UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
(Mark One)
| þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended April 30, 2005
OR
| o | 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 þ No o
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes þ No o
The number of shares outstanding of Registrant’s Common Stock,
par value $0.01 per share, at
June 3, 2005 was 118,548,564
QUIKSILVER, INC.
FORM 10-Q
INDEX
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| EXHIBIT 10.1 | ||||||||
| EXHIBIT 10.2 | ||||||||
| EXHIBIT 10.3 | ||||||||
| EXHIBIT 10.4 | ||||||||
| EXHIBIT 10.5 | ||||||||
| EXHIBIT 31.1 | ||||||||
| EXHIBIT 31.2 | ||||||||
| EXHIBIT 32.1 | ||||||||
| EXHIBIT 32.2 | ||||||||
1
PART I — FINANCIAL INFORMATION
QUIKSILVER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| April 30, | October 31, | |||||||
| In thousands, except share amounts | 2005 | 2004 | ||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 68,009 | $ | 55,197 | ||||
Trade accounts receivable, less allowance
of $12,607 (2005) and $11,367 (2004) |
342,035 | 281,263 | ||||||
Other receivables |
22,869 | 16,165 | ||||||
Inventories |
177,842 | 179,605 | ||||||
Deferred income taxes |
25,466 | 22,299 | ||||||
Deposit on planned acquisition |
59,085 | ¾ | ||||||
Prepaid expenses and other current assets |
23,649 | 12,267 | ||||||
Total current assets |
718,955 | 566,796 | ||||||
Fixed assets, less accumulated depreciation
and amortization of $109,166 (2005) and
$91,097 (2004) |
130,695 | 122,787 | ||||||
Intangible assets, net |
123,255 | 121,116 | ||||||
Goodwill |
172,738 | 169,785 | ||||||
Deferred income taxes |
2,279 | ¾ | ||||||
Other assets |
17,994 | 10,506 | ||||||
Total assets |
$ | 1,165,916 | $ | 990,990 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
Current liabilities: |
||||||||
Lines of credit |
$ | 24,025 | $ | 10,801 | ||||
Accounts payable |
110,492 | 105,054 | ||||||
Accrued liabilities |
56,248 | 79,095 | ||||||
Current portion of long-term debt |
9,148 | 10,304 | ||||||
Income taxes payable |
20,977 | 18,442 | ||||||
Total current liabilities |
220,890 | 223,696 | ||||||
Long-term debt, net of current portion |
269,514 | 163,209 | ||||||
Deferred income taxes |
21,855 | 15,841 | ||||||
Total liabilities |
512,259 | 402,746 | ||||||
Stockholders’ equity |
||||||||
Preferred stock, $.01 par value, authorized
shares - 5,000,000; issued and outstanding
shares — none |
¾ | ¾ | ||||||
Common stock, $.01 par value, authorized shares –
185,000,000; issued shares – 121,289,762 (2005)
and 120,339,046 (2004) |
1,213 | 1,203 | ||||||
Additional paid-in-capital |
206,925 | 200,118 | ||||||
Treasury stock, 2,885,200 shares |
(6,778 | ) | (6,778 | ) | ||||
Retained earnings |
407,804 | 358,923 | ||||||
Accumulated other comprehensive income |
44,493 | 34,778 | ||||||
Total stockholders’ equity |
653,657 | 588,244 | ||||||
Total liabilities and stockholders’ equity |
$ | 1,165,916 | $ | 990,990 | ||||
See notes to condensed consolidated financial statements.
2
QUIKSILVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
| Three months ended April 30, | ||||||||
| In thousands, except per share amounts | 2005 | 2004 | ||||||
Revenues, net |
$ | 426,853 | $ | 322,579 | ||||
Cost of goods sold |
233,488 | 175,536 | ||||||
Gross profit |
193,365 | 147,043 | ||||||
Selling, general and administrative expense |
139,314 | 104,647 | ||||||
Operating income |
54,051 | 42,396 | ||||||
Interest expense |
3,269 | 1,476 | ||||||
Foreign currency gain |
(288 | ) | (1,180 | ) | ||||
Other (income) expense |
(61 | ) | 227 | |||||
Income before provision for income taxes |
51,131 | 41,873 | ||||||
Provision for income taxes |
16,464 | 14,083 | ||||||
Net income |
$ | 34,667 | $ | 27,790 | ||||
Net income per share |
$ | 0.29 | $ | 0.25 | ||||
Net income per share, assuming dilution |
$ | 0.28 | $ | 0.24 | ||||
Weighted average common shares outstanding |
118,169 | 112,340 | ||||||
Weighted average common shares outstanding,
assuming dilution |
123,791 | 117,370 | ||||||
See notes to condensed consolidated financial statements.
3
QUIKSILVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
| Six months ended April 30, | ||||||||
| In thousands, except per share amounts | 2005 | 2004 | ||||||
Revenues, net |
$ | 769,713 | $ | 578,721 | ||||
Cost of goods sold |
423,442 | 318,009 | ||||||
Gross profit |
346,271 | 260,712 | ||||||
Selling, general and administrative expense |
268,797 | 199,382 | ||||||
Operating income |
77,474 | 61,330 | ||||||
Interest expense |
5,058 | 3,065 | ||||||
Foreign currency loss |
175 | 2,087 | ||||||
Other expense |
145 | 509 | ||||||
Income before provision for income taxes |
72,096 | 55,669 | ||||||
Provision for income taxes |
23,215 | 18,705 | ||||||
Net income |
$ | 48,881 | $ | 36,964 | ||||
Net income per share |
$ | 0.41 | $ | 0.33 | ||||
Net income per share, assuming dilution |
$ | 0.40 | $ | 0.32 | ||||
Weighted average common shares outstanding |
117,877 | 111,786 | ||||||
Weighted average common shares outstanding,
assuming dilution |
123,448 | 116,634 | ||||||
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
| Six months ended April 30, | ||||||||
| In thousands | 2005 | 2004 | ||||||
Net income |
$ | 48,881 | $ | 36,964 | ||||
Other comprehensive income: |
||||||||
Foreign currency translation adjustment |
7,340 | 4,553 | ||||||
Net unrealized income on derivative instruments, net of
tax of $1,516 (2005) and $1,024 (2004) |
2,375 | 1,667 | ||||||
Comprehensive income |
$ | 58,596 | $ | 43,184 | ||||
See notes to condensed consolidated financial statements.
4
QUIKSILVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Six months ended April 30, | ||||||||
| In thousands | 2005 | 2004 | ||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 48,881 | $ | 36,964 | ||||
Adjustments to reconcile net income to net cash
provided by operating activities: |
||||||||
Depreciation and amortization |
16,626 | 12,365 | ||||||
Provision for doubtful accounts |
3,624 | 3,737 | ||||||
Loss on sale of fixed assets |
283 | 869 | ||||||
Foreign currency loss (gain) |
465 | (649 | ) | |||||
Interest accretion |
998 | 633 | ||||||
Changes in operating assets and liabilities: |
||||||||
Trade accounts receivable |
(63,018 | ) | (30,415 | ) | ||||
Other receivables |
638 | 1,121 | ||||||
Inventories |
3,031 | 21,748 | ||||||
Prepaid expenses and other current assets |
(5,627 | ) | (5,645 | ) | ||||
Other assets |
(3,084 | ) | (1,496 | ) | ||||
Accounts payable |
4,719 | (2,530 | ) | |||||
Accrued liabilities |
(9,364 | ) | (394 | ) | ||||
Income taxes payable |
5,761 | 5,125 | ||||||
Net cash provided by operating activities |
3,933 | 41,433 | ||||||
Cash flows from investing activities: |
||||||||
Capital expenditures |
(24,732 | ) | (19,370 | ) | ||||
Deposit on planned acquisition |
(59,588 | ) | ¾ | |||||
Business acquisitions, net of cash acquired |
(21,389 | ) | (5,605 | ) | ||||
Net cash used in investing activities |
(105,709 | ) | (24,975 | ) | ||||
Cash flows from financing activities: |
||||||||
Borrowings on lines of credit |
35,172 | 12,713 | ||||||
Payments on lines of credit |
(21,536 | ) | (20,449 | ) | ||||
Borrowings on long-term debt |
104,149 | 4,091 | ||||||
Payments on long-term debt |
(7,036 | ) | (6,271 | ) | ||||
Proceeds from stock option exercises |
3,494 | 6,798 | ||||||
Net cash provided by (used in) financing activities |
114,243 | (3,118 | ) | |||||
Effect of exchange rate changes on cash |
345 | 1,129 | ||||||
Net increase in cash and cash equivalents |
12,812 | 14,469 | ||||||
Cash and cash equivalents, beginning of period |
55,197 | 27,866 | ||||||
Cash and cash equivalents, end of period |
$ | 68,009 | $ | 42,335 | ||||
Supplementary cash flow information: |
||||||||
Cash paid during the period for: |
||||||||
Interest |
$ | 4,482 | $ | 2,638 | ||||
Income taxes |
$ | 16,443 | $ | 12,947 | ||||
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 six months ended April 30, 2005 and 2004. 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, 2004 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
In November 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 151, “Inventory Costs an amendment of ARB No. 43, Chapter 4”. SFAS No. 151 clarifies that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges and requires the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. SFAS No. 151 is effective for fiscal years beginning after June 15, 2005. The Company does not expect the adoption of SFAS No. 151 to have a significant impact on its consolidated financial position, results of operations or cash flows.
In December 2004, the FASB issued SFAS No. 123 (R) “Share-Based Payment”. SFAS No. 123 (R) requires that companies recognize compensation expense equal to the fair value of stock options or other share based payments. The standard is effective for the Company beginning the first quarter of fiscal 2006. The impact on the Company’s net income is significant and will include the remaining amortization of the fair value of existing options currently disclosed as pro-forma expense in Note 3 to the condensed consolidated financial statements and is contingent upon the number of future options granted, the selected transition method and the selection of either the Black-Scholes or the binomial lattice model for valuing options. The adoption of this standard will have no impact on the Company’s cash flows.
3. Stock Based Compensation
The Company currently 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 our stock option plans have 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,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.”
6
| Three Months Ended | Six Months Ended | |||||||||||||||
| April 30, | April 30, | |||||||||||||||
| In thousands, except per share amounts | 2005 | 2004 | 2005 | 2004 | ||||||||||||
Actual net income |
$ | 34,667 | $ | 27,790 | $ | 48,881 | $ | 36,964 | ||||||||
Less stock-based employee compensation expense
determined under the fair value based method |
3,781 | 2,282 | 5,594 | 4,358 | ||||||||||||
Pro forma net income |
$ | 30,886 | $ | 25,508 | $ | 43,287 | $ | 32,606 | ||||||||
Actual net income per share |
$ | 0.29 | $ | 0.25 | $ | 0.41 | $ | 0.33 | ||||||||
Pro forma net income per share |
$ | 0.26 | $ | 0.23 | $ | 0.37 | $ | 0.29 | ||||||||
Actual net income per share, assuming dilution |
$ | 0.28 | $ | 0.24 | $ | 0.40 | $ | 0.32 | ||||||||
Pro forma net income per share, assuming dilution |
$ | 0.25 | $ | 0.22 | $ | 0.35 | $ | 0.28 | ||||||||
4. Inventories
Inventories consist of the following:
| April 30, | October 31, | |||||||
| In thousands | 2005 | 2004 | ||||||
Raw Materials |
$ | 12,718 | $ | 14,133 | ||||
Work-In-Process |
5,737 | 7,698 | ||||||
Finished Goods |
159,387 | 157,774 | ||||||
| $ | 177,842 | $ | 179,605 | |||||
5. Intangible Assets and Goodwill
A summary of intangible assets is as follows:
| April 30, 2005 | October 31, 2004 | |||||||||||||||||||||||
| Gross | Amorti- | Net Book | Gross | Amorti- | Net Book | |||||||||||||||||||
| In thousands | Amount | zation | Value | Amount | zation | Value | ||||||||||||||||||
Amortizable trademarks |
$ | 4,524 | $ | (1,145 | ) | $ | 3,379 | $ | 3,476 | $ | (692 | ) | $ | 2,784 | ||||||||||
Amortizable licenses |
10,075 | (2,536 | ) | 7,539 | 10,105 | (1,937 | ) | 8,168 | ||||||||||||||||
Other amortizable intangibles |
5,633 | (969 | ) | 4,664 | 5,633 | (498 | ) | 5,135 | ||||||||||||||||
Non-amortizable trademarks |
107,673 | ¾ | 107,673 | 105,029 | ¾ | 105,029 | ||||||||||||||||||
| $ | 127,905 | $ | (4,650 | ) | $ | 123,255 | $ | 124,243 | $ | (3,127 | ) | $ | 121,116 | |||||||||||
Certain trademarks and licenses will continue to be amortized by the Company using estimated useful lives of 10 to 25 years with no residual values. Intangible amortization expense for the six months ended April 30, 2005 and 2004 was $1.2 million and $0.6 million, respectively. Annual amortization expense is estimated to be approximately $2.2 million in each of the fiscal years ending October 31, 2005 through 2007 and approximately $1.5 million in each of the fiscal years ending October 31, 2008 and 2009. Goodwill related to the Company’s geographic segments is as follows:
| April 30, | October 31, | |||||||
| In thousands | 2005 | 2004 | ||||||
Americas |
$ | 86,892 | $ | 86,382 | ||||
Europe |
72,045 | 70,057 | ||||||
Asia/Pacific |
13,801 | 13,346 | ||||||
| $ | 172,738 | $ | 169,785 | |||||
7
Goodwill arose primarily from the acquisitions of Quiksilver Europe, The Raisin Company, Inc., Mervin Manufacturing, Inc., Freestyle SA, Beach Street Inc., Quiksilver Asia/Pacific and DC Shoes, Inc. Goodwill increased during the six months ended April 30, 2005 as a result of a contingent purchase price payment related to the acquisition of DC Shoes, Inc., as described in Note 9 to the condensed consolidated financial statements, as well as foreign exchange fluctuations of $2.9 million.
6. Accumulated Other Comprehensive Income
The components of accumulated other comprehensive income include changes in fair value of derivative instruments qualifying as cash flow hedges, the fair value of interest rate swaps and foreign currency translation adjustments. The components of accumulated other comprehensive income, net of income taxes, are as follows:
| April 30, | October 31, | |||||||
| In thousands | 2005 | 2004 | ||||||
Foreign currency translation adjustment |
$ | 49,764 | $ | 42,424 | ||||
Loss on cash flow hedges and interest rate swaps |
(5,271 | ) | (7,646 | ) | ||||
| $ | 44,493 | $ | 34,778 | |||||
7. Segment Information
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the Company’s management in deciding how to allocate resources and in assessing performance. The Company operates exclusively in the consumer products industry in which the Company designs, produces and distributes clothing, accessories and related products. Operating results of the Company’s various product lines have been aggregated because of their common characteristics and their reliance on shared operating functions. Within the consumer products industry, the Company operates in the Americas (primarily the United States), Europe and Asia/Pacific. Costs that support all three geographic segments, including trademark protection, trademark maintenance and licensing functions are part of corporate operations. Corporate operations also includes sourcing income and gross profit earned from the Company’s international licensees. No single customer accounted for more than 10% of the Company’s revenues.
8
Information related to the Company’s geographical segments is as follows:
| Three Months Ended April 30, | ||||||||
| In thousands | 2005 | 2004 | ||||||
Revenues, net: |
||||||||
Americas |
$ | 199,192 | $ | 148,536 | ||||
Europe |
176,272 | 140,286 | ||||||
Asia/Pacific |
50,331 | 33,205 | ||||||
Corporate operations |
1,058 | 552 | ||||||
| $ | 426,853 | $ | 322,579 | |||||
Gross Profit: |
||||||||
Americas |
$ | 76,697 | $ | 61,044 | ||||
Europe |
90,595 | 69,053 | ||||||
Asia/Pacific |
25,541 | 16,229 | ||||||
Corporate operations |
532 | 717 | ||||||
| $ | 193,365 | $ | 147,043 | |||||
Operating Income: |
||||||||
Americas |
$ | 23,425 | $ | 18,929 | ||||
Europe |
33,704 | 26,258 | ||||||
Asia/Pacific |
6,340 | 3,832 | ||||||
Corporate operations |
||||||||