WEST MARINE INC - FORM 10-Q - October 30, 2012

Attached files

file filename
EX-4.1 - FORM OF STOCK CERTIFICATE - WEST MARINE INCspecimencommonstockcertifi.htm
EXCEL - IDEA: XBRL DOCUMENT - WEST MARINE INCFinancial_Report.xls
EX-32.1 - CERTIFICATION OF CEO AND CFO - WEST MARINE INCwmar2012q3ex321.htm
EX-15.1 - LETTER REGARDING UNAUDITED INTERIM FINANCIAL INFORMATION - WEST MARINE INCwmar2012q3ex151.htm
EX-31.1 - CERTIFICATION OF CEO - WEST MARINE INCwmar2012q3ex311.htm
EX-31.2 - CERTIFICATION OF CFO - WEST MARINE INCwmar2012q3ex312.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
FORM 10-Q
 
  
Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 29, 2012
OR 
o
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 0-22512
 
 
WEST MARINE, INC.
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware
77-0355502
(State or Other Jurisdiction of
Incorporation or Organization)
(IRS Employer
Identification No.)
500 Westridge Drive
Watsonville, CA 95076-4100
(Address of Principal Executive Offices) (Zip Code)
Registrant’s Telephone Number, Including Area Code: (831) 728-2700
 
 
Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  Q    No  o
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  Q    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act). (Check one): 
Large accelerated filer
o
 
Accelerated filer
Q
 
 
 
 
 
Non-accelerated filer
o  (Do not check if a smaller reporting company)
 
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  Q
At October 23, 2012, the number of shares outstanding of the registrant’s common stock was 23,480,551.


TABLE OF CONTENTS
 
 
 
Page No.
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.

2

PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

WEST MARINE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 29, 2012, DECEMBER 31, 2011 AND OCTOBER 1, 2011
(Unaudited and in thousands, except share data)
 
 
September 29,
2012
 
December 31,
2011
 
October 1,
2011
ASSETS
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
68,283

 
$
43,966

 
$
44,104

Trade receivables, net
7,500

 
5,771

 
6,538

Merchandise inventories
213,117

 
193,375

 
211,521

Deferred income taxes
3,440

 
7,118

 
8,752

Assets held for sale
4,283

 
—

 
—

Other current assets
14,760

 
13,792

 
15,042

Total current assets
311,383

 
264,022

 
285,957

Property and equipment, net
58,850

 
60,746

 
58,928

Long-term deferred income taxes
7,126

 
7,800

 
8,815

Other assets
2,976

 
3,089

 
3,132

TOTAL ASSETS
$
380,335

 
$
335,657

 
$
356,832

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Accounts payable
$
29,545

 
$
25,085

 
$
26,701

Accrued expenses and other
49,881

 
41,007

 
44,081

Total current liabilities
79,426

 
66,092

 
70,782

Deferred rent and other
14,339

 
13,922

 
17,677

Total liabilities
93,765

 
80,014

 
88,459

Stockholders’ equity:
 
 
 
 
 
Preferred stock, $.001 par value: 1,000,000 shares authorized; no shares outstanding
—

 
—

 
—

Common stock, $.001 par value: 50,000,000 shares authorized; 23,451,455 shares issued and 23,420,565 shares outstanding at September 29, 2012; 23,022,654 shares issued and 22,991,764 shares outstanding at December 31, 2011; and 22,842,299 shares issued and 22,811,409 shares outstanding at October 1, 2011
23

 
23

 
23

Treasury stock
(385
)
 
(385
)
 
(385
)
Additional paid-in capital
190,468

 
186,089

 
184,754

Accumulated other comprehensive loss
(820
)
 
(727
)
 
(614
)
Retained earnings
97,284

 
70,643

 
84,595

Total stockholders’ equity
286,570

 
255,643

 
268,373

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
380,335

 
$
335,657

 
$
356,832

See accompanying notes to condensed consolidated financial statements.

3

WEST MARINE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE 13 WEEKS AND 39 WEEKS ENDED SEPTEMBER 29, 2012 AND OCTOBER 1, 2011
(Unaudited and in thousands, except per share data)
 
 
13 Weeks Ended
 
39 Weeks Ended
 
September 29, 2012
 
October 1, 2011
 
September 29, 2012
 
October 1, 2011
Net revenues
$
191,924

 
$
180,269

 
$
556,964

 
$
530,049

Cost of goods sold
131,628

 
125,578

 
381,315

 
365,831

Gross profit
60,296

 
54,691

 
175,649

 
164,218

Selling, general and administrative expense
43,121

 
41,789

 
130,439

 
123,252

Restructuring costs (recoveries)
4

 
(10
)
 
159

 
(107
)
Impairment of long-lived assets
—

 
22

 
—

 
50

Income from operations
17,171

 
12,890

 
45,051

 
41,023

Interest expense
217

 
226

 
661

 
666

Income before income taxes
16,954

 
12,664

 
44,390

 
40,357

Provision (benefit) for income taxes
6,682

 
1,448

 
17,749

 
(3,257
)
Net income
$
10,272

 
$
11,216

 
$
26,641

 
$
43,614

Net income per common and common equivalent share:
 
 
 
 
 
 
 
Basic
$
0.44

 
$
0.49

 
$
1.15

 
$
1.92

Diluted
$
0.43

 
$
0.48

 
$
1.12

 
$
1.88

Weighted average common and common equivalent shares outstanding:
 
 
 
 
 
 
 
Basic
23,383

 
22,788

 
23,215

 
22,713

Diluted
23,813

 
23,268

 
23,706

 
23,256

See accompanying notes to condensed consolidated financial statements.


4

WEST MARINE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE 13 WEEKS AND 39 WEEKS ENDED SEPTEMBER 29, 2012 AND OCTOBER 1, 2011
(Unaudited and in thousands)
 
 
13 Weeks Ended
 
39 Weeks Ended
 
September 29, 2012
 
October 1, 2011
 
September 29, 2012
 
October 1, 2011
Net income
$
10,272

 
$
11,216

 
$
26,641

 
$
43,614

Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
Foreign currency translation adjustments
(68
)
 
279

 
(93
)
 
136

Other comprehensive income (loss)
(68
)
 
279

 
(93
)
 
136

Total comprehensive income
$
10,204

 
$
11,495

 
$
26,548

 
$
43,750

See accompanying notes to condensed consolidated financial statements.



5

WEST MARINE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE 39 WEEKS ENDED SEPTEMBER 29, 2012 AND OCTOBER 1, 2011
(Unaudited and in thousands)
 
 
39 Weeks Ended
 
September 29,
2012
 
October 1,
2011
OPERATING ACTIVITIES:
 
 
 
Net income
$
26,641

 
$
43,614

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
11,513

 
10,886

Impairment of long-lived assets
—

 
50

Share-based compensation
2,372

 
1,749

Tax benefit (deficiency) from equity issuance
(423
)
 
96

Excess tax benefit from share-based compensation
(412
)
 
(180
)
Deferred income taxes
4,669

 
(12,557
)
Provision for doubtful accounts
106

 
83

Lower of cost or market inventory adjustments
1,466

 
1,912

Loss (gain) on asset disposals
60

 
(29
)
Changes in assets and liabilities:
 
 
 
Trade receivables
(1,834
)
 
(1,016
)
Merchandise inventories
(21,208
)
 
(11,845
)
Other current assets
(968
)
 
1,697

Other assets
(188
)
 
263

Accounts payable
3,060

 
(1,542
)
Accrued expenses and other
9,282

 
429

Deferred items and other non-current liabilities
100

 
877

Net cash provided by operating activities
34,236

 
34,487

INVESTING ACTIVITIES:
 
 
 
Proceeds from sale of property and equipment
93

 
45

Purchases of property and equipment
(12,831
)
 
(13,665
)
Net cash used in investing activities
(12,738
)
 
(13,620
)
FINANCING ACTIVITIES:
 
 
 
Borrowings on line of credit
4,767

 
28,174

Repayments on line of credit
(4,767
)
 
(28,174
)
Proceeds from exercise of stock options
2,090

 
692

Proceeds from sale of common stock pursuant to Associates Stock Buying Plan
340

 
326

Excess tax benefit from share-based compensation
412

 
180

Net cash provided by financing activities
2,842

 
1,198

Effect of exchange rate changes on cash
(23
)
 
20

NET INCREASE IN CASH
24,317

 
22,085

CASH AT BEGINNING OF PERIOD
43,966

 
22,019

CASH AT END OF PERIOD
$
68,283

 
$
44,104

Other cash flow information:
 
 
 
Cash paid for interest
$
452

 
$
514

Cash paid for income taxes
4,143

 
1,824

Non-cash investing activities
 
 
 
Property and equipment additions in accounts payable
357

 
305


See accompanying notes to condensed consolidated financial statements.

6

WEST MARINE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Thirteen and Thirty-nine Weeks Ended September 29, 2012 and October 1, 2011
(Unaudited)

NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared from the records of West Marine, Inc. and its subsidiaries (collectively, the “Company”) in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments (consisting only of normal recurring items) necessary to fairly present the financial position at September 29, 2012 and October 1, 2011, and the interim results of operations for the 13-week and 39-week periods then ended and cash flows for the 39-week periods then ended, have been included.
The condensed consolidated balance sheet at December 31, 2011 presented herein has been derived from the audited consolidated financial statements of the Company for the year then ended that was included in the Company's Annual Report on Form 10-K for the year ended December 31, 2011 (the “2011 Form 10-K”). These unaudited condensed consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements, including the notes thereto, for the fiscal year ended December 31, 2011 that were included in the 2011 Form 10-K.
Accounting policies followed by the Company are described in Note 1 in the audited consolidated financial statements for the year ended December 31, 2011. Certain information and disclosures normally included in the notes to annual financial statements prepared in accordance with GAAP have been omitted for purposes of the condensed consolidated interim financial statements presented herein. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The results of operations for the 13-week and 39-week periods ended September 29, 2012 are not necessarily indicative of the results to be expected for any other interim period or for the fiscal year ending December 29, 2012. Historically, the Company's revenues and net income are higher in the second and third quarters and decrease in the first and fourth quarters of the fiscal year. The increase in revenues and earnings, principally during the period from April through August, is representative of the peak months for boat buying, usage and maintenance in most of the Company's retail markets.
The Company's fiscal year consists of 52 weeks, ending on the Saturday closest to December 31. The 2012 fiscal year and 2011 fiscal year consist of the 52 weeks ending on December 29, 2012 and December 31, 2011, respectively. All quarters of both fiscal years 2012 and 2011 consist of 13 weeks. All references to years relate to fiscal years rather than calendar years.
Fair Value of Financial Instruments
Fair value is the exchange price that would be received for an asset or that would be paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy prescribed under GAAP contains three levels, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 - Include other inputs that are directly or indirectly observable in the marketplace.
Level 3 - Unobservable inputs which are supported by little or no market activity.
The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. As of December 31, 2011, the entire $44.0 million of the Company's cash consisted of cash on hand and bank deposits and is classified within Level 1 because they are valued using quoted market prices. As of September 29, 2012 and October 1, 2011, the entire $68.3 million and $44.1 million, respectively, of the Company's cash consisted of cash on hand and bank deposits and is classified within Level 1 because they are valued using quoted market prices.


7

Assets Held for Sale
The Company has entered into an agreement to sell the land and building of the former Ft. Lauderdale store, which location has been vacant since the Company's new flagship store opened in November 2011. During the interim time, the Company was actively marketing the site for lease. On September 28, 2012, the Company received an offer for the site and has accepted the purchase agreement price of $4.5 million. The sale is subject to customary closing conditions and is expected to close in January 2013. These assets have been removed from property, plant and equipment and are presented in the current assets section of the balance sheet as assets held for sale. The Company does not expect a significant gain or loss on the sale.
NOTE 2: INCOME TAXES
The Company calculates its interim income tax provision by estimating the annual effective tax rate and applying that rate to its year-to-date ordinary earnings. The tax expense or benefit related to significant, unusual or extraordinary items that will be separately reported or reported net of their related tax effect are individually computed and recognized in the interim period in which those items occur. In addition, the effect of changes in tax laws, rates or status is recognized in the interim period in which the change occurs. The Company evaluates its effective income tax rate on a quarterly basis and updates its estimate of the full-year effective income tax rate as necessary.
The Company's effective income tax rate for the 13-week period ended September 29, 2012 was 39.4%, which resulted in a provision of $6.7 million, while the effective tax rate for the 13-week period ended October 1, 2011 was 11.4%, which resulted in a provision of $1.4 million. The Company's effective income tax rate for the 39-week period ended September 29, 2012 was 40.0%, which resulted in a provision of $17.7 million, while the effective tax rate for the 39-week period ended October 1, 2011 was (8.1)%, which resulted in a benefit of $3.3 million. During the second fiscal quarter of 2011, the Company determined that it was more likely than not that it would have sufficient future taxable income to utilize the majority of its deferred tax assets and, as a result, released approximately $15.7 million of the valuation allowance against these assets. The Company has returned to a more normalized effective tax rate this year. The Company continues to maintain a valuation allowance in the amount of $1.7 million against its South Carolina state tax credits until or unless sufficient positive evidence exists to support the reversal of this valuation allowance.
NOTE 3: SHARE-BASED COMPENSATION
The Company recognized share-based compensation expense of $0.8 million for the 13-week period ended September 29, 2012 and $0.6 million for the 13-week period ended October 1, 2011, the majority of which was recorded as selling, general and administrative expense. The Company recognized share-based compensation expense of $2.4 million for the 39-week period ended September 29, 2012 and $1.7 million for the 39-week period ended October 1, 2011, the majority of which was recorded as selling, general and administrative expense. The tax benefit (deficiency) associated with share-based compensation expense for the 13-week and 39-week periods ended September 29, 2012 were less than $0.1 million and $(0.4) million, respectively. The tax benefit associated with share-based compensation expense for the 13-week and 39-week periods ended October 1, 2011 were less than $0.1 million and $0.1 million, respectively.
NOTE 4: SEGMENT INFORMATION
The Company has three reportable segments—Stores, Port Supply (wholesale) and Direct-to-Customer (which we formerly referred to as Direct Sales)—all of which sell merchandise directly to customers. The Stores segment sells products to retail and wholesale customers through the Company's store locations. The Port Supply segment sells products directly to wholesale customers through our wholesale website and our call center. The Direct-to-Customer segment sells products through our retail eCommerce website, direct mail catalogs and our call center. The customer base overlaps between the Company’s Stores and Port Supply segments, and between its Stores and Direct-to-Customer segments. All processes for the three segments within the supply chain are commingled, including purchases from vendors, distribution center activity and customer delivery. Revenues from customers are derived from merchandise sales, and the Company does not rely on any major customers as a source of revenue.
The Company considers its individual stores to be operating segments. Each store's operating performance has been aggregated into one reportable segment. The Company's individual store operating segments are aggregated for financial reporting purposes because they are similar in each of the following areas: economic characteristics; class of consumer; nature of products; and distribution methods. The Company believes that disaggregating its operating segments would not provide meaningful additional information.
In addition to the Company’s 10 stores located in Canada and five franchised stores located in Turkey, revenues are attributed to geographic locations based on the location to which the Company ships its products. Through the Direct-to-Customer segment, the Company promotes and sells products internationally through both its website and call center. The

8

Company operates primarily in the United States with foreign revenues representing less than 5% of total net revenues during each of the 13-week and 39-week periods ended September 29, 2012 and October 1, 2011, and foreign long-lived assets totaled less than 2% of long-lived assets at each of these dates.
Segment assets are those directly allocated to an operating segment’s operations. For the Stores segment, assets primarily consist of leasehold improvements, computer assets, fixtures, land and buildings. For the Port Supply and Direct-to-Customer segments, assets primarily consist of information technology assets. Unallocated assets include merchandise inventory, shared technology infrastructure, distribution centers, corporate headquarters, prepaid expenses, deferred taxes and other assets. Capital expenditures and depreciation expense for each segment are allocated to the assets assigned to the segment. Contribution is defined as net revenues less product costs and direct expenses.
Following is financial information related to the Company’s business segments (in thousands):
 
 
13 Weeks Ended
 
39 Weeks Ended
 
September 29, 2012
 
October 1, 2011
 
September 29, 2012
 
October 1, 2011
Net revenues:
 
 
 
 
 
 
 
Stores
$
174,990

 
$
163,839

 
$
505,965

 
$
478,839

Port Supply
6,674

 
7,030

 
20,998

 
21,963

Direct-to-Customer
10,260

 
9,400

 
30,001

 
29,247

Consolidated net revenues
$
191,924

 
$
180,269

 
$
556,964

 
$
530,049

Contribution:
 
 
 
 
 
 
 
Stores
$
33,162

 
$
29,415

 
$
89,575

 
$
82,949

Port Supply
(893
)
 
(728
)
 
(2,315
)
 
(1,850
)
Direct-to-Customer
1,978

 
1,878

 
5,742

 
5,463

Consolidated contribution
$
34,247

 
$
30,565

 
$
93,002

 
$
86,562

Reconciliation of consolidated contribution to net income:
 
 
 
 
 
 
 
Consolidated contribution
$
34,247

 
$
30,565

 
$
93,002

 
$
86,562

Less:
 
 
 
 
 
 
 
Indirect costs of goods sold not included in consolidated contribution
(7,577
)
 
(7,781
)
 
(20,508
)
 
(20,248
)
General and administrative expense
(9,499
)
 
(9,894
)
 
(27,443
)
 
(25,291
)
Interest expense
(217
)
 
(226
)
 
(661
)
 
(666
)
Benefit (provision) for income taxes
(6,682
)
 
(1,448
)
 
(17,749
)
 
3,257

Net income
$
10,272

 
$
11,216

 
$
26,641

 
$
43,614

 
 
 
 
 
 
 
 


9


13 Weeks Ended
 
39 Weeks Ended

September 29, 2012
 
October 1, 2011
 
September 29, 2012
 
October 1, 2011
Assets:
 
 
 
 
 
 
 
Stores
 
 
 
 
$
31,167

 
$
36,631

Port Supply
 
 
 
 
7,045

 
5,955

Direct-to-Customer
 
 
 
 
301

 
216

Unallocated
 
 
 
 
341,822

 
314,030

Total assets
 
 
 
 
$
380,335

 
$
356,832

Capital expenditures:
 
 
 
 
 
 
 
Stores
$
3,496

 
$
2,526

 
$
11,204

 
$
10,687

Port Supply
—

 
—

 
—

 
—

Direct-to-Customer
(228
)
*
26

 
382

*
53

Unallocated
757

 
480

 
1,245

 
2,925

Total capital expenditures
$
4,025

 
$
3,032

 
$
12,831

 
$
13,665

Depreciation and amortization:
 
 
 
 
 
 
 
Stores
$
2,556

 
$
2,395

 
$
7,607

 
$
6,980

Port Supply
3

 
7

 
9

 
28

Direct-to-Customer
—

 
35

 
4

 
103

Unallocated
1,281

 
1,423

 
3,893

 
3,775

Total depreciation and amortization
$
3,840

 
$
3,860

 
$
11,513

 
$
10,886

* Reflects a reclassification of capital expenditures to expense and a negotiated reduction in project costs during third quarter 2012.
NOTE 5: COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) includes income, expenses, gains and losses that bypass the income statement and are reported directly as a separate component of equity. The Company’s comprehensive income consists of net income and foreign currency translation adjustments for all periods presented.

NOTE 6: CONTINGENCIES
The Company is party to various legal and administrative proceedings, claims, product recalls, litigation and regulatory compliance audits arising from normal business activities. Additionally, many of these proceedings and audits raise complex factual and legal issues and are subject to uncertainties. The Company cannot predict with assurance the outcome of these matters. Accordingly, material adverse developments, settlements, or resolutions may occur and negatively impact results in the quarter in which such developments, settlements, or resolutions are reached.
Based on the facts currently available, the Company does not believe that the disposition of matters that are pending or asserted, individually or in the aggregate, will have a material adverse effect on future financial results. However, an adverse judgment by a court, administrative or regulatory agency, arbitrator, a settlement, or other resolution could adversely impact the Company’s results of operations in any given period.
For legal proceedings where the Company has determined that a loss is probable, there is no material difference between the amount accrued and the reasonably possible amount of loss. For legal proceedings where a loss is reasonably possible, the range of estimated loss is not material.

NOTE 7: RESTRUCTURING COSTS
Restructuring charges include severance costs, lease termination fees, legal and professional fees paid for lease termination negotiations, and other costs associated with the closure of facilities that are part of formal restructuring plans. Severance benefits are detailed in approved severance plans, which are specific as to number, position, location and timing. In addition, severance benefits are communicated in specific detail to affected employees and are unlikely to change when costs are recorded. Costs are recognized over the period services are rendered, otherwise they are recognized when they are communicated to the employees. These costs are not material to any reportable segment. Other associated costs, such as legal

10

and professional fees, are expensed as incurred. Accrued liabilities related to costs associated with restructuring activities outstanding as of September 29, 2012 were $0.9 million. Costs and obligations (included in “Accrued liabilities” in the Company's condensed consolidated balance sheets) recorded by the Company in 2012, 2011 and 2010 in conjunction with the store closures and other restructuring costs are as follows (in thousands):


 
Termination
Benefits
and Other
Costs
 
Store Lease
Termination
Costs
 
Total
Beginning balance, January 2, 2010
$
590

 
$
3,936

 
$
4,526

Reduction in charges
(45
)
 
(216
)
 
(261
)
Payments
(252
)
 
(1,771
)
 
(2,023
)
Ending balance, January 1, 2011
$
293

 
$
1,949

 
$
2,242

Charges (reduction in charges)
19

 
(69
)
 
(50
)
Payments
(152
)
 
(976
)
 
(1,128
)
Ending balance, December 31, 2011
$
160

 
$
904

 
$
1,064

Charges
8

 
151

 
159

Payments
(10
)
 
(292
)
 
(302
)
Ending balance, September 29, 2012
$
158

 
$
763

 
$
921


NOTE 8: NET INCOME PER SHARE
Basic net income per share is computed by dividing net income available to common stock holders by the weighted average number of shares of common stock outstanding during the period. Diluted net income per share reflects the potential dilution that could occur if unvested restricted shares vest, unvested restricted stock units vest and outstanding options to purchase common stock were exercised. Options to purchase approximately 1.0 million and 2.2 million shares of common stock that were outstanding for the quarters ended September 29, 2012 and October 1, 2011, respectively, have been excluded from the calculation of diluted income per share because inclusion of such shares would be anti-dilutive. Options to purchase approximately 0.4 million and 2.2 million shares of common stock that were outstanding for the first 39 weeks ended September 29, 2012 and October 1, 2011, respectively, have been excluded from the calculation of diluted income per share because inclusion of such shares would be anti-dilutive.
The following is a reconciliation of the Company’s basic and diluted net income per share computations (shares in thousands):
 
 
13 Weeks Ended
 
September 29, 2012
 
October 1, 2011
 
Shares
 
Net Income
Per  Share
 
Shares
 
Net Income
Per  Share
Basic
23,383

 
$
0.44

 
22,788

 
$
0.49

Effect of dilutive stock options
430

 
(0.01
)
 
480

 
(0.01
)
Diluted
23,813

 
$
0.43

 
23,268

 
$
0.48

 
39 Weeks Ended
 
September 29, 2012
 
October 1, 2011
 
Shares
 
Net Income
Per  Share
 
Shares
 
Net Income
Per  Share
Basic
23,215

 
$
1.15

 
22,713

 
$
1.92

Effect of dilutive stock options
491

 
(0.03
)
 
543

 
(0.04
)
Dilutive
23,706

 
$
1.12

 
23,256

 
$
1.88



11


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
West Marine, Inc.
Watsonville, California

We have reviewed the accompanying condensed consolidated balance sheets of West Marine, Inc. and subsidiaries as of September 29, 2012 and October 1, 2011, and the related condensed consolidated statements of income and comprehensive income for the 13-week periods ended September 29, 2012 and October 1, 2011 and the condensed consolidated statements of income, comprehensive income and cash flows for the 39-week periods then ended. These interim financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to the accompanying condensed consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of West Marine, Inc. and subsidiaries as of December 31, 2011, and the related consolidated statements of operations, shareholders' equity and comprehensive income (loss), and cash flows for the year then ended (not presented herein); and in our report dated March 7, 2012, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2011, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ GRANT THORNTON LLP

San Francisco, California

October 30, 2012

12

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis is based upon our financial statements as of the dates and for the periods presented in this section. You should read this discussion and analysis in conjunction with the financial statements and notes thereto found in Item 1 of this Quarterly Report on Form 10-Q and our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2011 (the “2011 Form 10-K”). All references to the third quarter and the first nine months of 2012 mean the 13-week and 39-week periods ended September 29, 2012, and all references to the third quarter and the first nine months of 2011 mean the 13-week and 39-week periods ended October 1, 2011. Unless the context otherwise requires, “West Marine,” “we,” “us” and “our” refer to West Marine, Inc. and its subsidiaries.

Overview
West Marine is the largest specialty retailer of boating supplies and accessories. We have three reportable segments — Stores, Port Supply (wholesale) and Direct-to-Customer (eCommerce, catalog and call center transactions). At the end of the third quarter of 2012, we offered our products through 301 company-operated stores in 38 states, Puerto Rico and Canada and five franchised stores located in Turkey, on our eCommerce website, and through our catalogs and call center. We also are engaged in the wholesale distribution of boating products to commercial customers. Our principal executive offices are located at 500 Westridge Drive, Watsonville, California 95076-4100, and our telephone number is (831) 728-2700.
Critical Accounting Policies and Estimates
Our unaudited condensed consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States for interim financial information pursuant to Regulation S-X. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. These estimates and assumptions are affected by management’s application of accounting policies. We have identified certain policies that require the application of significant judgment by management. Our most critical accounting policies are those related to inventory valuations (including valuation adjustments and capitalization of indirect costs), vendor allowances receivable, costs associated with exit activities (e.g., store closures), impairment of long-lived assets, deferred tax assets, liabilities for self-insurance or high-deductible losses, and share-based compensation. These critical accounting policies are described in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2011 Form 10-K. The following discussion and analysis should be read in conjunction with such description of critical accounting policies and with our unaudited condensed consolidated financial statements and related notes included in Part I, Item 1 of this report.
Results of Operations
The following table sets forth certain statement of operations components expressed as a percentage of net revenues: 
 
13 Weeks Ended
 
 
39 Weeks Ended
 
 
September 29, 2012
 
 
October 1, 2011
 
 
September 29, 2012
 
 
October 1, 2011
 
Net revenues
100.0
%
 
100.0
%
 
100.0
%
 
100.0

%
Cost of goods sold
68.6
 
 
69.7
 
 
68.5
 
 
69.0

 
Gross profit
31.4
 
 
30.3
 
 
31.5
 
 
31.0

 
Selling, general and administrative expense
22.5
 
 
23.1
 
 
23.4
 
 
23.3

 
Restructuring costs (recoveries)
—
 
 
—
 
 
—
 
 
—

 
Impairment of long-lived assets
—
 
 
—
 
 
—
 
 
—

 
Income from operations
8.9
 
 
7.2
 
 
8.1
 
 
7.7

 
Interest expense
0.1
 
 
0.2
 
 
0.1
 
 
0.1

 
Income before income taxes
8.8
 
 
7.0
 
 
8.0
 
 
7.6

 
Provision (benefit) for income taxes
3.4
 
 
0.8
 
 
3.2
 
 
(0.6
)
 
Net income
5.4
%
 
6.2
%
 
4.8
%
 
8.2

%




13

Thirteen Weeks Ended September 29, 2012 Compared to Thirteen Weeks Ended October 1, 2011
Net revenues for the third quarter of 2012 were $191.9 million, an increase of $11.7 million, or 6.5%, compared to net revenues of $180.3 million in the third quarter of 2011. The increase primarily was due to a $7.1 million, or 4.9%, increase in comparable store sales and $16.6 million in sales attributable to stores opened or expanded in 2011 and the first nine months of 2012, partially offset by the impact of stores closed during the same periods, which closures effectively reduced net revenues by $12.7 million. The majority of these store closures occurred in connection with our ongoing real estate optimization strategy to evolve to fewer, larger stores. We experienced higher sales in our core categories, as well as electronics, during the third quarter. We also saw growth in our fishing and soft goods categories, which we believe resulted from our new store assortments and merchandise expansion strategies. Sales growth was also driven by increases in sales to wholesale customers through our store locations, which we believe resulted from our ongoing efforts to better serve this group of customers through our store locations. We had 301 company-operated stores and five franchised stores in Turkey open at the end of the third quarter of 2012, compared to 319 company-operated stores and three franchised stores in Turkey at the end of the third quarter of 2011. While the number of company-operated stores declined by 5.6% year-over-year, selling square footage decreased by only 0.7%.
Net revenues attributable to our Stores segment increased $11.2 million to $175.0 million in the third quarter of 2012, a 6.8% increase compared to the third quarter of 2011, primarily driven by the increase in comparable store sales. Wholesale (Port Supply) net revenues decreased $0.4 million, or 5.1%, to $6.7 million in the third quarter of 2012 compared to the same period in 2011. Our ongoing execution of real estate optimization, including adding hubs in our store locations that target the needs of our Port Supply customers continued to shift revenue from the Port Supply segment to the Stores segment. We believe these initiatives improve our service model to our wholesale customers. Net revenues in our Direct-to-Customer segment increased $0.9 million, or 9.1%, to $10.3 million in the third quarter of 2012, compared to the same period in 2011. This increase was driven by domestic eCommerce sales growth, which we attribute to increased traffic to our website and favorable response to our promotional offerings.
Gross profit increased by $5.6 million, or 10.2%, to $60.3 million in the third quarter of 2012, compared to $54.7 million for the same period last year. Gross profit increased as a percentage of net revenues to 31.4% in the third quarter of 2012, compared to 30.3% for the same period last year, primarily due to the leveraging of occupancy expense by 0.8% on higher sales. The increase in gross profit as a percentage of revenues also resulted from a 0.2% improvement in raw product margins, due to timing of promotional activity.
Selling, general and administrative expense ("SG&A") was $43.1 million, an increase of $1.3 million, or 3.2%, compared to $41.8 million for the same period last year. Drivers of the higher SG&A included: $1.0 million in expense for new stores and higher store buildout expenses reflecting the opening of two stores during the third quarter this year compared to no new store openings during the same period last year; and $0.8 million in higher advertising for additional circulation of marketing materials and to perform market tests. This was offset by $1.0 million of favorable foreign currency translation adjustments. SG&A decreased as a percentage of net revenues to 22.5% in the third quarter of 2012, compared to 23.1% for the same period last year.
Our effective income tax rate for the 13-week period ended September 29, 2012 was 39.4%, which resulted in a provision of $6.7 million, while the effective tax rate for the 13-week period ended October 1, 2011 was 11.4%, which resulted in a provision of $1.4 million. The year-over-year change in our effective tax rate primarily was due to the release of substantially all of our deferred tax valuation allowance last year. Our effective tax rate is subject to change based on the mix of income from different state jurisdictions that tax at different rates, as well as the change in status or outcome of uncertain tax positions. We evaluate our effective income tax rate on a quarterly basis and update our estimate of the full-year effective income tax rate as necessary.
Thirty-nine Weeks Ended September 29, 2012 Compared to Thirty-nine Weeks Ended October 1, 2011
Net revenues for the first 39 weeks of 2012 were $557.0 million, an increase of $26.9 million, or 5.1%, compared to net revenues of $530.0 million in the first 39 weeks of 2011. The increase primarily was due to a $15.0 million, or 3.5%, increase in comparable store sales and $48.2 million in sales attributable to stores opened or expanded in 2011 and the first nine months of 2012, partially offset by the impact of stores closed during the same periods, which closures effectively reduced net revenues by $36.5 million. The majority of these closures occurred in connection with our ongoing real estate optimization strategy to evolve to fewer, larger stores.
Net revenues attributable to our Stores segment increased $27.1 million to $506.0 million in the first 39 weeks of 2012, a 5.7% increase compared to the first 39 weeks of 2011. Port Supply net revenues decreased $1.0 million, or 4.4%, to $21.0 million in the first 39 weeks of 2012 compared to the same period in 2011. Net revenues in our Direct-to-Customer segment increased $0.8 million, or 2.6%, to $30.0 million in the first 39 weeks of 2012, compared to the same period in 2011. The drivers of the higher revenues in each segment for the 39 week-period are the same as those discussed above for the third

14

quarter.
Gross profit increased by $11.4 million, or 7.0%, to $175.6 million in the first 39 weeks of 2012, compared to $164.2 million for the same period last year. Gross profit increased as a percentage of net revenues to 31.5% in the first 39 weeks of 2012, compared to 31.0% for the same period last year, primarily due to the leveraging of occupancy expense by 0.4% on higher sales and a 0.1% improvement in shrink results.
SG&A was $130.4 million, an increase of $7.2 million, or 5.8%, compared to $123.3 million for the same period last year. SG&A increased as a percentage of net revenues to 23.4% in the first 39 weeks of 2012, compared to 23.3% for the same period last year. Drivers of the higher SG&A included: $3.1 million in higher store buildout expenses reflecting the opening of 10 stores during the first nine months of this year compared to eight stores last year; $1.2 million in higher advertising for additional circulation of marketing materials and to perform market tests; $1.2 million in infrastructure expense, which includes information technology spending to upgrade aging hardware and software; $0.6 million in additional compensation expense related to the recent Chief Executive Officer transition; and $0.5 million in higher accrued bonus expense, reflecting higher performance versus full-year targets.
Our effective income tax rate for the 39-week period ended September 29, 2012 was 40.0%, which resulted in a provision of $17.7 million, while the effective tax rate for the 39-week period ended October 1, 2011 was (8.1)%, which resulted in a benefit of $3.3 million. The year-over-year change in our effective tax rate for the first 39 weeks primarily was due to our valuation allowance release during the second quarter of 2011 of $15.7 million, which represented the majority of the valuation allowance against our deferred tax assets.
Net income for the 39-week period ended September 29, 2012 was $26.6 million, a $17.0 million decline when compared to the same period last year. This decline primarily was driven by the tax benefit recorded in the second quarter of 2011 reversing to a tax expense this year.
Liquidity and Capital Resources
We ended the third quarter of 2012 with $68.3 million of cash, compared to $44.1 million at the end of the third quarter of 2011. Working capital (the excess of current assets over current liabilities) increased to $232.0 million at the end of the third quarter of 2012, compared to $215.2 million last year. The increase in working capital primarily was attributable to higher cash at the end of the period this year.
Operating Activities
During the first nine months of 2012, net cash provided by operating activities was $34.2 million, compared to $34.5 million of cash provided by operating activities during the same period last year. The primary drivers of operating cash flows were timing of payments of accrued expenses for income taxes and accounts payable, partially offset by higher inventory purchases to support higher sales.
Investing Activities
We spent $12.7 million on capital expenditures during the first nine months of 2012, which was a $0.9 million decrease compared to the same period in the prior year. During the first nine months of 2012, we opened three flagship stores, six large-format stores and one standard-format store, as compared to three flagship stores, one large-format store and one standard-format store during the first nine months of 2011. During the remaining three months of 2012, we expect to spend approximately $6.3 million on additional capital expenditures, mainly for store development and our real estate optimization strategy of moving to fewer larger stores in markets where we believe this is beneficial, and for a heightened focus on information technology investments for network improvements, enhancements to our website functionality and capabilities, and replacement of aging software and hardware.
Financing Arrangements
Net cash provided by financing activities was $2.8 million for the first nine months of 2012, mostly attributable to proceeds from the exercise of stock options.
We have up to $140.0 million in borrowing capacity available under our revolving credit facility. At our option and subject to certain conditions set forth in the loan agreement, we may increase our borrowing capacity up to an additional $25.0 million during the term. The amount available to be borrowed is based on a percentage of certain of our inventory (excluding capitalized indirect costs) and accounts receivable. The revolving credit facility is available for general working capital and general corporate purposes.

15

At our election, borrowings under the revolving credit facility will bear interest at one of the following options:
1.The prime rate, which is defined in the loan agreement as the highest of:
a.Federal funds rate, as in effect from time to time, plus one-half of one percent;
b.LIBOR rate for a one-month interest period plus one percent; or
c.The rate of interest in effect for such day as publicly announced from time to time by Wells Fargo as its “prime rate”
2.The LIBOR rate quoted by the British Bankers Association for the applicable interest period.
In each case, the applicable interest rate is increased by a margin imposed by the loan agreement. The applicable margin for any date will depend upon the amount of available credit under the revolving credit facility. The margin range for option (1) above is between 1.5% and 2.0% and for option (2) above is between 2.5% and 3.0%.
The loan agreement also imposes a commitment fee of 0.5% per annum on the unused portion of the revolving credit facility available. For the third quarter of 2012 and 2011, the weighted-average interest rate on all of our borrowings throughout the quarter was 4.8% and 4.8%, respectively. For the first nine months of 2012 and 2011, the weighted-average interest rate on all of our outstanding borrowings was 4.8% and 3.1%, respectively. Although the loan agreement contains customary covenants, including, but not limited to, restrictions on our ability to incur liens, make acquisitions and investments, pay dividends and sell or transfer assets, it does not contain financial covenants, such as a requirement to maintain certain specific leverage, debt service or interest coverage ratios. Instead, our loan is asset-based (which means our lenders maintain a security interest in our inventory and accounts receivable which serve as collateral for the loan), and the amount we may borrow under our revolving credit facility at any given time is determined by the estimated value of these assets as determined by the lenders' appraisers. Additionally, we must maintain minimum revolving credit availability equal to the greater of $7 million or 10% of the borrowing base.
There are customary events of default under our loan agreement, including failure to comply with our covenants. If we fail to comply with any of the covenants contained in the loan agreement, an event of default occurs which, if not waived by our lenders or cured within the applicable time periods, results in the lenders having the right to accelerate repayment of all outstanding indebtedness under the loan agreement before the stated maturity date and the revolving credit facility could be terminated. As of September 29, 2012, we were in compliance with the covenants under our loan agreement, had no amounts outstanding under our revolving credit facility and $102.5 million available for future borrowings.
Our borrowing base at September 29, 2012 and October 1, 2011 consisted of the following (in millions): 
 
September 29,
2012
 
October 1,
2011
Accounts receivable availability
$
7.3

 
$
6.4

Inventory availability
115.9

 
115.0

Less: reserves for outstanding letters of credit
(4.5
)
 
(5.2
)
Less: minimum availability
(11.9
)
 
(11.6
)
Less: suppressed availability
—

 
—

Total borrowing base
$
106.8

 
$
104.6


Our aggregate borrowing base was reduced by the following obligations (in millions): 

16

Ending loan balance/(overpayment)
$
(0.2
)
 
$
(0.2
)
Outstanding letters of credit
4.5

 
6.8

Total obligations
$
4.3

 
$
6.6

 
 
 
 
Accordingly, our availability as of September 29, 2012 and October 1, 2011, respectively, was (in millions):
 
 
 
Total borrowing base
$
106.8

 
$
104.6

Less: obligations
(4.3
)
 
(6.6
)
Total availability
$
102.5

 
$
98.0

We are currently in discussions with Wells Fargo Bank, National Association, to amend our existing loan agreement. We currently expect to, among other things, reduce the borrowing capacity under this credit facility to approximately $120.0 million and retain our option for up to an additional $25.0 million in borrowing capacity. We believe pricing for the amended credit facility will be at current market rates, which are lower than those in effect for our existing facility. While we cannot give assurances as to when we will enter into an amendment, if at all, we expect to amend our facility this fiscal year.
Off-Balance Sheet Arrangements
Operating leases are the only financing arrangements not reported on our condensed consolidated balance sheets. We do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as special purpose entities or variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other limited purposes. As of September 29, 2012, we are not involved in any unconsolidated special purpose entities or variable interest entities.
Substantially all of the real property used in our business is leased under operating lease agreements, as described in Item 2, “Properties” and Note 7 to the consolidated financial statements in the 2011 Form 10-K.
Seasonality
Historically, our business has been highly seasonal. In 2011, approximately 65% of our net sales and all of our net income occurred during the second and third quarters, principally during the period from April through August, which represents the peak months for boat buying, usage and maintenance in most of our markets.
Business Trends
In 2012, we experienced increased net revenues over 2011, and we believe this growth was driven by both internal and external factors. We saw higher sales in most core categories, which appear to be related to the dry, warm weather and early Spring this year across most areas of the country. We also experienced growth in our fishing and soft goods categories, which we believe resulted from our new store assortments and merchandise expansion strategies. We are also experiencing improved growth domestically in our Direct-to-Customer segment driven by increased traffic to our eCommerce website and favorable responses to our promotional offerings. We continue to see increased net revenues from some of our strategic initiatives, including implementing our real estate optimization strategy, increasing sales to wholesale customers through our store locations, and increasing soft goods sales. Although we believe we have seen some recovery in customer boat usage, we believe that the ongoing uncertainty in economic conditions has had, and may continue to have, an adverse impact on discretionary consumer spending in an already challenging climate for the boating industry, and we believe that economic uncertainty could continue to have an impact on our sales, with corresponding risks to our earnings and cash flow. For the remainder of 2012, we will continue to control expense growth and maximize cash flow.
Looking ahead to 2013, we remain focused on three of our previously-discussed strategies. First, our store optimization strategy of moving to fewer, larger stores that provide us with an environment to execute our second strategy of offering expanded merchandise assortments to a broader group of customers. This includes core product categories, such as watersports and fishing, as well as the soft goods categories, such as footwear, apparel and accessories. Our third strategy centers on enhancing our eCommerce website to provide our customers with an improved shopping experience. We will be investing significant resources in support of these strategies, including a 40% to 50% increase in our capital investment over 2012 to support sales growth and to upgrade our infrastructure. These strategies and investments support our shift to an omni-channel retail model designed to provide a seamless customer experience and to better position us to deliver incremental sales and operating margin improvement over time.
For more information see the "Overview," “Fiscal 2011 Compared with Fiscal 2010 - Segment Revenues,” and "Business

17

Trends" discussions in Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” in the 2011 Form 10-K.
Internet Address and Access to SEC Filings
Our Internet address is westmarine.com. Interested readers may access our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), in the “Investor Relations” portion of our website as well as through the Securities and Exchange Commission’s website, sec.gov.
Forward-Looking Statements
All statements other than those that are purely historical are forward-looking statements. Words such as “expect,” “anticipate,” “believe,” “estimate,” “plan,” “project,” and similar expressions also identify forward-looking statements. These forward-looking statements include, among other things, statements that relate to West Marine's future plans, expectations, objectives and business strategies, including our ability to: continue to invest in inventory, maintain in-stock levels and improve financial performance; experience increased sales and control operating expenses in a challenging environment; continue to successfully execute our real estate optimization program; continue to grow sales to our wholesale customers; to improve our Direct-to-Customer business, including our eCommerce website; develop an expanded merchandise and private label assortment; and amend our credit facility on terms acceptable to us; as well as facts and assumptions underlying these statements or projections. Actual results may differ materially from the results expressed or implied in these forward-looking statements due to various risks, uncertainties or other factors.
West Marine's operations could be adversely affected if the current soft economic conditions and the decreased spending in the boating industry continue or worsen, if fuel prices were to increase, or if unseasonably cold weather, prolonged winter-like conditions, natural disasters such as hurricanes, man-made disasters or extraordinary amounts of rainfall occur during the peak boating season in the second and third quarters. Risk factors that may affect our earnings in the future include the risk factors set forth in the 2011 Form 10-K, and those risks which may be described from time to time in West Marine's other filings with the Securities and Exchange Commission. Except as required by applicable law, West Marine assumes no responsibility to update any forward-looking statements as a result of new information, future events or otherwise.
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not undertake any specific actions to diminish our exposure to interest rate or currency rate risk, and we are not a party to any interest rate or currency rate risk management transactions. We do not purchase or hold any derivative financial instruments. We believe there has been no material change in our exposure to market risk from that discussed in the 2011 Form 10-K.
Based on our operating results for the third quarter ended September 29, 2012, a 48-basis point change in the interest rate (10% of our weighted-average interest rate) affecting our floating financial instruments would have an effect of reducing our pre-tax income and cash flows by less than $0.1 million over the next year (see Note 5 to our consolidated financial statements in the 2011 Form 10-K).
A 10% increase in the exchange rate of the U.S. dollar versus the Canadian dollar would have an effect of reducing our pre-tax income and cash flows by approximately $0.7 million over the next year. Our only significant risk exposure is from U.S. dollar to Canadian dollar exchange rate fluctuations.
ITEM 4 – CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures
We conducted, under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on our evaluation, we concluded that, as of September 29, 2012, our disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the second quarter of 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


18

PART II – OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS
We are involved in various legal and administrative proceedings, claims, product recalls, litigation and regulatory compliance audits arising in the ordinary course of business. Accordingly, material adverse developments, settlements or resolutions may occur and negatively impact our results in the quarter in which such developments, settlements or resolutions are reached. Based on the facts currently available, we do not believe that the disposition of legal or administrative proceedings that are pending or asserted, individually and in the aggregate, will have a material adverse effect on our financial position. However, an adverse judgment by a court, administrative or regulatory agency, arbitrator, a settlement, or other resolution could adversely impact our results of operations in any given period.
For legal proceedings where we have determined that a loss is probable, there is no material difference between the amount accrued and the reasonably possible amount of loss. For legal proceedings where a loss is reasonably possible, the range of estimated loss is not material. There has been no material change in any of the matters referenced in Item 3 of the 2011 Form 10-K, and no new matters have commenced since the filing of the 2011 Form 10-K that would be required to be disclosed. For more information, see Item 3, “Legal Proceedings” in the 2011 Form 10-K.
ITEM 1A – RISK FACTORS
We have included in Part I, Item 1A of the 2011 Form 10-K, a description of certain risks and uncertainties that could affect our business, future performance or financial condition, referred to as “Risk Factors.” These risk factors have not materially changed. Investors should consider these Risk Factors prior to making an investment decision with respect to our common stock.
ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3 – DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 – MINE SAFETY DISCLOSURE
None.
ITEM 5 – OTHER INFORMATION
None.

19

 
ITEM 6 – EXHIBITS
 
 
3.1
Certificate of Incorporation of West Marine, Inc., as amended (incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K filed March 18, 2004).
 
 
3.2
Bylaws of West Marine, Inc., as amended (incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K filed March 13, 2007).
 
 
4.1
Specimen Common Stock Certificate.
 
 
15.1
Letter regarding Unaudited Interim Financial Information.
 
 
31.1
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.
 
 
31.2
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.
 
 
32.1
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended.
 
 
101.INS†
XBRL Instance Document.
 
 
101.SCH†
XBRL Taxonomy Extension Schema Document.
 
 
101.CAL†
XBRL Taxonomy Calculation Linkbase Document.
 
 
101.DEF†
XBRL Taxonomy Extension Definition Linkbase Document.
 
 
101.LAB†
XBRL Taxonomy Label Linkbase Document.
 
 
101.PRE†
XBRL Taxonomy Presentation Linkbase Document.
 
†
Attached as Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) the condensed consolidated balance sheets as of September 29, 2012, December 31, 2011 and October 1, 2011; (ii) the condensed consolidated statements of income for the 13 weeks ended September 29, 2012 and October 1, 2011 and 39 weeks ended September 29, 2012 and October 1, 2011; (iii) the condensed consolidated statements of comprehensive income for the 13 weeks ended September 29, 2012 and October 1, 2011 and 39 weeks ended September 29, 2012 and October 1, 2011; and (iv) the condensed consolidated statements of cash flows for the 39 weeks ended September 29, 2012 and October 1, 2011. Users of this data are advised pursuant to Rule 406T of Regulation S-T that this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

20

SIGNATURES

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.
 
Date:
October 30, 2012
 
WEST MARINE, INC.
 
 
 
 
 
 
 
 
By:
/s/ Matthew L. Hyde
 
 
 
 
Matthew L. Hyde
 
 
 
 
Chief Executive Officer
 
 
 
 
 
 
 
 
By:
/s/ Thomas R. Moran
 
 
 
 
Thomas R. Moran
 
 
 
 
Chief Financial Officer

21

Stock widget

Investing forum

WEST MARINE INC Reports