Volcom Inc - FORM 10-Q - November 9, 2010

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EX-31.1 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SECTION 302 - Volcom Inc	dex311.htm
EX-32 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER - Volcom Inc	dex32.htm
EX-31.2 - CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO SECTION 302 - Volcom Inc	dex312.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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 September 30, 2010

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 000-51382

Volcom, Inc.

(Exact name of registrant as specified in its charter)

Delaware

33-0466919

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

Volcom, Inc.

1740 Monrovia Avenue

Costa Mesa, CA 92627

(Address of principal executive offices, including zip code)

(949) 646-2175

(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 requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

As of November 1, 2010, there were 24,409,180 shares of the registrant’s common stock, par value $0.001, outstanding.

VOLCOM, INC.

FORM 10-Q

INDEX


		Page
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements		3
	Condensed Consolidated Balance Sheets (unaudited) as of September 30, 2010 and December 31, 2009		3
	Condensed Consolidated Statements of Operations (unaudited) for the three and nine months ended September 30, 2010 and 2009		4
	Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2010 and 2009		5
	Notes to Condensed Consolidated Financial Statements (unaudited)		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		24
Item 4.	Controls and Procedures		25

PART II. OTHER INFORMATION			26

Item 1.	Legal Proceedings		26
Item 1A.	Risk Factors		26
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		27
Item 3.	Defaults Upon Senior Securities		27
Item 4.	Removed and Reserved		27
Item 5.	Other Information		27
Item 6.	Exhibits		27

SIGNATURES			29

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

VOLCOM, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

(in thousands, except share and per share data)


	September 30, 2010		December 31, 2009
Assets
Current assets:
Cash and cash equivalents	$	104,950	$	76,180
Short-term investments		—		35,000
Accounts receivable — net of allowances of $8,082 (2010) and $8,626 (2009)		81,821		53,792
Inventories		37,024		33,250
Prepaid expenses and other current assets		9,404		4,353
Income taxes receivable		—		725
Deferred income taxes		8,212		7,700

Total current assets		241,411		211,000

Property and equipment — net		26,543		26,348
Investment in unconsolidated investee		—		330
Deferred income taxes		3,535		3,545
Intangible assets — net		10,235		9,784
Goodwill		1,341		1,291
Other assets		1,134		735

Total assets	$	284,199	$	253,033

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	24,328	$	22,788
Accrued expenses and other current liabilities		15,168		9,957
Income taxes payable		3,422		—
Current portion of capital lease obligations		17		50

Total current liabilities		42,935		32,795

Long-term capital lease obligations		27		—
Other long-term liabilities		1,257		1,203
Income taxes payable — non-current		23		68
Commitments and contingencies (Note 8)
Stockholders’ equity:
Common stock, $0.001 par value — 60,000,000 shares authorized; 24,408,900 (2010) and 24,374,362 (2009) shares issued and outstanding		24		24
Additional paid-in capital		94,279		92,192
Retained earnings		144,334		123,679
Accumulated other comprehensive income		1,320		3,072

Total stockholders’ equity		239,957		218,967

Total liabilities and stockholders’ equity	$	284,199	$	253,033

See accompanying notes to condensed consolidated financial statements

VOLCOM, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except share and per share data)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
Revenues:
Product revenues	$	104,213	$	93,356	$	243,196	$	215,103
Licensing revenues		445		560		1,426		1,348

Total revenues		104,658		93,916		244,622		216,451
Cost of goods sold		52,797		45,433		120,933		107,232

Gross profit		51,861		48,483		123,689		109,219
Selling, general and administrative expenses		33,884		28,825		94,657		82,710

Operating income		17,977		19,658		29,032		26,509
Other income:
Interest income, net		66		127		272		229
Gain on investment in unconsolidated investee		39		—		39		—
Foreign currency gain		1,256		222		1,179		991

Total other income		1,361		349		1,490		1,220

Income before provision for income taxes		19,338		20,007		30,522		27,729
Provision for income taxes		6,285		6,750		9,868		9,381

Net income	$	13,053	$	13,257	$	20,654	$	18,348

Net income per share:
Basic	$	0.54	$	0.54	$	0.85	$	0.75
Diluted	$	0.53	$	0.54	$	0.85	$	0.75
Weighted average shares outstanding:
Basic		24,396,899		24,354,208		24,377,222		24,350,725
Diluted		24,431,095		24,367,464		24,421,970		24,361,034

See accompanying notes to condensed consolidated financial statements

VOLCOM, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)


	Nine Months Ended September 30,
	2010			2009
Cash flows from operating activities:
Net income	$	20,654		$	18,348
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		4,645			5,034
Gain on investment in unconsolidated investee		(39	)		—
Provision for doubtful accounts		173			2,434
Excess tax benefits related to exercise of stock options		(51	)		—
Loss on disposal of property and equipment		35			3
Stock-based compensation		1,514			1,246
Deferred income taxes		(487	)		(963	)
Changes in operating assets and liabilities, net of effects of acquisition:
Accounts receivable		(24,562	)		(13,574	)
Inventories		376			5,032
Prepaid expenses and other current assets		(4,149	)		(407	)
Income taxes receivable/payable		4,182			6,683
Other assets		(351	)		31
Accounts payable		800			(5,445	)
Accrued expenses and other current liabilities		4,035			1,040
Other long-term liabilities		72			(96	)

Net cash provided by operating activities		6,847			19,366

Cash flows from investing activities:
Purchase of property and equipment		(4,286	)		(3,406	)
Business acquisitions, net of cash acquired		(2,304	)		(897	)
Purchase of short-term investments		(20,000	)		(64,933	)
Sale of short-term investments		55,000			24,944
Proceeds from sale of property and equipment		38			6

Net cash provided by/(used in) investing activities		28,448			(44,286	)

Cash flows from financing activities:
Principal payments on capital lease obligations		(12	)		(65	)
Proceeds from exercise of stock options		523			—
Excess tax benefits related to exercise of stock options		51			—

Net cash provided by/(used in) financing activities		562			(65	)

Effect of exchange rate changes on cash		(7,087	)		4,701

Net increase/(decrease) in cash and cash equivalents		28,770			(20,284	)
Cash and cash equivalents — Beginning of period		76,180			79,613

Cash and cash equivalents — End of period	$	104,950		$	59,329

Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	2		$	3
Income taxes	$	6,692		$	3,945

Supplemental disclosures of noncash investing and financing activities:

At September 30, 2010 and 2009, the Company accrued for $118 and $56 of property and equipment purchases, respectively.

See accompanying notes to condensed consolidated financial statements

VOLCOM, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Note 1 — Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) 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 GAAP for complete financial statements.

In the opinion of management, the unaudited condensed consolidated financial statements contain all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the condensed consolidated balance sheet as of September 30, 2010, the condensed consolidated statements of operations for the three and nine months ended September 30, 2010 and 2009, and the condensed consolidated statements of cash flows for the nine months ended September 30, 2010 and 2009. The results of operations for the three and nine months ended September 30, 2010 are not necessarily indicative of the results to be expected for the year ending December 31, 2010. The condensed consolidated financial statements and notes thereto should be read in conjunction with the Company’s consolidated annual financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

Note 2 — Stock-Based Compensation

The Company accounts for stock-based compensation under the provisions of Accounting Standards Codification (“ASC”) 718, Compensation – Stock Compensation (“ASC 718”). The Company accounts for all stock-based compensation using a fair-value method and recognizes the fair value of each award as an expense over the service period. The Company uses the Black-Scholes option-pricing model to value compensation expense. Forfeitures are estimated at the date of grant based on historical employee turnover rates and reduce the compensation expense recognized. Depending upon the option grant, the expected option term is based upon historical industry data on employee exercises and management’s expectation of exercise behavior, or is estimated based on the simplified method as prescribed in ASC 718. For options granted concurrently with the Company’s initial public offering of common stock, the expected volatility of the Company’s stock price was based upon the historical volatility of similar entities whose share prices were publicly available. For options granted subsequent to the Company’s offering, expected volatility is based on the historical volatility of the Company’s stock. The risk-free interest rate is based upon the current yield on U.S. Treasury securities having a term similar to the expected option term. Dividend yield is estimated at zero because the Company does not anticipate paying dividends in the foreseeable future. The fair value of employee stock-based awards is amortized using the straight-line method over the vesting period.

During the nine months ended September 30, 2010 and 2009, the Company recognized approximately $1.5 million, or $938,000 net of tax, and $1.2 million, or $822,000 net of tax, respectively, in stock-based compensation expense, which includes the impact of all stock-based awards and is included in selling, general and administrative expenses.

Stock Compensation Plans — In June 2005, the Company’s Board of Directors and stockholders approved the 2005 Incentive Award Plan (the “Incentive Plan”), as amended and restated in February 2007, and re-approved by the stockholders in May 2009. A total of 2,300,000 shares of common stock were initially authorized and reserved for issuance under the Incentive Plan for incentives such as stock options, stock appreciation rights, restricted stock awards, restricted stock units, performance shares and deferred stock awards. The actual number of awards reserved for issuance under the Incentive Plan automatically increases on the first trading day in January of each calendar year by an amount equal to 2% of the total number of shares of common stock outstanding on the last trading day in December of the preceding calendar year, but in no event will any such annual increase exceed 750,000 shares. As of September 30, 2010, there were 3,398,629 shares available for issuance pursuant to new stock option grants or other equity awards. Under the Incentive Plan, stock options have been granted at an exercise price equal to the fair market value of the Company’s stock at the time of grant. The vesting period for stock options is determined by the Board of Directors or the Compensation Committee of the Board of Directors, as applicable, and the stock options generally expire ten years from the date of grant or 90 days after employment or services are terminated.

Stock Option Awards — In June 2005, the Company’s Board of Directors approved the grant of 586,526 options to purchase the Company’s common stock. The Company granted these options under the Incentive Plan at the effective date of the Company’s initial public offering at an exercise price of $19.00, which was equal to the initial public offering price of the Company’s common stock. The stock options have vesting terms whereby 10,526 options vested immediately, 210,000 options vested on December 15, 2005 and the remaining 366,000 options vested 20% per annum over 5 years. The fair value of these awards was calculated through the use of the Black-Scholes option-pricing model assuming an exercise price equal to the fair market value of the Company’s stock and the following additional significant weighted average assumptions: expected life of 4.2 years; volatility of 47.5%; risk-free interest rate of 3.73%; and no dividends during the expected term.

VOLCOM, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

In May 2007, the Company’s Board of Directors approved the grant of 2,000 options to purchase the Company’s common stock to each independent member of the Company’s Board of Directors (10,000 options in total). The Company granted these options at the fair market value of the Company’s common stock on the date of grant. The stock options vested one year from the date of grant. The fair value of these awards was calculated through the use of the Black-Scholes option-pricing model assuming an exercise price equal to the fair market value of the Company’s stock and the following additional significant weighted average assumptions: expected life of 2.0 years; volatility of 55.7%; risk-free interest rate of 4.68%; and no dividends during the expected term.

In May 2008, the Company’s Board of Directors approved the grant of 2,000 options to purchase the Company’s common stock to each independent member of the Company’s Board of Directors (10,000 options in total). The Company granted these options at the fair market value of the Company’s common stock on the date of grant. The stock options vested one year from the date of grant. The fair value of these awards was calculated through the use of the Black-Scholes option-pricing model assuming an exercise price equal to the fair market value of the Company’s stock and the following additional significant weighted average assumptions: expected life of 2.0 years; volatility of 61.9%; risk-free interest rate of 2.38%; and no dividends during the expected term.

In May 2009, the Company’s Board of Directors approved the grant of 670,000 options to purchase the Company’s common stock. The Company granted these options at the fair market value of the Company’s common stock on the date of grant. The stock option vesting periods range from one to five years from the date of grant. The fair value of these awards was calculated through the use of the Black-Scholes option-pricing model assuming an exercise price equal to the fair market value of the Company’s stock and the following additional significant weighted average assumptions: expected life ranging from 1.0 to 6.5 years; volatility ranging from 69.7% to 90.7%; risk-free interest rate ranging from 0.53% to 3.22%; and no dividends during the expected term.

In May 2010, the Company’s Board of Directors approved the grant of 2,000 options to purchase the Company’s common stock to each non-employee member of the Company’s Board of Directors (12,000 options in total). The Company granted these options at the fair market value of the Company’s common stock on the date of grant. The stock options vest one year from the date of grant. The fair value of these awards was calculated through the use of the Black-Scholes option-pricing model assuming an exercise price equal to the fair market value of the Company’s stock and the following additional significant weighted average assumptions: expected life of 5.5 years; volatility of 65.2%; risk-free interest rate of 2.38%; and no dividends during the expected term.

A summary of the Company’s stock option activity under the Incentive Plan for the nine months ended September 30, 2010 is as follows:


	Number of Options			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term
Outstanding at January 1, 2010		1,103,158		$	16.52
Granted		12,000			23.80
Exercised		(34,538	)		16.33
Canceled or forfeited		(39,620	)		16.30

Outstanding at September 30, 2010		1,041,000		$	16.61		7.2 years

Exercisable at September 30, 2010		540,720		$	18.40		5.8 years

As of September 30, 2010, there was unrecognized compensation expense of $4.1 million related to unvested stock options, which the Company expects to recognize over a weighted-average period of 3.4 years. The aggregate intrinsic value of options exercised during the nine months ended September 30, 2010 and 2009 was $192,000 and zero, respectively. The aggregate intrinsic value of options outstanding and options exercisable as of September 30, 2010 was $3.0 million and $679,000, respectively.

VOLCOM, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

Additional information regarding stock options outstanding as of September 30, 2010 is as follows:


	Options Outstanding						Options Exercisable
Exercise price	Number of Options		Weighted- Average Remaining Life (yrs)		Weighted- Average Exercise Price		Number of Options		Weighted- Average Exercise Price
$13.43		8,000		8.7	$	13.43		1,600	$	13.43
$14.47		616,100		8.6	$	14.47		134,220	$	14.47
$19.00		384,900		4.8	$	19.00		384,900	$	19.00
$23.80		12,000		9.6	$	23.80		—		—
$25.42		10,000		7.6	$	25.42		10,000	$	25.42
$42.07		10,000		6.6	$	42.07		10,000	$	42.07

As of September 30, 2010, the total number of outstanding options vested or expected to vest (based on anticipated forfeitures) was 1,013,203, which had a weighted-average exercise price of $16.39. The weighted-average remaining life of these options was 7.1 years and the aggregate intrinsic value was $2.8 million at September 30, 2010.

Restricted Stock Awards — The Company’s Incentive Plan provides for awards of restricted shares of common stock. Restricted stock awards have time-based vesting and are subject to forfeiture if employment terminates prior to the end of the service period. Restricted stock awards are valued at the grant date based upon the market price of the Company’s common stock and the fair value of each award is charged to expense over the service period.

In 2005, the Company granted a total of 20,000 shares of restricted stock to employees. The restricted stock awards have a purchase price of $.001 per share and vested 20% per year over a five-year period. The total fair value of the restricted stock awards is $660,000, of which $77,000 and $99,000 was amortized to expense during the nine month periods ended September 30, 2010 and 2009, respectively.

In 2006, the Company granted a total of 15,000 shares of restricted stock to employees. The restricted stock awards have a purchase price of $.001 per share and vest 20% per year over a five-year period. The total value of the restricted stock awards is $405,000, of which $61,000 was amortized to expense during each of the nine month periods ended September 30, 2010 and 2009.

In 2008, the Company granted 10,000 shares of restricted stock to a service provider. The restricted stock award has a purchase price of $.001 per share and vests 20% per year over a five-year period. The total value of the restricted stock award is $254,000, of which $38,000 was amortized to expense during each of the nine month periods ended September 30, 2010 and 2009.

Restricted stock activity for the nine months ended September 30, 2010 is as follows:


	Shares of Restricted Stock			Weighted- Average Grant-Date Fair Value
Unvested restricted stock at January 1, 2010		18,000		$	27.64
Granted		—			—
Vested		(9,000	)		29.32
Canceled or forfeited		—			—

Unvested restricted stock at September 30, 2010		9,000		$	25.95

As of September 30, 2010, there was unrecognized compensation expense of $177,000 related to all unvested restricted stock awards, which the Company expects to recognize on a straight-line basis over a weighted average period of approximately 1.9 years.

Note 3 — New Accounting Pronouncements

In October 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2009-13, which amends the guidance in ASC 605, Revenue Recognition (“ASC 605”). ASU No. 2009-13 eliminates the residual method of accounting for revenue on undelivered products and instead, requires companies to allocate revenue to each of the deliverable products based on their relative selling price. In addition, this ASU expands the disclosure requirements surrounding multiple-deliverable arrangements. ASU No. 2009-13 will be effective for revenue arrangements

VOLCOM, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

entered into for fiscal years beginning on or after June 15, 2010. The adoption of ASU No. 2009-13 will not have an impact on the Company’s consolidated financial position and results of operations.

Note 4 — Inventories

Inventories are as follows:


	September 30, 2010		December 31, 2009
	(In thousands)
Finished goods	$	34,809	$	31,348
Work-in-process		121		297
Raw materials		2,094		1,605

	$	37,024	$	33,250

Note 5 — Property and Equipment

Property and equipment are as follows:


	September 30, 2010			December 31, 2009
	(In thousands)
Furniture and fixtures	$	11,727		$	8,750
Office equipment		3,273			2,392
Computer equipment		8,198			7,130
Leasehold improvements		11,650			11,112
Buildings		7,316			7,614
Land		4,723			4,723
Construction in progress		152			308

		47,039			42,029
Less accumulated depreciation		(20,496	)		(15,681	)

Property and equipment — net	$	26,543		$	26,348

Note 6 — Intangible Assets

Intangible assets are as follows:


	As of September 30, 2010				As of December 31, 2009
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
	(In thousands)
Amortizing intangible assets	$	7,401	$	3,902	$	6,422	$	3,396
Non-amortizing trademarks		6,300		—		6,300		—
Other non-amortizing intangible assets		436		—		458		—

	$	14,137	$	3,902	$	13,180	$	3,396

Amortizing intangible assets include customer relationships, trademarks, non-compete agreements, backlog, leasehold rights, and athlete contracts. Other non-amortizing intangible assets consist of trademarks and land use rights. Amortizable intangible assets are amortized by the Company using estimated useful lives of 3 months to 20 years with no residual values. Fluctuations in the gross carrying amounts of intangible assets associated with the Company’s international subsidiaries are due to the effect of changes in foreign currency exchange rates. Intangible amortization expense for the nine months ended September 30, 2010 and 2009, was approximately $479,000 and $1.0 million, respectively. The Company’s annual amortization expense is estimated to be approximately $654,000, $768,000, $715,000, $398,000 and $289,000 in the fiscal years ending December 31, 2010, 2011, 2012, 2013 and 2014, respectively.

VOLCOM, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

Note 7 — Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities are as follows:


	September 30, 2010		December 31, 2009
	(In thousands)
Payroll and related accruals	$	8,004	$	4,708
Other		7,164		5,249

	$	15,168	$	9,957

Note 8 — Commitments and Contingencies

Litigation — The Company is involved from time to time in litigation incidental to its business.

During the three months ended September 30, 2010, the French tax authorities began an investigation into the appropriateness of the Company’s tax positions associated with its European operations for tax years beginning in 2007. The investigation specifically relates to intercompany transactions between certain of the Company’s wholly-owned European subsidiaries. Conclusion of this matter could result in payment of a different amount than the Company has accrued as uncertain tax benefits. If a position for which the Company concluded was more likely than not is subsequently not upheld, then the Company would need to accrue and ultimately pay an additional amount, which may or may not be significant. The Company has recorded a tax liability of approximately $100,000 associated with this uncertain tax position as of September 30, 2010.

The Company is subject to various other claims, complaints and legal actions in the normal course of business from time to time. These other matters are, in the opinion of management, immaterial both individually and in the aggregate with respect to the Company’s consolidated financial position, liquidity or results of operations.

Indemnities and Guarantees — During its normal course of business, the Company has made certain indemnities and guarantees under which it may be required to make payments in relation to certain transactions. These include (i) intellectual property indemnities to the Company’s customers and licensees in connection with the use, sale and license of Company products, (ii) indemnities to various lessors in connection with facility leases for certain claims arising from such facility or lease, (iii) indemnities to vendors and service providers pertaining to claims based on the negligence or willful misconduct of the Company and (iv) indemnities involving the accuracy of representations and warranties in certain contracts. The duration of these indemnities, commitments and guarantees varies, and in certain cases, may be indefinite. The majority of these indemnities, commitments and guarantees do not provide for any limitation on the maximum potential future payments the Company could be obligated to make. The Company has not been required to record nor has it recorded any liability for these indemnities, commitments and guarantees in the accompanying condensed consolidated balance sheets.

Note 9 — Earnings Per Share

Basic net income per common share is calculated by dividing net income by the weighted average number of common shares outstanding during the reporting period. Diluted net income per common share reflects the effects of potentially dilutive securities, which consists solely of restricted stock and stock options using the treasury stock method. A reconciliation of the numerator and denominator used in the calculation of basic and diluted net income per share is as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
	(In thousands, except share data)				(In thousands, except share data)
Numerator — Net income	$	13,053	$	13,257	$	20,654	$	18,348

Denominator: Weighted average common stock outstanding for basic earnings per share		24,396,899		24,354,208		24,377,222		24,350,725
Effect of dilutive securities:
Stock options and restricted stock		34,196		13,256		44,748		10,309

Adjusted weighted average common stock and assumed conversions for diluted earnings per share		24,431,095		24,367,464		24,421,970		24,361,034

VOLCOM, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

For the three months ended September 30, 2010 and 2009, 594,100 and 1,105,158 stock options, respectively, were excluded from the weighted-average number of shares outstanding because their effect would be antidilutive. For the nine months ended September 30, 2010 and 2009, 610,127 and 1,105,158 stock options, respectively, were excluded from the weighted-average number of shares outstanding because their effect would be antidilutive.

Note 10 — Fair Value Measurements of Financial Instruments

The Company’s financial assets and liabilities are measured and reported on a fair value basis in accordance with ASC 820, Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosure about fair value measurements. It also establishes a three-level hierarchy of fair value measurements for ranking the quality and reliability of the information used to determine fair values. ASC 820 requires that assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:

•

Level 1 – Quoted market prices in active markets for identical instruments

•

Level 2 – Quoted market prices in active markets for similar instruments; quoted prices for identical or similar instruments that are not active; and model-derived valuations in which all significant inputs are observable in active markets; and

•

Level 3 – Valuations derived from valuation techniques in which one or more significant inputs are unobservable.

The Company’s financial assets and liabilities include cash and cash equivalents, short-term investments, accounts receivable, accounts payable and foreign currency exchange contracts. The Company believes the carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to their short term maturities. The fair value of the Company’s short-term investments is determined based on quoted market prices in active markets. The fair value of the Company’s foreign currency exchange contracts is determined based on observable inputs that are corroborated by market data.

The following table presents information on the Company’s financial instruments (in thousands):


	September 30, 2010								December 31, 2009
	Carrying Amount		Fair Value Measurements						Carrying Amount		Fair Value Measurements
	Carrying Amount		Level 1		Level 2		Level 3		Carrying Amount		Level 1		Level 2		Level 3
Financial assets:
Short-term investments	$	—	$	—	$	—	$	—	$	35,000	$	25,000	$	10,000	$	—
Foreign currency exchange contracts	$	515	$	—	$	515	$	—	$	79	$	—	$	79	$	—
Financial liabilities:
Foreign currency exchange contracts	$	—	$	—	$	—	$	—	$	48		—	$	48	$	—

Note 11 — Derivative Financial Instruments

The Company is exposed to gains and losses resulting from fluctuations in foreign currency exchange rates relating to certain sales, licensing revenues, and product purchases of its international subsidiaries that are denominated in currencies other than their functional currencies. The Company is also exposed to foreign currency gains and losses resulting from domestic transactions that are not denominated in U.S. dollars. Furthermore, the Company is exposed to gains and losses resulting from the effect that fluctuations in foreign currency exchange rates have on the reported results in the Company’s consolidated financial statements due to the translation of the operating results and financial position of the Company’s international subsidiaries.

As part of its overall strategy to manage the level of exposure to the risk of fluctuations in foreign currency exchange rates, the Company enters into forward foreign currency exchange contracts to hedge a portion of its European operations U.S. dollar denominated inventory purchases. All of the Company’s forward foreign currency exchange contracts qualified for hedge accounting and the changes in the fair value of the derivatives are recorded in other comprehensive income. As of September 30, 2010, the Company was hedging forecasted transactions expected to occur through September 2011.

VOLCOM, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

Assuming exchange rates at September 30, 2010 remain constant, $464,000 of gains, net of tax, related to hedges of these transactions are expected to be reclassified into earnings during the next 12 months.

On the date the Company enters into a derivative contract, the Company designates the derivatives as a hedge of the identified exposure. The Company formally documents all relationships between hedging instruments and hedged items, as well as the risk-management objective and strategy for entering into various hedge transactions. The Company identifies in this documentation the asset, liability, firm commitment, or forecasted transaction that has been designated as a hedged item and indicates how the hedging instrument is expected to hedge the risks related to the hedged item. The Company formally measures effectiveness of its hedging relationships both at the hedge inception and on an ongoing basis in accordance with the Company’s risk management policy. The Company will discontinue hedge accounting prospectively:

•

if the Company determines that the derivative is no longer effective in offsetting changes in the cash flows of a hedged item;

•

when the derivative expires or is sold, terminated or exercised;

•

if it becomes probable that the forecasted transaction being hedged by the derivative will not occur;

•

if a hedged firm commitment no longer meets the definition of a firm commitment; or

•

if the Company determines that designation of the derivative as a hedge instrument is no longer appropriate.

The Company has entered into forward foreign currency exchange contracts with a bank and is exposed to foreign currency losses in the event of nonperformance by this bank. The Company anticipates, however, that this bank will be able to fully satisfy its obligations under the contracts. Accordingly, the Company does not obtain collateral or other security to support the contracts.

As of September 30, 2010, the Company had U.S. dollar denominated forward foreign currency contracts outstanding to hedge a portion of its European operations U.S. dollar denominated inventory purchases with a notional amount of $6.4 million and a fair value of $515,000, which mature from November 2010 through September 2011. All outstanding contracts were in a gain position and the $515,000 asset is included in prepaid expenses and other current assets in the accompanying condensed consolidated balance sheet.

For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income (“OCI”) and reclassified into earnings in the same period or periods which the hedged transaction affects earnings. The following table summarizes the effective portions of gains (losses) of foreign exchange derivative instruments in the condensed consolidated statement of operations:


		Three Months Ended September 30,						Nine Months Ended September 30,
		(In thousands)
	Location	2010			2009			2010		2009
Gain (loss) recognized in OCI on foreign currency derivatives	OCI	$	(672	)	$	(89	)	$	195	$	143
Gain (loss) reclassified from accumulated OCI into income	Cost of goods sold		304			(77	)		741		(537	)

Note 12 — Segment Information

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker 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, eyewear and related products. Based on the nature of the financial information that is received by the chief operating decision maker and the Company’s internal reporting structure, the Company operates in four operating and reportable segments, the United States, Europe, Australia and Electric. The United States segment primarily includes Volcom product revenues generated from customers in the United States, Canada, Asia Pacific, Central America and South America that are served by the Company’s United States and Japanese operations, as well as licensing revenues and revenues generated from Company-owned domestic retail stores, including Laguna Surf & Sport. The European segment primarily includes Volcom product revenues generated from customers in Europe that are served by the Company’s European operations. The Australian segment primarily includes Volcom product revenues generated from customers in Australia and New Zealand that are served by the Company’s Australian operations. The Electric segment includes Electric product revenues generated from customers worldwide, primarily in the United States, Canada, Europe and Asia Pacific. All intercompany revenues, expenses, payables and receivables are eliminated in consolidation and are not reviewed when evaluating segment performance. Each segment’s performance is evaluated based on revenues, gross profit and operating

VOLCOM, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

income. The accounting policies of the segments are the same as those described in the summary of significant accounting policies in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

Information related to the Company’s operating segments is as follows:


	Three Months Ended September 30,
	2010		2009
	(In thousands)
Total revenues:
United States	$	64,487	$	56,769
Europe		28,672		30,250
Electric		8,911		6,897
Australia		2,588		—

Consolidated	$	104,658	$	93,916

Gross profit:
United States	$	29,261	$	28,350
Europe		15,971		16,016
Electric		5,466		4,117
Australia		1,163		—

Consolidated	$	51,861	$	48,483

Operating income:
United States	$	6,354	$	9,017
Europe		9,653		9,730
Electric		1,885		911
Australia		85		—

Consolidated	$	17,977	$	19,658


	Nine Months Ended September 30,
	2010		2009
	(In thousands)
Total revenues:
United States	$	163,513	$	142,839
Europe		57,420		57,814
Electric		21,101		15,798
Australia		2,588		—

Consolidated	$	244,622	$	216,451

Gross profit:
United States	$	77,409	$	69,874
Europe		32,611		30,457
Electric		12,506		8,888
Australia		1,163		—

Consolidated	$	123,689	$	109,219

Operating income (loss):
United States	$	11,624	$	13,801
Europe		14,725		13,306
Electric		2,598		(598	)
Australia		85		—

Consolidated	$	29,032	$	26,509

VOLCOM, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)


	September 30, 2010		December 31, 2009
	(In thousands)
Identifiable assets:
United States	$	185,945	$	170,463
Europe		63,084		61,351
Electric		24,704		21,219
Australia		10,466		—

Consolidated	$	284,199	$	253,033

Although the Company operates within three reportable segments, it has several different product categories within each segment, for which the revenues attributable to each product category are as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
	(In thousands)				(In thousands)
Mens	$	48,670	$	40,149	$	128,022	$	103,749
Girls		16,368		16,518		41,611		46,935
Snow		21,389		23,148		21,799		23,903
Boys		7,417		5,619		18,514		14,353
Footwear		369		238		4,356		3,676
Girls swim		265		156		5,910		4,948
Electric		8,911		6,897		21,101		15,798
Other		824		631		1,883		1,741

Subtotal product categories		104,213		93,356		243,196		215,103
Licensing revenues		445		560		1,426		1,348

Total revenues	$	104,658	$	93,916	$	244,622	$	216,451

The Electric product category includes revenues from all Electric branded products including sunglasses, goggles and related clothing and accessories. Other includes revenues primarily related to the Company’s Volcom Entertainment division, films and related accessories.

During the nine months ended September 30, 2010 and 2009, approximately 10% and 11%, respectively, of product revenues were attributable to one customer.

The table below summarizes product revenues by geographic regions, which includes revenues generated worldwide by the Company’s Electric operating segment and are allocated based on customer location. Revenues generated by the Company’s Australian subsidiary are included in the Asia Pacific geographic region.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
	(In thousands)
United States	$	45,939	$	41,058	$	121,802	$	105,979
Europe		30,804		31,836		61,264		61,127
Canada		13,083		9,617		29,522		23,270
Asia Pacific		11,392		8,359		19,943		16,472
Other		2,995		2,486		10,665		8,255

	$	104,213	$	93,356	$	243,196	$	215,103

VOLCOM, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

Long-lived assets (excluding deferred income tax assets) by geographic region are as follows:


	September 30, 2010		December 31, 2009
	(In thousands)
United States	$	24,124	$	24,535
Europe		10,094		10,739
Asia Pacific		5,035		3,214

	$	39,253	$	38,488

Note 13 — Acquisitions

Effective August 1, 2010, the Company completed the acquisition of Volcom Australia, a licensee of the Company’s products located in Australia. The purchase price, excluding transaction costs, was approximately $2.9 million in cash, of which approximately $2.3 million relates to net assets acquired, for the purchase of all of the outstanding common stock of Volcom Australia, subject to certain indemnities and post-closing adjustments. Prior to the closing of the transaction, the Company held a 13.9% ownership interest in Volcom Australia. The operations of Volcom Australia have been included in the Company’s financial results since August 1, 2010. Due to the recent closing of the acquisition, the Company has not completed the allocation of its purchase price to the fair value of the assets acquired and liabilities assumed. At September 30, 2010, approximately $833,000 in net intangible assets associated with the Australia acquisition is included in the Company’s condensed consolidated balance sheet.

Note 14 — Subsequent Events

On October 11, 2010, the Company entered into an agreement for the transition and sale of certain assets of its distributor of Volcom branded products in Spain, whereby the Company will take direct control of the Spain territory beginning with the delivery of the Fall 2011 product line, which will begin shipping in approximately July 2011. The acquisition is contingent upon the Spain distributor delivering certain assets, including the Fall 2011 order file, customer information, certain inventory stock and other sales and marketing tools. Total consideration related to this transition and acquisition agreement is 1.9 million Euro (or approximately $2.6 million based on a 1 Euro to 1.3612 U.S. dollar exchange rate at September 30, 2010), of which 1.2 million Euro (or approximately $1.6 million based on a 1 Euro to 1.3612 U.S. dollar exchange rate at September 30, 2010) will be paid upon the expected closing date of July 1, 2011.

On October 27, 2010, the Company’s Board of Directors approved a special cash dividend of $1.00 per share payable on each share of the Company’s outstanding common stock, including any unvested shares of restricted common stock. The special dividend will be payable on November 19, 2010 to stockholders of record at the close of business on November 8, 2010. The aggregate amount of payments to be made in connection with the special dividend will be approximately $24.4 million.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements due to known and unknown risks, uncertainties and other factors. The section entitled “Risk Factors” set forth in Part II, Item 1A in this Quarterly Report on Form 10-Q, and similar discussions in our other Securities and Exchange Commission, or 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 purchase, hold or sell our securities. We do not have any intention or obligation to update forward-looking statements included in this Quarterly Report on Form 10-Q after the date of this Quarterly Report on Form 10-Q, except as required by law. In addition, the following discussion should be read in conjunction with the information presented in our audited consolidated financial statements and related notes contained in our Annual Report on Form 10-K for our fiscal year ended December 31, 2009.

Overview

We are an innovative designer, marketer and distributor of premium quality young mens and young womens clothing, footwear, accessories and related products under the Volcom brand name. We seek to offer products that appeal to participants in skateboarding, snowboarding, surfing and motocross, and those who affiliate themselves with the broader action sports youth lifestyle. Our products, which include, among others, t-shirts, fleece, bottoms, tops, jackets, boardshorts, denim, outerwear, sandals, girls swimwear and a complete collection of kids and boys clothing, combine fashion, functionality and athletic performance. Our designs are infused with an artistic and creative element that we believe differentiates our products from those of many of our competitors. We develop and introduce products that we believe set the industry standard for style and quality in each of our product categories.

In 2008, we acquired all of the outstanding membership interests of Electric Visual Evolution LLC, or Electric. Known for its Volt logo, Electric is a core action sports lifestyle brand. Electric’s growing product line includes sunglasses, goggles, t-shirts, bags, hats, belts and other accessories. Electric is headquartered in Orange County, California. In 2008, we also acquired the assets of Laguna Surf & Sport, a California-based retail chain currently operating two retail stores.

As part of our strategy to take direct control of our European operations, we delivered our first full season product line in Europe during the third quarter of 2007. We furthered our international expansion in 2008 by completing the acquisition of our distributor of Volcom branded products in Japan. In 2009, we took direct control of the Volcom brand in the United Kingdom. Effective August 1, 2010, we acquired all of the outstanding common stock of Volcom Australia, a licensee of the Company’s products located in Australia. On October 11, 2010, we entered into an agreement for the transition and sale of certain assets of our distributor of Volcom branded products in Spain, whereby we will take direct control of the Spain territory beginning with the delivery of the Fall 2011 product line, which will begin shipping in approximately July 2011.

Volcom branded products are currently sold throughout the United States and in over 40 countries internationally by either us or international licensees. We serve the United States, Europe, Canada, Latin America, Australia, New Zealand, Asia Pacific and Puerto Rico through our in-house sales personnel, independent sales representatives and distributors. In these areas, Volcom branded products are sold to retailers that we believe merchandise our products in an environment that supports and reinforces our brand image and provide a superior in-store experience. Our retail customers are primarily specialty boardsports retailers, several retail chains and select department stores.

In Indonesia, South Africa, Brazil and Argentina (including Paraguay and Uruguay), we license the Volcom brand to entities that we believe have local market insight and strong relationships with retailers in their respective territories. We receive royalties on the sales of Volcom branded products sold by our licensees. Our license agreements specify quality, design, marketing and distributing standards for the Volcom branded products distributed by our licensees. Our licensees are not controlled and operated by us, and the amount of our licensing revenues could decrease in the future. As these license agreements expire, we may assume direct responsibility for serving these licensed territories. With the completion of the acquisition of Volcom Australia (our former Australian licensee) effective August 1, 2010, we will experience a decrease in our licensing revenues effective as of the date of the acquisition, and an increase in selling, general and administrative expenses attributable to the operations of Volcom Australia. However, our product revenues should increase in Australia as we have begun to directly sell our products in this territory.

The global macroeconomic environment has put pressure on discretionary consumer spending worldwide. While we believe that Volcom is well positioned from a business and financial perspective, we are not immune to global economic conditions. Continued economic uncertainty may affect our business in a number of direct and indirect ways, including lower revenues, reduced profit margins and increased costs, changes in interest and currency exchange rates, lack of credit availability and business disruptions due to difficulties experienced by suppliers and customers.

Our revenues increased from $160.0 million in 2005 to $280.6 million in 2009. Our revenues were $244.6 million for the nine months ended September 30, 2010, an increase of $28.1 million, or 13.0%, compared to $216.5 million for the nine months ended September 30, 2009. We believe our overall increase in revenues was driven primarily by strong sell-through of Volcom and Electric products at retail, improved focus on product marketing, increased in-store merchandising efforts, and additional revenues associated with our recently acquired Australian licensee.

Sales to Pacific Sunwear, our largest customer, decreased 3.1%, or $0.7 million, for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009. We currently expect revenues from Pacific Sunwear to increase approximately 17% in the fourth quarter of 2010 compared to the fourth quarter of 2009. It is unclear where our sales to Pacific Sunwear will trend in the longer term. Pacific Sunwear remains an important customer for us and we are working both internally and with Pacific Sunwear to maximize our business with them. We believe our brand continues to be an important part of the Pacific Sunwear business.

Our gross margins are affected by our ability to accurately forecast demand and avoid excess inventory by matching purchases of finished goods to orders, which decreases our percentage of sales at discount or close-out prices. Gross margins are also impacted by our ability to control our sourcing costs and, to a lesser extent, by changes in our product mix and geographic distribution channel. Our gross margins have also historically been seasonal, with the first quarter having the highest margin. If we misjudge forecasting inventory levels or our sourcing costs increase and we are unable to raise our prices, our gross margins may decline. We believe that as of September 30, 2010, we have excess inventory levels on hand and in order to align these inventory levels with current in-season demand, we anticipate that we will experience higher inventory liquidation sales during the fourth quarter of 2010.

We currently source all of our products from third-party manufacturers located primarily in China and Mexico. As a result, we may be adversely affected by the disruption of trade with these countries, the imposition of new regulations related to imports, duties, taxes and other charges on imports, and decreases in the value of the U.S. dollar against foreign currencies. We seek to mitigate the possible disruption in product flow by diversifying our manufacturing across numerous manufacturers and by using manufacturers in countries that we believe to be politically stable. We do not enter into long-term contracts with our third-party manufacturers. Rather, we typically enter into contracts with each manufacturer to produce one or more product lines for a particular selling season. This strategy has enabled us to maintain flexibility in our sourcing.

Our products manufactured abroad are subject to U.S. customs laws, which impose tariffs and duties on products being imported from other countries. Additionally, China offers a rebate tax on exports to control the amount of exports from China, which can affect our cost either positively or negatively. These potential cost increases, along with the rising currency, raw material cost increases and labor shortages in China, may have an impact on our business. Beginning in 2010, there have been widespread labor shortages in China, which have adversely impacted our product costs and deliveries. Additionally, wages and raw material costs have increased in China, which has caused price increases. Recently, the price of cotton has risen significantly compared to the same period last year. We have addressed these issues by sourcing with other suppliers and adjusting our wholesale prices, where possible, to offset these increases. While we do not believe the limitations on imports from China will have a material effect on our operations, we have begun sourcing more in other countries, such as India, Bangladesh, Vietnam and Mexico. There will be increased pressure on costs going forward, and we intend to closely monitor our sourcing in China to avoid disruptions.

With the passage of the Consumer Product Safety Improvement Act of 2008 and similar state laws, such as California’s Proposition 65, there are new requirements mandated for the textiles and apparel industries. These requirements relate to all metal and painted trim items and certain other raw materials used in children’s apparel, as well as flammability standards in certain types of textiles. The Consumer Product Safety Commission, or CPSC, will require certification and testing for lead in paint and metal trims, pointed or sharp edge items, Phthalates, and fabric flammability to meet the CPSC’s limits. We will continue to monitor the situation and intend to abide by all rules and changes made by the CPSC and similar state laws. This could have a negative impact on the cost of our goods and poses a potential risk if we do not adhere to these requirements.

Over the past five years, our selling, general and administrative expenses have increased on an absolute dollar basis as we have increased our spending on marketing, advertising and promotions, strengthened our management team, hired additional personnel and made investments in new territories and initiatives. As a percentage of revenues, our selling, general and administrative expenses have increased from 26.8% in 2005 to 39.5% in 2009. This increase was primarily due to additional expenses in the United States segment associated with growth and brand building initiatives, including costs associated with our transition to a new warehouse facility in Irvine, California. In addition, we have made investments in our acquired distributors in Japan and the UK, which has increased our selling, general and administrative expenses as a percentage of revenue. Our selling, general and administrative expenses have increased on an absolute dollar basis from $82.7 million for the nine months ended September 30, 2009 to $94.7 million for the nine months ended September 30, 2010. Our selling, general and administrative expenses as a percentage of revenues have increased from 38.3% for the nine

months ended September 30, 2009 to 38.7% for the nine months ended September 30, 2010. The increase in selling, general and administrative expenses, both in absolute dollars and as a percentage of revenues, was due primarily to increased marketing and personnel costs, as well as other programs to increase market share. In addition, this increase was due to incremental expenses of $1.1 million associated with our recently acquired licensee in Australia.

Critical Accounting Policies

The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We evaluate these estimates and assumptions on an ongoing basis. We base our estimates on our historical experience and on various other factors which we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the amounts of certain expenses that are not readily apparent from other sources. The accounting policies that involve the most significant judgments, assumptions and estimates used in the preparation of our financial statements are those related to revenue recognition, accounts receivable, inventories, goodwill and intangible assets, long-lived assets, income taxes, foreign currency and derivatives, and stock-based compensation. The judgments, assumptions and estimates used in these areas by their nature involve risks and uncertainties, and in the event that any of them prove to be inaccurate in any material respect, it could have a material adverse effect on our reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. A summary of these critical accounting policies is included in Item 7 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) of Part II, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2009. There have been no material changes to the critical accounting policies disclosed in our Annual Report on Form 10-K.

General

Our revenues consist of both our product revenues and our licensing revenues. Our product revenues are derived primarily from the sale of young mens and young womens clothing, accessories and related products under the Volcom brand name. We offer Volcom branded apparel and accessory products in six main categories: mens, girls, boys, footwear, girls swim and snow. Product revenues also include revenues from music and film sales. We also offer the full product line under the Electric brand name, including sunglasses, goggles, soft goods and other accessories. Amounts billed to customers for shipping and handling are included in product revenues. Licensing revenues consist of royalties on Volcom product sales by our international licensees in Australia (through August 2010), Indonesia, South Africa, Brazil and Argentina (including Uruguay and Paraguay).

Our cost of goods sold consists primarily of product costs, retail packaging, freight costs associated with shipping goods to customers, quality control and inventory shrinkage. There is no cost of goods sold associated with our licensing revenues.

Our selling, general and administrative expenses consist primarily of wages and related payroll and employee benefit costs, handling costs, sales and marketing expenses, advertising costs, legal and accounting professional fees, insurance, utilities and other facility related costs, such as rent and depreciation.

Results of Operations

The following table sets forth selected items in our condensed consolidated statements of operations for the periods presented, expressed as a percentage of revenues:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Revenues		100.0	%		100.0	%		100.0	%		100.0	%
Cost of goods sold		50.4			48.4			49.4			49.5

Gross profit		49.6			51.6			50.6			50.5
Selling, general and administrative expenses		32.4			30.7			38.7			38.3

Operating income		17.2			20.9			11.9			12.2
Other income		1.3			0.4			0.6			0.6

Income before provision for income taxes		18.5			21.3			12.5			12.8
Provision for income taxes		6.0			7.2			4.1			4.3

Net income		12.5	%		14.1	%		8.4	%		8.5	%

Three Months Ended September 30, 2010 Compared to Three Months Ended September 30, 2009

Revenues

Consolidated revenues were $104.7 million for the three months ended September 30, 2010, an increase of $10.8 million, or 11.4%, compared to $93.9 million for the three months ended September 30, 2009. Revenues from our United States segment were $64.5 million for the three months ended September 30, 2010, an increase of $7.7 million, or 13.6% compared to $56.8 million for the three months ended September 30, 2009. Revenues from our Europe segment were $28.7 million for the three months ended September 30, 2010, a decrease of $1.5 million, or 5.2% compared to $30.2 million for the three months ended September 30, 2009. On a Euro to Euro basis, revenues in our European segment increased approximately 0.4% for the three months ended September 30, 2010 compared to the three months ended September 30, 2009. Revenues from our Electric segment were $8.9 million for the three months ended September 30, 2010, an increase of $2.0 million, or 29.2% compared to $6.9 million for the three months ended September 30, 2009. Revenues from our Australian segment, which was acquired on August 1, 2010, were $2.6 million for the three months ended September 30, 2010. We believe our overall increase in revenues was driven primarily by strong sell-through of Volcom and Electric products at retail, improved focus on product marketing, increased in-store merchandising efforts, and additional revenues associated with our recently acquired Australian licensee.

Revenues from our five largest full-price customers were $13.7 million for the three months ended September 30, 2010, a decrease of $0.7 million, or 4.5%, compared to $14.4 million for the three months ended September 30, 2009. Excluding revenues from Pacific Sunwear, which increased $0.4 million, or 5.3%, to $6.9 million, total revenues from our remaining five largest full-price customers decreased $1.0 million, or 12.8%, to $6.8 million for the three months ended September 30, 2010 from $7.8 million for the three months ended September 30, 2009. This decrease was driven primarily by lower revenues from girls products. We currently expect revenues from Pacific Sunwear to increase approximately 17% in the fourth quarter of 2010 compared to the fourth quarter of 2009.

Consolidated product revenues were $104.2 million for the three months ended September 30, 2010, an increase of $10.8 million, or 11.6%, compared to $93.4 million for the three months ended September 30, 2009. Revenues from mens products increased $8.6 million, or 21.2%, to $48.7 million for the three months ended September 30, 2010 compared to $40.1 million for the three months ended September 30, 2009. Revenues from our Electric subsidiary increased $2.0 million, or 29.2%, to $8.9 million for the three months ended September 30, 2010 compared to $6.9 million for the three months ended September 30, 2009. Revenues from boys products increased $1.8 million, or 32.0%, to $7.4 million for the three months ended September 30, 2010 compared to $5.6 million for the three months ended September 30, 2009. Revenues from footwear products increased $0.2 million, or 55.5%, to $0.4 million for the three months ended September 30, 2010 compared to $0.2 million for the three months ended September 30, 2009. Revenues from our girls swim line increased $0.1 million, or 69.6%, to $0.3 million for the three months ended September 30, 2010 compared to $0.2 million for the three months ended September 30, 2009. Revenues from snow products decreased $1.7 million, or 7.6%, to $21.4 million for the three months ended September 30, 2010 compared to $23.1 million for the three months ended September 30, 2009. Revenues from girls products decreased $0.1 million, or 0.9%, to $16.4 million for the three months ended September 30, 2010 compared to $16.5 million for the three months ended September 30, 2009.

Licensing revenues decreased 20.6% to $0.4 million for the three months ended September 30, 2010 from $0.6 million for the three months ended September 30, 2009. The decrease in licensing revenues was primarily a result of the transition of our Australian operations from a licensee model to a direct control model. Licensing revenues will likely continue to decrease in the near term as a result of this transition.

Product revenues by geographic region include revenues from our Electric operating segment, and are allocated based on customer location. Such product revenues in the United States were $45.9 million, or 44.1% of our product revenues, for the three months ended September 30, 2010, compared to $41.1 million, or 44.0% of our product revenues, for the three months ended September 30, 2009. Product revenues in Europe were $30.8 million, or 29.6% of our product revenues, for the three months ended September 30, 2010, compared to $31.8 million, or 34.1% of our product revenues, for the three months ended September 30, 2009. Product revenues in the rest of the world consist primarily of product revenues from sales in the Canadian and Asia Pacific regions, and do not include sales by our international licensees. Such product revenues in the rest of the world were $27.5 million, or 26.3% of our product revenues, for the three months ended September 30, 2010 compared to $20.5 million, or 21.9% of our product revenues, for the three months ended September 30, 2009.

Gross Profit

Consolidated gross profit increased $3.4 million, or 7.0%, to $51.9 million for the three months ended September 30, 2010 compared to $48.5 million for the three months ended September 30, 2009. Gross profit as a percentage of revenues, or gross margin, decreased 200 basis points to 49.6% for the three months ended September 30, 2010 compared to 51.6% for the three months ended September 30, 2009. Consolidated gross margin related specifically to product revenues decreased 200 basis points to 49.3% for the three months ended September 30, 2010 compared to 51.3% for the three months ended September 30, 2009. Gross margin on product from the United States segment decreased 440 basis points to 45.0% for the three months ended September 30, 2010 compared to 49.4% for the three months ended September 30, 2009. This decrease is primarily due to higher inventory liquidation during the three months ended September 30, 2010 compared to the same period last year as we sought to better align inventory levels with current in-season demand. Additionally, this decrease is due to incentive pricing, which was part of our strategy designed to gain market share, as well as higher return and markdown allowances. Gross margin from the European segment increased 280 basis points to 55.7% for the three months ended September 30, 2010 compared to 52.9% for the three months ended September 30, 2009, primarily reflecting better pricing on fall season product, combined with a larger portion of high margin fall season product in the product mix during the three months ended September 30, 2010 compared to the same period last year. Gross margin from the Electric segment increased 160 basis points to 61.3% for the three months ended September 30, 2010 compared to 59.7% for the three months ended September 30, 2009 primarily due to a larger portion of high margin goggles in the product mix, as well as significant improvement of gross margins on soft goods. Gross margin from the Australian segment was 45.0% for the three months ended September 30, 2010.

Selling, General and Administrative Expenses

Consolidated selling, general and administrative expenses increased $5.1 million, or 17.5%, to $33.9 million for the three months ended September 30, 2010 compared to $28.8 million for the three months ended September 30, 2009. The increase in absolute dollars was due primarily to increased payroll and payroll related costs of $1.5 million, incremental expenses of $1.1 million associated with our recently acquired Australian licensee, increased marketing and advertising costs of $1.0 million, and increased commissions expense of $0.6 million associated with an increase in revenues between periods. The net increase in various other expense categories was $0.9 million. Selling, general and administrative expenses as a percentage of revenue increased 170 basis points to 32.4% for the three months ended September 30, 2010 compared to 30.7% for the three months ended September 30, 2009.

Operating Income

As a result of the factors above, operating income for the three months ended September 30, 2010 decreased $1.7 million to $18.0 million compared to $19.7 million for the three months ended September 30, 2009. Operating income as a percentage of revenue decreased to 17.2% for the three months ended September 30, 2010 from 20.9% for the three months ended September 30, 2009.

Other Income

Other income primarily includes net interest income and foreign currency gains and losses. Interest income for each of the three month periods ended September 30, 2010 and 2009 was $0.1 million. Foreign currency gain increased to $1.3 million for the three months ended September 30, 2010 compared to $0.2 million for the three months ended September 30, 2009 due primarily to fluctuations in the Euro, Canadian dollar and Japanese yen exchange rates against the U.S. dollar, as the U.S. dollar weakened significantly against these currencies during the three months ended September 30, 2010.

Provision for Income Taxes

We have computed our provision for income taxes for the three months ended September 30, 2010 using an estimated effective annual tax rate of 32.0% plus the tax impact of discrete items in the quarter. The provision for income taxes decreased $0.5 million to $6.3 million for the three months ended September 30, 2010 compared to $6.8 million for the three months ended September 30, 2009.

Net Income

As a result of the factors above, net income decreased $0.2 million, or 1.5%, to $13.1 million for the three months ended September 30, 2010 from $13.3 million for the three months ended September 30, 2009.

Nine Months Ended September 30, 2010 Compared to Nine Months Ended September 30, 2009

Revenues

Consolidated revenues were $244.6 million for the nine months ended September 30, 2010, an increase of $28.1 million, or 13.0%, compared to $216.5 million for the nine months ended September 30, 2009. Revenues from our United States segment were $163.5 million for the nine months ended September 30, 2010, an increase of $20.7 million, or 14.5% compared to $142.8 million for the nine months ended September 30, 2009. Revenues from our Europe segment were $57.4 million for the nine months ended September 30, 2010, a decrease of $0.4 million, or 0.7% compared to $57.8 million for the nine months ended September 30, 2009. On a Euro to Euro basis, revenues in our European segment increased approximately 2.3% for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009. Revenues from our Electric segment were $21.1 million for the nine months ended September 30, 2010, an increase of $5.3 million, or 33.6% compared to $15.8 million for the nine months ended September 30, 2009. Revenues from our Australian segment were $2.6 million for the nine months ended September 30, 2010. We believe our overall increase in revenues was driven primarily by strong sell-through of Volcom and Electric products at retail, improved focus on product marketing, increased in-store merchandising efforts, and additional revenues associated with our recently acquired Australian licensee.

Revenues from our five largest full-price customers were $41.8 million for the nine months ended September 30, 2010, a decrease of $2.0 million, or 4.6%, compared to $43.8 million for the nine months ended September 30, 2009. Excluding revenues from Pacific Sunwear, which decreased $0.7 million, or 3.1%, to $23.2 million, total revenues from our remaining five largest full-price customers decreased $1.3 million, or 6.4%, to $18.6 million for the nine months ended September 30, 2010 from $19.9 million for the nine months ended September 30, 2009. This decrease was driven primarily by lower revenues from girls products. We currently expect revenues from Pacific Sunwear to increase approximately 17% in the fourth quarter of 2010 compared to the fourth quarter of 2009.

Consolidated product revenues were $243.2 million for the nine months ended September 30, 2010, an increase of $28.1 million, or 13.1%, compared to $215.1 million for the nine months ended September 30, 2009. Revenues from mens products increased $24.3 million, or 23.4%, to $128.0 million for the nine months ended September 30, 2010 compared to $103.7 million for the nine months ended September 30, 2009. Revenues from our Electric subsidiary increased $5.3 million, or 33.6%, to $21.1 million for the nine months ended September 30, 2010 compared to $15.8 million for the nine months ended September 30, 2009. Revenues from boys products increased $4.1 million, or 29.0%, to $18.5 million for the nine months ended September 30, 2010 compared to $14.4 million for the nine months ended September 30, 2009. Revenues from our girls swim line increased $1.0 million, or 19.4%, to $5.9 million for the nine months ended September 30, 2010 compared to $4.9 million for the nine months ended September 30, 2009. Revenues from footwear products increased $0.7 million, or 18.5%, to $4.4 million for the nine months ended September 30, 2010 compared to $3.7 million for the nine months ended September 30, 2009. Revenues from girls products decreased $5.3 million, or 11.3%, to $41.6 million for the nine months ended September 30, 2010 compared to $46.9 million for the nine months ended September 30, 2009. Revenues from snow products decreased $2.1 million, or 8.8%, to $21.8 million for the nine months ended September 30, 2010 compared to $23.9 million for the nine months ended September 30, 2009.

Licensing revenues increased 5.8% to $1.4 million for the nine months ended September 30, 2010 from $1.3 million for the nine months ended September 30, 2009. Licensing revenues will likely decrease in the near term as a result of the transition of our Australian operations from a licensee model to a direct control model.

Product revenues by geographic region include revenues from our Electric operating segment, and are allocated based on customer location. Such product revenues in the United States were $121.8 million, or 50.1% of our product revenues, for the nine months ended September 30, 2010, compared to $106.0 million, or 49.3% of our product revenues, for the nine months ended September 30, 2009. Product revenues in Europe were $61.3 million, or 25.2% of our product revenues, for the nine months ended September 30, 2010, compared to $61.1 million, or 28.4% of our product revenues, for the nine months ended September 30, 2009. Product revenues in the rest of the world consist primarily of product revenues from sales in the Canadian and Asia Pacific regions, and do not include sales by our international licensees. Such product revenues in the rest of the world were $60.1 million, or 24.7% of our product revenues, for the nine months ended September 30, 2010 compared to $48.0 million, or 22.3% of our product revenues, for the nine months ended September 30, 2009.

Gross Profit

Consolidated gross profit increased $14.5 million, or 13.2%, to $123.7 million for the nine months ended September 30, 2010 compared to $109.2 million for the nine months ended September 30, 2009. Gross profit as a percentage of revenues, or gross margin, increased 10 basis points to 50.6% for the nine months ended September 30, 2010 compared to 50.5% for the nine months ended September 30, 2009. Consolidated gross margin related specifically to product revenues increased 20 basis points to 50.3% for the nine months ended September 30, 2010 compared to 50.1% for the nine months ended September 30, 2009. Gross margin on product from the United States segment decreased 150 basis points to 46.9% for the nine months ended September 30, 2010 compared to 48.4% for the nine months ended September 30, 2009. This decrease

is primarily due to higher inventory liquidation during the nine months ended September 30, 2010 compared to the same period last year as we sought to better align inventory levels with current in-season demand. Additionally, this decrease is due to incentive pricing, which was part of our strategy designed to gain market share, as well as higher return and markdown allowances. Gross margin from the European segment increased 410 basis points to 56.8% for the nine months ended September 30, 2010 compared to 52.7% for the nine months ended September 30, 2009, primarily due to strong demand for product combined with a greater percentage of sales directly to retailers and a lesser percentage of sales to territory distributors during the nine months ended September 30, 2010 compared to the same period last year. The increase was also attributable to better pricing on fall season product, combined with a larger portion of high margin fall season product in the product mix during the nine months ended September 30, 2010 compared to the same period last year. Gross margin from the Electric segment increased 300 basis points to 59.3% for the nine months ended September 30, 2010 compared to 56.3% for the nine months ended September 30, 2009 primarily due to better margins achieved on off-price sales, and sales of sunglasses that were purchased at a more favorable Euro to U.S. dollar exchange rate than last year. The increase was also due to a larger portion of high margin goggles in the product mix, as well as significant improvement of gross margins on soft goods.

Selling, General and Administrative Expenses

Consolidated selling, general and administrative expenses increased $12.0 million, or 14.4%, to $94.7 million for the nine months ended September 30, 2010 compared to $82.7 million for the nine months ended September 30, 2009. The increase in absolute dollars was due primarily to increased payroll and payroll related costs of $5.4 million, increased marketing and advertising costs of $3.7 million, increased commissions expense of $1.3 million associated with an increase in revenues between periods, incremental expenses of $1.1 million associated with our recently acquired Australian licensee, increased rent expense of $0.4 million, and increased stock-based compensation expense of $0.3 million. These increases were offset by a decrease in bad debt expense of $2.2 million. The net increase in various other expense categories was $2.0 million. Selling, general and administrative expenses as a percentage of revenue increased 40 basis points to 38.7% for the nine months ended September 30, 2010 compared to 38.3% for the nine months ended September 30, 2009.

Operating Income

As a result of the factors above, operating income for the nine months ended September 30, 2010 increased $2.5 million to $29.0 million compared to $26.5 million for the nine months ended September 30, 2009. Operating income as a percentage of revenue decreased to 11.9% for the nine months ended September 30, 2010 from 12.2% for the nine months ended September 30, 2009.

Other Income

Other income primarily includes net interest income and foreign currency gains and losses. Interest income for the nine months ended September 30, 2010 and 2009 was $0.3 million and $0.2 million, respectively. The increase in interest income is due to higher returns on our cash and cash equivalents and short-term investments. Foreign currency gain increased to $1.2 million for the nine months ended September 30, 2010 compared to $1.0 million for the nine months ended September 30, 2009 due primarily to fluctuations in the Euro, Canadian dollar and Japanese yen exchange rates against the U.S. dollar.

Provision for Income Taxes

We have computed our provision for income taxes for the nine months ended September 30, 2010 using an estimated effective annual tax rate of 32.0% plus the tax impact of discrete items in the quarter. The provision for income taxes increased $0.5 million to $9.9 million for the nine months ended September 30, 2010 compared to $9.4 million for the nine months ended September 30, 2009.

Net Income

As a result of the factors above, net income increased $2.4 million, or 12.6%, to $20.7 million for the nine months ended September 30, 2010 from $18.3 million for the nine months ended September 30, 2009.

Liquidity and Capital Resources

Our primary cash needs are working capital and capital expenditures. These sources of liquidity may be impacted by fluctuations in demand for our products, ongoing investments in our infrastructure and expenditures on marketing and advertising.

The following table sets forth, for the periods indicated, our beginning balance of cash and cash equivalents, net cash flows from operating, investing and financing activities and our ending balance of cash and cash equivalents:


	Nine Months Ended September 30,
	2010			2009
	(In thousands)
Cash and cash equivalents at beginning of period	$	76,180		$	79,613
Cash flow from operating activities		6,847			19,366
Cash flow from investing activities		28,448			(44,286	)
Cash flow from financing activities		562			(65	)
Effect of exchange rate on cash		(7,087	)		4,701

Cash and cash equivalents at end of period	$	104,950		$	59,329

Cash from operating activities consists primarily of net income adjusted for certain non-cash items including depreciation and amortization, gain on investment of unconsolidated investee, deferred income taxes, provision for doubtful accounts, excess tax benefits related to the exercise of stock options, loss on disposal of property and equipment, stock-based compensation and the effect of changes in working capital and other activities. For the nine months ended September 30, 2010 and 2009, cash from operating activities was $6.8 million and $19.4 million, respectively. The $12.6 million decrease in cash from operating activities between the periods was attributable to the following:


(In thousands)		Attributable to
	$(10,988)	Decrease in cash flows from accounts receivable due to the timing of sales and collections
	(4,656)	Decrease in cash flows from inventories due to an increase in inventories between periods
	(3,742)	Decrease in cash flows due to an increase in payments for prepaid expenses and other current assets between periods
	(2,701)	Decrease in non-cash provision for doubtful accounts, depreciation and amortization, and excess tax benefits related to exercise of stock options
	(2,501)	Decrease in cash flow from income taxes receivable/payable due to the timing of payments between periods
	9,240	Increase in cash flow from accounts payable, accrued expenses and other current liabilities due to the timing of payments between periods
	2,306	Increase in net income
	523	Net increase in cash flows from all other operating activities

	$(12,519)	Total

Cash provided by investing activities was $28.4 million for the nine months ended September 30, 2010 compared to cash used in investing activities of $44.3 million during the nine months ended September 30, 2009. During the nine months ended September 30, 2010, the cash provided by investing activities was primarily due to the net sale of short-term investments of $35.0 million, offset by purchases of property and equipment of $4.3 million, and $2.3 million spent on the acquisition of our Australian licensee, net of cash acquired. During the nine months ended September 30, 2009, the cash used in investing activities was primarily due to the net purchase of short-term investments of $40.0 million, purchases of property and equipment of $3.4 million, of which $1.1 million was related to the purchase of equipment for the new European warehouse, and $0.9 million spent on taking direct control of the UK territory from our UK distributor. Capital expenditures during the nine months ended September 30, 2010 and 2009 included the ongoing purchase of investments in computer equipment, warehouse equipment, marketing initiatives and in-store buildouts at customer retail locations.

Cash provided by financing activities was $0.6 million for the nine months ended September 30, 2010 compared to cash used in financing activities of $0.1 million for the nine months ended September 30, 2009. Cash from financing activities is primarily due to proceeds and excess tax benefits related to the exercise of stock options, offset by principal payments on capital lease obligations.

On October 27, 2010, our Board of Directors approved a special cash dividend of $1.00 per share payable on each share of our outstanding common stock, including any unvested shares of restricted common stock. The special dividend will be payable on November 19, 2010 to stockholders of record at the close of business on November 8, 2010. The aggregate amount of payments to be made in connection with the special dividend will be approximately $24.4 million.

Aside from the aforementioned cash dividend, we currently have no material cash commitments, except for the maximum consideration of 1.2 million Euro (or approximately $1.6 million based on a 1 Euro to 1.3612 U.S. dollar exchange rate at September 30, 2010) related to our agreement for the transition and sale of certain assets of our Spain distributor, our normal recurring trade payables, expense accruals, operating leases, capital leases and athlete endorsement agreements. We believe that our cash and cash equivalents, short-term investments, cash flow from operating activities and available borrowings under our credit facility will be sufficient to meet all requirements for at least the next twelve months.

Credit Facilities

We maintain a $40.0 million unsecured credit agreement with a bank (which includes a line of credit, foreign exchange facility and letter of credit sub-facilities). The amended credit agreement, which expires on August 31, 2012, may be used to fund our working capital requirements. Borrowings under this agreement bear interest, at our option, either at the bank’s prime rate (3.25% at September 30, 2010) or LIBOR plus 1.25%. Under this credit facility, we had $2.1 million outstanding in letters of credit at September 30, 2010. At September 30, 2010, there were no outstanding borrowings under this credit facility, and $37.9 million was available under the credit facility. The credit agreement requires compliance with conditions precedent that must be satisfied prior to any borrowing, as well as ongoing compliance with specified affirmative and negative covenants, including covenants related to our financial condition, including requirements that we maintain a minimum net profit after tax and a minimum earnings before interest, taxes, depreciation and amortization, or EBITDA. At September 30, 2010, we were in compliance with all restrictive covenants.

Contractual Obligations and Commitments

We lease certain land and buildings under non-cancelable operating leases. The leases expire at various dates through 2036, excluding extensions at our option, and contain provisions for rental adjustments, including in certain cases, adjustments based on increases in the Consumer Price Index. The leases generally contain renewal provisions for varying periods of time.

In June 2008, we entered into a lease agreement for a new warehouse facility located in close proximity to the offices of our French distributor in France. The lease runs for a period of nine years, with an option to terminate after six years.

We lease computer and office equipment pursuant to capital lease obligations. These leases bear interest at rates ranging from 8.0% to 10.7% per year and expire at various dates through July 2012.

We establish relationships with professional athletes in order to promote our products and brand. We have entered into endorsement agreements with professional skateboarding, snowboarding, surfing and motocross athletes. Additionally, many of these contracts provide incentives for magazine exposure and competitive victories while wearing or using our products.

We did not have any off-balance sheet arrangements or outstanding balances on our credit facility as of September 30, 2010. Our contractual letters of credit typically have maturity dates of less than one year. We use these letters of credit to purchase finished goods.

In connection with the 2008 acquisition of Electric, the sellers are eligible to receive $12.0 million in cash upon achieving certain financial milestones through December 31, 2010. Based on the financial performance of Electric, it is not considered probable that these financial milestones will be met.

Inflation

We do not believe inflation has had a material impact on our results of operations in the past. There can be no assurance that our business will not be affected by inflation in the future.

Recent Accounting Pronouncements

See Note 3 to the Condensed Consolidated Financial Statements for a discussion of recent accounting pronouncements.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk.

Foreign Currency Risk

In the normal course of business, we are exposed to foreign currency exchange rate risks (see Note 11 to the Condensed Consolidated Financial Statements) that could impact our results of operations. We are exposed to gains and losses resulting from fluctuations in foreign currency exchange rates relating to certain sales, licensing revenues and product purchases of our international subsidiaries that are denominated in currencies other than their functional currencies. We are

also exposed to foreign currency gains and losses resulting from domestic transactions that are not denominated in U.S. dollars. Furthermore, we are exposed to gains and losses resulting from the effect that fluctuations in foreign currency exchange rates have on the reported results in our consolidated financial statements due to the translation of the operating results and financial position of our international subsidiaries. Changes in foreign currency rates affect our results of operations and distort comparisons between periods. For example, when the U.S. dollar strengthens compared to the Euro, there is a negative effect on our reported results from our European operation because it takes more profits in Euro to generate the same amount of profits in stronger U.S. dollars. We do not enter into foreign currency exchange contracts to hedge the translation of operating results and financial position of our international subsidiaries.

A portion of our domestic sales are made in Canadian dollars. Sales in Canada accounted for approximately 10.7% of our product revenues in 2009 and approximately 12.1% of our product revenues for the nine months ended September 30, 2010. As a result, we are exposed to fluctuations in the value of Canadian dollar denominated receivables and payables, foreign currency investments, primarily consisting of Canadian dollar deposits, and cash flows related to repatriation of those investments. A weakening of the Canadian dollar relative to the U.S. dollar could negatively impact the profitability of our products sold in Canada and the value of our Canadian receivables, as well as the value of repatriated funds we may bring back to the United States from Canada. Account balances denominated in Canadian dollars are marked-to-market every period using current exchange rates and the resulting changes in the account balance are included in our income statement as other income. If recent foreign currency market volatility continues and the Canadian dollar weakens, our results could be adversely affected. Based on the balance of Canadian dollar receivables of $13.0 million at September 30, 2010, an assumed 10% strengthening of the U.S. dollar would result in pretax foreign currency losses of $1.3 million.

We are exposed to foreign currency exchange rate risks between the Euro, Japanese yen and Australian dollar against the U.S. dollar, as our foreign operations purchase a portion of their inventories in U.S. dollars. In addition, we are also exposed to foreign currency gains and losses resulting from various other foreign operations transactions that are denominated in U.S. dollars. A weakening of these foreign currencies relative to the U.S. dollar could have a negative impact on our net exposure of these foreign currencies to the U.S. dollar. If recent foreign currency market volatility continues and these foreign currencies weaken compared to the U.S. dollar, our results could be adversely affected. Based on our net foreign currency exposure at September 30, 2010, an assumed 10% strengthening of the U.S. dollar would result in pre-tax foreign currency losses of $1.9 million.

We generally purchase Volcom branded finished goods from our manufacturers in U.S. dollars. However, we source substantially all of these finished goods abroad and their cost may be affected by changes in the value of the relevant currencies. Price increases caused by currency exchange rate fluctuations could increase our costs. If we are unable to increase our prices to a level sufficient to cover the increased costs, it could adversely affect our margins and we may become less price competitive with companies who manufacture their products in the United States.

Interest Rate Risk

We maintain a $40.0 million unsecured credit agreement (which includes a line of credit, foreign exchange facility and letter of credit sub-facilities) with no balance outstanding at September 30, 2010. The credit agreement, which expires on August 31, 2012, may be used to fund our working capital requirements. Borrowings under this agreement bear interest, at our option, either at the bank’s prime rate (3.25% at September 30, 2010) or LIBOR plus 1.25%. Based on the average interest rate on our credit facility during 2009, and to the extent that borrowings were outstanding, we do not believe that a 10% change in interest rates would have a material effect on our results of operations or financial condition.

Item 4.

Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Our management, including our Chief Executive Officer and our Chief Financial Officer, does not expect that our disclosure controls or procedures will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the

control. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2010, the end of the quarterly period covered by this report. The evaluation of our disclosure controls and procedures included a review of the disclosure controls’ and procedures’ objectives, design, implementation and the effect of the controls and procedures on the information generated for use in this report. In the course of our evaluation, we sought to identify data errors, control problems or acts of fraud and to confirm the appropriate corrective actions, including process improvements, were being undertaken.

Based on the foregoing, our Chief Executive Officer and our Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective and were operating at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

There has been no change in our internal controls over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

PART II.

OTHER INFORMATION

Item 1.

Legal Proceedings.

The information set forth under Note 8 to the Condensed Consolidated Financial Statements (unaudited), included in Part I, Item 1 of this Quarterly Report, is incorporated herein by reference.

Item 1A.

Risk Factors.

Before deciding to purchase, hold or sell our common stock, you should carefully consider the risks described below in addition to the other cautionary statements and risks described elsewhere, and the other information contained, in this Report and in our other filings with the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2009 and subsequent reports on Forms 10-Q and 8-K. Risks that could affect our actual performance include, but are not limited to those discussed in Part I, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2009 and Part II, Item 1A of our Quarterly Report on Form 10-Q for the periods ended March 31, 2010 and June 30, 2010. The following are the material changes and updates from the risk factors previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K and Part II, Item 1A of our Quarterly Report on Form 10-Q for the periods ended March 31, 2010 and June 30, 2010.

Our results of operations could be materially harmed if we are unable to accurately forecast demand for our products.

We often place orders for products with independent manufacturers before our customers’ orders are firm. Therefore, if we fail to accurately forecast customer demand, we may experience excess inventory levels or a shortage of product to deliver to our customers. Factors that could affect our ability to accurately forecast demand for our products include:

•

An increase or decrease in consumer demand for our products or for products of our competitors;

•

Our failure to accurately forecast customer acceptance of new season and new style products;

•

New product introductions by competitors;

•

Unanticipated changes in general market conditions or other factors, which may result in cancellations of orders or a reduction or increase in the rate of reorders placed by retailers; and

•

Weak economic conditions or consumer confidence, which could reduce our projected demand for our products.

Inventory levels in excess of customer demand may result in inventory write-downs and the sale of excess inventory at discounted prices, which could have an adverse effect on our results of operations and financial condition. On the other hand, if we underestimate demand for our products, our third party manufacturers may not be able to produce products to meet

customer requirements, and this could result in delays in the shipment of products and lost revenues, as well as damage to our reputation and customer relationships. There can be no assurance that we will be able to successfully manage inventory levels to exactly meet future order and reorder requirements.

Our profitability may decline as a result of increasing pressure on margins.

The apparel industry is subject to significant pricing pressure caused by many factors, including increasing production costs, intense competition, consolidation in the retail industry, pressure from retailers to reduce the costs of products and changes in consumer demand. These factors may cause our costs of goods sold to increase and could cause us to reduce our sales prices to retailers and consumers, which could each cause our gross margin to decline if we are unable to offset increased costs or price reductions. This could have a material adverse effect on our results of operations and financial condition.

Fluctuations in the price, availability and quality of raw materials and finished goods could increase costs and cause service delays.

Fluctuations in the price, availability and quality of fabrics or other raw materials used to make our products could have a material adverse effect on our cost of goods sold and our ability to meet our customers’ demands. The prices for fabrics depend on demand and market prices for the raw materials used to produce them, particularly cotton. The price and availability of such raw materials may fluctuate significantly, depending on many factors, including crop yields and weather patterns. We may not be able to pass higher costs on to its customers, which could have a material adverse effect on our operations and financial condition.

One retail customer represents a material amount of our revenues, and the loss of this retail customer or reduced purchases from this retail customer may have a material adverse effect on our operating results.

Pacific Sunwear accounted for approximately 11% of our product revenues in 2009 and approximately 10% of our product revenues for the nine months ended September 30, 2010. We do not have a long-term contract with Pacific Sunwear, and all of its purchases from us have historically been on a purchase order basis. Sales to Pacific Sunwear decreased 42%, or $22.0 million, for 2009 compared to 2008, and decreased 3%, or $0.7 million, for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009. Because Pacific Sunwear has represented such a significant amount of our product revenues, our results of operations are likely to be adversely affected by any Pacific Sunwear decision to decrease its rate of purchases of our products. A decrease in its purchases of our products, a cancellation of orders of our products or a change in the timing of its orders will have an additional adverse affect on our operating results.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

We did not sell any unregistered equity securities or purchase any of our securities during the period ended September 30, 2010.

Item 3.

Defaults Upon Senior Securities.

None

Item 4.

Removed and Reserved

Item 5.

Other Information.

None

Item 6.

Exhibits.



3.1*		Restated Certificate of Incorporation of Volcom, Inc.

3.2*		Amended and Restated Bylaws of Volcom, Inc.

3.3*		Certificate of Amendment of Restated Certificate of Incorporation of Volcom, Inc.

4.1*		Specimen Common Stock certificate

31.1		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002



32		Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

*	Incorporated by reference to Volcom, Inc.’s Registration Statement on Form S-1 (File Number: 333-124498)

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		Volcom, Inc.

Date: November 9, 2010		/s/ DOUGLAS P. COLLIER
		Douglas P. Collier
		Executive Vice President, Chief Financial Officer,
		Secretary and Treasurer
		(Principal Financial Officer and Authorized Signatory)

INDEX TO EXHIBITS


Exhibit No.			Description

	3.1	*	Restated Certificate of Incorporation of Volcom, Inc.

	3.2	*	Amended and Restated Bylaws of Volcom, Inc.

	3.3	*	Certificate of Amendment of Restated Certificate of Incorporation of Volcom, Inc.

	4.1	*	Specimen Common Stock certificate

	31.1		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	31.2		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	32		Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

*	Incorporated by reference to Volcom, Inc.’s Registration Statement on Form S-1 (File Number: 333-124498)

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