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ZQK > SEC Filings for ZQK > Form 10-Q on 6-Jun-2014All Recent SEC Filings

Show all filings for QUIKSILVER INC

Form 10-Q for QUIKSILVER INC


6-Jun-2014

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, 2013 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:
known or anticipated trends regarding our net revenues, selling, general and administrative expenses, Adjusted EBITDA and other operating results; and

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; 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, intangible assets or other fixed assets;

our ability to continue to maintain our brand image and reputation;

foreign currency exchange rate and interest 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;

changes in customer demand; and

disruptions to, or breaches of, 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 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 board-riding culture and heritage. Our three core brands, Quiksilver, Roxy, and DC, 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 100 countries through a wide range of distribution points, including wholesale accounts (surf shops, skate shops, snow shops, specialty stores, and select department stores), 658 Company-owned retail stores, licensed 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, Russia and South Africa. Our APAC segment, consisting of Asia and the Pacific Rim, includes revenue primarily from Australia, Japan, New Zealand, South Korea, Taiwan and Indonesia. Royalties earned from various licensees 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 2013, more than 60% of our revenue was generated outside of the United States. Multi-Year Profit Improvement Plan
We previously announced a multi-year profit improvement plan ("PIP") designed to accelerate our three fundamental strategies of strengthening brands, growing sales and driving operational efficiencies. The PIP's initiatives focus on prioritizing our three core brands, globalizing key functions and reducing our cost structure.
Important elements of the PIP include:
clarifying the positioning of our three flagship brands (Quiksilver, Roxy and DC);

divesting or exiting certain non-core brands;

globalizing product design and merchandising;

licensing of secondary or peripheral product categories;

reprioritization of marketing investments to emphasize in-store and print marketing along with digital and social media;

continued investment in emerging markets and e-commerce;

improving sales execution;

optimizing our supply chain;

reducing product styles;

centralizing global responsibility for key functions, including product design, supply chain, marketing, retail stores, licensing and administrative functions; and

closing under-performing retail stores, reorganizing wholesale sales operations, implementing greater pricing discipline, and improving product segmentation.


We expect that the PIP, when fully implemented by the end of fiscal 2017, could improve our Adjusted EBITDA by approximately $150 million compared to our fiscal 2012 Adjusted EBITDA. The timing of this expected improvement has been deferred by one year from our original expectations due to several factors impacting our current operating results (see "Known or Anticipated Trends"). We continue to expect approximately one-half of this improvement to come from supply chain optimization and the remainder to be primarily driven by corporate overhead reductions, licensing opportunities and improved pricing management, along with net revenue growth. We believe we have made meaningful progress on our PIP initiatives through the second quarter of fiscal 2014. Discontinued Operations
One of the elements of the multi-year PIP involves divesting or exiting certain non-core businesses in order to improve our focus on our three flagship brands. In November 2013, we completed the sale of Mervin Manufacturing, Inc. ("Mervin"), a manufacturer of snowboards and related products under the Lib Technologies and GNU brands, for $58 million, subject to a final working capital adjustment. In January 2014, we completed the sale of substantially all of the assets of Hawk Designs, Inc. ("Hawk"), our subsidiary that owned and operated our Hawk brand, for $19 million. The sale of these businesses generated a net after-tax gain of approximately $31 million, which is included in income from discontinued operations. As a result, both our Mervin and Hawk businesses were classified as "held for sale" as of October 31, 2013 and are presented as discontinued operations in our consolidated financial statements for all periods presented. The Company's sale of these businesses generated income tax expense of approximately $18 million within discontinued operations during the first six months of fiscal 2014. However, as the Company does not expect to pay income tax after application of available loss carryforwards, an offsetting income tax benefit was recognized within continuing operations. See Note 15 to our condensed consolidated financial statements, "Discontinued Operations", for further discussion of the operating results of our discontinued businesses. At October 31, 2013, we also classified our equity interest in Surfdome Shop, Ltd. ("Surfdome"), a multi-brand e-commerce retailer, as "held for sale" based on the status of our negotiations to sell our majority stake in Surfdome at that time. During the second quarter of fiscal 2014, we decided to maintain our investment in Surfdome. As a result, we have reclassified Surfdome back into continuing operations for all periods presented herein. As a result of the sale process conducted during the second quarter of fiscal 2014, the Company received offers to purchase from third parties which indicated that there was an impairment in the value of Surfdome. We recorded a $15 million impairment in EMEA continuing operations to write-down Surfdome goodwill and intangible assets to their estimated fair market value. As a result of our 51% ownership stake in Surfdome, 49% of this charge, or $7.5 million, is allocated to "net loss/(income) attributable to non-controlling interest" in our condensed consolidated statements of operations for the second quarter and six months ended April 30, 2014. See Note 7 to our condensed consolidated financial statements, "Intangible Assets and Goodwill", for further discussion on the impairment charge.
Known or Anticipated Trends
Based on our recent operating results and current perspective on our operating environment. we anticipate certain trends continuing to impact our operating results during the second half of fiscal 2014, including:
Year-over-year net revenue comparisons continuing to be unfavorable. Within this trend, we expect the year-over-year net revenue comparisons to be unfavorable in our North America and Europe wholesale channels, and favorable in our emerging markets and our e-commerce channel;

Year-over-year SG&A comparisons being less favorable in the second half of fiscal 2014 due to annualizing against the expense reduction initiatives we implemented last year and to the timing of planned marketing campaigns; and

Fiscal 2014 Adjusted EBITDA being below fiscal 2013 results with third quarter year-over-year comparisons being more impacted.


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