1
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 JULY 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
COMMISSION FILE NUMBER 0-15131
QUIKSILVER, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 33-0199426
(State or other jurisdiction o (I.R.S. Employer
incorporation or organization) 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
--- ---
The number of shares outstanding of issuer's Common Stock,
par value $0.01 per share, at
September 7, 2001 was
23,164,183
2
QUIKSILVER, INC.
FORM 10-Q
INDEX
Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets
July 31, 2001 and October 31, 2000........................ 2
Condensed Consolidated Statements of Income
Three Months Ended July 31, 2001 and 2000................. 3
Condensed Consolidated Statements of Income
Nine Months Ended July 31, 2001 and 2000.................. 4
Condensed Consolidated Statements of Comprehensive Income
Nine Months Ended July 31, 2001 and 2000.................. 4
Condensed Consolidated Statements of Cash Flows
Nine Months Ended July 31, 2001 and 2000.................. 5
Notes to Condensed Consolidated Financial Statements........ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 8
Part II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8K............................. 12
SIGNATURE............................................................ 12
1
3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
QUIKSILVER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JULY 31, OCTOBER 31,
2001 2000
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents ............................... $ 1,774,000 $ 2,298,000
Trade accounts receivable, less allowance
for doubtful accounts of $4,063,000 (2001)
and $5,090,000 (2000) ................................ 149,221,000 136,394,000
Other receivables ...................................... 6,557,000 5,654,000
Inventories ............................................ 125,508,000 90,034,000
Prepaid expenses and other current assets .............. 10,491,000 8,993,000
------------- -------------
Total current assets .............................. 293,551,000 243,373,000
Property and equipment, less accumulated depreciation and
amortization of $31,325,000 (2001) and $23,211,000 (2000) 54,187,000 49,834,000
Trademark, less accumulated amortization of
$4,265,000 (2001) and $2,825,000 (2000) ................. 46,727,000 43,566,000
Goodwill, less accumulated amortization of
$6,641,000 (2001) and $6,022,000 (2000) ................. 19,099,000 18,962,000
Other assets ............................................... 4,097,000 3,007,000
------------- -------------
Total assets ...................................... $ 417,661,000 $ 358,742,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Lines of credit ......................................... $ 70,338,000 $ 49,203,000
Accounts payable ........................................ 38,423,000 40,642,000
Accrued liabilities ..................................... 24,057,000 22,568,000
Current portion of long-term debt ....................... 9,629,000 9,428,000
Income taxes payable .................................... 4,587,000 2,003,000
------------- -------------
Total current liabilities ......................... 147,034,000 123,844,000
Long-term debt ............................................. 57,460,000 57,284,000
------------- -------------
Total liabilities ................................. 204,494,000 181,128,000
------------- -------------
Stockholders' equity
Preferred stock, $.01 par value, authorized
shares - 5,000,000; issued and outstanding
shares - none ........................................ -- --
Common stock, $.01 par value, authorized
shares - 30,000,000; issued and outstanding
shares - 23,885,483 (2001) and 23,234,036 (2000) ..... 239,000 232,000
Additional paid-in-capital .............................. 52,551,000 42,833,000
Treasury stock, 721,300 shares .......................... (6,778,000) (6,778,000)
Retained earnings ....................................... 179,068,000 153,426,000
Accumulated other comprehensive loss .................... (11,913,000) (12,099,000)
------------- -------------
Total stockholders' equity ........................ 213,167,000 177,614,000
------------- -------------
Total liabilities and stockholders' equity ........ $ 417,661,000 $ 358,742,000
============= =============
See notes to condensed consolidated financial statements.
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4
QUIKSILVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED JULY 31,
-------------------------------
2001 2000
------------- -------------
Net sales .................................... $ 155,259,000 $ 122,011,000
Cost of goods sold ........................... 96,381,000 75,226,000
------------- -------------
Gross profit .............................. 58,878,000 46,785,000
------------- -------------
Operating expenses:
Selling, general and administrative expense 44,887,000 34,194,000
Royalty income ............................ (1,397,000) (888,000)
Royalty expense ........................... -- 550,000
------------- -------------
Total operating expenses ............... 43,490,000 33,856,000
------------- -------------
Operating income ............................. 15,388,000 12,929,000
Interest expense ............................. 2,514,000 1,713,000
Foreign currency (gain) loss ................. (272,000) 101,000
Other expense ................................ 149,000 131,000
------------- -------------
Income before provision for income taxes ..... 12,997,000 10,984,000
Provision for income taxes ................... 5,042,000 4,314,000
------------- -------------
Net income ................................... $ 7,955,000 $ 6,670,000
============= =============
Net income per share ......................... $ 0.34 $ 0.30
============= =============
Net income per share, assuming dilution ...... $ 0.33 $ 0.29
============= =============
Weighted average common shares outstanding ... 23,131,000 22,460,000
============= =============
Weighted average common shares outstanding,
assuming dilution ......................... 24,279,000 23,215,000
============= =============
See notes to condensed consolidated financial statements.
3
5
QUIKSILVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
NINE MONTHS ENDED JULY 31,
-------------------------------
2001 2000
------------- -------------
Net sales .................................... $ 445,290,000 $ 364,079,000
Cost of goods sold ........................... 271,515,000 220,154,000
------------- -------------
Gross profit .............................. 173,775,000 143,925,000
------------- -------------
Operating expenses:
Selling, general and administrative expense 127,637,000 100,857,000
Royalty income ............................ (3,871,000) (2,010,000)
Royalty expense ........................... -- 3,449,000
------------- -------------
Total operating expenses ............... 123,766,000 102,296,000
------------- -------------
Operating income ............................. 50,009,000 41,629,000
Interest expense ............................. 8,178,000 3,944,000
Foreign currency (gain) loss ................. (409,000) 224,000
Other expense ................................ 382,000 391,000
------------- -------------
Income before provision for income taxes ..... 41,858,000 37,070,000
Provision for income taxes ................... 16,216,000 15,012,000
------------- -------------
Net income ................................... $ 25,642,000 $ 22,058,000
============= =============
Net income per share ......................... $ 1.12 $ 0.99
============= =============
Net income per share, assuming dilution ...... $ 1.06 $ 0.95
============= =============
Weighted average common shares outstanding ... 22,884,000 22,392,000
============= =============
Weighted average common shares outstanding,
assuming dilution ......................... 24,084,000 23,189,000
============= =============
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
NINE MONTHS ENDED JULY 31,
-----------------------------
2001 2000
------------ ------------
Net income ..................................... $ 25,642,000 $ 22,058,000
Other comprehensive gain (loss) --
Foreign currency translation adjustment ..... 958,000 (4,824,000)
Net unrealized loss on derivative instruments (1,635,000) --
Income tax effects .......................... 863,000 --
------------ ------------
Comprehensive income ........................... $ 25,828,000 $ 17,234,000
============ ============
See notes to condensed consolidated financial statements.
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QUIKSILVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED JULY 31,
---------------------------
2001 2000
------------ ------------
Cash flows from operating activities:
Net income .................................................. $ 25,642,000 $ 22,058,000
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization ......................... 10,175,000 7,189,000
Provision for doubtful accounts ....................... 3,143,000 2,348,000
Accretion of interest expense ......................... 1,179,000 137,000
Loss on sale of fixed assets .......................... 22,000 79,000
Foreign currency gain ................................. (266,000) --
Changes in operating assets and liabilities,
net of effects from the purchase of Quiksilver
International:
Trade accounts receivable .......................... (14,563,000) (10,162,000)
Other receivables .................................. 553,000 (1,922,000)
Inventories ........................................ (35,234,000) (13,631,000)
Prepaid expenses and other current assets .......... (1,637,000) (2,389,000)
Other assets ....................................... (385,000) (2,860,000)
Accounts payable ................................... (2,687,000) 319,000
Accrued liabilities ................................ (1,477,000) 1,750,000
Income taxes payable ............................... 6,332,000 6,471,000
------------ ------------
Net cash (used in) provided by operating activities (9,203,000) 9,387,000
Cash flows from investing activities:
Proceeds from sales of fixed assets ......................... 81,000 2,000
Capital expenditures and other business acquisitions ........ (13,192,000) (13,530,000)
Acquisition of Quiksilver International, net of cash acquired -- (23,453,000)
------------ ------------
Net cash used in investing activities .............. (13,111,000) (36,981,000)
Cash flows from financing activities:
Borrowings on lines of credit ............................... 68,084,000 56,200,000
Payments on lines of credit ................................. (46,732,000) (48,744,000)
Borrowings on long-term debt ................................ 2,887,000 40,408,000
Payments on long-term debt .................................. (8,006,000) (16,026,000)
Proceeds from stock option exercises ........................ 5,824,000 3,319,000
Purchase of treasury stock .................................. -- (3,724,000)
------------ ------------
Net cash provided by financing activities .......... 22,057,000 31,433,000
Effect of exchange rate changes on cash ........................ (267,000) (127,000)
------------ ------------
Net (decrease) increase in cash and cash equivalents ........... (524,000) 3,712,000
Cash and cash equivalents, beginning of period ................. 2,298,000 1,449,000
------------ ------------
Cash and cash equivalents, end of period ....................... $ 1,774,000 $ 5,161,000
============ ============
Supplementary cash flow information:
Cash paid during the period for:
Interest ................................................. $ 6,695,000 $ 3,679,000
============ ============
Income taxes ............................................. $ 9,243,000 $ 8,675,000
============ ============
Non-cash investing and financing activity --
Deferred purchase price obligations ...................... $ 4,267,000 $ 18,054,000
============ ============
See notes to condensed consolidated financial statements.
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QUIKSILVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. 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.
The Company, in its opinion, has included all adjustments, consisting only
of normal recurring accruals, necessary for a fair presentation of the
results of operations for the three and nine months ended July 31, 2001 and
2000. The condensed consolidated financial statements and notes thereto
should be read in conjunction with the audited financial statements and
notes for the year ended October 31, 2000 included in the Company's Annual
Report on Form 10-K. Interim results are not necessarily indicative of
results for the full year due to seasonal and other factors.
2. Inventories consist of the following:
JULY 31, OCTOBER 31,
2001 2000
------------ -----------
Raw Materials ................. $ 26,043,000 $22,191,000
Work-In-Process................ 6,583,000 7,543,000
Finished Goods................. 92,882,000 60,300,000
------------ -----------
$125,508,000 $90,034,000
============ ===========
3. Information related to domestic and European operations is as follows:
NINE MONTHS ENDED JULY 31,
----------------------------
2001 2000
------------ ------------
Net sales to unaffiliated customers:
Domestic ......................... $290,477,000 $236,150,000
Europe ........................... 154,813,000 127,929,000
------------ ------------
Consolidated .................. $445,290,000 $364,079,000
============ ============
Gross profit:
Domestic ......................... $106,390,000 $ 86,936,000
Europe ........................... 67,385,000 56,989,000
------------ ------------
Consolidated .................. $173,775,000 $143,925,000
============ ============
Operating income:
Domestic ......................... $ 32,640,000 $ 26,470,000
Europe ........................... 17,369,000 15,159,000
------------ ------------
Consolidated .................. $ 50,009,000 $ 41,629,000
============ ============
Identifiable assets:
Domestic ......................... $289,514,000 $236,396,000
Europe ........................... 128,147,000 93,950,000
------------ ------------
Consolidated .................. $417,661,000 $330,346,000
============ ============
6
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
4. Effective November 1, 2000, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". 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, and to fluctuations in interest rates related
to its variable rate debt. 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. In addition,
interest rate swaps are used to manage the Company's exposure to the risk
of fluctuations in interest rates.
For all qualifying cash flow hedges, the changes in the fair value of the
derivatives are recorded in other comprehensive income. All other
derivatives are marked to market value with corresponding gains or losses
recorded in earnings. As of July 31, 2001, the Company was hedging
forecasted transactions expected to occur in the following twelve months.
Also included in accumulated other comprehensive income at July 31, 2001 is
a charge related to cash flow hedges of the Company's long-term debt that
is denominated in Australian dollars, which will be amortized into earnings
through fiscal 2005 as the debt matures.
On the date the Company enters into a derivative contract, management
designates the derivative as a hedge of the identified exposure. The
Company formally documents all relationships between hedging instruments
and hedged items, as well as the risk-management objective and strategy for
entering into various hedge transactions. 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 it is determined 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) because 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 credit 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 obtain collateral or other security to
support the contracts.
A summary of derivative contracts at July 31, 2001 is as follows:
July 31, 2001
----------------------------------------------------
Notional Fair
Amount Maturity Value
------------ -------- -----------
British pounds $ 20,253,000 Aug 2001 - Apr 2001 $ 211,000
U.S. dollars 51,200,000 Aug 2001 - Dec 2001 447,000
Australian dollars 21,730,000 Sept 2002 - Sept 2005 (1,121,000)
Interest rate swap 20,312,000 Oct 2004 (390,000)
Interest rate swap 10,762,000 Jan 2007 (677,000)
------------ -----------
$124,257,000 $(1,530,000)
============ ===========
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PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
THREE MONTHS ENDED JULY 31, 2001 COMPARED TO THREE MONTHS ENDED JULY 31, 2000
Net sales for the three months ended July 31, 2001 increased 27.3% to
$155,259,000 from $122,011,000 in the comparable period of the prior year.
Domestic net sales for the three months ended July 31, 2001 increased 26.9% to
$101,510,000 from $79,971,000 in the comparable period of the prior year, and
European net sales increased 27.9% to $53,749,000 from $42,040,000 for those
same periods. As measured in French francs, Quiksilver Europe's functional
currency, net sales in the current year's quarter increased 38.4% compared to
the prior year. Domestic men's sales increased 18.3% to $57,430,000 from
$48,548,000 in the comparable period of the prior year, while domestic women's
sales increased 44.6% to $41,047,000 from $28,378,000. In the domestic division,
sales of snowboards, boots and bindings amounted to $3,033,000 in the current
year's quarter compared to $3,045,000 in the prior year. The domestic men's
sales increase came from the Quiksilver Young Mens and Boys divisions,
Quiksilveredition and from the Company's new Hawk Clothing and Fidra businesses.
The domestic women's sales increase came from the Roxy division. In Europe,
men's sales increased 17.3% to $41,762,000 from $35,608,000, while women's sales
increased 86.4% to $11,987,000 from $6,432,000. The European men's sales
increase came from the Quiksilver Young Mens, Boys and Gotcha divisions. The
European women's sales increase came from the Roxy division. These comparisons
of sales in Europe were negatively impacted by the strong dollar in comparison
to the prior year. As measured in French francs, European men's sales increased
27.0% and European women's sales increased 101.7%.
The gross profit margin for the three months ended July 31, 2001 decreased to
37.9% from 38.3% in the comparable period of the prior year. The domestic gross
profit margin decreased to 35.8% from 36.7% in the comparable period of the
prior year, while the European gross profit margin increased to 41.9% from 41.5%
for those same periods. In the domestic division, the positive gross margin
effect of a higher level of sales through company-owned retail stores was more
than offset by lower gross margins on off-price and clearance sales. Gross
profit margins are higher, on a consolidated basis, for sales in company-owned
retail stores compared to the Company's normal wholesale distribution. In
Europe, the gross profit margin increased primarily due to a higher level of
sales through company-owned retail stores, which was partially offset by higher
product costs in the local currency that were not passed along to customers.
Product costs increased as goods purchased in U.S. dollars were paid for with a
weaker local currency in comparison to previous periods.
Selling, general and administrative expense ("SG&A") for the three months ended
July 31, 2001 increased 31.3% to $44,887,000 from $34,194,000 in the comparable
period of the prior year. Domestic SG&A increased 32.6% to $28,593,000 from
$21,565,000 in the comparable period of the prior year, and European SG&A
increased 29.0% to $16,294,000 from $12,629,000 for those same periods. The
increase in both domestic and European SG&A was primarily due to higher
personnel and other costs related to increased sales volume. SG&A increased as a
percentage of sales domestically primarily due to the operating costs of
additional company-owned retail stores and the operating costs of Quiksilver
International, which was acquired during the third quarter of fiscal 2000. SG&A
increased as a percentage of sales in Europe also due primarily to the operating
costs of additional company-owned retail stores.
Royalty income for the three months ended July 31, 2001 totaled $1,397,000
versus net royalty income of $338,000 in the comparable period of the prior
year. This increase in royalty income came from the acquisition of Quiksilver
International, which receives royalties based on sales of Quiksilver products by
its licensees in various countries around the world. Royalty expense in the
previous year was eliminated with the acquisition, which was effective July 1,
2000.
Interest expense for the three months ended July 31, 2001 increased 46.8% to
$2,514,000 from $1,713,000 in the comparable period of the prior year. This
increase was primarily due to borrowings to acquire Quiksilver International,
and to a lesser extent, borrowings to fund retail investments and working
capital growth.
8
10
The effective income tax rate for the three months ended July 31, 2001, which is
based on current estimates of the annual effective income tax rate, decreased to
38.8% from 39.3% in the comparable period of the prior year. This improvement
resulted primarily from an expected lower overall tax rate for Quiksilver
Europe.
As a result of the above factors, net income for the three months ended July 31,
2001 increased 19.3% to $7,955,000 or $0.33 per share on a diluted basis from
$6,670,000 or $0.29 per share on a diluted basis in the comparable period of the
prior year. Basic net income per share increased to $0.34 for the three months
ended July 31, 2001 from $0.30 in the comparable period of the prior year.
NINE MONTHS ENDED JULY 31, 2001 COMPARED TO NINE MONTHS ENDED JULY 31, 2000
Net sales for the nine months ended July 31, 2001 increased 22.3% to
$445,290,000 from $364,079,000 in the comparable period of the prior year.
Domestic net sales for the nine months ended July 31, 2001 increased 23.0% to
$290,477,000 from $236,150,000 in the comparable period of the prior year, and
European net sales increased 21.0% to $154,813,000 from $127,929,000 for those
same periods. As measured in French francs, Quiksilver Europe's net sales in the
first nine months of the current year increased 32.1% compared to the prior
year. Domestic men's sales increased 14.5% to $153,575,000 from $134,154,000 in
the comparable period of the prior year, while domestic women's sales increased
37.2% to $131,291,000 from $95,707,000. In the domestic division, sales of
snowboards, boots and bindings amounted to $5,611,000 in the current year's
nine-month period compared to $6,289,000 in the prior year. The domestic men's
sales increase came from Quiksilver Young Mens and Boys divisions, the Snow
division and from the Company's new Hawk Clothing and Fidra businesses. The
domestic women's sales increase came from both the Roxy and Raisins divisions.
In Europe, men's sales increased 13.8% to $122,095,000 from $107,306,000, while
women's sales increased 58.6% to $32,718,000 from $20,623,000. The European
men's sales increase came from the Quiksilver Young Mens and Boys divisions, and
the Gotcha division. The European women's sales increase came from the Roxy
division. These comparisons of sales in Europe were negatively impacted by the
strong dollar in comparison to the prior year. As measured in French francs,
European men's sales increased 24.4% and European women's sales increased 71.7%.
The gross profit margin for the nine months ended July 31, 2001 decreased to
39.0% from 39.5% in the comparable period of the prior year. The domestic gross
profit margin decreased somewhat to 36.6% from 36.8% in the comparable period of
the prior year, while the European gross profit margin decreased to 43.5% from
44.5% for those same periods. In the domestic division, the positive gross
margin effect of a higher level of sales through company-owned retail stores was
more than offset by lower gross margins on off-price and clearance sales in the
third quarter of the current year. In Europe, the positive gross profit margin
effect of a higher level of sales through company-owned retail stores was more
than offset by higher product costs in the local currency that were not passed
along to customers. Product costs increased as goods purchased in U.S. dollars
were paid for with a weaker local currency in comparison to previous periods.
SG&A for the nine months ended July 31, 2001 increased 26.6% to $127,637,000
from $100,857,000 in the comparable period of the prior year. Domestic SG&A
increased 31.0% to $82,149,000 from $62,725,000 in the comparable period of the
prior year, and European SG&A increased 19.3% to $45,488,000 from $38,132,000
for those same periods. The increase in both domestic and European SG&A was
primarily due to higher personnel costs related to increased sales volume. SG&A
increased as a percentage of sales domestically primarily due to the operating
costs of Quiksilver International, which was acquired in the third quarter of
fiscal 2000, and from additional company-owned retail stores. In Europe, SG&A
decreased as a percentage of sales as the incremental operating costs of
company-owned retail stores were more than offset by general leverage on growth.
Royalty income for the nine months ended July 31, 2001 totaled $3,871,000
compared to net royalty expense of $1,439,000 in the comparable period of the
prior year. The increase in royalty income came primarily from the acquisition
of Quiksilver International.
Interest expense for the nine months ended July 31, 2001 increased 107.4% to
$8,178,000 from $3,944,000 in the comparable period of the prior year. This
increase was primarily due to borrowings to acquire Quiksilver International,
and to a lesser extent, borrowings to fund retail investments and working
capital growth.
9
11
The effective income tax rate for the nine months ended July 31, 2001, which is
based on current estimates of the annual effective income tax rate, decreased to
38.7% from 40.5% in the comparable period of the prior year. This improvement
resulted primarily from an expected lower overall tax rate for Quiksilver
Europe.
As a result of the above factors, net income for the nine months ended July 31,
2001 increased 16.2% to $25,642,000 or $1.06 per share on a diluted basis from
$22,058,000 or $0.95 per share on a diluted basis in the comparable period of
the prior year. Basic net income per share increased to $1.12 for the nine
months ended July 31, 2001 from $0.99 in the comparable period of the prior
year.
FINANCIAL POSITION, CAPITAL RESOURCES AND LIQUIDITY
The Company finances its capital investments and working capital requirements
with funds generated by operations and its bank revolving lines of credit.
Net cash used in operating activities for the nine months ended July 31, 2001
totaled $9,203,000 compared to cash provided by operating activities of
$9,387,000 in the comparable period of the prior year. The $8,084,000 increase
in net income and non-cash expenses was more than offset by the $24,609,000
increase in inventories net of changes in accounts payable.
For the nine months ended July 31, 2001, cash used for capital expenditures and
business acquisitions totaled $13,192,000, which was down slightly from the
$13,530,000 used for capital expenditures in the comparable period of the prior
year. These investments include company-owned Boardriders Clubs and Quiksvilles,
screenprinting and embroidery equipment, and ongoing investments in computer and
warehouse equipment. Additionally in the prior year, $23,453,000 was used for
the acquisition of Quiksilver International.
During the nine months ended July 31, 2001, net cash provided by financing
activities decreased 29.8% to $22,057,000 compared to $31,433,000 in the
comparable period of the prior year. The additional cash used by operating
activities was more than offset by the decrease in cash used in investing
activities.
Effective July 1, 2000, the Company acquired Quiksilver International, an
Australian company that owns the worldwide trademark rights to the "Quiksilver"
brand name (other than in the United States, Mexico and Puerto Rico where those
rights were already owned by the Company.) The initial purchase price was
$23,880,000, which includes cash consideration of $23,380,000 and transaction
costs of $500,000. Under the terms of the purchase agreement, two additional
payments will be made, one at the end of fiscal 2002 and one at the end of
fiscal 2005. Such deferred purchase price payments will be contingent on the
computed earnings of Quiksilver International through June 30, 2005. The
deferred purchase price payments, which were estimated and discounted to present
value, initially totaled $18,054,000. In the third quarter of the current year,
the estimated deferred purchase price payment due at the end of fiscal 2002 was
increased by $4,267,000 as a result of Quiksilver International's operations
through June 30, 2001.
The deferred purchase price obligations are reflected in the Condensed
Consolidated Balance Sheet as a component of long-term debt. Noncash interest
expense is recorded to reflect the calculated financing costs associated with
the deferred purchase price obligations.
Cash and cash equivalents decreased $524,000 for the nine months ended July 31,
2001 compared to an increase of $3,712,000 in the comparable period of the prior
year. Working capital increased $26,988,000 or 22.6% to $146,517,000 at July 31,
2001 from $119,529,000 at October 31, 2000. The Company believes its current
lines of credit are adequate to cover its seasonal working capital and other
requirements for the foreseeable future and that increases in its lines of
credit can be obtained as needed to fund future growth.
Accounts receivable increased 9.4% to $149,221,000 at July 31, 2001 from
$136,394,000 at October 31, 2000. Domestic accounts receivable increased 0.1% to
$87,433,000 at July 31, 2001 from $87,369,000 at October 31, 2000, and European
accounts receivable increased 26.0% to $61,788,000 from $49,025,000 for that
same period. These increases in accounts receivable are generally consistent
with the increases in net sales but fluctuate somewhat due to differences in the
timing of shipments in comparison to previous periods.
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Consolidated inventories increased 39.4% to $125,508,000 at July 31, 2001 from
$90,034,000 at October 31, 2000. Domestic inventories increased 28.2% to
$93,388,000 from $72,860,000 at October 31, 2000, and European inventories
increased 87.0% to $32,120,000 from $17,174,000 for that same period. Inventory
turnover decreased as of July 31, 2001 in comparison to October 31, 2000
primarily due to early receipts of holiday season product in comparison to the
prior year.
It is not uncommon for some of the Company's customers to have financial
difficulties from time to time. This is normal given the wide variety of the
Company's account base, which includes small surf shops, medium-sized retail
chains, and some large department store chains. In some cases, customers have
ended up in bankruptcy. However, the Company's losses from these situations has
been relatively normal and anticipated.
To allow for such losses, the Company establishes reserves for doubtful accounts
to reduce the value of its receivables. Management believes that the allowance
for doubtful accounts at July 31, 2001 is adequate to cover anticipated losses.
Throughout the year, the Company monitors developments regarding its major
customers. However, if customers experience unforeseen, material financial
difficulties, this could have an adverse impact on the Company's profits.
FOREIGN CURRENCY
The Company's foreign currency risks are discussed in the Company's Annual
Report on Form 10-K for the year ended October 31, 2000 in Item 7a.
Quiksilver Europe's statements of income are translated from French francs into
U.S. dollars at average exchange rates in effect during the reporting period.
When the French franc and euro strengthen compared to the U.S. dollar there is a
positive effect on Quiksilver Europe's results as reported in the Company's
Consolidated Financial Statements. Conversely, when the U.S. dollar strengthens,
there is a negative effect.
European net sales increased 38.4% in French francs during the three months
ended July 31, 2001 compared to the three months ended July 31, 2000. As
measured in U.S. dollars and reported in the Company's financial statements,
European net sales increased only 27.9% as a result of a stronger U.S. dollar
versus the French franc and euro in comparison to the prior year.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) approved Statement
of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 prohibits the
pooling of interest method of accounting for business combinations initiated
after June 30, 2001. SFAS No. 142 requires companies to cease amortizing
goodwill that existed at June 30, 2001 on the date of implementation of this
standard. Any goodwill resulting from acquisitions completed after June 30, 2001
will not be amortized. SFAS No. 142 also establishes a new method of testing
goodwill for impairment on an annual basis or on an interim basis if an event
occurs or circumstances change that would reduce the fair value of a reporting
unit below its carrying value. These standards must be adopted by the Company by
its fiscal year ending October 31, 2002. The Company is currently evaluating the
impact of these standards on its financial statements.
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PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8K.
(a) Exhibits
None
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended July 31,
2001.
SIGNATURE
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.
QUIKSILVER, INC., a Delaware corporation
September 14, 2001 /s/ Steven L. Brink
-----------------------------------------
Steven L. Brink
Chief Financial Officer and Treasurer
(Principal Accounting Officer)
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