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ZQK > SEC Filings for ZQK > Form 10-Q on 9-Sep-2013All Recent SEC Filings

Show all filings for QUIKSILVER INC

Form 10-Q for QUIKSILVER INC


9-Sep-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 10-Q and 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 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 core Quiksilver, Roxy, and DC 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), 562 Company-owned retail stores, as well as via licensed stores and 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 includes revenues primarily from the United States, Canada, Brazil and Mexico. Our EMEA segment includes revenues primarily from continental Europe, the United Kingdom, Russia, and South Africa. Our APAC segment 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.



                                                      Three Months Ended             Nine Months Ended
                                                           July 31,                      July 31,
                                                     2013            2012           2013           2012
Statements of Operations data:
Revenues, net                                          100.0 %        100.0 %         100.0 %       100.0 %
Gross profit                                            49.4           49.5            48.8          49.8
Selling, general and administrative expense             43.7           44.1            47.6          46.8
Asset impairments                                        0.4            0.0             0.8           0.0
Operating income                                         5.3            5.4             0.4           2.9

Interest expense                                         4.1            2.9             3.7           3.1
Foreign currency loss/(gain)                             0.8           (0.4 )           0.3          (0.3 )
Income/(Loss) before provision for income taxes          0.4            2.9            (3.7 )         0.1

Other data
Adjusted EBITDA(1)                                       8.5 %          9.2 %           4.7 %         7.1 %

(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 third quarter and nine months ended July 31, 2013 and 2012:

                                                 Three Months Ended             Nine Months Ended
                                                     July  31,                      July  31,
In thousands                                    2013            2012          2013            2012
Net income/(loss) attributable to
Quiksilver, Inc.                              $   2,071       $ 12,610      $ (61,453 )     $ (15,115 )
(Benefit)/provision for income taxes                (49 )        2,508         10,322          14,913
Interest expense, net                            20,195         14,834         50,991          45,464
Depreciation and amortization                    12,991         12,312         38,018          39,437
Non-cash stock-based compensation expense         4,972          4,872         16,195          17,272
Non-cash asset impairments                        2,152            141         10,652             556

Adjusted EBITDA                               $  42,332       $ 47,277      $  64,725       $ 102,527


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Third Quarter (Three Months) Ended July 31, 2013 Compared to Third Quarter (Three Months) Ended July 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 third quarter of fiscal 2013 and 2012:

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



                             Americas        EMEA       APAC         Corporate      Total
     Third Quarter 2013      $     268       $ 164      $  63       $         1     $  496
     Third Quarter 2012            286         154         72                 1        512
     % (decrease)/increase          (6 )%        6 %      (12 )%                        (3 )%

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 third 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
     Third Quarter 2013      $     268       $ 164      $  63       $         1     $  496
     Third Quarter 2012            286         160         64                 1        510
     % (decrease)/increase          (6 )%        3 %       (1 )%                        (3 )%

On an as reported basis, total net revenues for the third quarter of fiscal 2013 decreased 3% to $496 million from $512 million in the comparable period of the prior year. This decrease was primarily due to an $18 million, or 6%, net revenue decrease within our Americas segment and an $8 million, or 12%, net revenue decrease in our APAC segment. These decreases were partially offset by a $10 million, or 6%, net revenue increase in our EMEA segment.

Net revenues in our Americas segment decreased primarily due to lower sales in the wholesale channel, particularly in our DC and Quiksilver brands, partially offset by increased sales of Roxy products.

Net revenues in our EMEA segment increased primarily due to a $6 million favorable foreign currency impact from the strengthening of the euro versus the U.S. dollar. After currency impacts, the remaining $4 million increase in EMEA segment net revenues was driven by growth in the e-commerce and retail channels, as well as in the DC and Roxy brands within the wholesale channel. These increases were partially offset by a net revenue decrease in our Quiksilver brand within the wholesale channel. While net revenues increased across the EMEA segment generally, net revenues (in constant currency) continued to be challenging in France (high-single digit percentage decrease) and Spain (low-single digit percentage decrease) consistent with the ongoing economic difficulties in those countries.

Net revenues in the APAC segment decreased primarily due to an $8 million unfavorable foreign currency impact from the weakening of the Japanese yen and Australian dollar versus the U.S. dollar. The remaining decrease in APAC segment net revenues came from our Quiksilver and Roxy brands, particularly within the wholesale channel. These decreases were largely offset by net revenue growth in our DC brand and growth within our e-commerce channel. In constant currency, net revenues from Australia and New Zealand declined in the low-double digits on a percentage basis versus the prior year. These declines were largely 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 19% versus the prior year (21% in constant currency).

Revenues, net - By Brand

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

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



                              Quiksilver        Roxy         DC          Other       Total
     Third Quarter 2013      $        172       $ 130       $ 166       $    28      $  496
     Third Quarter 2012               191         131         167            23         512
     % (decrease)/increase            (10 )%       (1 )%       (1 )%         23 %        (3 )%

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



                              Quiksilver        Roxy        DC          Other       Total
     Third Quarter 2013      $        172       $ 130      $ 166       $    28      $  496
     Third Quarter 2012               191         129        167            23         510
     % (decrease)/increase            (10 )%        1 %       (1 )%         23 %        (3 )%

Quiksilver brand net revenues decreased 10% on an as reported basis during the third quarter of fiscal 2013 compared to the prior year period. This decrease was primarily due to a high-teens percentage decline in wholesale channel net revenues, which was spread across all three regional segments.

Roxy brand net revenues decreased 1% on an as reported basis due to a high-twenties percentage decrease in the APAC wholesale channel and a high-teens percentage decrease in the retail channel within both the Americas and APAC segments. In constant currency, net revenues of Roxy products within the APAC segment declined in the high-teens on a percentage basis within the wholesale channel and in the low-single digits on a percentage basis in the retail channel. These decreases were largely offset by a low double-digit percentage increase in the Americas wholesale channel and growth across all channels within the EMEA segment.

DC brand net revenues decreased slightly on an as reported basis with a low-double digit percentage decline in the Americas wholesale channel largely offset by growth across all other channels and regional segments. This growth was largely driven by increased discounting and clearance sales as we continue to reduce slow-selling DC inventories. Based on current channel inventories, we anticipate that DC brand net revenues in the fourth quarter of fiscal 2013 will decrease by approximately 15% from the $166 million recognized in the third quarter of fiscal 2013.

Revenues, net - By Channel

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

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



                                 Wholesale         Retail        E-com       Total
        Third Quarter 2013      $       345       $    120      $    31      $  496
        Third Quarter 2012              369            120           23         512
        % (decrease)/increase            (7 )%           0 %         33 %        (3 )%


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



                                 Wholesale         Retail        E-com       Total
        Third Quarter 2013      $       345       $    120      $    31      $  496
        Third Quarter 2012              368            119           23         510
        % (decrease)/increase            (6 )%           1 %         33 %        (3 )%

Wholesale net revenues decreased 7% on an as reported basis in the third quarter of fiscal 2013 versus the prior year period. Wholesale net revenues declined across all three regional segments, particularly in the Americas and APAC segments. Wholesale net revenue declines were focused within the Quiksilver brand across all three regional segments and the DC brand in the Americas segment.

Retail net revenues were flat on an as reported basis versus the prior year. Retail net revenues increased in the EMEA segment but were offset by decreases in the Americas and APAC segments. The decrease in retail net revenues within the Americas segment was primarily due to operating 15 net fewer retail stores at the end of the third quarter of fiscal 2013 versus fiscal 2012 as we continued to close underperforming stores. Retail net revenues in the DC brand increased significantly across all three regional segments but were offset by single-digit percentage decreases in the Quiksilver and Roxy brands. Retail same-store sales increased 2% during the third quarter of fiscal 2013.

E-commerce net revenues increased 33% on an as reported basis versus the prior year period due to significant growth in the EMEA and APAC segments as we continued to expand our online business within these segments.

Gross Profit

Gross profit decreased to $245 million in the third quarter of fiscal 2013 from $253 million in the comparable period of the prior year. Gross margin (gross profit as a percentage of net revenues) was in line with the comparable period of the prior year at 49.4% in the third quarter of fiscal 2013 versus 49.5% in the prior year period. The gross margin decrease was primarily due to increased discounting and clearance sales of our DC brand within our Americas wholesale channel to clear slow-selling product.

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

                                                             Basis
                                                             Point
                                    2013        2012         Change
                    Americas         42.7 %      44.1 %      (140) bp
                    EMEA             59.3 %      57.2 %        210 bp
                    APAC             51.2 %      54.8 %      (360) bp
                    Consolidated     49.4 %      49.5 %       (10) bp

The gross margin decrease in our Americas segment was primarily the result of increased sales discounts in our wholesale channel, particularly related to DC, as well as a sales mix shift toward our lower margin Roxy brand. Our APAC segment gross margin decreased across all brands and channels due to increased discounting to move slow-selling product. These decreases were largely offset by improvement in EMEA gross margins across all three core brands primarily due to a revenue mix shift toward the retail and e-commerce channels and lower sales discounts in the wholesale channel versus the comparable prior year period.

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

SG&A for the third quarter of fiscal 2013 decreased $9 million, or 4%, to $217 million from $226 million in the comparable period of the prior year. This decrease was primarily attributable to reduced employee compensation expenses (approximately $12 million) and reduced athlete and event expenses (approximately $4 million). These reductions were partially offset by an increase in employee severance and restructuring costs (approximately $9 million) and increased direct selling expenses, particularly e-commerce expenses (approximately $1 million) associated with the continuing growth of our online business.


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

                                2013                      2012                              Basis
                                   % of Net                  % of Net          $            Point
                          $        Revenues         $        Revenues        Change         Change
 Americas                  79           29.4 %       93           32.4 %         (14 )      (300) bp
 EMEA                      89           54.2 %       81           52.5 %           8          170 bp
 APAC                      34           53.5 %       38           52.7 %          (4 )         80 bp
 Corporate Operations      15                        14                            1

 Consolidated             217           43.7 %      226           44.1 %          (9 )       (40) bp

Asset Impairments

Asset impairment charges were $2 million in the third quarter of fiscal 2013 compared to $0.1 million in the prior year period. Impairment charges were related to certain underperforming retail stores.

Non-Operating Expenses

Interest expense for the third quarter of fiscal 2013 was $20 million compared to $15 million in the third quarter of fiscal 2012. This increase was primarily due to the inclusion in interest expense for the third quarter of fiscal 2013 of a $3 million write-off of debt issuance costs related to our former senior notes due April 2015 that were redeemed in August 2013 (see note 9 to the condensed consolidated footnotes).

Our foreign currency loss amounted to $4 million for the third quarter of fiscal 2013 compared to a gain of $2 million in the comparable period of the prior year. This $6 million unfavorable comparison with the third quarter of fiscal 2012 resulted primarily from the foreign currency exchange effect of revaluing certain non-euro denominated assets of our European subsidiaries.

We generated a modest income tax benefit for the third quarter of fiscal 2013 compared to income tax expense of $3 million in the third quarter of fiscal 2012. Although we generated net income during the third quarter of fiscal 2013, we recorded a benefit to income tax expense primarily associated with the reduction of a liability for uncertain tax positions of approximately $1.6 million.

Net Income Attributable to Quiksilver, Inc.

Our net income attributable to Quiksilver, Inc. for the third quarter of fiscal 2013 was $2 million, or $0.01 per diluted share, compared to net income of $13 million, or $0.07 per diluted share, in the comparable period of the prior year.

Adjusted EBITDA

Adjusted EBITDA decreased to $42 million in the third quarter of fiscal 2013 compared to $47 million in the third quarter of fiscal 2012. This decrease was primarily due to the net revenue declines noted previously, partially offset by SG&A reductions. For a definition of Adjusted EBITDA and a reconciliation of net income attributable to Quiksilver, Inc. to Adjusted EBITDA, see footnote (1) to the table under "Results of Operations" above.


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Nine Months Ended July 31, 2013 Compared to Nine Months Ended July 31, 2012

Revenues, net . . .

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