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ZQK > SEC Filings for ZQK > Form 10-Q on 7-Jun-2013All Recent SEC Filings

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Form 10-Q for QUIKSILVER INC


7-Jun-2013

Quarterly Report


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 this Quarterly Report on Form 10-Q and 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;

our belief that we have sufficient liquidity to fund our business operations during the next twelve months; and

our expectations regarding the implementation of our recently announced multi-year profit improvement plan.

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 successfully implement our multi-year profit improvement plan;

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;


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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;

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.

Business Overview

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. Our Quiksilver, Roxy, DC, Lib Tech and Hawk brands 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), 857 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.


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Results of Operations

The table below sets forth selected statements of operations and other data as a
percentage of net revenues as of the dates indicated. The discussion that
follows should be read in conjunction with the table.



                                                       Second Quarter                First Half
                                                       Ended April 30,             Ended April 30,
                                                     2013          2012          2013          2012
Statements of Operations data:
Revenues, net                                         100.0 %       100.0 %       100.0 %       100.0 %
Gross profit                                           46.0          49.2          48.4          49.9
Selling, general and administrative expense            47.6          45.5          49.8          48.2
Asset impairments                                       1.2           0.1           1.0           0.0
Operating (loss)/income                                (2.7 )         3.6          (2.4 )         1.6
Interest expense                                        3.3           3.2           3.5           3.3
Foreign currency (gain)/loss                           (0.6 )        (0.1 )         0.1          (0.3 )
(Loss)/income before provision for income taxes        (5.5 )         0.6          (5.9 )        (1.4 )
Other data
Adjusted EBITDA(1)                                      2.6 %         7.6 %         2.5 %         5.9 %

(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 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 second quarter and first half ended April 30, 2013 and 2012:

                                                Second Quarter Ended              First Half Ended
                                                     April 30,                        April 30,
In thousands                                    2013             2012           2013            2012
Net loss attributable to Quiksilver, Inc.    $   (32,395 )     $ (5,120 )     $ (63,524 )     $ (27,725 )
Provision for income taxes                         7,147          7,155          10,371          12,405
Interest expense, net                             15,289         15,585          30,796          30,630
Depreciation and amortization                     12,808         14,163          25,027          27,125
Non-cash stock-based compensation expense          3,887          5,423          11,223          12,400
Non-cash asset impairments                         5,332            415           8,500             415

Adjusted EBITDA                              $    12,068       $ 37,621       $  22,393       $  55,250


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Second Quarter (Three Months) Ended April 30, 2013 Compared to Second Quarter (Three Months) Ended April 30, 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 second quarter of fiscal 2013 and 2012:

         Net Revenues by Segment in Historical Currency (as reported):



                             Americas       EMEA        APAC         Corporate      Total
     Second Quarter 2013     $     229      $ 165       $  64       $         1     $  459
     Second Quarter 2012           221        196          74                 2        492
     % increase/(decrease)           3 %      (16 )%      (14 )%                        (7 )%

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 second quarter of fiscal 2013 and 2012 were as follows:

  Net Revenues by Segment in Constant Currency (current year exchange rates):



                             Americas       EMEA        APAC         Corporate      Total
     Second Quarter 2013     $     229      $ 165       $  64       $         1     $  459
     Second Quarter 2012           219        193          70                 2        483
     % increase/(decrease)           4 %      (14 )%       (9 )%                        (5 )%

On an as reported basis, total net revenues for the second quarter of fiscal 2013 decreased 7% to $459 million from $492 million in the comparable period of the prior year. This decrease was primarily due to a $30 million, or 16%, net revenue decrease within our EMEA segment and a $10 million, or 14%, decrease in our APAC segment, partially offset by an $8 million, or 3%, increase in our Americas segment.

Net revenues in our Americas segment increased primarily due to strong sales of Roxy products as well as increased clearance sales of DC products in the wholesale channel, partially offset by lower retail channel net revenues from Company-owned retail stores due to 12 net store closures since the end of the second quarter of fiscal 2012.

Net revenues in our EMEA segment decreased across all three core brands (Quiksilver, Roxy and DC), primarily within the wholesale channel The $30 million decline in net revenue in EMEA was driven by three primary factors: a) approximately $16 million was attributable to unanticipated shipping delays associated with our implementation of SAP that resulted in canceled orders from wholesale accounts; b) poor weather that impacted key markets; and c) continuing economic difficulties in the region. Net revenues decreased most significantly in Spain where net revenues declined in the high-twenties on a percentage basis. Net revenues also declined in the high-single digits on a percentage basis in France and in the low-double digits on a percentage basis in Germany.

Net revenues in the APAC segment decreased across our Quiksilver and Roxy brands, as well as within our wholesale and retail channels. These decreases were partially offset by continued growth in our DC brand and within our e-commerce channel. Net revenues from Australia, New Zealand and Japan declined in the low-twenties on a percentage basis versus the prior year, although the decline in Japan was only high-single digits in constant currency. These declines were partially offset by net revenue growth in all other APAC countries.


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Net revenues in our emerging markets, which include Brazil, Mexico, Russia, Taiwan, Korea, China and Indonesia increased by 7% versus the prior year (13% in constant currency).

Revenues, net - By Brand

Net revenues by brand (in millions), in both historical and constant currency, for the second quarter of fiscal 2013 and 2012 were as follows:

          Net Revenues by Brand in Historical Currency (as reported):



                              Quiksilver        Roxy         DC          Other       Total
     Second Quarter 2013     $        182       $ 129       $ 129       $    18      $  459
     Second Quarter 2012              207         137         131            17         492
     % (decrease)/increase            (12 )%       (6 )%       (1 )%          3 %        (7 )%

   Net Revenues by Brand in Constant Currency (current year exchange rates):



                              Quiksilver        Roxy         DC         Other       Total
     Second Quarter 2013     $        182       $ 129       $ 129      $    18      $  459
     Second Quarter 2012              203         134         128           17         483
     % (decrease)/increase            (10 )%       (4 )%        1 %          4 %        (5 )%

Quiksilver brand net revenues decreased 12% on an as reported basis during the second 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 high-single digit percentage decline in retail channel net revenues. The wholesale and retail net revenue decreases were spread across all three regional segments, but were focused largely in the EMEA segment.

Roxy brand net revenues decreased 6% on an as reported basis due to low-twenties percentage decreases in both EMEA and APAC. These decreases occurred in both the wholesale and retail channels, but were more prominent within the wholesale channel. These decreases were partially offset by a high-teens percentage increase in the Americas segment, particularly within the wholesale channel.

DC brand net revenues decreased slightly on an as reported basis with growth in the Americas and APAC segments offset by a high-single digit percentage decline in the EMEA segment. DC net revenue growth in the Americas was driven by increased clearance sales. Significant DC net revenue growth within the retail and e-commerce channels was offset by a decrease in wholesale net revenues, particularly within EMEA.

Revenues, net - By Channel

Net revenues by channel (in millions), in both historical and constant currency, for the second quarter of fiscal 2013 and 2012 were as follows:

         Net Revenues by Channel in Historical Currency (as reported):



                                 Wholesale        Retail         E-com       Total
        Second Quarter 2013     $       344       $    91       $    23      $  459
        Second Quarter 2012             377            98            18         492
        % (decrease)/increase            (9 )%         (7 )%         29 %        (7 )%

  Net Revenues by Channel in Constant Currency (current year exchange rates):



                                 Wholesale        Retail         E-com       Total
        Second Quarter 2013     $       344       $    91       $    23      $  459
        Second Quarter 2012             370            96            18         483
        % (decrease)/increase            (7 )%         (5 )%         31 %        (5 )%


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Wholesale net revenues decreased 9% on an as reported basis in the second quarter of fiscal 2013 versus the prior year period. Wholesale net revenues declined in the EMEA and APAC segments and across all three core brands. Wholesale net revenues increased in the Americas segment primarily due to strong Roxy product sales.

Retail net revenues decreased 7% on an as reported basis versus the prior year. Retail net revenues decreased across all three regional segments and across the Quiksilver and Roxy brands, while the DC brand showed strong growth. Retail same-store sales declined 4% with single-digit percentage decreases in all three regional segments during the second quarter of fiscal 2012.

E-commerce net revenues increased 29% on an as reported basis versus the prior year period due to significant growth in EMEA and APAC as we expanded our online business within these segments.

Gross Profit

Gross profit decreased to $211 million in the second quarter of fiscal 2013 from $242 million in the comparable period of the prior year. Gross margin (gross profit as a percentage of net revenues) decreased to 46.0% in the second quarter of fiscal 2013 from 49.2% in the prior year period. The gross margin decrease was primarily due to four factors: a) increased discounting and clearance sales of our DC brand within our wholesale channel to clear slow-selling product, primarily in the Americas segment; b) increased discounting in our EMEA segment across all three core brands associated with shipping delays encountered with our implementation of SAP; c) $3 million of additional inventory reserves recorded related to certain non-core brands and peripheral product categories that were discontinued; and d) a net revenue mix shift from the higher gross margin EMEA segment toward the lower gross margin Americas segment. These unfavorable factors were partially offset by improved gross margin in the APAC segment, particularly within the retail channel and the Roxy and Quiksilver brands. We expect the discounting and clearance sales related to our DC brand to continue into the second half of fiscal 2013. However, the SAP issues experienced within the EMEA segment and the additional inventory reserves recorded are expected to be isolated within the second quarter.

Gross margin by segment for the second quarter of fiscal 2013 and 2012 was as follows:

                                                             Basis
                                                             Point
                                    2013        2012         Change
                    Americas         40.5 %      44.2 %      (370) bp
                    EMEA             53.2 %      55.7 %      (250) bp
                    APAC             49.5 %      48.6 %         90 bp
                    Consolidated     46.0 %      49.2 %      (320) bp

The gross margin decreases in our Americas and EMEA segments were primarily the result of increased sales discounts in our wholesale channel, especially related to DC in the Americas and both Quiksilver and Roxy in EMEA. Our APAC segment gross margin increased primarily as a result of improved full-price selling within our retail channel.

Selling, General and Administrative Expense ("SG&A")

SG&A for the second quarter of fiscal 2013 decreased 3% to $218 million from $224 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 (approximately $9 million) and a favorable impact from foreign currency exchange rates (approximately $4 million). These decreases were partially offset by an increase in e-commerce expenses (approximately $6 million) associated with the continuing growth of our online business.


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SG&A by segment (in millions) as reported for the second quarter of fiscal 2013 and 2012 was as follows:

                                 2013                      2012                             Basis
                                    % of Net                  % of Net          $           Point
                           $        Revenues         $        Revenues       Change        Change
  Americas                  85           37.2 %       88           40.0 %         (3 )      (280)bp
  EMEA                      81           49.0 %       83           42.5 %         (2 )       650 bp
  APAC                      38           59.1 %       40           54.0 %         (2 )       510 bp
  Corporate Operations      14                        12                           2

  Consolidated             218           47.6 %      224           45.5 %         (6 )       210 bp

Asset Impairments

Asset impairment charges were $5 million in the second quarter of fiscal 2013 compared to $0.4 million in the prior year period. Impairment charges were related to certain underperforming retail stores and certain other assets associated with non-core brands that we have discontinued.

Non-Operating Expenses

Interest expense for the second quarter of fiscal 2013 was $15 million compared to $16 million in the second quarter of fiscal 2012.

Our foreign currency gain amounted to $3 million for the second quarter of fiscal 2013 compared to $1 million in the comparable period of the prior year. This gain 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 second quarter of fiscal 2013 and fiscal 2012 was $7 million. Although we incurred a net loss during the second 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 second quarter of fiscal 2013 was $32 million, or $0.19 per share, compared to $5 million, or $0.03 per share, in the comparable period of the prior year.

Adjusted EBITDA

Adjusted EBITDA decreased to $12 million in the second quarter of fiscal 2013 compared to $38 million in the second quarter of fiscal 2012. This decrease was primarily due to the net revenue and gross margin declines, 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.

First Half (Six Months) Ended April 30, 2013 Compared to First Half (Six Months) Ended April 30, 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 half of fiscal 2013 and 2012:

         Net Revenues by Segment in Historical Currency (as reported):



                          Americas        EMEA        APAC         Corporate      Total
. . .
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