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, 2003
OR
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 0-15131
QUIKSILVER, INC.
| Delaware (State or other jurisdiction of incorporation or organization) |
33-0199426 (I.R.S. Employer Identification Number) |
15202 Graham Street
Huntington Beach, California
92649
(Address of principal executive offices)
(Zip Code)
(714) 889-2200
(Registrant’s telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [X] No [ ]
The number of shares outstanding of issuer’s Common Stock,
par value $0.01 per share, at
September 10, 2003 was
55,383,716
QUIKSILVER, INC.
FORM 10-Q
INDEX
| Page No. | |||||
PART I - FINANCIAL INFORMATION |
|||||
Item 1. Financial Statements (Unaudited): |
|||||
Condensed Consolidated Balance Sheets
July 31, 2003 and October 31, 2002 |
2 | ||||
Condensed Consolidated Statements of Income
Three Months Ended July 31, 2003 and 2002 |
3 | ||||
Condensed Consolidated Statements of Income
Nine Months Ended July 31, 2003 and 2002 |
4 | ||||
Condensed Consolidated Statements of Comprehensive Income
Nine Months Ended July 31, 2003 and 2002 |
4 | ||||
Condensed Consolidated Statements of Cash Flows
Nine Months Ended July 31, 2003 and 2002 |
5 | ||||
Notes to Condensed Consolidated Financial Statements |
6 | ||||
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
13 | ||||
Results
of Operations |
13 | ||||
Three Months Ended July 31, 2003 Compared to Three Months Ended
July 31, 2002 |
14 | ||||
Nine Months Ended July 31, 2003 Compared to Nine Months Ended
July 31, 2002 |
15 | ||||
Financial Position, Capital Resources and Liquidity |
16 | ||||
Critical Accounting Policies |
17 | ||||
New Accounting Pronouncements |
19 | ||||
Item 3. Quantitative and Qualitative Disclosures About Market Risk |
20 | ||||
Item 4. Controls and Procedures |
20 | ||||
Part II - OTHER INFORMATION |
|||||
Item 6. Exhibits and Reports on Form 8-K |
21 | ||||
SIGNATURE |
22 | ||||
1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
QUIKSILVER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| July 31, | October 31, | |||||||||
| In thousands, except share amounts | 2003 | 2002 | ||||||||
ASSETS |
||||||||||
Current assets: |
||||||||||
Cash and cash equivalents |
$ | 49,363 | $ | 2,597 | ||||||
Trade accounts receivable, less allowance
for doubtful accounts of $8,758 (2003)
and $6,667 (2002) |
217,924 | 168,237 | ||||||||
Other receivables |
9,425 | 7,415 | ||||||||
Inventories |
159,493 | 95,872 | ||||||||
Deferred income taxes |
17,935 | 14,070 | ||||||||
Prepaid expenses and other current assets |
11,289 | 6,638 | ||||||||
Total current assets |
465,429 | 294,829 | ||||||||
Fixed assets, less accumulated depreciation
and amortization of $64,317 (2003) and
$48,724 (2002) |
93,108 | 73,182 | ||||||||
Intangibles, less accumulated amortization of
$5,783 (2003) and $5,007 (2002) |
65,770 | 51,134 | ||||||||
Goodwill |
98,917 | 26,978 | ||||||||
Deferred income taxes |
— | 1,411 | ||||||||
Other assets |
7,700 | 3,055 | ||||||||
Total assets |
$ | 730,924 | $ | 450,589 | ||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||||
Current liabilities: |
||||||||||
Lines of credit |
$ | 112,476 | $ | 32,498 | ||||||
Accounts payable |
89,798 | 47,279 | ||||||||
Accrued liabilities |
39,518 | 40,137 | ||||||||
Current portion of long-term debt |
7,999 | 10,680 | ||||||||
Income taxes payable |
10,678 | 3,717 | ||||||||
Total current liabilities |
260,469 | 134,311 | ||||||||
Long-term debt, net of current portion |
50,429 | 43,405 | ||||||||
Deferred income taxes |
1,610 | — | ||||||||
Total liabilities |
312,508 | 177,716 | ||||||||
Stockholders’ equity |
||||||||||
Preferred stock, $.01 par value, authorized
shares - 5,000,000; issued and outstanding
shares - none |
— | — | ||||||||
Common stock, $.01 par value, authorized
shares - 85,000,000; issued and outstanding
shares – 56,826,316 (2003) and 49,360,284 (2002) |
568 | 494 | ||||||||
Additional paid-in-capital |
152,770 | 66,522 | ||||||||
Treasury stock, 1,442,600 shares |
(6,778 | ) | (6,778 | ) | ||||||
Retained earnings |
260,154 | 219,038 | ||||||||
Accumulated other comprehensive income (loss) |
11,702 | (6,403 | ) | |||||||
Total stockholders’ equity |
418,416 | 272,873 | ||||||||
Total liabilities and stockholders’ equity |
$ | 730,924 | $ | 450,589 | ||||||
See notes to condensed consolidated financial statements.
2
QUIKSILVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
| Three months ended July 31, | |||||||||
| In thousands, except per share amounts | 2003 | 2002 | |||||||
Revenues |
$ | 251,498 | $ | 175,044 | |||||
Cost of goods sold |
144,369 | 104,691 | |||||||
Gross profit |
107,129 | 70,353 | |||||||
Selling, general and administrative expense |
85,684 | 53,835 | |||||||
Operating income |
21,445 | 16,518 | |||||||
Interest expense |
2,232 | 2,039 | |||||||
Foreign currency loss |
801 | 234 | |||||||
Other expense |
146 | 108 | |||||||
Income before provision for income taxes |
18,266 | 14,137 | |||||||
Provision for income taxes |
6,348 | 5,292 | |||||||
Net income |
$ | 11,918 | $ | 8,845 | |||||
Net income per share |
$ | 0.22 | $ | 0.19 | |||||
Net income per share, assuming dilution |
$ | 0.21 | $ | 0.18 | |||||
Weighted average common shares outstanding |
55,077 | 47,054 | |||||||
Weighted average common shares outstanding,
assuming dilution |
57,567 | 49,364 | |||||||
See notes to condensed consolidated financial statements.
3
QUIKSILVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
| Nine months ended July 31, | |||||||||
| In thousands, except per share amounts | 2003 | 2002 | |||||||
Revenues |
$ | 705,788 | $ | 509,426 | |||||
Cost of goods sold |
398,568 | 308,554 | |||||||
Gross profit |
307,220 | 200,872 | |||||||
Selling, general and administrative expense |
235,483 | 152,587 | |||||||
Operating income |
71,737 | 48,285 | |||||||
Interest expense |
6,455 | 6,754 | |||||||
Foreign currency loss |
1,616 | 596 | |||||||
Other expense |
410 | 323 | |||||||
Income before provision for income taxes |
63,256 | 40,612 | |||||||
Provision for income taxes |
22,140 | 15,218 | |||||||
Net income |
$ | 41,116 | $ | 25,394 | |||||
Net income per share |
$ | 0.76 | $ | 0.54 | |||||
Net income per share, assuming dilution |
$ | 0.73 | $ | 0.52 | |||||
Weighted average common shares outstanding |
53,827 | 46,692 | |||||||
Weighted average common shares outstanding,
assuming dilution |
56,244 | 48,696 | |||||||
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
| Nine months ended July 31, | |||||||||
| In thousands | 2003 | 2002 | |||||||
Net income |
$ | 41,116 | $ | 25,394 | |||||
Other comprehensive income (loss): |
|||||||||
Foreign currency translation adjustment |
16,986 | 6,776 | |||||||
Net unrealized gain (loss) on derivative instruments, net of tax |
1,119 | (375 | ) | ||||||
Comprehensive income |
$ | 59,221 | $ | 31,795 | |||||
See notes to condensed consolidated financial statements.
4
QUIKSILVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Nine months ended July 31, | ||||||||||||
| In thousands | 2003 | 2002 | ||||||||||
Cash flows from operating activities: |
||||||||||||
Net income |
$ | 41,116 | $ | 25,394 | ||||||||
Adjustments to reconcile net income to net cash
provided by operating activities: |
||||||||||||
Depreciation and amortization |
15,206 | 11,252 | ||||||||||
Provision for doubtful accounts |
4,565 | 3,963 | ||||||||||
Loss on sale of fixed assets |
332 | — | ||||||||||
Foreign currency loss (gain) |
42 | (1,444 | ) | |||||||||
Interest accretion |
586 | 1,486 | ||||||||||
Changes in operating assets and liabilities: |
||||||||||||
Trade accounts receivable |
(16,036 | ) | (6,988 | ) | ||||||||
Other receivables |
(3,099 | ) | (1,736 | ) | ||||||||
Inventories |
(45,097 | ) | 17,658 | |||||||||
Prepaid expenses and other current assets |
(3,765 | ) | (2,930 | ) | ||||||||
Other assets |
(1,807 | ) | (478 | ) | ||||||||
Accounts payable |
25,028 | 4,910 | ||||||||||
Accrued liabilities |
(2,360 | ) | 6,254 | |||||||||
Income taxes payable |
7,921 | 2,360 | ||||||||||
Net cash provided by operating activities |
22,632 | 59,701 | ||||||||||
Cash flows from investing activities: |
||||||||||||
Capital expenditures |
(23,382 | ) | (15,151 | ) | ||||||||
Business acquisitions, net of cash acquired |
(27,790 | ) | — | |||||||||
Net cash used in investing activities |
(51,172 | ) | (15,151 | ) | ||||||||
Cash flows from financing activities: |
||||||||||||
Borrowings on lines of credit |
108,025 | 5,980 | ||||||||||
Payments on lines of credit |
(34,609 | ) | (30,637 | ) | ||||||||
Borrowings on long-term debt |
12,298 | 2,325 | ||||||||||
Payments on long-term debt |
(22,848 | ) | (8,356 | ) | ||||||||
Proceeds from stock option exercises |
10,395 | 4,457 | ||||||||||
Net cash provided by (used in) financing activities |
73,261 | (26,231 | ) | |||||||||
Effect of exchange rate changes on cash |
2,045 | 2,874 | ||||||||||
Net increase in cash and cash equivalents |
46,766 | 21,193 | ||||||||||
Cash and cash equivalents, beginning of period |
2,597 | 5,002 | ||||||||||
Cash and cash equivalents, end of period |
$ | 49,363 | $ | 26,195 | ||||||||
Supplementary cash flow information -
Cash paid during the period for: |
||||||||||||
Interest |
$ | 4,763 | $ | 4,810 | ||||||||
Income taxes |
$ | 13,139 | $ | 12,640 | ||||||||
Non-cash investing and financing activities: |
||||||||||||
Common stock issued for business acquisition |
$ | 71,252 | $ | — | ||||||||
Deferred purchase price obligation |
$ | 4,535 | $ | 5,310 | ||||||||
See notes to condensed consolidated financial statements.
5
QUIKSILVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| 1. | Basis of Presentation | |
| The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statement presentation. | ||
| 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, 2003 and 2002. 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, 2002 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. | New Accounting Pronouncements | |
| Effective November 1, 2002, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, which superseded previous guidance on financial accounting and reporting for the impairment or disposal of long-lived assets and for segments of a business to be disposed of. The adoption of SFAS No. 144 had no impact on our financial position or results of operations. However, future impairment reviews may result in charges against earnings to write down the value of long-lived assets. | ||
| In November 2002, the Financial Accounting Standards Board (“FASB”) issued FIN No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN No. 45 elaborates on the disclosures to be made by the guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, while the provisions of the disclosure requirements are effective beginning with our financial statements for the three months ended January 31, 2003. The adoption of FIN No. 45 has not had a material impact on our operational results or financial position. | ||
| In August 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”, which requires that costs associated with exit or disposal activities be recognized when they are incurred rather than at the date of a commitment to an exit or disposal plan. We must apply SFAS No. 146 prospectively to exit or disposal activities initiated after December 31, 2002. If we initiate exit or disposal activities after that date, SFAS No.146 will affect the timing of the recognition of the related costs. We do not expect the adoption of this standard to have a significant impact on our financial position or results of operations. | ||
| In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123.” SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. We are required to follow the prescribed format and provide the additional disclosures required by SFAS No. 148 in our financial statements for the year ending October 31, 2003 and have provided the disclosures required for interim periods below. |
6
| The Company applies Accounting Principles Board Opinion 25 and related interpretations in accounting for its stock option plans. No stock-based employee compensation expense is reflected in net income, as all options granted under the Company’s stock option plans had exercise prices equal to the market value of the underlying common stock on the grant dates. The following table contains the pro forma disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation”. |
| Three Months | Nine Months | |||||||||||||||
| Ended | Ended | |||||||||||||||
| July 31, | July 31, | |||||||||||||||
| In thousands | 2003 | 2002 | 2003 | 2002 | ||||||||||||
Actual net income |
$ | 11,918 | $ | 8,845 | $ | 41,116 | $ | 25,394 | ||||||||
Less: stock-based employee compensation expense
determined under the fair value based method, net
of tax |
1,443 | 1,005 | 3,767 | 2,933 | ||||||||||||
Pro forma net income |
$ | 10,475 | $ | 7,840 | $ | 37,349 | $ | 22,461 | ||||||||
Actual net income per share |
$ | 0.22 | $ | 0.19 | $ | 0.76 | $ | 0.54 | ||||||||
Pro forma net income per share |
$ | 0.19 | $ | 0.17 | $ | 0.69 | $ | 0.48 | ||||||||
Actual net income per share, assuming dilution |
$ | 0.21 | $ | 0.18 | $ | 0.73 | $ | 0.52 | ||||||||
Pro forma net income per share, assuming dilution |
$ | 0.18 | $ | 0.16 | $ | 0.67 | ||||||||||