiksilver, Inc. and its domestic subsidiaries within the notes to the consolidated financial statements in accordance with the criteria established for parent companies in the SEC’s Regulation S-X, Rule 3-10(f). The following condensed consolidating financial information presents the results of operations, financial position and cash flows of Quiksilver Inc., its 100% owned Guarantor subsidiaries, its non-Guarantor subsidiaries and the eliminations necessary to arrive at the information for the Company on a consolidated basis as of January 31, 2013 and October 31, 2012 and for the first quarter of fiscal 2013 and 2012. The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions. Certain immaterial balances have been reclassified in the January 31, 2012 condensed consolidating financial information to conform to the current year presentation. The Company has applied the estimated consolidated annual effective income tax rate to both the guarantor and non-guarantor subsidiaries, adjusting for any discrete items, for interim reporting purposes. In the Company’s consolidated financial statements for fiscal 2013, management will apply the actual income tax rates to both the guarantor and non-guarantor subsidiaries. These interim tax rates may differ from the actual annual effective income tax rates for both the guarantor and non-guarantor subsidiaries.
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CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended January 31, 2013
In thousands | Quiksilver, Inc. | Guarantor Subsidiaries | Non- Guarantor | Eliminations | Consolidated | |||||||||||||||
Revenues, net | $ | 116 | $ | 165,746 | $ | 297,344 | $ | (32,188 | ) | $ | 431,018 | |||||||||
Cost of goods sold | — | 103,732 | 133,685 | (26,106 | ) | 211,311 | ||||||||||||||
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Gross profit | 116 | 62,014 | 163,659 | (6,082 | ) | 219,707 | ||||||||||||||
Selling, general and administrative expense | 15,975 | 74,188 | 142,154 | (7,058 | ) | 225,259 | ||||||||||||||
Asset impairments | — | 1,335 | 1,833 | — | 3,168 | |||||||||||||||
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Operating (loss)/income | (15,859 | ) | (13,509 | ) | 19,672 | 976 | (8,720 | ) | ||||||||||||
Interest expense | 7,269 | 1,468 | 6,770 | — | 15,507 | |||||||||||||||
Foreign currency loss | 154 | 165 | 2,854 | — | 3,173 | |||||||||||||||
Equity in earnings and other expense/(income) | 7,847 | (204 | ) | — | (7,643 | ) | — | |||||||||||||
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(Loss)/income before provision for income taxes | (31,129 | ) | (14,938 | ) | 10,048 | 8,619 | (27,400 | ) | ||||||||||||
(Benefit)/provision for income taxes | — | (1,187 | ) | 4,411 | — | 3,224 | ||||||||||||||
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Net (loss)/income | (31,129 | ) | (13,751 | ) | 5,637 | 8,619 | (30,624 | ) | ||||||||||||
Less: net income attributable to non-controlling interest | — | — | (505 | ) | — | (505 | ) | |||||||||||||
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Net (loss)/income attributable to Quiksilver, Inc. | $ | (31,129 | ) | $ | (13,751 | ) | $ | 5,132 | $ | 8,619 | $ | (31,129 | ) | |||||||
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CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended January 31, 2012
In thousands | Quiksilver, Inc. | Guarantor Subsidiaries | Non- Guarantor | Eliminations | Consolidated | |||||||||||||||
Revenues, net | $ | 116 | $ | 171,377 | $ | 305,027 | $ | (26,899 | ) | $ | 449,621 | |||||||||
Cost of goods sold | — | 105,206 | 136,183 | (19,718 | ) | 221,671 | ||||||||||||||
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Gross profit | 116 | 66,171 | 168,844 | (7,181 | ) | 227,950 | ||||||||||||||
Selling, general and administrative expense | 16,916 | 77,497 | 143,045 | (7,043 | ) | 230,415 | ||||||||||||||
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Operating (loss)/income | (16,800 | ) | (11,326 | ) | 25,799 | (138 | ) | (2,465 | ) | |||||||||||
Interest expense | 7,240 | 1,294 | 6,511 | — | 15,045 | |||||||||||||||
Foreign currency gain | (126 | ) | (203 | ) | (1,521 | ) | — | (1,850 | ) | |||||||||||
Equity in earnings and other (income)/expense | (1,309 | ) | 1,251 | — | 58 | — | ||||||||||||||
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(Loss)/income before provision for income taxes | (22,605 | ) | (13,668 | ) | 20,809 | (196 | ) | (15,660 | ) | |||||||||||
Provision for income taxes | — | 216 | 5,034 | — | 5,250 | |||||||||||||||
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Net (loss)/income | (22,605 | ) | (13,884 | ) | 15,775 | (196 | ) | (20,910 | ) | |||||||||||
Less: net income attributable to non-controlling interest | — | — | (1,695 | ) | — | (1,695 | ) | |||||||||||||
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Net (loss)/income attributable to Quiksilver, Inc. | $ | (22,605 | ) | $ | (13,884 | ) | $ | 14,080 | $ | (196 | ) | $ | (22,605 | ) | ||||||
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CONDENSED CONSOLIDATING BALANCE SHEET
At January 31, 2013
In thousands | Quiksilver, Inc. | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||||
ASSETS | ||||||||||||||||||||
Current assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 419 | $ | 292 | $ | 67,650 | $ | — | $ | 68,361 | ||||||||||
Trade accounts receivable, net | — | 121,059 | 218,521 | — | 339,580 | |||||||||||||||
Other receivables | (29 | ) | 7,461 | 24,437 | — | 31,869 | ||||||||||||||
Income taxes receivable | — | (656 | ) | 1,666 | — | 1,010 | ||||||||||||||
Inventories | — | 136,978 | 281,239 | 974 | 419,191 | |||||||||||||||
Deferred income taxes | — | 5,209 | 22,403 | — | 27,612 | |||||||||||||||
Prepaid expenses and other current assets | 3,842 | 10,360 | 23,713 | — | 37,915 | |||||||||||||||
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Total current assets | 4,232 | 280,703 | 639,629 | 974 | 925,538 | |||||||||||||||
Fixed assets, net | 19,698 | 61,768 | 158,484 | — | 239,950 | |||||||||||||||
Intangible assets, net | 3,516 | 48,526 | 88,048 | — | 140,090 | |||||||||||||||
Goodwill | — | 112,216 | 165,034 | — | 277,250 | |||||||||||||||
Other assets | 2,329 | 2,398 | 40,736 | — | 45,463 | |||||||||||||||
Deferred income taxes long-term | — | (23,550 | ) | 143,211 | — | 119,661 | ||||||||||||||
Investment in subsidiaries | 1,095,771 | 5,550 | — | (1,101,321 | ) | — | ||||||||||||||
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Total assets | $ | 1,125,546 | $ | 487,611 | $ | 1,235,142 | $ | (1,100,347 | ) | $ | 1,747,952 | |||||||||
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LIABILITIES AND EQUITY | ||||||||||||||||||||
Current liabilities: | ||||||||||||||||||||
Lines of credit | $ | — | $ | — | $ | 11,897 | $ | — | $ | 11,897 | ||||||||||
Accounts payable | 4,443 | 96,400 | 120,853 | — | 221,696 | |||||||||||||||
Accrued liabilities | 11,027 | 23,327 | 75,488 | — | 109,842 | |||||||||||||||
Current portion of long-term debt | — | 7,094 | 35,264 | — | 42,358 | |||||||||||||||
Intercompany balances | 139,175 | (108,829 | ) | (30,346 | ) | — | — | |||||||||||||
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Total current liabilities | 154,645 | 17,992 | 213,156 | — | 385,793 | |||||||||||||||
Long-term debt, net of current portion | 400,000 | 62,000 | 272,191 | — | 734,191 | |||||||||||||||
Other long-term liabilities | — | 24,347 | 13,245 | — | 37,592 | |||||||||||||||
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Total liabilities | 554,645 | 104,339 | 498,592 | — | 1,157,576 | |||||||||||||||
Stockholders’/invested equity | 570,901 | 383,272 | 717,075 | (1,100,347 | ) | 570,901 | ||||||||||||||
Non-controlling interest | — | — | 19,475 | — | 19,475 | |||||||||||||||
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Total liabilities and equity | $ | 1,125,546 | $ | 487,611 | $ | 1,235,142 | $ | (1,100,347 | ) | $ | 1,747,952 | |||||||||
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CONDENSED CONSOLIDATING BALANCE SHEET
At October 31, 2012
In thousands | Quiksilver, Inc. | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||||
ASSETS | ||||||||||||||||||||
Current assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 324 | $ | 135 | $ | 41,364 | $ | — | $ | 41,823 | ||||||||||
Trade accounts receivable, net | — | 181,945 | 251,798 | — | 433,743 | |||||||||||||||
Other receivables | 20 | 6,158 | 26,640 | — | 32,818 | |||||||||||||||
Inventories | — | 107,722 | 237,465 | (441 | ) | 344,746 | ||||||||||||||
Deferred income taxes | — | 5,209 | 21,159 | — | 26,368 | |||||||||||||||
Prepaid expenses and other current assets | 2,277 | 9,548 | 14,546 | — | 26,371 | |||||||||||||||
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Total current assets | 2,621 | 310,717 | 592,972 | (441 | ) | 905,869 | ||||||||||||||
Fixed assets, net | 18,802 | 64,496 | 155,015 | — | 238,313 | |||||||||||||||
Intangible assets, net | 3,228 | 47,746 | 88,475 | — | 139,449 | |||||||||||||||
Goodwill | — | 112,216 | 160,951 | — | 273,167 | |||||||||||||||
Other assets | 2,753 | 2,677 | 42,359 | — | 47,789 | |||||||||||||||
Deferred income taxes long-term | — | (23,550 | ) | 137,203 | — | 113,653 | ||||||||||||||
Investment in subsidiaries | 1,087,924 | 5,028 | — | (1,092,952 | ) | — | ||||||||||||||
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Total assets | $ | 1,115,328 | $ | 519,330 | $ | 1,176,975 | $ | (1,093,393 | ) | $ | 1,718,240 | |||||||||
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LIABILITIES AND EQUITY | ||||||||||||||||||||
Current liabilities: | ||||||||||||||||||||
Lines of credit | $ | — | $ | — | $ | 18,147 | $ | — | $ | 18,147 | ||||||||||
Accounts payable | 6,995 | 95,355 | 101,222 | — | 203,572 | |||||||||||||||
Accrued liabilities | 6,189 | 28,343 | 80,359 | — | 114,891 | |||||||||||||||
Current portion of long-term debt | — | 8,594 | 10,053 | — | 18,647 | |||||||||||||||
Income taxes payable | — | (117 | ) | 1,476 | — | 1,359 | ||||||||||||||
Intercompany balances | 118,834 | (95,809 | ) | (23,025 | ) | — | — | |||||||||||||
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Total current liabilities | 132,018 | 36,366 | 188,232 | — | 356,616 | |||||||||||||||
Long-term debt, net of current portion | 400,000 | 60,700 | 260,475 | — | 721,175 | |||||||||||||||
Other long-term liabilities | — | 25,241 | 12,972 | — | 38,213 | |||||||||||||||
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Total liabilities | 532,018 | 122,307 | 461,679 | — | 1,116,004 | |||||||||||||||
Stockholders’/invested equity | 583,310 | 397,023 | 696,370 | (1,093,393 | ) | 583,310 | ||||||||||||||
Non-controlling interest | — | — | 18,926 | — | 18,926 | |||||||||||||||
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Total liabilities and equity | $ | 1,115,328 | $ | 519,330 | $ | 1,176,975 | $ | (1,093,393 | ) | $ | 1,718,240 | |||||||||
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CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Three Months Ended January 31, 2013
In thousands | Quiksilver, Inc. | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||||
Cash flows from operating activities: | ||||||||||||||||||||
Net (loss)/income | $ | (31,129 | ) | $ | (13,751 | ) | $ | 5,637 | $ | 8,619 | $ | (30,624 | ) | |||||||
Adjustments to reconcile net (loss)/income to net cash (used in)/provided by operating activities: | ||||||||||||||||||||
Depreciation and amortization | 445 | 4,080 | 7,694 | — | 12,219 | |||||||||||||||
Stock-based compensation | 7,336 | — | — | — | 7,336 | |||||||||||||||
Provision for doubtful accounts | — | (1,171 | ) | 2,502 | — | 1,331 | ||||||||||||||
Equity in earnings | 7,847 | (204 | ) | (11 | ) | (7,643 | ) | (11 | ) | |||||||||||
Asset impairments | — | 1,335 | 1,833 | — | 3,168 | |||||||||||||||
Non-cash interest expense | 393 | 330 | 188 | — | 911 | |||||||||||||||
Deferred income taxes | — | — | 1,135 | — | 1,135 | |||||||||||||||
Other adjustments to reconcile net income/(loss) | 154 | (105 | ) | 2,707 | — | 2,756 | ||||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||||||
Trade accounts receivable | — | 62,058 | 37,603 | — | 99,661 | |||||||||||||||
Inventories | — | (29,118 | ) | (38,385 | ) | (976 | ) | (68,479 | ) | |||||||||||
Other operating assets and liabilities | 1,707 | (7,401 | ) | (393 | ) | — | (6,087 | ) | ||||||||||||
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Net cash (used in)/provided by operating activities | (13,247 | ) | 16,053 | 20,510 | — | 23,316 | ||||||||||||||
Cash flows from investing activities: | ||||||||||||||||||||
Capital expenditures | (1,708 | ) | (3,097 | ) | (7,973 | ) | — | (12,778 | ) | |||||||||||
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Net cash used in investing activities | (1,708 | ) | (3,097 | ) | (7,973 | ) | — | (12,778 | ) | |||||||||||
Cash flows from financing activities: | ||||||||||||||||||||
Borrowings on lines of credit | — | — | 1,963 | — | 1,963 | |||||||||||||||
Payments on lines of credit | — | — | (8,042 | ) | — | �� | (8,042 | ) | ||||||||||||
Borrowings on long-term debt | — | 23,000 | 24,879 | — | 47,879 | |||||||||||||||
Payments on long-term debt | — | (23,200 | ) | — | — | (23,200 | ) | |||||||||||||
Stock option exercises and employee stock purchases | 3,319 | — | — | — | 3,319 | |||||||||||||||
Intercompany | 11,731 | (12,599 | ) | 868 | — | — | ||||||||||||||
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Net cash provided by/(used in) financing activities | 15,050 | (12,799 | ) | 19,668 | — | 21,919 | ||||||||||||||
Effect of exchange rate changes on cash | — | — | (5,919 | ) | — | (5,919 | ) | |||||||||||||
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Net increase in cash and cashequivalents | 95 | 157 | 26,286 | — | 26,538 | |||||||||||||||
Cash and cash equivalents, beginning of period | 324 | 135 | 41,364 | — | 41,823 | |||||||||||||||
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Cash and cash equivalents, end of period | $ | 419 | $ | 292 | $ | 67,650 | $ | — | $ | 68,361 | ||||||||||
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CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Three Months Ended January 31, 2012
In thousands | Quiksilver, Inc. | Guarantor Subsidiaries | Non- Guarantor | Eliminations | Consolidated | |||||||||||||||
Cash flows from operating activities: | ||||||||||||||||||||
Net (loss)/income | $ | (22,605 | ) | $ | (13,884 | ) | $ | 15,775 | $ | (196 | ) | $ | (20,910 | ) | ||||||
Adjustments to reconcile net (loss)/income to net cash (used in)/provided by operating activities: | ||||||||||||||||||||
Depreciation and amortization | 636 | 4,607 | 7,719 | — | 12,962 | |||||||||||||||
Stock-based compensation | 6,977 | — | — | — | 6,977 | |||||||||||||||
Provision for doubtful accounts | — | (2,600 | ) | 918 | — | (1,682 | ) | |||||||||||||
Equity in earnings | (1,309 | ) | 1,251 | (195 | ) | 58 | (195 | ) | ||||||||||||
Non-cash interest expense | 366 | 527 | 170 | — | 1,063 | |||||||||||||||
Deferred income taxes | — | — | 3,354 | — | 3,354 | |||||||||||||||
Other adjustments to reconcile net (loss)/income | (125 | ) | 5 | (1,007 | ) | — | (1,127 | ) | ||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||||||
Trade accounts receivable | — | 32,448 | 34,758 | — | 67,206 | |||||||||||||||
Inventories | — | (19,307 | ) | (51,984 | ) | 138 | (71,153 | ) | ||||||||||||
Other operating assets and liabilities | 4,390 | 8,611 | (5,620 | ) | — | 7,381 | ||||||||||||||
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Net cash (used in)/provided by operating activities | (11,670 | ) | 11,658 | 3,888 | — | 3,876 | ||||||||||||||
Cash flows from investing activities: | ||||||||||||||||||||
Capital expenditures | (434 | ) | (7,494 | ) | (8,558 | ) | — | (16,486 | ) | |||||||||||
Business acquisitions, net of cash acquired | — | — | (9,117 | ) | — | (9,117 | ) | |||||||||||||
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Net cash used in investing activities | (434 | ) | (7,494 | ) | (17,675 | ) | — | (25,603 | ) | |||||||||||
Cash flows from financing activities: | ||||||||||||||||||||
Borrowings on lines of credit | — | — | — | — | — | |||||||||||||||
Payments on lines of credit | — | — | (11,448 | ) | — | (11,448 | ) | |||||||||||||
Borrowings on long-term debt | — | 18,000 | 29,442 | — | 47,442 | |||||||||||||||
Payments on long-term debt | — | (20,500 | ) | (2,128 | ) | — | (22,628 | ) | ||||||||||||
Stock option exercises and employee stock purchases | 779 | — | — | — | 779 | |||||||||||||||
Intercompany | 11,635 | (2,740 | ) | (8,895 | ) | — | — | |||||||||||||
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Net cash provided by/(used in) financing activities | 12,414 | (5,240 | ) | 6,971 | — | 14,145 | ||||||||||||||
Effect of exchange rate changes on cash | — | — | (7,736 | ) | — | (7,736 | ) | |||||||||||||
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Net increase/(decrease) in cash and cash equivalents | 310 | (1,076 | ) | (14,552 | ) | — | (15,318 | ) | ||||||||||||
Cash and cash equivalents, beginning of period | 17 | 1,331 | 108,405 | — | 109,753 | |||||||||||||||
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Cash and cash equivalents, end of period | $ | 327 | $ | 255 | $ | 93,853 | $ | — | $ | 94,435 | ||||||||||
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Unless the context indicates otherwise, when we refer to “Quiksilver”, “we”, “us”, “our”, or the “Company” in this Form 10-Q, we are referring to Quiksilver, Inc. and its subsidiaries on a consolidated basis. The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and related notes thereto contained elsewhere in this report. The information contained in this quarterly report on Form 10-Q is not a complete description of our business or the risks associated with an investment in our securities. We urge you to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended October 31, 2012 and subsequent reports on Form 8-K, which discuss our business in greater detail. The section entitled “Risk Factors” set forth in Item 1A of our Annual Report on Form 10-K, and similar disclosures in our other SEC filings, discuss some of the important risk factors that may affect our business, results of operations and financial condition. You should carefully consider those risks, in addition to the information in this report and in our other filings with the SEC, before deciding to invest in, or maintain your investment in, our common stock or senior notes.
Cautionary Note Regarding Forward-Looking Statements
This report on Form 10-Q contains “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are often, but not always, identified by words such as: “anticipate,” “intend,” “plan,” “goal,” “seek,” “believe,” “project,” “estimate,” “expect,” “outlook,” “strategy,” “future,” “likely,” “may,” “should,” “could,” “will” and similar references to future periods. Examples of forward-looking statements include, but are not limited to, statements we make regarding:
• | current or future volatility in certain economies, credit markets and future market conditions; and |
• | our belief that we have sufficient liquidity to fund our business operations during the next twelve months. |
Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following:
• | our ability to execute our mission and strategies; |
• | our ability to achieve the financial results that we anticipate; |
• | our ability to effectively transition our supply chain and certain other business processes to global scope; |
• | future expenditures for capital projects, including the ongoing implementation of our global enterprise-wide reporting system; |
• | increases in production costs and raw materials and disruptions in the supply chains for these materials; |
• | deterioration of global economic conditions and credit and capital markets; |
• | potential non-cash asset impairment charges for goodwill or other fixed assets; |
• | our ability to continue to maintain our brand image and reputation; |
• | foreign currency exchange rate fluctuations; |
• | our ability to remain compliant with our debt covenants; |
• | payments due on contractual commitments and other debt obligations; |
• | changes in political, social and economic conditions and local regulations, particularly in Europe and Asia; |
• | the occurrence of hostilities or catastrophic events; |
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• | changes in customer demand; and |
• | disruptions to our computer systems and software, as well as natural events such as severe weather, fires, floods and earthquakes or man-made or other disruptions of our operating systems, structures or equipment. |
Any forward-looking statement made by us in this report is based only on information currently available to us and speaks only as of the date on which it is made. We undertake no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise.
Quiksilver is one of the world’s leading outdoor sports lifestyle companies. We design, develop and distribute a diversified mix of branded apparel, footwear, accessories and related products. Our brands, inspired by the passion for outdoor action sports, represent a casual lifestyle for young-minded people who connect with our boardriding culture and heritage. OurQuiksilver,Roxy,DC,Lib TechandHawkbrands are synonymous with the heritage and culture of surfing, skateboarding and snowboarding. Our products combine decades of brand heritage, authenticity and design experience with the latest technical performance innovations available in the marketplace.
Our products are sold in over 90 countries through a wide range of distribution points, including wholesale accounts (surf shops, skate shops, snow shops, specialty stores, and select department stores), 840 owned or licensed Company retail stores, and via our e-commerce websites. We have four operating segments consisting of the Americas, EMEA and APAC, each of which sells a full range of our products, as well as Corporate Operations. Our Americas segment, consisting of North, South and Central America, includes revenues primarily from the United States, Canada, Brazil and Mexico. Our EMEA segment, consisting of Europe, the Middle East and Africa, includes revenues primarily from continental Europe, the United Kingdom, and South Africa. Our APAC segment, consisting of Australia, New Zealand, and Asia, includes revenues primarily from Australia, Japan, New Zealand and Indonesia. Royalties earned from various licensees in other international territories are categorized in Corporate Operations, along with revenues from sourcing services to our licensees. For information regarding the revenues, operating income/(loss), and identifiable assets attributable to our operating segments, see note 3 of our condensed consolidated financial statements included in this report. In fiscal 2012, more than 60% of our revenue was generated outside of the United States.
The table below sets forth selected statements of operations and other data as a percentage of net revenues for the first quarter of fiscal 2013 and 2012. The discussion that follows should be read in conjunction with the table.
Statements of Operations data | 2013 | 2012 | ||||||
Revenues, net | 100.0 | % | 100.0 | % | ||||
Gross profit | 51.0 | 50.7 | ||||||
Selling, general and administrative expense | 52.3 | 51.2 | ||||||
Asset impairments | 0.7 | — | ||||||
Operating loss | (2.0 | ) | (0.5 | ) | ||||
Interest expense | 3.6 | 3.3 | ||||||
Foreign currency loss/(gain) | 0.7 | (0.4 | ) | |||||
Loss before provision for income taxes | (6.4 | )% | (3.5 | )% | ||||
Other data | ||||||||
Adjusted EBITDA(1) | 2.4 | % | 3.9 | % |
(1) | Adjusted EBITDA is defined as net (loss)/income attributable to Quiksilver, Inc. before (i) interest expense, (ii) provision/(benefit) for income taxes, (iii) depreciation and amortization, (iv) non-cash stock-based compensation expense and (v) asset impairments. Adjusted EBITDA is not defined under generally accepted accounting principles (“GAAP”), and it may not be comparable to similarly titled measures reported by other |
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companies. We use Adjusted EBITDA, along with other GAAP measures, as a measure of profitability because Adjusted EBITDA helps us to compare our performance on a consistent basis by removing from our operating results the impact of our capital structure, the effect of operating in different tax jurisdictions, the impact of our asset base, which can differ depending on the book value of assets, the accounting methods used to compute depreciation and amortization, the existence or timing of asset impairments and the effect of non-cash stock-based compensation expense. We believe EBITDA is useful to investors as it is a widely used measure of performance and the adjustments we make to EBITDA provide further clarity on our profitability. We remove the effect of non-cash stock-based compensation from our earnings which can vary based on share price, share price volatility and the expected life of the equity instruments we grant. In addition, this stock-based compensation expense does not result in cash payments by us. We remove the effect of asset impairments from Adjusted EBITDA for the same reason that we remove depreciation and amortization as it is part of the impact of our asset base. Adjusted EBITDA has limitations as a profitability measure in that it does not include the interest expense on our debts, our provisions for income taxes, the effect of our expenditures for capital assets and certain intangible assets, the effect of non-cash stock-based compensation expense and the effect of asset impairments. The following is a reconciliation of net loss attributable to Quiksilver, Inc. to Adjusted EBITDA for the first quarter of fiscal 2013 and 2012: |
In thousands | 2013 | 2012 | ||||||
Net loss attributable to Quiksilver, Inc. | $ | (31,129 | ) | $ | (22,605 | ) | ||
Provision for income taxes | 3,224 | 5,250 | ||||||
Interest expense, net | 15,507 | 15,045 | ||||||
Depreciation and amortization | 12,219 | 12,962 | ||||||
Non-cash stock-based compensation expense | 7,336 | 6,977 | ||||||
Non-cash asset impairments | 3,168 | — | ||||||
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Adjusted EBITDA | $ | 10,325 | $ | 17,629 | ||||
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First Quarter (Three Months) Ended January 31, 2013 Compared to First Quarter Ended January 31, 2012
Revenues, net
Revenues, net – by Segment
The following table presents consolidated net revenues (in millions) by segment in historical currency (as reported) for the first quarter of fiscal 2013 and 2012:
Net Revenues by Segment in Historical Currency (as reported):
Americas | EMEA | APAC | Corporate | Total | ||||||||||||||||
First Quarter 2013 | $ | 186 | $ | 171 | $ | 73 | $ | 1 | $ | 431 | ||||||||||
First Quarter 2012 | 205 | 169 | 75 | 1 | 450 | |||||||||||||||
% (decrease)/increase | (9 | )% | 1 | % | (2 | )% | (4 | )% |
We use constant currency measurements to better understand actual growth rates in our foreign operations. Constant currency measurements remove the impact of foreign currency exchange rate fluctuations from period to period. Constant currency is calculated by taking the ending foreign currency exchange rate (for balance sheet items) or the average foreign currency exchange rate (for income statement items) used in translation for the current period and applying that same rate to the prior period. Net revenues (in millions) by segment in constant currency for the first quarter of fiscal 2013 and 2012 were as follows:
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Net Revenues by Segment in Constant Currency (current year exchange rates):
Americas | EMEA | APAC | Corporate | Total | ||||||||||||||||
First Quarter 2013 | $ | 186 | $ | 171 | $ | 73 | $ | 1 | $ | 431 | ||||||||||
First Quarter 2012 | 204 | 168 | 74 | 1 | 446 | |||||||||||||||
% (decrease)/increase | (9 | )% | 2 | % | (1 | )% | (3 | )% |
On an as reported basis, total net revenues for the first quarter of fiscal 2013 decreased 4% to $431 million from $450 million in the comparable period of the prior year. This decrease was primarily due to a $19 million, or 9%, net revenue decrease within our Americas segment.
Net revenues in our Americas segment declined across all three core brands (Quiksilver,DC andRoxy) and also within both our wholesale and retail distribution channels. The net revenue decrease in the Americas was primarily due to three factors: a) lower sales to wholesale clearance customers, largely driven by the timing of shipments between the first and second quarters of fiscal 2013; b) lower net revenues in our Company-owned retail stores due to 17 store closures since the end of the first quarter of fiscal 2012; and c) increased markdown allowances and sales discounts to wholesale customers to assist the sell-through of inventory in this channel.
Net revenues in our EMEA segment increased 1% versus the prior year with high-single digit percentage growth inDCnet revenues and low-single digit percentage growth inRoxynet revenues largely offset by a high-single digit percentage decline inQuiksilvernet revenues. Growth in the e-commerce and retail channels within EMEA were largely offset by a decline in the wholesale channel. Net revenues increased in the high-teens on a percentage basis in the United Kingdom, due largely to e-commerce growth, as well as in Germany. These increases were largely offset by a high-teens percentage decrease in Spain and a low-single digit percentage decrease in France due to the continuing negative economic circumstances in those countries.
Net revenues in the APAC segment decreased 2% versus the prior year with a high-single digit percentage decline inRoxy net revenues and a low-single digit percentage decline inQuiksilver net revenues largely offset by a low-teens percentage increase inDC net revenues. Wholesale channel net revenues decreased in the high-single digits on a percentage basis, while retail net revenues were flat and e-commerce net revenues grew substantially as we expanded our online business in this region. Net revenues from Australia and New Zealand declined in the high-single digits on a percentage basis versus the prior year, but were largely offset by net revenue growth in all other APAC countries.
Net revenues in our emerging markets, which include Brazil, Mexico, Russia, Taiwan, Korea, China and Indonesia increased by 15% versus the prior year.
Revenues, net – By Brand
Net revenues by brand (in millions), in both historical and constant currency, for the first quarter of fiscal 2013 and 2012 were as follows:
Net Revenues by Brand in Historical Currency (as reported):
Quiksilver | Roxy | DC | Other | Total | ||||||||||||||||
First Quarter 2013 | $ | 179 | $ | 115 | $ | 109 | $ | 28 | $ | 431 | ||||||||||
First Quarter 2012 | 194 | 125 | 109 | 22 | 450 | |||||||||||||||
% (decrease)/increase | (8 | )% | (8 | )% | 0 | % | 25 | % | (4 | )% |
Net Revenues by Brand in Constant Currency (current year exchange rates):
Quiksilver | Roxy | DC | Other | Total | ||||||||||||||||
First Quarter 2013 | $ | 179 | $ | 115 | $ | 109 | $ | 28 | $ | 431 | ||||||||||
First Quarter 2012 | 192 | 124 | 108 | 22 | 446 | |||||||||||||||
% (decrease)/increase | (7 | )% | (7 | )% | 1 | % | 24 | % | (3 | )% |
Quiksilver brand net revenues decreased 8% on an as reported basis during the first quarter of fiscal 2013 compared to the prior year period. This decrease was primarily due to a low-double digit percentage decline in wholesale channel net revenues and a low-single digit percentage decline in retail channel net revenues. The wholesale and retail net revenue decreases were spread across all three regional segments.
Roxy brand net revenues also decreased 8% on an as reported basis due to a low-teens percentage decrease in the Americas and a high-single digit percentage decrease within APAC. These decreases were largely focused within the wholesale channel.
DC brand net revenues increased slightly on an as reported basis with growth in EMEA and APAC largely offset by a single digit percentage decline in the Americas. SignificantDC brand growth within the retail and e-commerce channels was largely offset by a decrease in wholesale net revenues, particularly within the Americas.
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Revenues, net – By Channel
Net revenues by channel (in millions), in both historical and constant currency, for the first quarter of fiscal 2013 and 2012 were as follows:
Net Revenues by Channel in Historical Currency (as reported):
Wholesale | Retail | E-com | Total | |||||||||||||
First Quarter 2013 | $ | 268 | $ | 129 | $ | 33 | $ | 431 | ||||||||
First Quarter 2012 | 295 | 131 | 24 | 450 | ||||||||||||
% (decrease)/increase | (9 | )% | (1 | )% | 40 | % | (4 | )% |
Net Revenues by Channel in Constant Currency (current year exchange rates):
Wholesale | Retail | E-com | Total | |||||||||||||
First Quarter 2013 | $ | 268 | $ | 129 | $ | 33 | $ | 431 | ||||||||
First Quarter 2012 | 292 | 131 | 24 | 446 | ||||||||||||
% (decrease)/increase | (8 | )% | (1 | )% | 39 | % | (3 | )% |
Wholesale net revenues decreased 9% on an as reported basis in the first quarter of fiscal 2013 versus the prior year period. Wholesale net revenues declined in all three regional segments and across all three core brands.
Retail net revenues decreased 1% on an as reported basis versus the prior year. Retail net revenues decreased in the high-single digits on a percentage basis within the Americas segment, offsetting modest growth within the EMEA segment, and were flat within the APAC segment. Retail net revenues decreased by approximately $3 million due to 17 retail store closures since the end of the first quarter of fiscal 2012.
E-commerce net revenues increased 40% versus the prior year period due to significant growth in EMEA and APAC as we expanded our online business within these regional segments.
Gross Profit
Gross profit decreased to $220 million in the first quarter of fiscal 2013 from $228 million in the comparable period of the prior year. Gross margin increased to 51.0% of net revenues in the first quarter of fiscal 2013 from 50.7% in the prior year period. This increase was primarily due to a net revenue mix shift from our wholesale channel toward our higher gross margin retail and e-commerce distribution channels; a net revenue mix shift from the Americas region toward the higher gross margin EMEA region; as well as improved retail margins within our APAC and Americas segments. These favorable factors were partially offset by increased sales discounts regarding the DC brand and the EMEA region. Gross margin as a percentage of net revenues by regional segment for the first quarter of fiscal 2013 and 2012 was as follows:
2013 | 2012 | Basis Point Change | ||||||||||
Americas | 43.4 | % | 42.8 | % | 60 | bp | ||||||
EMEA | 57.8 | % | 60.3 | % | (250) | bp | ||||||
APAC | 53.9 | % | 51.1 | % | 280 | bp | ||||||
Consolidated | 51.0 | % | 50.7 | % | 30 | bp |
The gross margin increases in our Americas and APAC segments were primarily the result of improved performance within the retail and e-commerce channels as well as the net revenue mix shift toward these channels. Our EMEA segment gross margin decreased primarily as a result of discounting within the wholesale and retail channels.
Selling, General and Administrative Expenses (“SG&A”)
SG&A for the first quarter of fiscal 2013 decreased 2% to $225 million from $230 million in the comparable period of the prior year. This decrease was primarily attributable to the favorable impact of our expense reduction efforts implemented in the past year ($9 million), reduced retail expenses associated with the closure of underperforming stores ($3 million), and lower wholesale selling
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expenses associated with decreased sales in this channel ($1 million). These decreases were partially offset by an increase in e-commerce expenses associated with the continuing growth of our online business ($4 million), higher bad debt expenses ($4 million), and increased professional services fees ($1 million). SG&A by segment (in millions) as reported for the first quarter of fiscal 2013 and 2012 was as follows:
2013 | 2012 | Basis | ||||||||||||||||||||||
$ | % of Net Revenues | $ | % of Net Revenues | $ Change | Point Change | |||||||||||||||||||
Americas | 88 | 47.3 | % | 89 | 43.6 | % | (1 | ) | 370 | bp | ||||||||||||||
EMEA | 83 | 48.6 | % | 86 | 51.0 | % | (3 | ) | (240) | bp | ||||||||||||||
APAC | 37 | 51.1 | % | 37 | 49.9 | % | (0 | ) | 120 | bp | ||||||||||||||
Corporate Operations | 17 | 18 | (1 | ) | ||||||||||||||||||||
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Consolidated | 225 | 52.3 | % | 230 | 51.2 | % | (5 | ) | 110 | bp | ||||||||||||||
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Asset Impairments
Asset impairment charges were $3 million in the first quarter of fiscal 2013 compared to zero in the prior year period. Impairment charges were related to certain underperforming retail stores.
Non-Operating Expenses
Interest expense for the first quarter of fiscal 2013 was $16 million compared to $15 million in the first quarter of fiscal 2012, primarily due to increased net borrowings year over year.
Our foreign currency loss amounted to $3 million for the first quarter of fiscal 2013 compared to a gain of $2 million in the comparable period of the prior year. This loss resulted primarily from the foreign currency exchange effect of certain non-euro denominated assets of our European subsidiaries and, to a lesser extent, certain foreign currency exchange contracts.
Our income tax expense for the first quarter of fiscal 2013 was $3 million compared to $5 million in the comparable period of the prior year. Although we incurred a net loss during the first quarter of fiscal 2013 and 2012, we incurred income tax expense as we were unable to record tax benefits against the losses in certain jurisdictions where we have previously recorded valuation allowances.
Net Loss Attributable to Quiksilver, Inc.
Our net loss attributable to Quiksilver, Inc. for the first quarter of fiscal 2013 was $31 million, or $0.19 per share, compared to $23 million, or $0.14 per share, in the comparable period of the prior year.
Adjusted EBITDA
Adjusted EBITDA decreased 41% to $10 million in the first quarter of fiscal 2013 compared to $18 million in the first quarter of fiscal 2012. This decrease was primarily due to the $5 million change in foreign currency impacts noted above as well as the net revenue decline during the first quarter of fiscal 2013, partially offset by SG&A reductions. For a definition of Adjusted EBITDA and a reconciliation of net loss attributable to Quiksilver, Inc. to Adjusted EBITDA, see footnote (1) to the table under “Results of Operations” above.
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Financial Position, Capital Resources and Liquidity
The following table shows our cash, working capital and total indebtedness as of the dates indicated:
in millions | January 31, 2013 | October 31, 2012 | January 31, 2012 | |||||||||
Cash and cash equivalents | $ | 68 | $ | 42 | $ | 94 | ||||||
Working capital | 540 | 549 | 549 | |||||||||
Total indebtedness | 788 | 758 | 740 |
We believe that our cash flows from operations, together with our existing credit facilities, cash on hand and term loans will be adequate to fund our capital requirements for at least the next twelve months.
Cash Flows
Operating activities provided cash of $23 million in the first quarter of fiscal 2013 compared to $4 million in the comparable period of the prior year. This $19 million increase was primarily the result of improved cash collections on accounts receivable during the first quarter of fiscal 2013 compared to the prior year period.
Capital expenditures totaled $13 million for the first quarter of fiscal 2013 compared to $16 million in the comparable period of the prior year. These investments include our ongoing enterprise-wide reporting system (SAP) and investments in company-owned stores.
Net cash provided by financing activities totaled $22 million in the first quarter of fiscal 2013 compared to $14 million in the comparable period of the prior year. Net cash provided primarily resulted from net borrowings on our existing credit facilities.
The net increase in cash and cash equivalents for the first quarter of fiscal 2013 was $27 million compared to a decrease of $15 million in the comparable period of the prior year.
Working Capital—Trade Accounts Receivable and Inventories
Two of the primary components of our working capital and near-term sources of cash at any point in time are trade accounts receivable and inventories. Our net trade accounts receivable decreased 22% to $340 million at January 31, 2013 compared to $434 million at October 31, 2012 due to the typical seasonality of our business. Compared to January 31, 2012, our net trade accounts receivable increased 5% and our average days sales outstanding (“DSO”) increased 13%. The increase in DSO was driven by the timing of customer payments, longer credit terms granted to certain wholesale customers, and the net revenue decrease during the first quarter of fiscal 2013.
Our net inventories increased 22% to $419 million at January 31, 2013 compared to $345 million at October 31, 2012. Compared to January 31, 2012, net inventories increased 2% and inventory days on hand increased 7%. These increases were primarily due to the net revenue decline in the wholesale channel during the first quarter of fiscal 2013, resulting in higher ending inventories than planned. Inventory from prior seasons was 14% of total inventory at January 31, 2013 compared to 19% at January 31, 2012. We do not currently expect the clearance of these inventories to have a material negative impact on our year over year gross margin comparisons for fiscal 2013.
Income Taxes
As of January 31, 2013, our liability for uncertain tax positions, exclusive of interest and penalties, was approximately $11 million. If our positions are favorably sustained by the relevant taxing authority, approximately $10 million, excluding interest and penalties, of uncertain tax position liabilities would favorably impact our effective tax rate in future periods.
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Contractual Obligations
There have been no material changes outside the ordinary course of business in our contractual obligations since October 31, 2012.
Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. To prepare these financial statements, we must make estimates and assumptions that affect the reported amounts of assets and liabilities. These estimates also affect our reported revenues and expenses. Judgments must also be made about the disclosure of contingent liabilities. Actual results could be significantly different from these estimates. We believe that the following discussion addresses the accounting policies that are necessary to understand and evaluate our reported financial results.
Revenue Recognition
Revenues are recognized when the risk of ownership and title passes to our customers. Generally, we extend credit to our customers and do not require collateral. Our sales agreements with our customers do not provide for any rights of return. However, we do approve returns on a case-by-case basis at our sole discretion to protect our brands and our image. We provide allowances for estimated returns when revenues are recorded, and related losses have historically been within our expectations. If returns are higher than our estimates, our results of operations would be adversely affected.
Accounts Receivable
Throughout the year, we perform credit evaluations of our customers, and we adjust credit limits based on payment history and the customer’s current creditworthiness. We continuously monitor our collections and maintain a reserve for estimated credit losses based on our historical experience and any specific customer collection issues that have been identified. We also use insurance on certain classes of receivables in our EMEA segment. Historically, our losses have been consistent with our estimates, but there can be no assurance that we will continue to experience the same credit loss rates that we have experienced in the past. It is not uncommon for some of our customers to have financial difficulties from time to time. This is normal given the wide variety of our account base, which includes small surf shops, medium-sized retail chains, and some large department store chains. Unforeseen, material financial difficulties of our customers could have an adverse impact on our results of operations.
Inventories
We value inventories at the cost to purchase and/or manufacture the product or the current estimated market value of the inventory, whichever is lower. We regularly review our inventory quantities on hand, and adjust inventory values for excess and obsolete inventory based primarily on estimated forecasts of product demand and market value. Demand for our products could fluctuate significantly. The demand for our products could be negatively affected by many factors, including the following:
• | weakening economic conditions; |
• | product quality and pricing; |
• | changes in consumer preferences; |
• | reduced customer confidence; and |
• | unseasonable weather. |
Our estimates of product demand and/or market value could be inaccurate, which could result in an understated or overstated provision required for excess and obsolete inventory.
Long-Lived Assets
We acquire tangible and intangible assets in the normal course of our business. We evaluate the recoverability of the carrying amount of these long-lived assets (including fixed assets, trademarks, licenses and other amortizable intangibles) whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss is recognized when the carrying value exceeds the undiscounted future cash flows estimated to result from the use and eventual
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disposition of the asset. Impairments are recognized in operating earnings. We use our best judgment based on the most current facts and circumstances regarding our business when applying these impairment rules to determine the timing of the impairment tests, the undiscounted cash flows used to assess impairments, and the fair value of a potentially impaired asset. Changes in assumptions used could have a significant impact on our assessment of recoverability.
Goodwill
We evaluate the recoverability of goodwill at least annually based on a two-step impairment test. The first step compares the fair value of each reporting unit with its carrying amount, including goodwill. We have three reporting units under which we evaluate goodwill for impairment, the Americas, EMEA and APAC. We estimate the fair value of our reporting units using a combination of a discounted cash flow approach and market approach. Material assumptions in our test for impairment include future cash flows of each reporting unit, discount rates applied to these cash flows and current market estimates of value. The discount rates used approximate our cost of capital. Future cash flows assume varying degrees of future growth in each reporting unit’s business. If the carrying amount exceeds fair value under the first step of our goodwill impairment test, then the second step of the impairment test is performed to measure the amount of any impairment loss.
As of October 31, 2012, the fair value of our Americas reporting unit substantially exceeded its carrying value. The fair values of our EMEA and APAC reporting units exceeded their carrying values by 6% and 5%, respectively. Goodwill amounted to $191 million for EMEA and $6 million for APAC as of October 31, 2012. No goodwill impairments have been recorded in fiscal 2013 or 2012. Based on the uncertainty of future growth rates and other assumptions used to estimate goodwill recoverability in our reporting units, future reductions in our expected cash flows for a reporting unit could cause a material impairment of goodwill.
Income Taxes
Current income tax expense is the amount of income taxes expected to be payable for the current year. A deferred income tax asset or liability is established for the expected future consequences of temporary differences in the financial reporting and tax bases of assets and liabilities. We consider future taxable income and ongoing prudent and feasible tax planning strategies in assessing the value of our deferred tax assets. If we determine that it is more likely than not that these assets will not be realized, we would reduce the value of these assets to their expected realizable value by recording a valuation allowance, thereby decreasing net income. Evaluating the value of these assets is necessarily based on our judgment. If we subsequently determine that the deferred tax assets for which a valuation allowance had been recorded would, in our judgment, be realized in the future, the valuation allowance would be reduced, thereby increasing net income in the period when that determination was made.
We adhere to the authoritative guidance included in Accounting Standards Codification Topic 740, “Income Taxes” which clarifies the accounting for uncertainty in income taxes recognized in the financial statements. This guidance provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits of the tax position. We recognize accrued interest and penalties related to unrecognized tax benefits as a component of our provision for income taxes. The application of this guidance can create significant variability in our tax rate from period to period based upon changes in or adjustments to our uncertain tax positions.
Stock-Based Compensation Expense
We recognize compensation expense for all stock-based payments net of an estimated forfeiture rate and only recognize compensation cost for those shares expected to vest using the graded vested method over the requisite service period of the award. For option valuation, we determine the fair value at the grant date using the Black-Scholes option-pricing model which requires the input of certain assumptions, including the expected life of the stock-based payment awards, stock price volatility and interest rates. For performance based equity awards with stock price contingencies, we determine the fair value using a Monte-Carlo simulation, which creates a normal distribution of future stock prices, which is then used to value the awards based on their individual terms.
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Foreign Currency Translation
A significant portion of our revenues are generated in Europe, where we operate with the euro as our primary functional currency, and a smaller portion of our revenues are generated in APAC, where we operate with the Australian dollar and Japanese yen as our primary functional currencies. Our European revenues in the United Kingdom are denominated in British pounds, and substantial portions of our EMEA and APAC product is sourced in U.S. dollars, both of which result in exposure to gains and losses that could occur from fluctuations in foreign currency exchange rates. Revenues and expenses that are denominated in foreign currencies are translated using the average exchange rate for the period. Assets and liabilities are translated at the rate of exchange on the balance sheet date. Gains and losses from assets and liabilities denominated in a currency other than the functional currency of the entity on which they reside are generally recognized currently in our statement of operations. Gains and losses from translation of foreign subsidiary financial statements into U.S. dollars are included in accumulated other comprehensive income or loss.
As part of our overall strategy to manage our level of exposure to the risk of fluctuations in foreign currency exchange rates, we enter into foreign currency exchange contracts generally in the form of forward contracts. For all contracts that qualify as cash flow hedges, we record the changes in the fair value of the derivative contracts in other comprehensive income or loss.
See Note 2, “New Accounting Pronouncements” for a discussion of pronouncements that may affect our future financial reporting.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to a variety of risks, including foreign currency exchange rate fluctuations.
Foreign Currency and Derivatives
We are exposed to financial statement gains and losses as a result of translating the operating results and financial position of our international subsidiaries. We translate the local currency statements of operations of our foreign subsidiaries into U.S. dollars using the average exchange rate during the reporting period. Changes in foreign currency exchange rates affect our reported results and distort comparisons from period to period. By way of example, when the U.S. dollar strengthens compared to the euro, there is a negative effect on our reported results for our European segment because it takes more profits in euros to generate the same amount of profits in stronger U.S. dollars. The opposite is also true. That is, when the U.S. dollar weakens, there is a positive effect on the translation of our reported results from our European segment. In addition, the statements of operations of our APAC segment are translated from Australian dollars and Japanese yen into U.S. dollars, and there is a negative effect on our reported results for our APAC segment when the U.S. dollar is stronger in comparison to the Australian dollar or Japanese yen.
EMEA revenues increased 2% in local currency during the first quarter of fiscal 2013 compared to the first quarter of fiscal 2012. As measured in U.S. dollars and reported in our condensed consolidated statements of operations, EMEA revenues increased 1% primarily as a result of a stronger U.S. dollar versus the euro in comparison to the prior period.
APAC revenues decreased 1% in local currency during the first quarter of fiscal 2013 compared to the first quarter of fiscal 2012. As measured in U.S. dollars and reported in our condensed consolidated statements of operations, APAC revenues decreased 2% primarily as a result of a stronger U.S. dollar versus the Japanese yen in comparison to the prior period.
Our other foreign currency and interest rate risks are discussed in our Annual Report on Form 10-K for the year ended October 31, 2012 in Item 7A.
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Item 4. Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures are designed to provide a reasonable level of assurance of reaching our desired disclosure control objectives.
We carried out an evaluation under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of January 31, 2013, the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective, and were operating at the reasonable assurance level as of January 31, 2013.
There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended January 31, 2013 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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2.1 | Stock Purchase Agreement between the Roger Cleveland Golf Company, Inc., Rossignol Ski Company, Incorporated, Quiksilver, Inc. and SRI Sports Limited dated October 30, 2007 (incorporated by reference to Exhibit 2.3 of the Company’s Annual Report on Form 10-K for the year ended October 31, 2007). | |
2.2 | Amendment No. 1 to the Stock Purchase Agreement between the Roger Cleveland Golf Company, Inc., Rossignol Ski Company, Incorporated, Quiksilver, Inc. and SRI Sports Limited dated December 7, 2007 (incorporated by reference to Exhibit 2.4 of the Company’s Annual Report on Form 10-K for the year ended October 31, 2007). | |
2.3 | Stock Purchase Agreement dated November 12, 2008, by and among Quiksilver, Inc., Pilot S.A.S., Meribel S.A.S., Quiksilver Americas, Inc., Chartreuse et Mont Blanc LLC, Chartreuse et Mont Blanc SAS, Chartreuse et Mont Blanc Global Holdings S.C.A., Macquarie Asset Finance Limited and Mavilia SAS (incorporated by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K filed on November 18, 2008). | |
2.4 | Amendment No. 1 to Stock Purchase Agreement dated October 29, 2009, by and among Quiksilver, Inc., Pilot S.A.S., Meribel S.A.S., Quiksilver Americas, Inc., Chartreuse et Mont Blanc LLC, Chartreuse et Mont Blanc SAS, Chartreuse et Mont Blanc Global Holdings S.C.A., Macquarie Asset Finance Limited and Mavilia SAS (incorporated by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K filed on October 30, 2009). | |
3.1 | Restated Certificate of Incorporation of Quiksilver, Inc., as amended (incorporated by reference to Exhibit 3.1 of the Company’s Annual Report on Form 10-K for the year ended October 31, 2004). | |
3.2 | Certificate of Amendment of Restated Certificate of Incorporation of Quiksilver, Inc. (incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended April 30, 2005). | |
3.3 | Certificate of Designation of the Series A Convertible Preferred Stock of Quiksilver, Inc. (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed on August 4, 2009). | |
3.4 | Certificate of Amendment of Restated Certificate of Incorporation of Quiksilver, Inc. (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed on April 1, 2010). | |
3.5 | Amended and Restated Bylaws of Quiksilver, Inc. (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed on January 3, 2013). | |
4.1 | Indenture for the 6 7/8% Senior Notes due 2015 dated July 22, 2005, among Quiksilver, Inc., the subsidiary guarantors set forth therein and Wilmington Trust Company, as trustee, including the form of Global Note attached thereto (incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed July 25, 2005). | |
4.2 | Indenture, dated as of December 10, 2010, by and among Boardriders S.A., Quiksilver, Inc., as guarantor, the subsidiary guarantor parties thereto, and Deutsche Trustee Company Limited, as trustee, Deutsche Bank Luxembourg S.A., as registrar and transfer agent, and Deutsche Bank AG, London Branch, as principal paying agent and common depositary (incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed December 13, 2010). |
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10.1 | Amended and Restated Employment Agreement between Robert B. McKnight, Jr. and Quiksilver, Inc. dated January 3, 2013 (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on January 3, 2013). (1) | |
10.2 | Employment Agreement between Andrew P. Mooney and Quiksilver, Inc. dated January 3, 2013 (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed on January 3, 2013). (1) | |
10.3 | Employment Agreement between Robert Colby and Quiksilver, Inc. dated January 5, 2012 (incorporated by reference to Exhibit 10.44 of the Company’s Annual Report on Form 10-K filed on January 10, 2013). (1) | |
10.4 | Restricted Stock Unit Agreement between Andrew P. Mooney and Quiksilver, Inc. dated January 11, 2013. (1) | |
10.5 | Letter Agreement for the Surrender, Cancellation and Amendment of Restricted Stock Unit Award between Robert B. McKnight, Jr. and Quiksilver, Inc. dated January 22, 2013. (1) | |
10.6 | Fourth Amendment to Term Loan Agreement by and among QS Wholesale, Inc., as borrower, Quiksilver, Inc., as a guarantor, Bank of America, N.A., as an administrative and collateral agent, and the lender parties thereto dated January 24, 2013. | |
10.7 | Deed of Separation between Craig Stevenson and Ug Manufacturing Co. Pty Ltd dated February 22, 2013 (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on February 22, 2013). (1) | |
31.1 | Rule 13a-14(a)/15d-14(a) Certifications – Principal Executive Officer | |
31.2 | Rule 13a-14(a)/15d-14(a) Certifications – Principal Financial Officer | |
32.1 | Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 – Chief Executive Officer | |
32.2 | Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 – Chief Financial Officer |
(1) | Management contract or compensatory plan. |
101.INS* | XBRL Instance Document | |
101.SCH* | XBRL Taxonomy Extension Schema Document | |
101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB* | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document |
* | As provided in Rule 406T of Regulation S-T, this information is deemed furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933, as amended, and Section 18 of the Securities Exchange Act of 1934, as amended. |
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Pursuant to the requirements 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.
March 8, 2013
QUIKSILVER, INC. |
/s/ Richard Shields |
Richard Shields |
Chief Financial Officer |
(Principal Financial and Accounting Officer) |
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