QUIKSILVER INC - FORM 10-Q - September 5, 2014

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
______________________________________________________
FORM 10-Q
______________________________________________________
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2014
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-14229
______________________________________________________
QUIKSILVER, INC.
(Exact name of registrant as specified in its charter)
______________________________________________________
Delaware
33-0199426
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification Number)
15202 Graham Street
Huntington Beach, California
92649
(Address of principal executive offices)
(Zip Code)
(714) 889-2200
(Registrant’s telephone number, including area code)
__________________________________________________
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    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):
Large accelerated filer
ý
 
Accelerated filer
¨
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
The number of shares outstanding of Registrant’s Common Stock, par value $0.01 per share, at August 31, 2014 was 171,172,210.



QUIKSILVER, INC.
FORM 10-Q
INDEX
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
QUIKSILVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
Three Months Ended July 31,
 
Nine Months Ended July 31,
In thousands, except per share amounts
2014
 
2013
 
2014
 
2013
Revenues, net
$
395,655

 
$
488,325

 
$
1,215,038

 
$
1,368,929

Cost of goods sold
206,719

 
248,479

 
619,122

 
703,818

Gross profit
188,936

 
239,846

 
595,916

 
665,111

Selling, general and administrative expense
212,674

 
214,722

 
638,140

 
653,668

Goodwill impairment
182,384

 
—

 
195,081

 
—

Asset impairments
180

 
2,152

 
8,327

 
10,652

Operating (loss)/income
(206,302
)
 
22,972

 
(245,632
)
 
791

Interest expense, net
18,772

 
20,223

 
57,467

 
51,073

Foreign currency (gain)/loss
(2,294
)
 
4,046

 
1,459

 
4,436

Loss before (benefit)/provision for income taxes
(222,780
)
 
(1,297
)
 
(304,558
)
 
(54,718
)
(Benefit)/provision for income taxes
(636
)
 
(1,232
)
 
(6,139
)
 
8,773

Loss from continuing operations
(222,144
)
 
(65
)
 
(298,419
)
 
(63,491
)
(Loss)/income from discontinued operations, net of tax (includes net gain on sale of $30,833 and $0 for the nine months of 2014 and 2013, respectively)
(34
)
 
1,889

 
30,366

 
2,473

Net (loss)/income
(222,178
)
 
1,824

 
(268,053
)
 
(61,018
)
Less: net loss/(income) attributable to non-controlling interest
2,093

 
247

 
10,294

 
(435
)
Net (loss)/income attributable to Quiksilver, Inc.
$
(220,085
)
 
$
2,071

 
$
(257,759
)
 
$
(61,453
)
(Loss)/income per share from continuing operations attributable to Quiksilver, Inc.
$
(1.29
)
 
$
0.00

 
$
(1.69
)
 
$
(0.38
)
(Loss)/income per share from discontinued operations attributable to Quiksilver, Inc.
$
0.00

 
$
0.01

 
$
0.18

 
$
0.01

Net (loss)/income per share attributable to Quiksilver, Inc.
$
(1.29
)
 
$
0.01

 
$
(1.51
)
 
$
(0.37
)
(Loss)/income per share from continuing operations attributable to Quiksilver, Inc., assuming dilution
$
(1.29
)
 
$
0.00

 
$
(1.69
)
 
$
(0.38
)
(Loss)/income per share from discontinued operations attributable to Quiksilver, Inc., assuming dilution
$
0.00

 
$
0.01

 
$
0.18

 
$
0.01

Net (loss)/income per share attributable to Quiksilver, Inc., assuming dilution
$
(1.29
)
 
$
0.01

 
$
(1.51
)
 
$
(0.37
)
Weighted average common shares outstanding, basic
170,794

 
167,624

 
170,337

 
166,735

Weighted average common shares outstanding, diluted
170,794

 
190,568

 
170,337

 
166,735

Amounts attributable to Quiksilver, Inc.:
 
 
 
 
 
 
 
(Loss)/income from continuing operations
$
(220,051
)
 
$
182

 
$
(288,125
)
 
$
(63,926
)
(Loss)/income from discontinued operations, net of tax
(34
)
 
1,889

 
30,366

 
2,473

Net (loss)/income
$
(220,085
)
 
$
2,071

 
$
(257,759
)
 
$
(61,453
)
See Notes to Condensed Consolidated Financial Statements

1


QUIKSILVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)/INCOME
(Unaudited)
 
Three Months Ended July 31,
 
Nine Months Ended July 31,
In thousands
2014
 
2013
 
2014
 
2013
Net (loss)/income
$
(222,178
)
 
$
1,824

 
$
(268,053
)
 
$
(61,018
)
Other comprehensive loss:
 
 
 
 
 
 
 
Foreign currency translation adjustment
(745
)
 
(522
)
 
(11,318
)
 
(7,066
)
Reclassification adjustment for realized gain/(loss) on derivative instruments transferred to earnings, net of tax (benefit) of $(92) and $(1,447) for the third quarter of 2014 and 2013, respectively, and $(126) and $(2,956) for the first nine months of 2014 and 2013, respectively
690

 
(2,142
)
 
(367
)
 
(4,420
)
Net unrealized (loss)/gain on derivative instruments, net of tax provision of $6,002 and $840 for the third quarter of 2014 and 2013, respectively, and $5,913 and $1,381 for the first nine months of 2014 and 2013, respectively
(1,753
)
 
524

 
1,136

 
733

Comprehensive loss
(223,986
)
 
(316
)
 
(278,602
)
 
(71,771
)
Comprehensive loss/(income) attributable to non-controlling interest
2,093

 
247

 
10,294

 
(435
)
Comprehensive loss attributable to Quiksilver, Inc.
$
(221,893
)
 
$
(69
)
 
$
(268,308
)
 
$
(72,206
)
See Notes to Condensed Consolidated Financial Statements

2


QUIKSILVER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
In thousands, except share and per share amounts
July 31,
2014
 
October 31,
2013
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
83,961

 
$
57,280

Restricted cash
23,897

 
—

Trade accounts receivable, less allowances of $63,251 (2014) and $60,912 (2013)
318,296

 
413,500

Other receivables
27,313

 
22,881

Income taxes receivable
1,535

 
—

Inventories, net
346,072

 
353,651

Deferred income taxes - current
9,778

 
10,103

Prepaid expenses and other current assets
30,362

 
24,463

Current portion of assets held for sale
—

 
33,378

Total current assets
841,214

 
915,256

Fixed assets, less accumulated depreciation and amortization of $258,374 (2014) and $251,150 (2013)
219,361

 
234,125

Intangible assets, net
135,627

 
137,991

Goodwill
80,845

 
277,734

Other assets
48,759

 
53,688

Assets held for sale, net of current portion
—

 
1,676

Total assets
$
1,325,806

 
$
1,620,470

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
198,878

 
$
213,508

Accrued liabilities
114,906

 
121,664

Current portion of long-term debt
28,406

 
23,488

Income taxes payable
—

 
3,912

Current portion of assets held for sale
—

 
4,468

Total current liabilities
342,190

 
367,040

Long-term debt, net of current portion
812,343

 
807,812

Other long-term liabilities
33,122

 
36,345

Deferred income taxes long-term
24,004

 
21,428

Assets held for sale, net of current portion
—

 
187

Total liabilities
1,211,659

 
1,232,812

Equity:
 
 
 
Preferred stock, $0.01 par value, authorized shares - 5,000,000; issued and outstanding shares - none
—

 
—

Common stock, $0.01 par value, authorized shares - 285,000,000; issued shares - 174,023,160 (2014) and 172,579,182 (2013)
1,740

 
1,726

Additional paid-in capital
587,506

 
576,726

Treasury stock, 2,885,200 shares
(6,778
)
 
(6,778
)
Accumulated deficit
(533,645
)
 
(275,886
)
Accumulated other comprehensive income
63,369

 
73,918

Total Quiksilver, Inc. stockholders’ equity
112,192

 
369,706

Non-controlling interest
1,955

 
17,952

Total equity
114,147

 
387,658

Total liabilities and equity
$
1,325,806

 
$
1,620,470

See Notes to Condensed Consolidated Financial Statements


3


QUIKSILVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Nine Months Ended July 31,
In thousands
2014
 
2013
Cash flows from operating activities:
 
 
 
Net loss
$
(268,053
)
 
$
(61,018
)
Adjustments to reconcile net loss to net cash provided by/(used in) operating activities:
 
 
 
Income from discontinued operations
(30,366
)
 
(2,473
)
Depreciation and amortization
41,169

 
37,806

Stock-based compensation
15,810

 
16,195

Provision for doubtful accounts
19,834

 
4,310

(Gain)/loss on disposal of fixed assets
(4,899
)
 
23

Unrealized foreign currency loss
893

 
621

Asset impairments
203,408

 
10,652

Non-cash interest expense
2,656

 
5,877

Equity in earnings
907

 
247

Deferred income taxes
(1,706
)
 
(281
)
Changes in operating assets and liabilities:
 
 
 
Trade accounts receivable
67,162

 
(5,599
)
Other receivables
(3,432
)
 
600

Inventories
(64
)
 
(55,680
)
Prepaid expenses and other current assets
(8,301
)
 
(13,450
)
Other assets
2,149

 
2,415

Accounts payable
(9,521
)
 
37,003

Accrued liabilities and other long-term liabilities
(7,391
)
 
7,090

Income taxes payable
(5,133
)
 
(4,765
)
Cash provided by/(used in) operating activities of continuing operations
15,122

 
(20,427
)
Cash (used in)/provided by operating activities of discontinued operations
(15,337
)
 
7,910

Net cash used in operating activities
(215
)
 
(12,517
)
Cash flows from investing activities:
 
 
 
Capital expenditures
(38,516
)
 
(39,861
)
Proceeds from sale of property
5,354

 
665

Changes in restricted cash
(23,897
)
 
(409,167
)
Cash used in investing activities of continuing operations
(57,059
)
 
(448,363
)
Cash provided by/(used in) investing activities of discontinued operations
77,052

 
(170
)
Net cash provided by/(used in) investing activities
19,993

 
(448,533
)
Cash flows from financing activities:
 
 
 
Borrowings on lines of credit
—

 
6,157

Payments on lines of credit
—

 
(22,561
)
Borrowings on long-term debt
187,495

 
646,876

Payments on long-term debt
(171,268
)
 
(142,121
)
Payments on short-term debt
(15,223
)
 
—

Stock option exercises and employee stock purchases
5,824

 
6,165

Payments of debt issuance costs
(123
)
 
(13,087
)
Cash provided by financing activities of continuing operations
6,705

 
481,429

Net cash provided by financing activities
6,705

 
481,429

Effect of exchange rate changes on cash
198

 
181

Net increase in cash and cash equivalents
26,681

 
20,560

Cash and cash equivalents, beginning of period
57,280

 
41,823

Cash and cash equivalents, end of period
$
83,961

 
$
62,383

Supplementary cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
51,347

 
$
42,035

Income taxes
$
13,211

 
$
11,126

Non-cash investing activities:
 
 
 
Capital expenditures accrued at period end
$
5,168

 
$
6,181

Non-cash financing activities:
 
 
 
Debt issued for purchase of non-controlling interest
$
17,388

 
$
—

See Notes to Condensed Consolidated Financial Statements

4


QUIKSILVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statement presentation.
Quiksilver, Inc. and its subsidiaries (the “Company”) has included all adjustments, consisting only of normal and recurring adjustments, necessary for a fair presentation of the results of operations for all periods presented. The Company's fiscal year ends on October 31 (for example, “fiscal 2014” refers to the year ending October 31, 2014). The condensed consolidated financial statements and notes thereto should be read in conjunction with the audited financial statements and notes thereto for the fiscal year ended October 31, 2013 included in the Company’s most recent Annual Report on Form 10-K. Interim results are not necessarily indicative of results for the full year.
In November 2013, the Company sold Mervin Manufacturing, Inc., its subsidiary that manufactured snowboards and related products under the “Lib Technologies” and “GNU” brands, (“Mervin”). In January 2014, the Company sold substantially all of the assets of Hawk Designs, Inc., its subsidiary that owned and operated the “Hawk” brand, (“Hawk”). The Company’s Mervin and Hawk businesses were classified as “held for sale” as of October 31, 2013 and are presented as discontinued operations in the accompanying condensed consolidated financial statements for all periods presented. As of October 31, 2013, the Company had also classified Surfdome Shop, Ltd. (“Surfdome”), a multi-brand e-commerce retailer, as "held for sale" based on the Company's intent and ability to sell its majority stake in Surfdome at that time. During the second quarter of fiscal 2014, the Company decided to maintain its investment in Surfdome. As a result, the Company reclassified Surfdome back into continuing operations for all periods presented. The Company recorded an impairment charge of $15 million within continuing operations during the second quarter of fiscal 2014 to write-down Surfdome goodwill and intangible assets to their estimated fair market value (see Note 15, "Discontinued Operations"). During the third quarter of fiscal 2014, the Company recorded an additional impairment charge of $4 million within continuing operations to impair the remainder of Surfdome goodwill as part of a $182 million non-cash charge to fully impair all goodwill associated with the Company's EMEA reporting unit (see Note 7, "Intangible Assets and Goodwill"). Due to the Company's 51% ownership stake in Surfdome, 49% of these charges, or $2.0 million and $9.5 million, were allocated to "net loss/(income) attributable to non-controlling interest" in the accompanying condensed consolidated statements of operations for the third quarter and nine months ended July 31, 2014, respectively.
2.
New Accounting Pronouncements
In April 2014, the FASB issued Accounting Standards Update ("ASU") 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360), which provides amended guidance on the presentation of financial statements and reporting discontinued operations and disclosures of disposals of components of an entity within property, plant and equipment. ASU 2014-08 amends the definition of a discontinued operation and requires entities to disclose additional information about disposal transactions that do not meet the discontinued operations criteria. The effective date of ASU 2014-08 is for disposals that occur in annual periods (and interim periods therein) beginning on or after December 15, 2014, with early adoption permitted. The Company is currently evaluating the impact, if any, that this amended guidance may have on its condensed consolidated financial statements and related disclosures.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which provides a single, comprehensive framework for all entities in all industries to apply in the determination of when to recognize revenue, and, therefore, supersedes virtually all existing revenue recognition requirements and guidance. This framework is expected to result in less complex guidance in application while providing a consistent and comparable methodology for revenue recognition. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve the principle, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract(s), (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract(s), and (v) recognize revenue when, or as, the entity satisfies a performance obligation. ASU 2014-09 is effective for annual periods (and interim periods therein) beginning on or after December 15, 2016. Early adoption is not permitted. The Company is currently in the process of evaluating the impact that this amended guidance will have on its condensed consolidated financial statements and related disclosures.

5


In June 2014, FASB issued ASU 2014-12, Compensation - Stock Compensation, which clarifies accounting for share-based payments for which the terms of an award provide that a performance target could be achieved after the requisite service period. That is the case when an employee is eligible to retire or otherwise terminate employment before the end of the period in which a performance target could be achieved and still be eligible to vest in the award if and when the performance target is achieved. The updated guidance clarifies that such a term should be treated as a performance condition that affects vesting. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the periods for which the requisite service has already been rendered. The guidance will be effective for the Company beginning with fiscal year 2016, and may be applied either prospectively or retrospectively. The Company does not anticipate that this guidance will materially impact its condensed consolidated financial statements and related disclosures.
3.
Segment Information
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the Company’s chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company operates in the outdoor market of the action sports industry, in which the Company designs, markets and distributes apparel, footwear, accessories and related products. The Company currently operates in four segments: the Americas, EMEA, and APAC, each of which sells a full range of the Company’s products, as well as Corporate Operations. The Americas segment, consisting of North, South and Central America, includes revenues primarily from the United States, Canada, Brazil and Mexico. The EMEA segment, consisting of Europe, the Middle East and Africa, includes revenues primarily from continental Europe, the United Kingdom, Russia and South Africa. The APAC segment, consisting of Asia and the Pacific Rim, includes revenues primarily from Australia, Japan, New Zealand, South Korea, Taiwan and Indonesia. Costs that support all segments, including trademark protection, trademark maintenance and licensing functions, are part of Corporate Operations. Corporate Operations also includes sourcing income and gross profit earned from the Company’s licensees.

6


Information, from continuing operations, related to the Company’s operating segments is as follows:
 
Three Months Ended July 31,
 
Nine Months Ended July 31,
In thousands
2014
 
2013
 
2014
 
2013
Revenues, net:
 
 
 
 
 
 
 
Americas
$
191,357

 
$
261,191

 
$
550,949

 
$
670,129

EMEA
142,553

 
163,750

 
472,483

 
497,501

APAC
61,658

 
62,769

 
191,254

 
199,045

Corporate Operations
87

 
615

 
352

 
2,254

 
$
395,655

 
$
488,325

 
$
1,215,038

 
$
1,368,929

Gross profit/(loss):
 
 
 
 
 
 
 
Americas
$
76,983

 
$
109,513

 
$
231,065

 
$
278,406

EMEA
79,297

 
97,219

 
261,661

 
283,305

APAC
35,025

 
32,259

 
105,246

 
103,018

Corporate Operations
(2,369
)
 
855

 
(2,056
)
 
382

 
$
188,936

 
$
239,846

 
$
595,916

 
$
665,111

SG&A expense:
 
 
 
 
 
 
 
Americas
$
87,311

 
$
76,920

 
$
262,673

 
$
245,984

EMEA
82,803

 
88,863

 
247,596

 
252,600

APAC
33,498

 
33,838

 
99,504

 
108,765

Corporate Operations
9,062

 
15,101

 
28,367

 
46,319

 
$
212,674

 
$
214,722

 
$
638,140

 
$
653,668

Asset impairments:
 
 
 
 
 
 
 
Americas
$
338

 
$
1,086

 
$
4,751

 
$
8,029

EMEA
182,226

 
1,066

 
198,657

 
2,623

APAC
—

 
—

 
—

 
—

Corporate Operations
—

 
—

 
—

 
—

 
$
182,564

 
$
2,152

 
$
203,408

 
$
10,652

Operating (loss)/income:
 
 
 
 
 
 
 
Americas
$
(10,666
)
 
$
31,507

 
$
(36,359
)
 
$
24,393

EMEA
(185,732
)
 
7,290

 
(184,592
)
 
28,082

APAC
1,527

 
(1,579
)
 
5,742

 
(5,747
)
Corporate Operations
(11,431
)
 
(14,246
)
 
(30,423
)
 
(45,937
)
 
$
(206,302
)
 
$
22,972

 
$
(245,632
)
 
$
791


In thousands
July 31,
2014
 
October 31,
2013
Identifiable assets:
 
 
 
Americas
$
522,300

 
$
581,021

EMEA
535,375

 
744,936

APAC
200,983

 
222,542

Corporate Operations
67,148

 
71,971

 
$
1,325,806

 
$
1,620,470


7



4.
Earnings per Share and Stock-Based Compensation
The Company reports basic and diluted earnings per share (“EPS”). Basic EPS is based on the weighted average number of shares outstanding during the period, while diluted EPS additionally includes the dilutive effect of the Company’s outstanding stock options, warrants and shares of restricted stock computed using the treasury stock method.
The table below sets forth the reconciliation of the denominator of each net loss/income per share calculation for the third quarter and nine months ended July 31, 2014 and 2013:
 
Three Months Ended July 31,
 
Nine Months Ended July 31,
In thousands
2014
 
2013
 
2014
 
2013
Shares used in computing basic net loss/income per share
170,794

 
167,624

 
170,337

 
166,735

Dilutive effect of stock options and restricted stock(1)
—

 
4,200

 
—

 
—

Dilutive effect of stock warrants(1)
—

 
18,744

 
—

 
—

Shares used in computing diluted net loss/income per share
170,794

 
190,568

 
170,337

 
166,735

(1)
For the third quarter of fiscal 2014, the shares used in computing diluted net loss per share do not include 1,572,000 of dilutive stock options and shares of restricted stock, nor 14,950,000 of dilutive warrant shares, as the effect is anti-dilutive given the Company’s net loss from continuing operations. For the third quarter of fiscal 2014 and 2013, additional stock options outstanding of 5,710,000 and 5,763,000, respectively, and additional warrant shares outstanding of 10,704,000 and 6,910,000, respectively, were excluded from the calculation of diluted EPS, as their effect would have been anti-dilutive based on the application of the treasury stock method. For the nine months ended July 31, 2014 and 2013, the shares used in computing diluted net loss per share do not include 2,922,000 and 4,016,000, respectively, of dilutive stock options and shares of restricted stock, nor 18,490,000 and 17,596,000, respectively, of dilutive warrant shares, as the effect is anti-dilutive given the Company’s net loss from continuing operations. For the nine months ended July 31, 2014 and 2013, additional stock options outstanding of 4,364,000 and 6,286,000, respectively, and additional warrant shares outstanding of 7,164,000 and 8,058,000, respectively, were excluded from the calculation of diluted EPS, as their effect would have been anti-dilutive based on the application of the treasury stock method.
The Company accounts for stock-based compensation under the fair value recognition provisions of Accounting Standards Codification ("ASC") 718, “Compensation – Stock Compensation.” Stock-based compensation expense is included in selling, general and administrative expense (“SG&A”).
The Company has previously granted performance-based stock options and performance-based restricted stock units to certain key employees and executives. Vesting of these awards is contingent upon a required service period and the Company’s achievement of specified common stock price thresholds. In addition, the vesting of a portion of the performance-based stock options can be accelerated based upon the Company’s achievement of specified annual performance targets. The Company believes that the granting of these awards serves to further align the interests of its employees and executives with those of its stockholders. Based on the vesting contingencies of the awards, the Company used a Monte-Carlo simulation in order to determine the grant date fair values of the awards. For the nine months ended July 31, 2014 and 2013, the assumptions used in the Monte-Carlo simulations for the performance-based restricted stock units granted included a risk-free interest rate of 0.6% to 0.7% and 0.4 % to 0.8%, respectively; volatility of 52% to 63% and 59% to 89%, respectively; and a zero dividend yield. The weighted average fair value of the performance-based restricted stock units granted in the nine months ended July 31, 2014 and 2013 was $5.16 and $4.19, respectively. There were no performance-based stock options granted in the first nine months of fiscal 2014 or 2013.

8


Activity related to these performance-based equity instruments for the nine months ended July 31, 2014 was as follows:
 
Performance
Options
 
Performance
Restricted
Stock Units
Outstanding, October 31, 2013
688,000

 
11,675,782

Granted
—

 
300,000

Exercised
(12,000
)
 
—

Canceled
(36,000
)
 
(30,937
)
Outstanding, July 31, 2014
640,000

 
11,944,845

As of July 31, 2014, 82,000 of the 640,000 outstanding performance-based stock options were exercisable and none of the performance-based restricted stock units were exercisable. As of July 31, 2014, the Company had unrecognized compensation expense, net of estimated forfeitures, of approximately $0.5 million related to the performance-based stock options and approximately $0.9 million related to the performance-based restricted stock units. This unrecognized compensation expense is expected to be recognized over a weighted average period of approximately 1.6 years and 0.4 years, respectively.
For non-performance-based stock options, the Company uses the Black-Scholes option-pricing model to value compensation expense. Forfeitures are estimated at the date of grant based on historical rates and reduce the compensation expense recognized. The expected term of stock options granted is derived from historical data on employee exercises. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the date of grant. Expected volatility is based on the historical volatility of the Company’s stock. For the first nine months of fiscal 2014 and 2013, non-performance based options granted were valued assuming a risk-free interest rate of 2.2% and 1.6%, respectively, volatility of 81% and 78%, respectively, zero dividend yield, and an expected life of 6.7 years and 7.1 years, respectively. The weighted average fair value of the grants was $5.82 and $4.77 for the first nine months of fiscal 2014 and 2013, respectively. The Company records stock-based compensation expense using the graded vested method over the vesting period, which is generally three years. As of July 31, 2014, the Company had approximately $2.3 million of unrecognized compensation expense for non-performance-based stock options expected to be recognized over a weighted average period of approximately 1.8 years.
Changes in shares underlying stock options, excluding performance-based stock options, for the nine months ended July 31, 2014 were as follows:
Dollar amounts in thousands,
except per share amounts
Shares
 
Weighted
Average
Price
 
Weighted
Average
Life
 
Aggregate
Intrinsic
Value
Outstanding, October 31, 2013
8,829,618

 
$
4.83

 
 
 
 
Granted
275,000

 
8.05

 
 
 
 
Exercised
(1,024,166
)
 
4.34

 
 
 
$
3,928

Canceled
(975,250
)
 
8.06

 
 
 
 
Outstanding, July 31, 2014
7,105,202

 
$
4.57

 
5.3
 
$
2,061

Options exercisable, July 31, 2014
5,802,200

 
$
4.24

 
4.7
 
$
2,061

Changes in non-vested shares underlying stock options, excluding performance-based stock options, for the nine months ended July 31, 2014 were as follows:
 
Shares
 
Weighted
Average Grant Date
Fair Value
Non-vested, October 31, 2013
2,784,826

 
$
2.95

Granted
275,000

 
5.82

Vested
(1,651,824
)
 
2.24

Canceled
(105,000
)
 
4.71

Non-vested, July 31, 2014
1,303,002

 
$
4.28


9


The Company also grants restricted stock and restricted stock units under its 2013 Performance Incentive Plan. Restricted stock issued under this plan generally vests in three years while restricted stock units issued under this plan generally vest upon the Company’s achievement of a specified common stock price threshold. Changes in restricted stock for the nine months ended July 31, 2014 were as follows:
 
Shares
Outstanding, October 31, 2013
195,000

Granted
105,000

Vested
(95,000
)
Forfeited
(30,000
)
Outstanding, July 31, 2014
175,000

Compensation expense for restricted stock is determined using the intrinsic value method and forfeitures are estimated at the date of grant based on historical rates and reduce the compensation expense recognized. The Company monitors the probability of meeting the restricted stock performance criteria, if any, and adjusts the amortization period as appropriate. As of July 31, 2014, there had been no acceleration of amortization periods and the Company had approximately $0.7 million of unrecognized compensation expense expected to be recognized over a weighted average period of approximately 1.6 years.
5.
Restricted Cash
The Company’s restricted cash balance as of July 31, 2014 was $24 million. Certain of the Company’s debt agreements contain restrictions on the usage of funds received from the sale of assets. The proceeds received from the Company’s disposition of its Mervin and Hawk businesses are subject to these restrictions. These restrictions generally require such cash to be used for either the repayment of indebtedness or for capital expenditures.
6.
Inventories, net
Inventories, net consisted of the following as of the dates indicated:
In thousands
July 31,
2014
 
October 31,
2013
Raw materials
$
3,832

 
$
4,725

Work in-process
644

 
680

Finished goods
341,596

 
348,246

 
$
346,072

 
$
353,651

7.
Intangible Assets and Goodwill
Intangible assets consisted of the following as of the dates indicated:
 
July 31, 2014
 
October 31, 2013
In thousands
Gross
Amount
 
Accumulated
Amortization
 
Net Book
Value
 
Gross
Amount
 
Accumulated
Amortization
 
Net Book
Value
Non-amortizable trademarks
$
124,129

 
$
—

 
$
124,129

 
$
124,099

 
$
—

 
$
124,099

Amortizable trademarks
22,043

 
(12,581
)
 
9,462

 
23,214

 
(11,543
)
 
11,671

Amortizable licenses
12,577

 
(12,577
)
 
—

 
12,749

 
(12,749
)
 
—

Other amortizable intangibles
8,324

 
(6,288
)
 
2,036

 
8,185

 
(5,964
)
 
2,221

 
$
167,073

 
$
(31,446
)
 
$
135,627

 
$
168,247

 
$
(30,256
)
 
$
137,991

The change in non-amortizable trademarks is due primarily to foreign currency exchange fluctuations. Other amortizable intangibles primarily include non-compete agreements, patents and customer relationships. These amortizable intangibles are amortized on a straight-line basis over their estimated useful lives. Certain trademarks will continue to be amortized by the Company using estimated useful lives of 10 to 25 years with no residual values. Intangible amortization expense for each of the nine months ended July 31, 2014 and 2013 was approximately $2 million. Annual amortization expense is estimated to be approximately $2 million per year through fiscal 2019.

10


The Company performs its annual goodwill impairment test during the fourth fiscal quarter. As of October 31, 2013, the fair value of each of its reporting units substantially exceeded their respective carrying values. However, certain factors may result in the need to perform an impairment test prior to the fourth fiscal quarter, including significant under-performance of the Company’s business relative to expected operating results, significant adverse economic and industry trends, a significant decline in the Company’s market capitalization for an extended period of time relative to net book value, or a decision to divest an individual business within a reporting unit.
Based upon the Company’s assessment of these factors in connection with the preparation of the Company’s condensed consolidated financial statements for the second quarter of fiscal 2014, given the sales decline in the Company’s EMEA reporting unit for the six months ended April 30, 2014, the Company performed an interim impairment test for the EMEA reporting unit using a discounted cash flow analysis and evaluated whether any adverse economic or industry trends would negatively affect the conclusions drawn from the prior period annual impairment test. The results of the Company’s interim impairment evaluation indicated that the fair value of the EMEA reporting unit exceeded its carrying value by 9%. As a result, the Company concluded that the EMEA reporting unit’s goodwill was not impaired based on the interim impairment evaluation.
During the second quarter of fiscal 2014, the Company also decided to maintain its investment in Surfdome, which resulted in the reclassification of the Surfdome business from "held for sale" to "held and used." As a result of the sale process conducted during the second quarter of fiscal 2014, the Company received offers to purchase from third parties which indicated that there was an impairment in the value of Surfdome. Consequently, the Company conducted an impairment analysis using the market approach based on third party purchase offers received for Surfdome. Based upon the result of the analysis, the Company recorded a $15 million impairment charge during the second quarter of fiscal 2014 against Surfdome goodwill and intangible assets within the EMEA reporting unit. This impairment charge reduced the carrying value of Surfdome assets to their estimated fair value.
During the third quarter of fiscal 2014, the Company performed an additional interim impairment test for the EMEA reporting unit due to the significant decline in the Company's stock price and further net revenue deterioration in the EMEA wholesale channel. The results of this impairment evaluation resulted in a non-cash charge of $182 million to fully impair goodwill associated with the EMEA reporting unit.
A summary of goodwill by reporting unit, and in total, and changes in the carrying amounts, as of the dates indicated is as follows:
In thousands
Americas
 
EMEA
 
APAC
 
Consolidated
Gross goodwill
$
75,974

 
$
190,986

 
$
135,752

 
$
402,712

Accumulated impairment losses
—

 
—

 
(129,545
)
 
(129,545
)
Net goodwill at October 31, 2012
$
75,974

 
$
190,986

 
$
6,207

 
$
273,167

Foreign currency translation and other
(1,031
)
 
5,598

 
—

 
4,567

Gross goodwill
74,943

 
196,584

 
135,752

 
407,279

Accumulated impairment losses
—

 
—

 
(129,545
)
 
(129,545
)
Net goodwill at October 31, 2013
$
74,943

 
$
196,584

 
$
6,207

 
$
277,734

Foreign currency translation and other
(305
)
 
(1,503
)
 
—

 
(1,808
)
Gross goodwill
74,638

 
195,081

 
135,752

 
405,471

Accumulated impairment losses
—

 
(195,081
)
 
(129,545
)
 
(324,626
)
Net goodwill at July 31, 2014
$
74,638

 
$
—

 
$
6,207

 
$
80,845

8.
Income Taxes
Each reporting period, the Company evaluates the realizability of all of its deferred tax assets in each tax jurisdiction. As of July 31, 2014, the Company continued to maintain a full valuation allowance against its net deferred tax assets in certain jurisdictions in each of its four operating segments due to sustained pre-tax losses. As a result of the valuation allowances recorded, no tax benefits have been recognized for losses incurred in those tax jurisdictions.
The Company’s sale of the Mervin and Hawk businesses in the first quarter of fiscal 2014 generated income tax expense of approximately $18 million within discontinued operations during the first nine months of fiscal 2014. However, as the Company does not expect to pay income tax after application of available loss carryforwards, an offsetting income tax benefit was recognized within continuing operations. Before this tax benefit, the Company generated income tax expense

11


in the nine months ended July 31, 2014 and 2013 due to being unable to record tax benefits against the losses in certain jurisdictions where the Company has previously recorded valuation allowances.
As of July 31, 2014, the Company’s liability for uncertain tax positions was approximately $12 million resulting from unrecognized tax benefits, excluding interest and penalties. If the Company’s positions are favorably sustained by the relevant taxing authority, approximately $11 million, excluding interest and penalties, of uncertain tax position liabilities would favorably impact the Company’s effective tax rate in future periods. During the next 12 months, it is reasonably possible that the Company’s liability for uncertain tax positions may change by a significant amount as a result of the resolution or payment of uncertain tax positions. The Company believes the outcomes which are reasonably possible within the next 12 months range from a reduction of the liability for unrecognized tax benefits of $10 million to an increase of the liability of $2 million, excluding penalties and interest for its existing tax positions.
9.
Restructuring Charges
In connection with the globalization of its organizational structure and core processes, as well as its cost reduction efforts, the Company formulated and announced a multi-year profit improvement plan (the "PIP") in May 2013. The PIP covers the global operations of the Company, and as the Company continues to evaluate its structure, processes and costs, additional charges may be incurred in the future under the PIP that are not yet determined. The PIP is, in many respects, a continuation and acceleration of the Company’s Fiscal 2011 Cost Reduction Plan (the “2011 Plan”). The Company will no longer incur any charges under the 2011 Plan, but will continue to make cash payments on amounts previously accrued under the 2011 Plan. Amounts charged to expense under the PIP and 2011 Plan were primarily recorded in SG&A with smaller amounts recorded in cost of goods sold (“COGS”) in the Company’s condensed consolidated statements of operations.
Activity and liability balances recorded as part of the PIP and 2011 Plan were as follows:
In thousands
Workforce
 
Facility
& Other
 
Total
Balance, October 31, 2012
$
5,335

 
$
6,856

 
$
12,191

Charged to expense
22,671

 
5,838

 
28,509

Cash payments
(15,847
)
 
(5,163
)
 
(21,010
)
Adjustments
—

 
(592
)
 
(592
)
Balance, October 31, 2013
$
12,159

 
$
6,939

 
$
19,098

Charged to expense
7,532

 
5,005

 
12,537

Cash payments
(13,936
)
 
(2,829
)
 
(16,765
)
Balance, July 31, 2014
$
5,755

 
$
9,115

 
$
14,870

Amounts charged to expense during the nine months ended July 31, 2014 were primarily composed of severance and separation charges for employees and athletes, as well as early lease exit costs. The majority of these charges were within the Americas and EMEA segments.
In addition to the restructuring charges noted above, the Company also recorded approximately $3 million of additional inventory reserves within COGS and approximately $2 million of additional expenses within SG&A during the nine months ended July 31, 2013, related to certain non-core brands and peripheral product categories that have been discontinued, which are not reflected in the table above.
The Company also recorded severance charges of approximately $3 million within SG&A during the nine months ended July 31, 2013 which were unrelated to the PIP or the 2011 Plan.

12


10.
Debt
A summary of borrowings under lines of credit and long-term debt as of the dates indicated is as follows:
In thousands
July 31,
2014
 
October 31,
2013
EMEA credit facilities
$
26,812

 
$
21,594

2017 Notes
267,953

 
274,952

ABL Credit Facility
38,184

 
27,408

2018 Notes
278,775

 
278,612

2020 Notes
222,505

 
222,285

Capital lease obligations and other borrowings
6,520

 
6,449

Total debt
840,749

 
831,300

Less current portion of long-term debt
(28,406
)
 
(23,488
)
Long-term debt, net of current portion
$
812,343

 
$
807,812

As of July 31, 2014, the Company’s credit facilities allowed for total cash borrowings and letters of credit of $216 million. The total maximum borrowings and actual availability fluctuate with the amount of assets comprising the borrowing base under certain of the credit facilities. At July 31, 2014, the Company had a total of $65 million of direct borrowings and $57 million in letters of credit outstanding. As of July 31, 2014, the effective availability for borrowings remaining under the Company’s credit facilities was $85 million, $66 million of which could also be used for letters of credit in the United States and APAC. In addition to the $85 million of effective availability for borrowings, the Company also had $9 million in additional capacity for letters of credit in EMEA as of July 31, 2014. Many of the Company’s debt agreements contain customary default provisions and restrictive covenants. The Company is not subject to financial covenant restrictions unless remaining borrowing availability under the ABL Credit Facility was to fall below the greater of $15 million or 10.0% of total borrowing base availability.
During the second quarter of 2014, the Company paid approximately $15 million of other borrowings to the former minority interest owners of the Company's Brazil subsidiary, related to the Company's acquisition of the remaining minority interest in this subsidiary in November 2013.
The estimated fair value of the Company’s borrowings under lines of credit and long-term debt as of July 31, 2014 was $786 million, compared to a carrying value of $841 million. The fair value of the Company’s long-term debt is calculated based on the market price of the Company’s publicly traded 2020 Notes, the trading prices of the Company’s 2018 Notes and 2017 Notes (all Level 1 inputs) and the carrying values of the Company’s credit facilities due to the variable rate nature of those debt obligations.
Other Fair Value Disclosures
The carrying value of the Company’s trade accounts receivable and accounts payable approximates fair value due to their short-term nature. The fair value of fixed assets is determined using a discounted cash flow model which requires Level 3 inputs. Where any impairment charge is required, fixed assets are adjusted to the fair value as determined by the discounted cash flow analysis.
11.
Derivative Financial Instruments
The Company is exposed to gains and losses resulting from fluctuations in foreign currency exchange rates relating to certain sales, royalty income 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 uses various foreign currency exchange contracts and intercompany loans.
The Company accounts for all of its cash flow hedges under ASC 815, “Derivatives and Hedging,” which requires companies to recognize all derivative instruments as either assets or liabilities at fair value in the consolidated balance sheet. In accordance with ASC 815, the Company designates forward contracts as cash flow hedges of forecasted purchases of commodities.

13


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 during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. As of July 31, 2014, the Company was hedging forecasted transactions expected to occur through October 2015. Assuming July 31, 2014 exchange rates remain constant, $4 million of losses, net of tax, related to hedges of these transactions are expected to be reclassified into earnings over the next 15 months.
On the date the Company enters into a derivative contract, management designates the derivative as a hedge of the identified exposure. Before entering into various hedge transactions, the Company formally documents all relationships between hedging instruments and hedged items, as well as the risk-management objective and strategy. In this documentation, the Company identifies 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 its risk management policy. The Company would discontinue hedge accounting prospectively (i) if management determines that the derivative is no longer effective in offsetting changes in the cash flows of a hedged item, (ii) when the derivative expires or is sold, terminated, or exercised, (iii) if it becomes probable that the forecasted transaction being hedged by the derivative will not occur, (iv) if a hedged firm commitment no longer meets the definition of a firm commitment, or (v) if management determines that designation of the derivative as a hedge instrument is no longer appropriate. As a result of the expiration, sale, termination, or exercise of derivative contracts, the Company reclassified into earnings net gains/(losses) of $0.7 million and $(2) million for the third quarters ended July 31, 2014 and 2013, respectively, and net losses of $0.4 million and $4 million for the nine months ended July 31, 2014 and 2013, respectively.
The Company enters into forward exchange and other derivative contracts with major banks and is exposed to exchange rate losses in the event of nonperformance by these banks. The Company anticipates, however, that these banks will be able to fully satisfy their obligations under the contracts. Accordingly, the Company does not require collateral or other security to support the contracts.
As of July 31, 2014, the Company had the following outstanding derivative contracts that were entered into to hedge forecasted purchases:
In thousands
Commodity
 
Notional
Amount
 
Maturity
 
Fair
Value
United States dollars
Inventory
 
$
286,032

 
Aug 2014 – Oct 2015
 
$
3,063

ASC 820, “Fair Value Measurements and Disclosures,” defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. ASC 820 also establishes a fair value hierarchy which prioritizes the valuation inputs into three broad levels. Based on the underlying inputs, each fair value measurement in its entirety is reported in one of the three levels. These levels are:
•
Level 1 – Valuation is based upon quoted prices for identical instruments traded in active markets. Level 1 assets and liabilities include debt and equity securities traded in an active exchange market, as well as U.S. Treasury securities.
•
Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
•
Level 3 – Valuation is determined using model-based techniques with significant assumptions not observable in the market. These unobservable assumptions reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of third party pricing services, option-pricing models, discounted cash flow models and similar techniques.
The Company’s derivative assets and liabilities include foreign exchange derivatives that are measured at fair value using observable market inputs such as forward rates, interest rates, the Company’s credit risk and the Company’s counterparties’ credit risks. Based on these inputs, the Company’s derivative assets and liabilities are classified within Level 2 of the valuation hierarchy.

14


The following table reflects the fair values of assets and liabilities measured and recognized at fair value on a recurring basis on the accompanying condensed consolidated balance sheets as of the dates indicated:
 
Fair Value Measurements Using
 
Assets/(Liabilities)
In thousands
Level 1
 
Level 2
 
Level 3
 
At Fair Value
July 31, 2014:
 
Derivative assets:
 
 
 
 
 
 
 
Other receivables
$
—

 
$
3,746

 
$
—

 
$
3,746

Other assets
—

 
166

 
—

 
166

Derivative liabilities:
 
 
 
 
 
 
 
Accrued liabilities
—

 
(849
)
 
—

 
(849
)
Total fair value
$
—

 
$
3,063

 
$
—

 
$
3,063

October 31, 2013:
 
Derivative assets:
 
 
 
 
 
 
 
Other receivables
$
—

 
$
2,026

 
$
—

 
$
2,026

Other assets
—

 
382

 
—

 
382

Derivative liabilities:
 
 
 
 
 
 
 
Accrued liabilities
—

 
(3,313
)
 
—

 
(3,313
)
Total fair value
$
—

 
$
(905
)
 
$
—

 
$
(905
)
12.
Stockholders’ Equity and Non-controlling Interest
The following tables summarize the changes in equity attributable to Quiksilver, Inc. and the non-controlling interests of its consolidated subsidiaries:
 
Attributable to
Quiksilver,
Inc.
 
Non-
controlling
Interest
 
Total
Stockholders’
Equity
In thousands
 
 
Nine Months Ended July 31, 2014:
 
 
 
 
 
Balance, October 31, 2013
$
369,706

 
$
17,952

 
$
387,658

Stock compensation expense
15,810

 
—

 
15,810

Exercise of stock options
4,501

 
—

 
4,501

Employee stock purchase plan
1,322

 
—

 
1,322

Transactions with non-controlling interest holders
(10,839
)
 
(5,703
)
 
(16,542
)
Net loss and other comprehensive loss
(268,308
)
 
(10,294
)
 
(278,602
)
Balance, July 31, 2014
$
112,192

 
$
1,955

 
$
114,147

Nine Months Ended July 31, 2013:
 
 
 
 
 
Balance, October 31, 2012
$
583,310

 
$
18,926

 
$
602,236

Stock compensation expense
16,195

 
—

 
16,195

Exercise of stock options
4,990

 
—

 
4,990

Employee stock purchase plan
1,175

 
—

 
1,175

Transactions with non-controlling interest holders
(44
)
 
44

 
—

Net loss and other comprehensive income
(72,206
)
 
435

 
(71,771
)
Balance, July 31, 2013
$
533,420

 
$
19,405

 
$
552,825

Transactions with non-controlling interest holders reflect the Company's acquisition of the remaining non-controlling interests of its Brazil and Mexico subsidiaries during the first quarter of fiscal 2014.
13.
Litigation, Indemnities and Guarantees
As part of its global operations, the Company may be involved in legal claims involving trademarks, intellectual property, licensing, employment matters, compliance, contracts and other matters incidental to its business. The Company believes

15


the resolution of any such matter, individually and in aggregate, currently threatened or pending will not have a material adverse effect on its financial condition, results of operations or liquidity.
During its normal course of business, the Company has made certain indemnities, commitments 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/or license of the Company’s products, (ii) indemnities to various lessors in connection with facility leases for certain claims arising from such facilities or leases, (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 of the maximum potential for future payments the Company could be obligated to make. The Company has not recorded any liability for these indemnities, commitments and guarantees in the accompanying condensed consolidated balance sheets.
14.
Accumulated Other Comprehensive Income
The components of accumulated other comprehensive income include changes in fair value of derivative instruments qualifying as cash flow hedges and foreign currency translation adjustments. The components of accumulated other comprehensive income, net of tax, are as follows:
 
Derivative
Instruments
 
Foreign
Currency
Adjustments
 
Total
In thousands
 
 
Nine Months Ended July 31, 2014:
 
 
 
 
 
Balance, October 31, 2013
$
(4,591
)
 
$
78,509

 
$
73,918

Net loss reclassified to COGS
(367
)
 
—

 
(367
)
Changes in fair value, net of tax
1,136

 
(11,318
)
 
(10,182
)
Balance, July 31, 2014
$
(3,822
)
 
$
67,191

 
$
63,369

Nine Months Ended July 31, 2013:
 
 
 
 
 
Balance, October 31, 2012
$
5,756

 
$
80,656

 
$
86,412

Net loss reclassified to COGS
(4,420
)
 
—

 
(4,420
)
Net loss reclassified to foreign currency loss
(61
)
 
—

 
(61
)
Changes in fair value, net of tax
794

 
(7,066
)
 
(6,272
)
Balance, July 31, 2013
$
2,069

 
$
73,590

 
$
75,659

15.
Discontinued Operations
One of the elements of the Company’s PIP involves divesting or exiting certain non-core businesses. In November 2013, the Company completed the sale of Mervin for $58 million. In January 2014, the Company completed the sale of substantially all of the assets of Hawk for $19 million. These transactions resulted in an after-tax gain of approximately $31 million during the first nine months of fiscal 2014, which is included in income from discontinued operations in the table below. The Company’s sale of these businesses generated income tax expense of approximately $18 million within discontinued operations during the first nine months of fiscal 2014. However, as the Company does not expect to pay income tax after application of available loss carryforwards, an offsetting income tax benefit was recognized within continuing operations.
Mervin, Hawk and Surfdome were classified as "assets held for sale" as of October 31, 2013. In the second quarter of fiscal 2014, the Company decided to maintain its investment in Surfdome. Consequently, Surfdome was reclassified from discontinued operations into continuing operations for all periods presented. The Company recorded a $15 million impairment charge within continuing operations during the second quarter of fiscal 2014 to write-down the carrying value of Surfdome goodwill and intangible assets to their estimated fair value. During the third quarter of fiscal 2014, the Company recorded an additional impairment charge of $4 million to impair the remainder of Surfdome goodwill as part of the $182 million non-cash charge to fully impair all goodwill associated with the EMEA reporting unit (see Note 7). As a result of the Company's 51% ownership stake in Surfdome, 49% of these charges, or $9.5 million, was allocated to "net loss/(income) attributable to non-controlling interest" in the accompanying condensed consolidated statement of operations for the nine months ended July 31, 2014.

16


The operating results of discontinued operations for the third quarter and first nine months of fiscal 2014 and 2013 are as follows:
 
Three Months Ended July 31,
 
Nine Months Ended July 31,
In thousands
2014
 
2013
 
2014
 
2013
Revenues, net
$
—

 
$
7,440

 
$
1,626

 
$
16,602

(Loss)/income before income taxes
(34
)
 
3,072

 
47,874

 
4,022

Provision for income taxes
—

 
1,183

 
17,508

 
1,549

(Loss)/income from discontinued operations
$
(34
)
 
$
1,889

 
$
30,366

 
$
2,473

There were no assets classified as held for sale at July 31, 2014. The components of major assets and liabilities held for sale at October 31, 2013 were as follows:
In thousands
October 31,
2013
Assets:
 
Receivables, net
$
22,792

Inventories, net
9,979

Other
2,283

 
$
35,054

Liabilities:
 
Accounts payable
$
1,206

Accrued liabilities
3,262

Other
187

 
$
4,655

Total assets held for sale as of October 31, 2013 by segment were as follows:
In thousands
October 31,
2013
Americas
$
27,398

EMEA
7,001

APAC
655

 
$
35,054

16.
Condensed Consolidating Financial Information
In July 2013, the Company issued $225 million aggregate principal amount of its 2020 Notes. These notes were issued in a private offering that was exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”). They were offered within the United States only to qualified institutional buyers in accordance with Rule 144A under the Securities Act, and outside of the United States only to non-U.S. investors in accordance with Regulation S under the Securities Act. In November 2013, these notes were exchanged for publicly registered notes with identical terms. Obligations under the Company’s 2020 Notes are fully and unconditionally guaranteed by certain of its existing 100% owned domestic subsidiaries.
In November 2013, the Company sold Mervin, a guarantor subsidiary, and in January 2014, the Company sold substantially all of the assets of Hawk, also a guarantor subsidiary. These subsidiaries continue to be presented in the “Guarantor Subsidiaries” column in the following condensed consolidating financial information where applicable. See Note 15, “Discontinued Operations,” for further discussion regarding the disposition of these businesses.
The Company is required to present condensed consolidating financial information for Quiksilver, Inc. and its guarantor subsidiaries within the notes to the condensed consolidated financial statements in accordance with the criteria established for parent companies in the SEC’s Regulation S-X, Rule 3-10(f). The following condensed consolidating financial information presents the results of operations for the three and nine months ended July 31, 2014 and 2013, the financial position as of July 31, 2014 and October 31, 2013, and cash flows for the nine months ended July 31, 2014 and 2013, of

17


Quiksilver, Inc., QS Wholesale, Inc., the 100% owned guarantor subsidiaries, the non-guarantor subsidiaries and the eliminations necessary to arrive at the information for the Company on a consolidated basis. The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions. The Company has applied the estimated consolidated annual effective income tax rate to both the guarantor and non-guarantor subsidiaries, adjusting for any discrete items, for interim reporting purposes. In the Company’s consolidated financial statements for the fiscal year ending October 31, 2014, management will apply the actual income tax rates to both the guarantor and non-guarantor subsidiaries. These interim tax rates may differ from the actual annual effective income tax rates for both the guarantor and non-guarantor subsidiaries.

18


QUIKSILVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statement of Operations
Third Quarter Ended July 31, 2014
In thousands
Quiksilver, Inc.
 
QS Wholesale,
Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues, net
$
116

 
$
89,431

 
$
98,214

 
$
244,806

 
$
(36,912
)
 
$
395,655

Cost of goods sold
—

 
57,777

 
69,731

 
116,950

 
(37,739
)
 
206,719

Gross profit
116

 
31,654

 
28,483

 
127,856

 
827

 
188,936

Selling, general and administrative expense
5,547

 
45,764

 
24,684

 
136,764

 
(85
)
 
212,674

Asset impairments
—

 
38,930

 
—

 
143,634

 
—

 
182,564

Operating loss
(5,431
)
 
(53,040
)
 
3,799

 
(152,542
)
 
912

 
(206,302
)
Interest expense, net
11,616

 
736

 
(3
)
 
6,423

 
—

 
18,772

Foreign currency loss
(131
)
 
(6
)
 
9

 
(2,166
)
 
—

 
(2,294
)
Equity in earnings
203,169

 
2,469

 
—

 
—

 
(205,638
)
 
—

Loss before (benefit)/provision for income taxes
(220,085
)
 
(56,239
)
 
3,793

 
(156,799
)
 
206,550

 
(222,780
)
(Benefit)/provision for income taxes
—

 
489

 
—

 
(1,125
)
 
—

 
(636
)
Loss from continuing operations
(220,085
)
 
(56,728
)
 
3,793

 
(155,674
)
 
206,550

 
(222,144
)
Loss from discontinued operations
—

 
—

 
(34
)
 
—

 
—

 
(34
)
Net loss
(220,085
)
 
(56,728
)
 
3,759

 
(155,674
)
 
206,550

 
(222,178
)
Net loss attributable to non-controlling interest
—

 
—

 
—

 
2,093

 
—

 
2,093

Net loss attributable to Quiksilver, Inc.
(220,085
)
 
(56,728
)
 
3,759

 
(153,581
)
 
206,550

 
(220,085
)
Other comprehensive income
(1,808
)
 
—

 
—

 
(1,808
)
 
1,808

 
(1,808
)
Comprehensive loss attributable to Quiksilver, Inc.
$
(221,893
)
 
$
(56,728
)
 
$
3,759

 
$
(155,389
)
 
$
208,358

 
$
(221,893
)
Asset impairments in the "QS Wholesale Inc." column above includes a $38 million non-cash charge for the impairment of DC Shoes goodwill that resides in the QS Wholesale Inc. legal entity, but is allocated to the EMEA segment for reporting unit purposes. This charge is a component of the $182 million non-cash charge to fully impair all goodwill attributable to the EMEA reporting unit (see Note 7, “Intangible Assets and Goodwill”).

19


QUIKSILVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statement of Operations
Third Quarter Ended July 31, 2013
In thousands
Quiksilver, Inc.
 
QS Wholesale,
Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues, net
$
116

 
$
123,731

 
$
153,634

 
$
286,757

 
$
(75,913
)
 
$
488,325

Cost of goods sold
—

 
73,456

 
101,312

 
129,432

 
(55,721
)
 
248,479

Gross profit
116

 
50,275

 
52,322

 
157,325

 
(20,192
)
 
239,846

Selling, general and administrative expense
11,426

 
30,423

 
34,134

 
146,429

 
(7,690
)
 
214,722

Asset impairments
—

 
—

 
925

 
1,227

 
—

 
2,152

Operating (loss)/income
(11,310
)
 
19,852

 
17,263

 
9,669

 
(12,502
)
 
22,972

Interest expense, net
12,251

 
1,420

 
1

 
6,551

 
—

 
20,223

Foreign currency (gain)/loss
(91
)
 
(64
)
 
(79
)
 
4,280

 
—

 
4,046

Equity in earnings
(25,541
)
 
(331
)
 
—

 
—

 
25,872

 
—

(Loss)/income before provision/(benefit) for income taxes
2,071

 
18,827

 
17,341

 
(1,162
)
 
(38,374
)
 
(1,297
)
Provision/(benefit) for income taxes
—

 
(205
)
 
(1,149
)
 
122

 
—

 
(1,232
)
Loss from continuing operations
2,071

 
19,032

 
18,490

 
(1,284
)
 
(38,374
)
 
(65
)
Income from discontinued operations
—

 
—

 
1,731

 
52

 
106

 
1,889

Net loss
2,071

 
19,032

 
20,221

 
(1,232
)
 
(38,268
)
 
1,824

Net income attributable to non-controlling interest
—

 
—

 
—

 
247

 
—

 
247

Net loss attributable to Quiksilver, Inc.
2,071

 
19,032

 
20,221

 
(985
)
 
(38,268
)
 
2,071

Other comprehensive loss
(2,140
)
 
—

 
—

 
(2,140
)
 
2,140

 
(2,140
)
Comprehensive loss attributable to Quiksilver, Inc.
$
(69
)
 
$
19,032

 
$
20,221

 
$
(3,125
)
 
$
(36,128
)
 
$
(69
)

20


QUIKSILVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statement of Operations
Nine Months Ended July 31, 2014
In thousands
Quiksilver, Inc.
 
QS Wholesale,
Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues, net
$
348

 
$
264,492

 
$
276,213

 
$
796,593

 
$
(122,608
)
 
$
1,215,038

Cost of goods sold
193

 
163,397

 
200,313

 
375,817

 
(120,598
)
 
619,122

Gross profit
155

 
101,095

 
75,900

 
420,776

 
(2,010
)
 
595,916

Selling, general and administrative expense
20,950

 
160,868

 
68,579

 
389,739

 
(1,996
)
 
638,140

Asset impairments
—

 
39,695

 
3,477

 
160,236

 
—

 
203,408

Operating (loss)/income
(20,795
)
 
(99,468
)
 
3,844

 
(129,199
)
 
(14
)
 
(245,632
)
Interest expense, net
34,834

 
2,201

 
(3
)
 
20,435

 
—

 
57,467

Foreign currency loss/(gain)
29

 
(9
)
 
5

 
1,434

 
—

 
1,459

Equity in earnings
202,101

 
1,851

 
—

 
—

 
(203,952
)
 
—

(Loss)/income before (benefit)/provision for income taxes
(257,759
)
 
(103,511
)
 
3,842

 
(151,068
)
 
203,938

 
(304,558
)
(Benefit)/provision for income taxes
—

 
(9,800
)
 
(6,878
)
 
10,539

 
—

 
(6,139
)
(Loss)/income from continuing operations
(257,759
)
 
(93,711
)
 
10,720

 
(161,607
)
 
203,938

 
(298,419
)
Income from discontinued operations
—

 
19,757

 
10,549

 
60

 
—

 
30,366

Net (loss)/income
(257,759
)
 
(73,954
)
 
21,269

 
(161,547
)
 
203,938

 
(268,053
)
Net loss attributable to non-controlling interest
—

 
—

 
—

 
10,294

 
—

 
10,294

Net (loss)/income attributable to Quiksilver, Inc.
(257,759
)
 
(73,954
)
 
21,269

 
(151,253
)
 
203,938

 
(257,759
)
Other comprehensive loss
(10,549
)
 
—

 
—

 
(10,549
)
 
10,549

 
(10,549
)
Comprehensive (loss)/income attributable to Quiksilver, Inc.
$
(268,308
)
 
$
(73,954
)
 
$
21,269

 
$
(161,802
)
 
$
214,487

 
$
(268,308
)
Asset impairments in the QS Wholesale Inc. column above includes a $38 million non-cash charge for the impairment of DC Shoes goodwill that resides in the QS Wholesale Inc. legal entity, but is allocated to the EMEA segment for reporting unit purposes. This charge is a component of the $182 million non-cash charge to fully impair all goodwill attributable to the EMEA reporting unit (see Note 7, “Intangible Assets and Goodwill”).

21


QUIKSILVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statement of Operations
Nine Months Ended July 31, 2013
In thousands
Quiksilver, Inc.
 
QS Wholesale,
Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues, net
$
348

 
$
317,643

 
$
368,404

 
$
871,248

 
$
(188,714
)
 
$
1,368,929

Cost of goods sold
—

 
191,351

 
258,249

 
404,992

 
(150,774
)
 
703,818

Gross profit
348

 
126,292

 
110,155

 
466,256

 
(37,940
)
 
665,111

Selling, general and administrative expense
39,154

 
102,946

 
104,790

 
429,114

 
(22,336
)
 
653,668

Asset impairments
—

 
1,646

 
5,602

 
3,404

 
—

 
10,652

Operating (loss)/income
(38,806
)
 
21,700

 
(237
)
 
33,738

 
(15,604
)
 
791

Interest expense, net
26,789

 
4,329

 
—

 
19,955

 
—

 
51,073

Foreign currency loss
35

 
23

 
31

 
4,347

 
—

 
4,436

Equity in earnings
(4,599
)
 
(1,018
)
 
—

 
—

 
5,617

 
—

(Loss)/income before provision/(benefit) for income taxes
(61,031
)
 
18,366

 
(268
)
 
9,436

 
(21,221
)
 
(54,718
)
Provision/(benefit) for income taxes
422

 
(161
)
 
(1,358
)
 
9,870

 
—

 
8,773

(Loss)/income from continuing operations
(61,453
)
 
18,527

 
1,090

 
(434
)
 
(21,221
)
 
(63,491
)
Income from discontinued operations
—

 
—

 
2,270

 
303

 
(100
)
 
2,473

Net (loss)/income
(61,453
)
 
18,527

 
3,360

 
(131
)
 
(21,321
)
 
(61,018
)
Net income attributable to non-controlling interest
—

 
—

 
—

 
(435
)
 
—

 
(435
)
Net (loss)/income attributable to Quiksilver, Inc.
(61,453
)
 
18,527

 
3,360

 
(566
)
 
(21,321
)
 
(61,453
)
Other comprehensive loss
(10,753
)
 
—

 
—

 
(10,753
)
 
10,753

 
(10,753
)
Comprehensive loss attributable to Quiksilver, Inc.
$
(72,206
)
 
$
18,527

 
$
3,360

 
$
(11,319
)
 
$
(10,568
)
 
$
(72,206
)


22


QUIKSILVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Balance Sheet
July 31, 2014
In thousands
Quiksilver, Inc.
 
QS Wholesale,
Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
149

 
$
29,571

 
$
(2,064
)
 
$
56,305

 
$
—

 
$
83,961

Restricted cash
—

 
22,494

 
—

 
1,403

 
—

 
23,897

Trade accounts receivable, net
—

 
64,380

 
43,118

 
210,798

 
—

 
318,296

Other receivables
10

 
3,387

 
1,332

 
22,584

 
—

 
27,313

Income taxes receivable
 
 
 
 
1,683

 
 
 
(148
)
 
1,535

Inventories, net
—

 
27,368

 
80,810

 
259,762

 
(21,868
)
 
346,072

Deferred income taxes - current
—

 
24,624

 
—

 
6,263

 
(21,109
)
 
9,778

Prepaid expenses and other current assets
1,574

 
6,519

 
3,599

 
18,670

 
—

 
30,362

Intercompany balances
—

 
163,992

 
—

 
—

 
(163,992
)
 
—

Total current assets
1,733

 
342,335

 
128,478

 
575,785

 
(207,117
)
 
841,214

Fixed assets, net
22,962

 
33,140

 
16,574

 
146,685

 
—

 
219,361

Intangible assets, net
5,704

 
43,971

 
1,124

 
84,828

 
—

 
135,627

Goodwill
—

 
61,982

 
11,089

 
7,774

 
—

 
80,845

Other assets
7,564

 
5,671

 
1,304

 
34,220

 
—

 
48,759

Deferred income taxes long-term
19,786

 
—

 
—

 
—

 
(19,786
)
 
—

Investment in subsidiaries
747,713

 
4,183

 
—

 
—

 
(751,896
)
 
—

Total assets
$
805,462

 
$
491,282

 
$
158,569

 
$
849,292

 
$
(978,799
)
 
$
1,325,806

LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
 
 
Accounts payable
$
3,003

 
$
40,051

 
$
26,056

 
$
129,768

 
$
—

 
$
198,878

Accrued liabilities
26,372

 
12,475

 
7,608

 
68,451

 
—

 
114,906

Current portion of long-term debt
—

 
576

 
—

 
27,830

 
—

 
28,406

Income taxes payable
—

 
—

 
—

 
148

 
(148
)
 
—

Deferred income taxes - current
20,365

 
—

 
744

 
—

 
(21,109
)
 
—

Intercompany balances
141,885

 
—

 
12,977

 
9,130

 
(163,992
)
 
—

Total current liabilities
191,625

 
53,102

 
47,385

 
235,327

 
(185,249
)
 
342,190

Long-term debt, net of current portion
501,281

 
21,590

 
—

 
289,472

 
—

 
812,343

Other long-term liabilities
364

 
5,442

 
7,758

 
19,558

 
—

 
33,122

Deferred income taxes long-term
—

 
41,039

 
2,053

 
698

 
(19,786
)
 
24,004

Total liabilities
693,270

 
121,173

 
57,196

 
545,055

 
(205,035
)
 
1,211,659

Stockholders’/invested equity
112,192

 
370,109

 
101,373

 
302,282

 
(773,764
)
 
112,192

Non-controlling interest
—

 
—

 
—

 
1,955

 
—

 
1,955

Total liabilities and equity
$
805,462

 
$
491,282

 
$
158,569

 
$
849,292

 
$
(978,799
)
 
$
1,325,806


23


QUIKSILVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Balance Sheet
October 31, 2013
In thousands
Quiksilver,
Inc.
 
QS Wholesale,
Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
35

 
$
3,733

 
$
296

 
$
53,216

 
$
—

 
$
57,280

Trade accounts receivable, net
—

 
83,991

 
48,230

 
281,279

 
—

 
413,500

Other receivables
19

 
5,613

 
2,007

 
15,242

 
—

 
22,881

Inventories, net
—

 
43,405

 
93,074

 
240,631

 
(23,459
)
 
353,651

Deferred income taxes - current
—

 
24,624

 
—

 
6,588

 
(21,109
)
 
10,103

Prepaid expenses and other current assets
3,372

 
3,271

 
3,752

 
14,068

 
—

 
24,463

Intercompany balances
—

 
173,547

 
—

 
—

 
(173,547
)
 
—

Current portion of assets held for sale
—

 
—

 
26,051

 
7,657

 
(330
)
 
33,378

Total current assets
3,426

 
338,184

 
173,410

 
618,681

 
(218,445
)
 
915,256

Fixed assets, net
21,378

 
35,152

 
21,816

 
155,779

 
—

 
234,125

Intangible assets, net
4,487

 
44,596

 
1,154

 
87,754

 
—

 
137,991

Goodwill
—

 
103,880

 
7,675

 
166,179

 
—

 
277,734

Other assets
8,025

 
5,654

 
1,096

 
38,913

 
—

 
53,688

Deferred income taxes long-term
21,085

 
—

 
—

 
579

 
(21,664
)
 
—

Investment in subsidiaries
949,814

 
8,795

 
—

 
—

 
(958,609
)
 
—

Assets held for sale, net of current portion
—

 
—

 
1,676

 
—

 
—

 
1,676

Total assets
$
1,008,215

 
$
536,261

 
$
206,827

 
$
1,067,885

 
$
(1,198,718
)
 
$
1,620,470

LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
 
 
Accounts payable
$
4,222

 
$
51,283

 
$
35,910

 
$
122,093

 
$
—

 
$
213,508

Accrued liabilities
17,900

 
9,921

 
6,929

 
86,914

 
—

 
121,664

Current portion of long-term debt
—

 
—

 
—

 
23,488

 
—

 
23,488

Income taxes payable
—

 
121

 
—

 
3,791

 
—

 
3,912

Deferred income taxes - current
20,365

 
—

 
744

 
—

 
(21,109
)
 
—

Intercompany balances
92,815

 
—

 
47,424

 
33,308

 
(173,547
)
 
—

Current portion of assets held for sale
689

 
—

 
3,773

 
6

 
—

 
4,468

Total current liabilities
135,991

 
61,325

 
94,780

 
269,600

 
(194,656
)
 
367,040

Long-term debt, net of current portion
500,896

 
—

 
—

 
306,916

 
—

 
807,812

Other long-term liabilities
1,622

 
6,012

 
8,946

 
19,765

 
—

 
36,345

Deferred income taxes long-term
—

 
41,039

 
2,053

 
—

 
(21,664
)
 
21,428

Assets held for sale, net of current portion
—

 
—

 
187

 
—

 
—

 
187

Total liabilities
638,509

 
108,376

 
105,966

 
596,281

 
(216,320
)
 
1,232,812

Stockholders’/invested equity
369,706

 
427,885

 
100,861

 
453,652

 
(982,398
)
 
369,706

Non-controlling interest
—

 
—

 
—

 
17,952

 
—

 
17,952

Total liabilities and equity
$
1,008,215

 
$
536,261

 
$
206,827

 
$
1,067,885

 
$
(1,198,718
)
 
$
1,620,470


24


QUIKSILVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statement of Cash Flows
Nine Months Ended July 31, 2014
In thousands
Quiksilver, Inc.
 
QS Wholesale,
Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
 
 
Net (loss)/income
$
(257,759
)
 
$
(73,954
)
 
$
21,269

 
$
(161,547
)
 
$
203,938

 
$
(268,053
)
Adjustments to reconcile net income to net cash (used in)/provided by operating activities:
 
 
 
 
 
 
 
 
 
 
 
Income from discontinued operations
—

 
(19,757
)
 
(10,549
)
 
(60
)
 
—

 
(30,366
)
Depreciation and amortization
1,848

 
8,046

 
8,194

 
23,081

 
—

 
41,169

Stock-based compensation
15,810

 
—

 
—

 
—

 
—

 
15,810

Provision for doubtful accounts
—

 
15,280

 
488

 
4,066

 
—

 
19,834

Asset impairments
—

 
39,695

 
3,477

 
160,236

 
—

 
203,408

Equity in earnings
202,101

 
1,851

 
—

 
907

 
(203,952
)
 
907

Non-cash interest expense
1,419

 
749

 
—

 
488

 
—

 
2,656

Deferred income taxes
—

 
—

 
—

 
(1,706
)
 
—

 
(1,706
)
Other adjustments to reconcile net income
28

 
(42
)
 
(314
)
 
(3,678
)
 
—

 
(4,006
)
Changes in operating assets and liabilities:
 
 
 
 
 
 
 
 
 
 
 
Trade accounts receivable
—

 
4,331

 
4,624

 
58,207

 
—

 
67,162

Inventories
—

 
15,769

 
11,346

 
(27,193
)
 
14

 
(64
)
Intercompany
29,313

 
46,651

 
(79,642
)
 
3,678

 
—

 
—

Other operating assets and liabilities
6,823

 
(20,969
)
 
(12,774
)
 
(4,709
)
 
—

 
(31,629
)
Cash (used in)/provided by operating activities of continuing operations
(417
)
 
17,650

 
(53,881
)
 
51,770

 
—

 
15,122

Cash used in operating activities of discontinued operations
—

 
—

 
(924
)
 
(14,413
)
 
—

 
(15,337
)
Net cash (used in)/provided by operating activities
(417
)
 
17,650

 
(54,805
)
 
37,357

 
—

 
(215
)
Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
 
 
Proceeds from the sale of assets
 
 
94

 
532

 
4,728

 
 
 
5,354

Capital expenditures
(5,133
)
 
(8,449
)
 
(6,139
)
 
(18,795
)
 
—

 
(38,516
)
Changes in restricted cash
—

 
(22,494
)
 
—

 
(1,403
)
 
—

 
(23,897
)
Cash used in investing activities of continuing operations
(5,133
)
 
(30,849
)
 
(5,607
)
 
(15,470
)
 
—

 
(57,059
)
Cash provided by investing activities of discontinued operations
—

 
19,000

 
58,052

 
—

 
—

 
77,052

Net cash (used in)/provided by investing activities
(5,133
)
 
(11,849
)
 
52,445

 
(15,470
)
 
—

 
19,993

Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
 
 
Borrowings on long-term debt
—

 
77,000

 
—

 
110,495

 
—

 
187,495

Payments on long-term debt
—

 
(57,000
)
 
—

 
(114,268
)
 
—

 
(171,268
)
Payment on short-term debt
—

 
—

 
—

 
(15,223
)
 
—

 
(15,223
)
Stock option exercises and employee stock purchases
5,824

 
—

 
—

 
—

 
—

 
5,824

Payments of debt issuance costs
(160
)
 
37

 
—

 
—

 
—

 
(123
)
Cash provided by financing activities of continuing operations
5,664

 
20,037

 
—

 
(18,996
)
 
—

 
6,705

Net cash provided by financing activities
5,664

 
20,037

 
—

 
(18,996
)
 
—

 
6,705

Effect of exchange rate changes on cash
—

 
—

 
—

 
198

 
—

 
198

Net increase/(decrease) in cash and cash equivalents
114

 
25,838

 
(2,360
)
 
3,089

 
—

 
26,681

Cash and cash equivalents, beginning of period
35

 
3,733

 
296

 
53,216

 
—

 
57,280

Cash and cash equivalents, end of period
$
149

 
$
29,571

 
$
(2,064
)
 
$
56,305

 
$
—

 
$
83,961


25


QUIKSILVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statement of Cash Flows
Nine Months Ended July 31, 2013
In thousands
Quiksilver, 
Inc.
 
QS Wholesale,
Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
 
 
Net (loss)/income
$
(61,453
)
 
$
18,527

 
$
3,360

 
$
(131
)
 
$
(21,321
)
 
$
(61,018
)
Adjustments to reconcile net (loss)/income to net cash (used in)/provided by operating activities:
 
 
 
 
 
 
 
 
 
 
 
Income from discontinued operations
—

 
—

 
(2,270
)
 
(303
)
 
100

 
(2,473
)
Depreciation and amortization
1,651

 
8,710

 
4,242

 
23,203

 
—

 
37,806

Stock-based compensation
16,195

 
—

 
—

 
—

 
—

 
16,195

Provision for doubtful accounts
—

 
(257
)
 
(1,379
)
 
5,946

 
—

 
4,310

Asset impairments
—

 
1,646

 
5,602

 
3,404

 
—

 
10,652

Equity in earnings
(4,599
)
 
(1,018
)
 
—

 
247

 
5,617

 
247

Non-cash interest expense
4,223

 
1,081

 
—

 
573

 
—

 
5,877

Deferred income taxes
—

 
—

 
—

 
(281
)
 
—

 
(281
)
Other adjustments to reconcile net (loss)/income
35

 
—

 
(124
)
 
733

 
—

 
644

Changes in operating assets and liabilities:
 
 
 
 
 
 
 
 
 
 
 
Trade accounts receivable
—

 
(4,000
)
 
8,177

 
(9,776
)
 
—

 
(5,599
)
Inventories
—

 
(7,297
)
 
(1,493
)
 
(62,494
)
 
15,604

 
(55,680
)
Intercompany
(46,914
)
 
44,762

 
(11,724
)
 
13,876

 
—

 
—

Other operating assets and liabilities
6,867

 
341

 
(4,289
)
 
25,974

 
—

 
28,893

Cash used in operating activities of continuing operations
(83,995
)
 
62,495

 
102

 
971

 
—

 
(20,427
)
Cash provided by operating activities of discontinued operations
—

 
—

 
7,219

 
691

 
—

 
7,910

Net cash (used in)/provided by operating activities
(83,995
)
 
62,495

 
7,321

 
1,662

 
—

 
(12,517
)
Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
 
 
Proceeds from sale of properties
47

 
 
 
2

 
616

 
 
 
665

Capital expenditures
(5,374
)
 
(3,908
)
 
(7,083
)
 
(23,496
)
 
—

 
(39,861
)
Changes in Restricted Cash
(409,167
)
 
 
 
 
 
 
 
 
 
(409,167
)
Cash used in investing activities of continuing operations
(414,494
)
 
(3,908
)
 
(7,081
)
 
(22,880
)
 
—

 
(448,363
)
Cash used in investing activities of discontinued operations
—

 
—

 
(170
)
 
—

 
—

 
(170
)
Net cash used in investing activities
(414,494
)
 
(3,908
)
 
(7,251
)
 
(22,880
)
 
—

 
(448,533
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
 
 
Borrowings on lines of credit
—

 
—

 
—

 
6,157

 
—

 
6,157

Payments on lines of credit
—

 
—

 
—

 
(22,561
)
 
—

 
(22,561
)
Payments of debt issuance costs
(8,775
)
 
(4,312
)
 
 
 
 
 
 
 
(13,087
)
Borrowings on long-term debt
500,776

 
59,829

 
—

 
86,271

 
—

 
646,876

Payments on long-term debt
—

 
(114,029
)
 
—

 
(28,092
)
 
—

 
(142,121
)
Stock option exercises and employee stock purchases
6,165

 
—

 
—

 
—

 
—

 
6,165

Cash provided by financing activities of continuing operations
498,166

 
(58,512
)
 
—

 
41,775

 
—

 
481,429

Net cash provided by financing activities
498,166

 
(58,512
)
 
—

 
41,775

 
—

 
481,429

Effect of exchange rate changes on cash
—

 
—

 
—

 
181

 
—

 
181

Net (decrease)/increase in cash and cash equivalents
(323
)
 
75

 
70

 
20,738

 
—

 
20,560

Cash and cash equivalents, beginning of period
324

 
1,966

 
(1,831
)
 
41,364

 
—

 
41,823

Cash and cash equivalents, end of period
$
1

 
$
2,041

 
$
(1,761
)
 
$
62,102

 
$
—

 
$
62,383



26


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Unless the context indicates otherwise, when we refer to “Quiksilver,” “we,” “us,” “our,” or the “Company” in this Form 10-Q, we are referring to Quiksilver, Inc. and its subsidiaries on a consolidated basis. The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and related notes thereto contained elsewhere in this report. The information contained in this Quarterly Report on Form 10-Q is not a complete description of our business or the risks associated with an investment in our securities. We urge you to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended October 31, 2013 and subsequent reports on Form 10-Q and Form 8-K, which discuss our business in greater detail. The section entitled “Risk Factors” set forth in Item 1A of this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K, and similar disclosures in our other SEC filings, discuss some of the important risk factors that may affect our business, results of operations and financial condition. You should carefully consider those risks, in addition to the information in this report and in our other filings with the SEC, before deciding to invest in, or maintain your investment in, our common stock or senior notes.
Cautionary Note Regarding Forward-Looking Statements
This report on Form 10-Q contains “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements are often, but not always, identified by words such as: “anticipate,” “intend,” “plan,” “goal,” “seek,” “believe,” “project,” “estimate,” “expect,” “outlook,” “strategy,” “future,” “likely,” “may,” “should,” “could,” “will” and similar references to future periods. Examples of forward-looking statements include, but are not limited to, statements we make regarding:
•
known or anticipated trends regarding our net revenues, selling, general and administrative expenses ("SG&A"), Adjusted EBITDA and other operating results; and
•
current or future volatility in certain economies, credit markets and future market conditions; and
•
our belief that we have sufficient liquidity to fund our business operations during the next twelve months; and
•
our expectations regarding the implementation of our multi-year profit improvement plan.
Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following:
•
our ability to execute our mission and strategies;
•
our ability to achieve the financial results that we anticipate;
•
our ability to successfully implement our multi-year profit improvement plan;
•
our ability to effectively transition our supply chain and certain other business processes to global scope;
•
future expenditures for capital projects, including the ongoing implementation of our global enterprise-wide reporting system;
•
increases in production costs and raw materials and disruptions in the supply chains for these materials;
•
deterioration of global economic conditions and credit and capital markets;
•
potential non-cash asset impairment charges for goodwill, intangible assets or other fixed assets;
•
our ability to continue to maintain our brand image and reputation;
•
foreign currency exchange rate and interest rate fluctuations;
•
our ability to remain compliant with our debt covenants;
•
payments due on contractual commitments and other debt obligations;

27


•
our ability to finance our operations;
•
changes in political, social and economic conditions and local regulations, particularly in Europe and Asia;
•
the occurrence of hostilities or catastrophic events;
•
changes in customer demand; and
•
disruptions to, or breaches of, our computer systems and software, as well as natural events such as severe weather, fires, floods and earthquakes or man-made or other disruptions of our operating systems, structures or equipment.
Any forward-looking statement made by us in this report is based only on information currently available to us and speaks only as of the date on which it is made. We undertake no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise.
Business Overview
Quiksilver is one of the world’s leading outdoor sports lifestyle companies. We design, develop and distribute branded apparel, footwear, accessories and related products. Our brands, inspired by the passion for outdoor action sports, represent a casual lifestyle for young-minded people who connect with our board-riding culture and heritage. Our three core brands, Quiksilver, Roxy, and DC, are synonymous with the heritage and culture of surfing, skateboarding and snowboarding. Our products combine decades of brand heritage, authenticity and design experience with the latest technical performance innovations available in the marketplace.
Our products are sold in over 100 countries through a wide range of distribution points, including wholesale accounts (surf shops, skate shops, snow shops, specialty stores, and select department stores), 658 Company-owned retail stores, licensed stores, and via our e-commerce websites. We have four operating segments consisting of the Americas, EMEA and APAC, each of which sells a full range of our products, as well as Corporate Operations. Our Americas segment, consisting of North, South and Central America, includes revenues primarily from the United States, Canada, Brazil and Mexico. Our EMEA segment, consisting of Europe, the Middle East and Africa, includes revenues primarily from continental Europe, the United Kingdom, Russia and South Africa. Our APAC segment, consisting of Asia and the Pacific Rim, includes revenues primarily from Australia, Japan, New Zealand, South Korea, Taiwan and Indonesia. Royalties earned from various licensees are categorized in Corporate Operations, along with revenues from sourcing services to our licensees. For information regarding the revenues, operating income/(loss), and identifiable assets attributable to our operating segments, see Note 3 of our condensed consolidated financial statements included in this report. In fiscal 2013, more than 60% of our revenue was generated outside of the United States.
Multi-Year Profit Improvement Plan
We previously announced a multi-year profit improvement plan (“PIP”) designed to accelerate our three fundamental strategies of strengthening brands, growing sales and driving operational efficiencies. The PIP’s initiatives focus on prioritizing our three core brands, globalizing key functions and reducing our cost structure.
Important elements of the PIP include:
•
clarifying the positioning of our three flagship brands (Quiksilver, Roxy and DC);
•
divesting or exiting certain non-core brands;
•
globalizing product design and merchandising;
•
licensing of secondary or peripheral product categories;
•
reprioritization of marketing investments to emphasize in-store and print marketing along with digital and social media;
•
continued investment in emerging markets, retail stores and e-commerce;
•
improving sales execution;
•
optimizing our supply chain;
•
reducing product styles;
•
centralizing global responsibility for key functions, including product design, supply chain, marketing, retail stores, licensing and administrative functions; and

28


•
closing under-performing retail stores, reorganizing wholesale sales operations, implementing greater pricing discipline, and improving product segmentation.
We believe we have made meaningful progress on these PIP initiatives through the third quarter of fiscal 2014.
We believe we can improve our profitability through supply chain optimization, corporate overhead reductions, licensing peripheral product categories, improved pricing management, and net revenue growth. We are currently updating our PIP based upon recent difficulties within the wholesale channels of our Americas and EMEA segments. As part of updating our PIP, we will establish additional SG&A reduction objectives and allocate capital to our emerging markets, e-commerce and retail channel growth plans. We expect to provide a detailed update on our PIP with, or shortly after, the release of our fiscal 2014 full-year results.
Discontinued Operations
One of the elements of the multi-year PIP involves divesting or exiting certain non-core businesses in order to improve our focus on our three flagship brands. In November 2013, we completed the sale of Mervin Manufacturing, Inc. (“Mervin”), a manufacturer of snowboards and related products under the Lib Technologies and GNU brands, for $58 million. In January 2014, we completed the sale of substantially all of the assets of Hawk Designs, Inc. (“Hawk”), our subsidiary that owned and operated our Hawk brand, for $19 million. The sale of these businesses generated a net after-tax gain of approximately $31 million, which is included in income from discontinued operations for the nine months ended July 31, 2014. As a result, both our Mervin and Hawk businesses were classified as “held for sale” as of October 31, 2013 and are presented as discontinued operations in our condensed consolidated financial statements for all periods presented. Our sale of these businesses generated income tax expense of approximately $18 million within discontinued operations during the first nine months of fiscal 2014. However, as we do not expect to pay income tax after application of available loss carryforwards, an offsetting income tax benefit was recognized within continuing operations. See Note 15 to our condensed consolidated financial statements, “Discontinued Operations”, for further discussion of the operating results of our discontinued businesses.
At October 31, 2013, we had also classified our equity interest in Surfdome Shop, Ltd. (“Surfdome”), a multi-brand e-commerce retailer, as "held for sale" based on the status of our negotiations to sell our majority stake in Surfdome at that time. During the second quarter of fiscal 2014, we decided to maintain our investment in Surfdome. As a result, Surfdome has been reclassified into continuing operations for all periods presented herein. As a result of the sale process conducted during the second quarter of fiscal 2014, we received third party offers to purchase Surfdome which indicated that there was an impairment in the fair value of Surfdome. We recorded a $15 million impairment in EMEA continuing operations to write-down Surfdome goodwill and intangible assets to their estimated fair market value in the second quarter of fiscal 2014. During the third quarter of fiscal 2014, we recorded an additional impairment charge of $4 million within continuing operations to impair the remainder of Surfdome goodwill as part of a $182 million non-cash charge to fully impair all goodwill associated with our EMEA reporting unit. Due to our 51% ownership stake in Surfdome, 49% of these charges, or $9.5 million were allocated to "net loss/(income) attributable to non-controlling interest" in the accompanying condensed consolidated statements of operations for the nine months ended July 31, 2014. See Note 7 to our condensed consolidated financial statements, "Intangible Assets and Goodwill", for further discussion on the impairment charge.
Known or Anticipated Trends
Based on our recent operating results and current perspective on our operating environment, we anticipate certain trends continuing to impact our operating results over the next few quarters, including:
•
Year-over-year net revenue comparisons continuing to be unfavorable. Within this trend, we expect the year-over-year net revenue comparisons to be unfavorable in our North America and Europe wholesale channels, and favorable in our emerging markets and our e-commerce channel;
•
Year-over-year SG&A comparisons being less favorable than in recent quarters due to annualizing against the expense reduction initiatives we implemented last year and to the timing of planned marketing campaigns; and
•
Fiscal 2014 Adjusted EBITDA being below fiscal 2013 results.

29


Results of Operations
The following table sets forth selected statement of operations and other data from continuing operations expressed as a percentage of net revenues for the third quarter and first nine months of both fiscal 2014 and 2013. The discussion of our operating results from continuing operations that follows should be read in conjunction with the table.
 
Three Months Ended July 31,
 
Nine Months Ended July 31,
 
2014
 
2013
 
2014
 
2013
Statements of Operations data
 
 
 
 
 
 
 
Revenues, net
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Gross profit
47.8
 %
 
49.1
 %
 
49.0
 %
 
48.6
 %
Selling, general and administrative expense
53.8
 %
 
44.0
 %
 
52.5
 %
 
47.8
 %
Goodwill impairment
46.1
 %
 
—
 %
 
16.1
 %
 
—
 %
Asset impairments
—
 %
 
0.4
 %
 
0.7
 %
 
0.8
 %
Operating (loss)/income
(52.1
)%
 
4.7
 %
 
(20.2
)%
 
0.1
 %
Interest expense, net
4.7
 %
 
4.1
 %
 
4.7
 %
 
3.7
 %
Foreign currency (gain)/loss
(0.6
)%
 
0.8
 %
 
0.1
 %
 
0.3
 %
Loss before benefit for income taxes
(56.3
)%
 
(0.3
)%
 
(25.1
)%
 
(4.0
)%
Other data
 
 
 
 
 
 
 
Adjusted EBITDA (1)
(0.4
)%
 
8.0
 %
 
1.2
 %
 
4.4
 %
(1)
Adjusted EBITDA is defined as (loss)/income from continuing operations attributable to Quiksilver, Inc. before (i) interest expense, (ii) (benefit)/provision for income taxes, (iii) depreciation and amortization, (iv) non-cash stock-based compensation expense and (v) non-cash asset impairments, including goodwill, net of non-controlling interest. For the nine months ended July 31, 2014, non-cash asset impairments reflect Quiksilver, Inc.'s 51% share of the Surfdome impairment charges. Adjusted EBITDA is not defined under generally accepted accounting principles (“GAAP”), and it may not be comparable to similarly titled measures reported by other companies. We use Adjusted EBITDA, along with GAAP measures, as a measure of profitability because Adjusted EBITDA helps us to compare our performance on a consistent basis by removing from our operating results the impact of our capital structure, the effect of operating in different tax jurisdictions, the impact of our asset base, which can differ depending on the book value of assets, the accounting methods used to compute depreciation and amortization, the existence or timing of asset impairments and the effect of non-cash stock-based compensation expense. We believe EBITDA is useful to investors as it is a widely used measure of performance and the adjustments we make to EBITDA provide further clarity on our profitability. We remove the effect of non-cash stock-based compensation from our earnings which can vary based on share price, share price volatility and the expected life of the equity instruments we grant. In addition, this stock-based compensation expense does not result in cash payments by us. We remove the effect of non-cash asset impairments from Adjusted EBITDA for the same reason that we remove depreciation and amortization as it is part of the impact of our asset base. Adjusted EBITDA has limitations as a profitability measure in that it does not include the interest expense on our debts, our provisions for income taxes, the effect of our expenditures for capital assets and certain intangible assets, the effect of non-cash stock-based compensation expense and the effect of non-cash asset impairments.

30


The following is a reconciliation of net (loss)/income from continuing operations attributable to Quiksilver, Inc. to Adjusted EBITDA for the third quarter and first nine months of both fiscal 2014 and 2013:
 
Third Quarter Ended July 31,
 
Nine Months Ended July 31,
In thousands
2014
 
2013
 
2014
 
2013
Net (loss)/income from continuing operations attributable to Quiksilver, Inc.
$
(220,051
)
 
$
182

 
$
(288,125
)
 
$
(63,926
)
(Benefit)/provision for income taxes
(636
)
 
(1,232
)
 
(6,139
)
 
8,773

Interest expense, net
18,772

 
20,223

 
57,467

 
51,073

Depreciation and amortization
15,555

 
12,921

 
41,169

 
37,806

Non-cash stock-based compensation expense
4,222

 
4,972

 
15,810

 
16,195

Non-cash goodwill impairment
180,353

 
—

 
185,591

 
—

Non-cash asset impairments
180

 
2,152

 
8,327

 
10,652

Adjusted EBITDA
$
(1,605
)
 
$
39,218

 
$
14,100

 
$
60,573


Third Quarter (Three Months) Ended July 31, 2014 Compared to Third Quarter (Three Months) Ended July 31, 2013

Revenues, net
Revenues, net – by Segment
The following tables present consolidated net revenues (in millions) by segment in historical currency (as reported) and constant currency (current year exchange rates) for the third quarter of fiscal 2014 and 2013:

Three Months Ended July 31,
 
$ Change
Increase
(Decrease)
 
% Change
Increase
(Decrease)
In millions
Historical Currency (as reported)
2014
 
2013
 
 
Americas
$
191

 
$
261

 
$
(70
)
 
(27
)%
EMEA
143

 
164

 
(21
)
 
(13
)%
APAC
62

 
63

 
(1
)
 
(2
)%
Corporate
—

 
1

 
(1
)
 
 
Total
$
396

 
$
488

 
$
(93
)
 
(19
)%
We use constant currency measurements to better understand growth rates in our foreign operations. Constant currency measurements remove the impact of foreign currency exchange rate fluctuations from period to period. Constant currency is calculated by taking the average foreign currency exchange rate used in translation for the current period and applying that same rate to the prior period.
 
Three Months Ended July 31,
 
$ Change
Increase
(Decrease)
 
% Change
Increase
(Decrease)
In millions
Constant Currency (current year exchange rates)
2014
 
2013
 
 
Americas
$
191

 
$
259

 
$
(68
)
 
(26
)%
EMEA
143

 
170

 
(28
)
 
(16
)%
APAC
62

 
61

 
1

 
1
 %
Corporate
—

 
1

 
(1
)
 
 
Total
$
396

 
$
491

 
$
(96
)
 
(19
)%
On an as reported basis, total net revenues for the third quarter of fiscal 2014 decreased $93 million, or 19%, to $396 million from $488 million in the comparable period of the prior year.
Net revenues in our Americas segment decreased $70 million, or 27%, on an as reported basis ($68 million, or 26% in constant currency) versus the prior year period. This net revenue decrease was primarily due to lower net revenues from our DC brand in the wholesale channel of $47 million driven by reduced clearance sales, narrowed product distribution to mid-tier wholesale customers, and the licensing of DC children's apparel. In addition, net revenues decreased in the Quiksilver and Roxy brands by

31


$14 million and $7 million, respectively, in the wholesale channel due to licensing of Quiksilver children's apparel, lower customer demand, and less effective order fulfillment compared to the prior year. Americas segment net revenues decreased 28% in the developed markets of North America, but increased 9% on a combined basis in the emerging markets of Brazil and Mexico.
Net revenues in our EMEA segment decreased $21 million, or 13%, on an as reported basis ($28 million, or 16%, in constant currency) versus the prior year period. This net revenue decrease was primarily due to lower revenues in the wholesale channel across all three brands driven by lower customer demand as a result of poor prior season's sell through, and less effective order fulfillment compared to the prior year. These decreases were partially offset by double-digit percentage growth in the e-commerce channel across all three brands as a result of our continuing direct-to-consumer investments in this segment. EMEA net revenues decreased most significantly in France and Germany, in excess of 20% and 30%, respectively, versus the prior year period. Net revenues increased modestly in Russia versus the prior year period.
Net revenues in our APAC segment decreased by $1 million, or 2%, on an as reported basis versus the prior year period due to unfavorable foreign currency fluctuations. In constant currency, APAC segment net revenues increased by $1 million, or 1%, versus the prior year period. Net revenue decreases in the wholesale channel were offset by increased net revenues in the retail and e-commerce channels as a result of our direct-to-consumer investments in this segment. APAC segment net revenues increased in excess of 25% in the emerging markets of South Korea, Taiwan and China. These increases were partially offset by a 5% decline in net revenues in the more developed markets of Australia/New Zealand and Japan.
Net revenues in our emerging markets, which include Brazil, Russia, Indonesia, China, Mexico, South Korea, and Taiwan, increased 4% versus the prior year period on an as reported basis (10% in constant currency). These markets are reported within their respective regional segments above.
Revenues, net – By Brand
Net revenues by brand (in millions), in both historical and constant currency, for the third quarter of fiscal 2014 and 2013 were as follows:
 
Three Months Ended July 31,
 
$ Change
Increase
(Decrease)
 
% Change
Increase
(Decrease)
In millions
Historical Currency (as reported)
2014
 
2013
 
 
Quiksilver
$
143

 
$
172

 
$
(29
)
 
(17
)%
Roxy
119

 
130

 
(11
)
 
(9
)%
DC
109

 
166

 
(57
)
 
(34
)%
Other
25

 
21

 
5

 
 
Total
$
396

 
$
488

 
$
(93
)
 
(19
)%
 
Three Months Ended July 31,
 
$ Change
Increase
(Decrease)
 
% Change
Increase
(Decrease)
In millions
Constant Currency (current year exchange rates)
2014
 
2013
 
 
Quiksilver
$
143

 
$
172

 
$
(30
)
 
(17
)%
Roxy
119

 
131

 
(12
)
 
(9
)%
DC
109

 
166

 
(57
)
 
(34
)%
Other
25

 
22

 
3

 
 
Total
$
396

 
$
491

 
$
(96
)
 
(19
)%
Quiksilver brand net revenues decreased $29 million, or 17%, on an as reported basis ($30 million, or 17%, in constant currency) versus the prior year period. This decrease was primarily due to reduced net revenues in the Americas and EMEA wholesale channels of approximately $14 million and $15 million, respectively. A portion of the decrease in Quiksilver brand net revenues ($6 million) was due to the licensing of children’s apparel.
Roxy brand net revenues decreased $11 million, or 9%, on an as reported basis ($12 million, or 9%, in constant currency) versus the prior year period. This decrease was primarily due to lower net revenues in the Americas and EMEA wholesale channels of approximately $7 million each, partially offset by increased revenues in the e-commerce and retail channels.
DC brand net revenues decreased $57 million, or 34%, both on an as reported basis and in constant currency versus the prior year period. This decrease was primarily driven by lower net revenues in the Americas and EMEA wholesale channels of $48

32


million and $10 million, respectively. The Americas net revenue decrease was driven by reduced clearance sales, narrowed product distribution to mid-tier wholesale customers, and the licensing of DC children’s apparel.
Revenues, net – By Channel
Net revenues by channel (in millions), in both historical and constant currency, for the third quarter of fiscal 2014 and 2013 were as follows:
 
Three Months Ended July 31,
 
$ Change
Increase
(Decrease)
 
% Change
Increase
(Decrease)
In millions
Historical Currency (as reported)
2014
 
2013
 
 
Wholesale
$
238

 
$
338

 
$
(100
)
 
(30
)%
Retail
123

 
120

 
3

 
2
 %
E-commerce
35

 
31

 
5

 
15
 %
Total
$
396

 
$
488

 
$
(93
)
 
(19
)%
 
Three Months Ended July 31,
 
$ Change
Increase
(Decrease)
 
% Change
Increase
(Decrease)
In millions
Constant Currency (current year exchange rates)
2014
 
2013
 
 
Wholesale
$
238

 
$
338

 
$
(100
)
 
(30
)%
Retail
123

 
121

 
1

 
1
 %
E-commerce
35

 
32

 
3

 
10
 %
Total
$
396

 
$
491

 
$
(96
)
 
(19
)%
Wholesale net revenues decreased $100 million, or 30%, on an as reported basis, and in constant currency, versus the prior year period. Wholesale net revenues declined across all three regional segments and all three core brands with the most significant declines in the developed markets of North America and Europe as discussed above.
Retail net revenues increased 2% on an as reported basis (1% in constant currency) versus the prior year period. Global comparable-store net revenues increased 1% during the third quarter of fiscal 2014. We operated 658 company-owned retail stores, including shop-in-shops, at July 31, 2014 compared to 632 at July 31, 2013. Almost all of the new stores are shop-in-shop configurations in the APAC segment which are smaller formats.
E-commerce net revenues increased 15% on an as reported basis (10% in constant currency) due to 17% growth in the EMEA and APAC segments, partially offset by a 9% decline in the Americas segment.
Gross Profit
Gross profit decreased to $189 million in the third quarter of fiscal 2014 from $240 million in the comparable period of the prior year. Gross margin, or gross profit as a percentage of net revenues, declined to 47.8% in the third quarter of fiscal 2014 versus 49.1% in the prior year period. This 130 basis point decrease in gross margins was primarily due to increased discounting in the wholesale channels of North America and Europe (320 basis points), partially offset by net revenue growth from our higher margin direct-to-consumer channels (160 basis points).
Gross margin by regional segment for the third quarter of fiscal 2014 and 2013 was as follows:

Three Months Ended July 31,

Basis
Point
Change

2014

2013

Americas
40.2
%
 
41.9
%
 
(170) bp
EMEA
55.6
%
 
59.4
%
 
(380) bp
APAC
56.8
%
 
51.4
%
 
540 bp
Consolidated
47.8
%
 
49.1
%
 
(130) bp

33


Selling, General and Administrative Expenses (“SG&A”)
SG&A for the third quarter of fiscal 2014 decreased $2 million, or 1%, to $213 million from $215 million in the comparable period of the prior year. This decrease was primarily attributable to: 1) reduced athlete and event-related spending of $5 million; 2) a gain on the sale of a building in our EMEA segment of $5 million; and 3) reduced employee compensation expenses of $4 million, largely due to reduced severance costs versus the prior year period. These decreases were partially offset by increases in print and other marketing placement expenses of $5 million, an increase in bad debt expense associated with certain independent distributor accounts of $3 million, and increased depreciation associated with the e-commerce systems of $2 million.
SG&A by segment (in millions) as reported for the third quarter of fiscal 2014 and 2013 was as follows:
 
Third Quarter Ended July 31, 2014
 
Third Quarter Ended July 31, 2013
 
$ Change
Increase
(Decrease)
 
Basis
Point
Change
In millions
 
 
% of Net
Revenues
 
 
 
% of Net
Revenues
 
 
Americas
$
87


45.6
%

$
77


29.4
%

$
10


1,620 bp
EMEA
83


58.1
%

89


54.3
%

(6
)

380 bp
APAC
33


54.3
%

34


53.9
%

—


40 bp
Corporate Operations
9




15




(6
)


Consolidated
$
213


53.8
%

$
215


44.0
%

$
(2
)

980 bp
The $10 million increase in Americas segment SG&A was primarily due to: 1) increased print and marketing placement expenses of $4 million; 2) increased bad debt expense as noted above of $3 million; and 3) increased depreciation associated with e-commerce systems of $2 million. The $6 million decrease in EMEA segment SG&A was primarily attributable to the $5 million gain on sale of a building noted above. SG&A within Corporate Operations decreased $6 million primarily due to organizational changes that have transitioned responsibility for certain costs to the regional segments.
Asset Impairments
Asset impairment charges were $183 million in the third quarter of fiscal 2014 compared to $2 million in the third quarter of fiscal 2013. Impairment charges in fiscal 2014 were due to the $182 million impairment of goodwill associated with our EMEA reporting unit. This impairment charge resulted from an interim impairment test for our EMEA reporting unit due to the significant decline in our stock price and further net revenue deterioration in the EMEA wholesale channel. Impairment charges in fiscal 2013 were primarily from certain under-performing retail stores in the Americas segment.
Non-Operating Expenses
Net interest expense for the third quarter of fiscal 2014 was $19 million compared to $20 million in the third quarter of fiscal 2013. This decrease was primarily due to decreased net borrowings under our various credit facilities.
Our foreign currency gain/loss for the third quarter of fiscal 2014 was a $2 million gain compared to a $4 million loss in the prior year period. This gain resulted primarily from the foreign currency exchange effect of certain non-euro denominated assets of our European subsidiaries.
Our income tax benefit in the third quarter of fiscal 2014 was approximately $0.6 million compared to approximately $1 million in the prior year period.
Net Loss/Income from Continuing Operations Attributable to Quiksilver, Inc.
Our net loss from continuing operations attributable to Quiksilver, Inc. for the third quarter of fiscal 2014 was $220 million, or $1.29 per share, compared to net income of $0.2 million, or $0.00 per share, in the comparable period of the prior year.
Adjusted EBITDA
Adjusted EBITDA decreased to $(1.6) million in the third quarter of fiscal 2014 compared to $39 million in the third quarter of fiscal 2013. This decrease was primarily due to the net revenue decline during the third quarter of fiscal 2014. For a definition of Adjusted EBITDA and a reconciliation of net loss attributable to Quiksilver, Inc. to Adjusted EBITDA, see footnote (1) to the table under “Results of Operations” above.


34


Nine Months Ended July 31, 2014 Compared to Nine Months Ended July 31, 2013

Revenues, net
Revenues, net - by Segment
The following tables present consolidated net revenues (in millions) by segment in historical currency (as reported) and constant currency (current year exchange rates) for the first nine months of fiscal 2014 and 2013:

Nine Months Ended July 31,

$ Change
Increase
(Decrease)
 
% Change
Increase
(Decrease)
In millions
Historical Currency (as reported)
2014

2013

 
Americas
$
551

 
$
670

 
$
(119
)
 
(18
)%
EMEA
472

 
498

 
(25
)
 
(5
)%
APAC
191

 
199

 
(8
)
 
(4
)%
Corporate
—

 
2

 
(2
)
 
 
Total
$
1,215

 
$
1,369

 
$
(154
)
 
(11
)%

 
Nine Months Ended July 31,
 
$ Change
Increase
(Decrease)
 
% Change
Increase
(Decrease)
In millions
Constant Currency (current year exchange rates)
2014
 
2013
 
 
Americas
$
551

 
$
660

 
$
(109
)
 
(17
)%
EMEA
472

 
513

 
(40
)
 
(8
)%
APAC
191

 
182

 
10

 
5
 %
Corporate
—

 
2

 
(2
)
 
 
Total
$
1,215

 
$
1,357

 
$
(142
)
 
(10
)%
Net revenues in our Americas segment declined $119 million, or 18%, on an as reported basis ($109 million, or 17%, in constant currency) during the first nine months of fiscal 2014 compared to the prior year period. Americas net revenues declined in the wholesale channel by $110 million with $75 million of the decrease in our DC brand, $23 million in the Quiksilver brand, and $12 million in the Roxy brand. These decreases were driven by lower customer demand, decreased clearance sales, narrowed product distribution to mid-tier wholesale customers for DC, and the licensing of DC and Quiksilver children’s apparel ($11 million). These declines were focused in North America. Net revenues in the emerging markets of Brazil and Mexico increased in excess of 20%.
Net revenues in our EMEA segment declined $25 million, or 5%, on an as reported basis ($40 million, or 8%, in constant currency) during the first nine months of fiscal 2014 compared to the prior year period. Excluding the effects of foreign currency fluctuations, EMEA wholesale channel net revenues declined by $55 million with $29 million in the Quiksilver brand and $18 million in the DC brand. These decreases were primarily due to lower customer orders due to poor prior season’s sell through, less effective order fulfillment compared to the prior year, and increased returns and markdowns to aid inventory sell-through versus the prior year period. Net revenues decreased most significantly in Germany and France where net revenues declined 24% and 10%, respectively. These declines were partially offset by growth of 22% in Russia and 11% in the United Kingdom, due largely to e-commerce growth.
Net revenues in the APAC segment decreased $8 million, or 4%, on an as reported basis, but increased $10 million, or 5%, in constant currency, versus the prior year period. Excluding the effects of foreign currency fluctuations, APAC net revenues grew primarily due to increased net revenues from our Quiksilver and Roxy brands in the retail channel and increased e-commerce net revenues across all three brands. Net revenues decreased 2% in Australia, but net revenues in our APAC emerging markets, which include Indonesia, South Korea, Taiwan and China, grew in excess of 25% collectively.
Net revenues in our emerging markets, which include Brazil, Russia, Indonesia, Mexico, South Korea, Taiwan and China increased by 13% versus the prior year period (24% in constant currency). These markets are reported within their respective regional segments above.

35


Revenues, net - by Brand
Net revenues by brand (in millions), in both historical and constant currency, for the nine months of fiscal 2014 and 2013 were as follows:
 
Nine Months Ended July 31,
 
$ Change
Increase
(Decrease)
 
% Change
Increase
(Decrease)
In millions
Historical Currency (as reported)
2014
 
2013
 
 
Quiksilver
$
473

 
$
533

 
$
(59
)
 
(11
)%
Roxy
357

 
375

 
(18
)
 
(5
)%
DC
315

 
404

 
(89
)
 
(22
)%
Other
69

 
57

 
12

 
 
Total
$
1,215

 
$
1,369

 
$
(154
)
 
(11
)%

 
Nine Months Ended July 31,
 
$ Change
Increase
(Decrease)
 
% Change
Increase
(Decrease)
In millions
Constant Currency (current year exchange rates)
2014
 
2013
 
 
Quiksilver
$
473

 
$
526

 
$
(53
)
 
(10
)%
Roxy
357

 
371

 
(13
)
 
(4
)%
DC
315

 
400

 
(85
)
 
(21
)%
Other
69

 
59

 
10

 
 
Total
$
1,215

 
$
1,357

 
$
(142
)
 
(10
)%
Quiksilver brand net revenues decreased $59 million, or 11%, on an as reported basis ($53 million, or 10%, in constant currency) during the first nine months of fiscal 2014 compared to the prior year period. Excluding the effects of foreign currency fluctuations, this decrease was primarily due to lower net revenues in the EMEA and Americas wholesale channels of $29 million and $23 million, respectively. Wholesale channel net revenues in both the EMEA and Americas segments decreased due to lower customer orders driven by poor prior season’s sell through, and less effective order fulfillment compared to the prior year. The decrease in Americas wholesale net revenues was partially due to our licensing of children's apparel ($6 million).
Roxy brand net revenues decreased $18 million, or 5%, on an as reported basis ($13 million, or 4%, in constant currency) during the first nine months of fiscal 2014 compared to the prior year period. Excluding the effects of foreign currency fluctuations, this decrease was driven by lower net revenues in the Americas and EMEA wholesale channels of $12 million and $9 million, respectively. Wholesale channel net revenues in both the Americas and EMEA segments decreased due to lower customer orders driven by poor prior season’s sell through, and less effective order fulfillment compared to the prior year. The decrease in wholesale channel activity was partially offset by increased net revenues from retail stores and e-commerce.
DC brand net revenues decreased $89 million, or 22%, on an as reported basis ($85 million, or 21%, in constant currency) during the first nine months of fiscal 2014 versus the prior year period. Excluding the effects of foreign currency fluctuations, the DC brand net revenue decline was driven by a $75 million decrease in the Americas wholesale channel due to decreased clearance sales, narrowed product distribution to mid-tier wholesale customers, and the licensing of DC children’s apparel, and lower customer orders driven by poor prior season’s sell through.

36


Revenues, net - by Channel
Net revenues by channel (in millions), in both historical and constant currency, for the first nine months of fiscal 2014 and 2013 were as follows:
 
Nine Months Ended July 31,
 
$ Change
Increase
(Decrease)
 
% Change
Increase
(Decrease)
In millions
Historical Currency (as reported)
2014
 
2013
 
 
Wholesale
$
765

 
$
941

 
$
(176
)
 
(19
)%
Retail
343

 
341

 
2

 
1
 %
E-commerce
107

 
87

 
20

 
23
 %
Total
$
1,215

 
$
1,369

 
$
(154
)
 
(11
)%
 
Nine Months Ended July 31,
 
$ Change
Increase
(Decrease)
 
% Change
Increase
(Decrease)
In millions
Constant Currency (current year exchange rates)
2014
 
2013
 
 
Wholesale
$
765

 
$
930

 
$
(165
)
 
(18
)%
Retail
343

 
337

 
6

 
2
 %
E-commerce
107

 
90

 
17

 
19
 %
Total
$
1,215

 
$
1,357

 
$
(142
)
 
(10
)%
Wholesale net revenues decreased $176 million, or 19%, on an as reported basis($165 million, or 18%, in constant currency) in the first nine months of fiscal 2014 versus the prior year period. Wholesale net revenues declined due to lower net revenues in our Americas and EMEA segments of $110 million and $55 million, respectively, of which $95 million was from our DC brand, $55 million was from our Quiksilver brand, and $20 million was from our Roxy brand. Both the Americas and EMEA wholesale channels were unfavorably impacted by lower customer orders driven by poor prior season’s sell through, and less effective order fulfillment compared to the prior year.
Retail net revenues were slightly positive on as reported basis and increased 2% in constant currency versus the prior year period. Global retail same-store sales improved 1% for the first nine months of fiscal 2014 versus the prior year period.
E-commerce net revenues increased $20 million, or 23%, on an as reported basis ($17 million, or 19%, in constant currency) versus the prior year period. E-commerce net revenues increased $14 million in our EMEA segment as we expanded our online business across all three core brands as well as with third party brands.
Gross Profit
Gross profit decreased to $596 million in the first nine months of fiscal 2014 from $665 million in the comparable period of the prior year. Gross margin, or gross profit as a percentage of net revenues, increased to 49.0% in the first nine months of fiscal 2013 from 48.6% in the prior year period. This 40 basis point improvement in gross margin was primarily due to the segment and channel net revenue shifts toward our higher margin EMEA and APAC segments and retail and e-commerce channels versus our Americas segment and wholesale channel (120 basis points), and the gross margin benefits from licensing activities (30 basis points), partially offset by increased discounting and increased clearance activity in the wholesale channel of North America and Europe (110 basis points).
Gross margin by segment for the first nine months of fiscal 2014and 2013 was as follows:
 
Nine Months Ended July 31,
 
Basis
Point
Change
 
2014
 
2013
 
Americas
41.9
%
 
41.5
%
 
40 bp
EMEA
55.4
%
 
56.9
%
 
(150) bp
APAC
55.0
%
 
51.8
%
 
320 bp
Consolidated
49.0
%
 
48.6
%
 
40 bp

37


Selling, General and Administrative Expenses ("SG&A")
SG&A for the first nine months of fiscal 2014 decreased $16 million, or 2%, to $638 million from $654 million in the comparable period of the prior year. This decrease was primarily attributable to the expense reduction initiatives within our PIP that were implemented in the past year. SG&A reductions were primarily driven by reduced employee compensation of $18 million, reduced event, athlete and other marketing spending of $10 million, a gain on the sale of a building in our EMEA segment of $5 million, and smaller reductions across several expense categories. These decreases were partially offset by increased charges for bad debt expense of $15 million, early lease terminations of $3 million, and lesser increases across other expenses. The increase in bad debt expense was primarily due to increased reserves for doubtful accounts regarding certain specific independent distributor accounts. The increase in early lease termination expense was related to the closure of under-performing retail store locations.
SG&A by segment (in millions) as reported for the first nine months of fiscal 2014 and 2013 was as follows:

Nine Months Ended July 31, 2014

Nine Months Ended July 31, 2013

$ Change
Increase
(Decrease)

Basis
Point
Change
In millions
 

% of Net
Revenues

 

% of Net
Revenues


Americas
$
263

 
47.7
%

$
246

 
36.7
%
 
$
17

 
1,100 bp
EMEA
248

 
52.4
%

253

 
50.8
%
 
(5
)
 
160 bp
APAC
100

 
52.0
%

109

 
54.6
%
 
(9
)
 
(260) bp
Corporate Operations
28

 
 

46

 
 
 
(18
)
 
 
Consolidated
$
638

 
52.5
%

$
654

 
47.8
%
 
$
(16
)
 
470 bp
The increase in Americas segment SG&A was primarily due to increased bad debt expense of $16 million associated with certain independent distributor accounts. SG&A within Corporate Operations decreased $18 million primarily due to organizational changes that have transitioned responsibility for certain costs to the regional segments.
Asset Impairments
Asset impairment charges were $203 million in the first nine months of fiscal 2014 compared to $11 million in the prior year period. Impairment charges in fiscal 2014 were primarily related to: 1) the impairment of goodwill associated with our EMEA reporting unit of $182 million; 2) the write-down of Surfdome goodwill and intangible assets to estimated fair value of $15 million during the second quarter of fiscal 2014 and 3) impairments associated with a planned restructuring of our e-commerce systems of $4 million. Impairment charges in fiscal 2013 were primarily related to certain under-performing retail stores, discontinued brands and trademarks associated with those brands.
Non-Operating Expenses
Interest expense for the first nine months of fiscal 2014 was $57 million compared to $51 million in the first nine months of fiscal 2013. This increase was primarily due to annualizing the increased net borrowings and higher interest rates associated with the refinancing of our U.S. senior notes in July 2013.
Our foreign currency loss amounted to $1 million for the first nine months of fiscal 2014 compared to $4 million in the comparable period of the prior year. The reduction in currency translation loss resulted primarily from the foreign currency exchange effect of certain non-euro denominated assets of our European subsidiaries.
Our income tax benefit for the first nine months of fiscal 2014 was $6 million compared to income tax expense of $9 million in the comparable period of the prior year. Our sale of the Mervin and Hawk businesses in the first quarter of fiscal 2014 resulted in aggregate income tax expense of approximately $18 million for the first nine months of fiscal 2014 within discontinued operations. However, as we do not expect to pay income tax after application of available loss carry-forwards, an offsetting income tax benefit was recognized within continuing operations. Before this income tax benefit, we generated income tax expense in the first nine months of both fiscal 2014 and 2013 as we recorded tax expense in certain tax jurisdictions but were unable to record tax benefits against the losses in those jurisdictions where we have previously recorded valuation allowances.
Net Loss from Continuing Operations Attributable to Quiksilver, Inc.
Our net loss from continuing operations attributable to Quiksilver, Inc. for the first nine months of fiscal 2014 was $288 million, or $1.69 per share, compared to $64 million, or $0.38 per share, in the comparable period of the prior year.

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Adjusted EBITDA
Adjusted EBITDA decreased to $14 million in the first nine months of fiscal 2014 compared to $61 million in the first nine months of fiscal 2013. This decrease was primarily due to the net revenue decline during fiscal 2014, partially offset by SG&A reductions. For a definition of Adjusted EBITDA and a reconciliation of net loss attributable to Quiksilver, Inc. to Adjusted EBITDA, see footnote (1) to the table under “Results of Operations” above.
Financial Position, Capital Resources and Liquidity
The following table shows our cash, working capital and total indebtedness as of the dates indicated:
In millions
July 31,
2014
 
October 31,
2013
 
July 31,
2013
Cash and cash equivalents
$
84

 
$
57

 
$
62

Restricted cash
24

 
—

 
409

Working capital
499

 
548

 
583

Total indebtedness
841

 
831

 
1,259

We believe that our cash flows from operations, cash on hand, and restricted cash, together with our existing credit facilities, will be adequate to fund our capital requirements for at least the next twelve months. Restricted cash at July 31, 2014 represents the remaining proceeds from our sale of the Mervin and Hawk businesses during the first quarter of fiscal 2014. Restricted cash at July 31, 2013 arose as a result of the issuance of our 2020 senior notes and 2018 senior secured notes in the third quarter of the prior year. As the repayment of our original senior notes took place subsequent to the end of our fiscal 2013 third quarter, this resulted in a temporary classification of the proceeds from the 2020 and 2018 notes as restricted cash.
Cash Flows
Net cash used by operating activities was $0.2 million in the first nine months of fiscal 2014 compared to $13 million in the comparable period of the prior year. Cash used in the operating activities of discontinued operations was $15 million in the first nine months of fiscal 2014 compared to cash provided of $8 million in the prior year period (for a discussion of the income tax impacts associated with our sale of the Mervin and Hawk businesses, refer to Note 8 to our condensed consolidated financial statements). Net cash provided by operating activities of continuing operations was $15 million in the first nine months of fiscal 2014 versus cash used of $20 million in the comparable prior year period, a $35 million improvement. Our non-cash adjustments to reconcile net loss to cash used in operating activities were $248 million in the first nine months of fiscal 2014 compared to $73 million in the prior year period, generating a $175 million add-back effect on cash flows in fiscal 2014 versus the prior year period. This net effect was primarily due to the $182 million EMEA goodwill impairment discussed above under "Asset Impairments." The Company also improved its cash generation from operating assets and liabilities, generating cash of $35 million in the first nine months of fiscal 2014 versus $32 million of cash used in the comparable prior year period. This $67 million improvement in cash provided from operating assets and liabilities was primarily driven by a $73 million year-over-year benefit from accounts receivable, which generated cash of $67 million in the first nine months of fiscal 2014 versus using cash of $6 million in the prior year period. Largely offsetting these benefits were a larger loss from continuing operations in the first nine months of fiscal 2014 ($268 million) versus the comparable prior year period ($61 million).
Net cash provided by investing activities totaled $20 million in the first nine months of fiscal 2014 compared to cash used of $449 million in the prior year period. We received cash proceeds from the sale of our Mervin and Hawk businesses of $77 million during the first quarter of fiscal 2014. The use of these proceeds is restricted by certain of our credit agreements to the repayment of indebtedness and for capital expenditures. Accordingly, the remaining proceeds from the sale at July 31, 2014 have been included with the changes in restricted cash of $24 million in the net cash used by investing activities. Capital expenditures totaled $39 million for the first nine months of each of fiscal 2014 and 2013. These investments include our ongoing enterprise-wide reporting system (SAP) and investments in company-owned stores. The $409 million change in restricted cash in fiscal 2013 includes the impact of the issuance of our 2020 senior notes and 2018 senior secured notes in the prior year. As the repayment of our original senior notes took place subsequent to the end of our fiscal 2013 third quarter, this resulted in a temporary classification of the proceeds from the notes as restricted cash in investing activities and an offsetting cash provided from borrowings on long-term debt in financing activities.
Net cash provided by financing activities totaled $7 million in the first nine months of fiscal 2014 compared to $481 million in the comparable period of the prior year. Net cash provided in fiscal 2014 was primarily due to proceeds from stock option exercises. In fiscal 2013, cash provided primarily resulted from net borrowings on our existing credit facilities, inclusive of the senior notes issuance noted above.

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The net increase in cash and cash equivalents for the first nine months of fiscal 2014 was approximately $27 million compared to $21 million for the comparable prior year period.
Working Capital - Trade Accounts Receivable and Inventories
Two of the primary components of our working capital and near-term sources of cash at any point in time are trade accounts receivable and inventories. Our net trade accounts receivable decreased 23% to $318 million at July 31, 2014 compared to $414 million at October 31, 2013 due to the typical seasonality of our business. Compared to July 31, 2013, our net trade accounts receivable decreased $93 million and our average days sales outstanding (“DSO”) increased 10%. The increase in DSO was driven by longer credit terms granted to certain wholesale customers, and the timing of customer payments.
Our net inventories decreased 2% to $346 million at July 31, 2014 compared to $354 million at October 31, 2013. Compared to July 31, 2013, net inventories decreased $39 million and inventory days on hand increased 8%. The decrease in net inventories were primarily due to tighter buying practices versus the comparable prior year period.
Income Taxes
As of July 31, 2014, our liability for uncertain tax positions exclusive of interest and penalties, was approximately $12 million. If our positions are favorably sustained by the relevant taxing authority, approximately $11 million, excluding interest and penalties, of uncertain tax position liabilities would favorably impact our effective tax rate in future periods.
Contractual Obligations
There have been no material changes outside the ordinary course of business in our contractual obligations since October 31, 2013.
Critical Accounting Policies
Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. To prepare these financial statements, we must make estimates and assumptions that affect the reported amounts of assets and liabilities. These estimates also affect our reported revenues and expenses. Judgments must also be made about the disclosure of contingent liabilities. Actual results could be significantly different from these estimates. We believe that the following discussion addresses the accounting policies that are necessary to understand and evaluate our reported financial results.
Revenue Recognition
Revenues are recognized when the risk of ownership and title passes to our customers. Generally, we extend credit to our customers and do not require collateral. Our sales agreements with our customers do not provide for any rights of return. However, we do approve returns on a case-by-case basis at our sole discretion to protect our brands and our image. We provide allowances for estimated returns when revenues are recorded, and related losses have historically been within our expectations.
Accounts Receivable
Throughout the year, we perform credit evaluations of our customers, and we adjust credit limits based on payment history and the customer’s current creditworthiness. We continuously monitor our collections and maintain a reserve for estimated credit losses based on our historical experience and any specific customer collection issues that have been identified. We also use insurance on certain classes of receivables in our EMEA segment. Historically, our losses have been consistent with our estimates, but there can be no assurance that we will continue to experience the same credit loss rates that we have experienced in the past.
Inventories
We value inventories at the cost to purchase and/or manufacture the product or the current estimated fair market value of the inventory, whichever is lower. We regularly review our inventory quantities on hand, and adjust inventory values for excess or obsolete inventory based primarily on estimated forecasts of product demand and market value.
Long-Lived Assets
We acquire tangible and intangible assets in the normal course of our business. We evaluate the recoverability of the carrying amount of these long-lived assets (including fixed assets, trademarks, licenses and other amortizable intangibles) whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss is recognized when the carrying value exceeds the undiscounted future cash flows estimated to result from the use and eventual disposition of the asset. Impairments are recognized in operating earnings. We use our best judgment based on the most current

40


facts and circumstances regarding our business when applying these impairment rules to determine the timing of the impairment tests, the undiscounted cash flows used to assess impairments, and the fair value of a potentially impaired asset.
Goodwill
We evaluate the recoverability of goodwill at least annually, and more often if an indicator of impairment exists, based on a two-step impairment test. The first step compares the fair value of each reporting unit with its carrying amount, including goodwill. We have three reporting segments under which we evaluate goodwill for impairment, the Americas, EMEA and APAC. We estimate the fair value of our reporting units using a combination of a discounted cash flow approach and market approach. Material assumptions in our test for impairment include future cash flows of each reporting unit, discount rates applied to these cash flows and current market estimates of value. The discount rates used approximate our cost of capital. Future cash flows assume varying degrees of future growth in each reporting segment’s business. If the carrying amount exceeds fair value under the first step of our goodwill impairment test, then the second step of the impairment test is performed to measure the amount of any impairment loss.
We perform our annual goodwill impairment test during our fourth fiscal quarter. As of October 31, 2013, the fair value of each of our reporting units substantially exceeded their respective carrying values. Goodwill amounted to $75 million for the Americas, $197 million for EMEA and $6 million for APAC as of October 31, 2013. However, certain factors may result in the need to perform an impairment test prior to our fourth fiscal quarter, including significant under-performance of our business relative to expected operating results, significant adverse economic and industry trends, significant decline in our market capitalization for an extended period of time relative to net book value, or a decision to divest an individual business within a reporting segment. Based upon our assessment of these factors in connection with the preparation of our financial statements for the second quarter of fiscal 2014, given the sales decline in our EMEA operating segment for the six months ended April 30, 2014, we performed an interim impairment test for the EMEA reporting segment using a discounted cash flow analysis and evaluated whether any adverse economic or industry trends would negatively affect the conclusions drawn from the prior period annual impairment test. The results of our interim impairment evaluation indicated that the fair value of the EMEA reporting segment exceeded its carrying value by 9%. As a result, we concluded that the EMEA reporting segment’s goodwill was not impaired based on the interim impairment evaluation.
In the second quarter of fiscal 2014, we also decided to maintain our investment in Surfdome which required us to reclassify this business from discontinued operations into continuing operations. As a result of the sale process conducted during the second quarter of fiscal 2014, we received offers to purchase from third parties which indicated that there was an impairment in the value of Surfdome. Consequently, we conducted an impairment analysis using the market approach based on the third party purchase offers we received for Surfdome. Based upon the result of this analysis, we recorded a $15 million impairment charge within the EMEA reporting segment to write-down Surfdome goodwill and intangible assets to their estimated fair value.
In the third quarter of fiscal 2014, we performed an additional interim impairment test for the EMEA reporting unit due to the significant decline in our stock price and further deterioration in the EMEA wholesale channel. The results of this impairment evaluation resulted in a non-cash charge of $182 million to fully impair goodwill associated with our EMEA reporting segment.
Income Taxes
Current income tax expense is the amount of income taxes expected to be payable for the current year. A deferred income tax asset or liability is established for the expected future consequences of temporary differences in the financial reporting and tax bases of assets and liabilities. We consider future taxable income and ongoing prudent and feasible tax planning strategies in assessing the value of our deferred tax assets. If we determine that it is more likely than not that these assets will not be realized, we would reduce the value of these assets to their expected realizable value by recording a valuation allowance, thereby decreasing net income. Evaluating the value of these assets is necessarily based on our judgment. If we subsequently determine that the deferred tax assets for which a valuation allowance had been recorded would, in our judgment, be realized in the future, the valuation allowance would be reduced, thereby increasing net income in the period when that determination was made.
We adhere to the authoritative guidance included in ASC 740, “Income Taxes” which clarifies the accounting for uncertainty in income taxes recognized in the financial statements. This guidance provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits of the tax position. We recognize accrued interest and penalties related to unrecognized tax benefits as a component of our provision for income taxes. The application of this guidance can create significant variability in our tax rate from period to period based upon changes in or adjustments to our uncertain tax positions.

41


Stock-Based Compensation Expense
We recognize compensation expense for all stock-based payments net of an estimated forfeiture rate and only recognize compensation cost for those shares expected to vest using the graded vested method over the requisite service period of the award. For option valuation, we determine the fair value at the grant date using the Black-Scholes option-pricing model which requires the input of certain assumptions, including the expected life of the stock-based payment awards, stock price volatility and interest rates. For performance-based equity awards with stock price contingencies, we determine the fair value using a Monte-Carlo simulation, which creates a normal distribution of future stock prices, which is then used to value the awards based on their individual terms.
Foreign Currency Translation
A significant portion of our revenues are generated in Europe, where we operate with the euro as our primary functional currency, and a smaller portion of our revenues are generated in APAC, where we operate with the Australian dollar and Japanese yen as our primary functional currencies. Our European revenues in the United Kingdom are denominated in British pounds, and substantial portions of our EMEA and APAC product is sourced in U.S. dollars, both of which result in exposure to gains and losses that could occur from fluctuations in foreign currency exchange rates. Revenues and expenses that are denominated in foreign currencies are translated using the average exchange rate for the period. Assets and liabilities are translated at the rate of exchange on the balance sheet date. Gains and losses from assets and liabilities denominated in a currency other than the functional currency of the entity on which they reside are generally recognized currently in our statement of operations. Gains and losses from translation of foreign subsidiary financial statements into U.S. dollars are included in accumulated other comprehensive income or loss.
As part of our overall strategy to manage our level of exposure to the risk of fluctuations in foreign currency exchange rates, we enter into foreign currency exchange contracts generally in the form of forward contracts. For all contracts that qualify as cash flow hedges, we record the changes in the fair value of the derivative contracts in other comprehensive income or loss.
New Accounting Pronouncements
See Note 2 to our condensed consolidated financial statements, “New Accounting Pronouncements,” for a discussion of pronouncements that may affect our future financial reporting.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to a variety of risks, including foreign currency exchange rate fluctuations.
Foreign Currency and Derivatives
We are exposed to financial statement gains and losses as a result of translating the operating results and financial position of our international subsidiaries. We translate the local currency statements of operations of our foreign subsidiaries into U.S. dollars using the average exchange rate during the reporting period. Changes in foreign currency exchange rates affect our reported results and distort comparisons from period to period. By way of example, when the U.S. dollar strengthens compared to the euro, there is a negative effect on our reported results for our European segment because it takes more profits in euros to generate the same amount of profits in stronger U.S. dollars. The opposite is also true. That is, when the U.S. dollar weakens, there is a positive effect on the translation of our reported results from our European segment. In addition, the statements of operations of our APAC segment are translated from Australian dollars and Japanese yen into U.S. dollars, and there is a negative effect on our reported results for our APAC segment when the U.S. dollar is stronger in comparison to the Australian dollar or Japanese yen.
EMEA revenues decreased 13% in U.S. dollars during the third quarter of fiscal 2014 compared to the third quarter of fiscal 2013 as reported in our condensed consolidated statements of operations. In local currency, EMEA revenues decreased 16% primarily as a result of a strengthening of the U.S. dollar versus the euro in comparison to the prior period.
APAC revenues decreased 2% in U.S. dollars during the third quarter of fiscal 2014 compared to the third quarter of fiscal 2013 as reported in our condensed consolidated statements of operations. In local currency, APAC revenues increased 1% primarily as a result of a weaker U.S. dollar versus various currencies in APAC in comparison to the prior period.
Our other foreign currency and interest rate risks are discussed in our Annual Report on Form 10-K for the year ended October 31, 2013 in Item 7A.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), that are designed to ensure that information required to be disclosed in our

42


reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures are designed to provide a reasonable level of assurance of reaching our desired disclosure control objectives.
We carried out an evaluation under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of July 31, 2014, the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective, and were operating at the reasonable assurance level as of July 31, 2014.
There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended July 31, 2014 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, except the change discussed under Change in Internal Control over Financial Reporting below.
Change in Internal Control over Financial Reporting
During the quarter ended July 31, 2014, we expanded the implementation of our enterprise resource planning (“ERP”) system into our APAC segment. The new ERP system was purchased from a leading internationally respected software provider of enterprise software solutions, SAP. The implementation of SAP represents a material change in our internal controls over financial reporting.
Management is reviewing and evaluating the design of key controls in SAP and the accuracy of the data conversion that took place during the APAC implementation, and thus far has not uncovered a control deficiency or combination of control deficiencies that management believes meet the definition of a material weakness in internal control over financial reporting. Although management believes internal controls will be maintained or enhanced by SAP, it has not completed its testing of the operating effectiveness of all key controls in the new system. As such, there is a risk such control deficiencies may exist that have not yet been identified and that could constitute, individually or in combination, a material weakness. Management will continue to evaluate the operating effectiveness of related key controls during subsequent periods.

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PART II – OTHER INFORMATION
Item 1A. RISK FACTORS
Our business faces numerous risks, many of which are beyond our control. The impact of these risks, as well as other unforeseen risks, could have a material negative impact on our business, financial condition or results of operations. The trading price of our common stock or our senior notes could decline as a result. You should consider these risks before deciding to invest in, or maintain your investment in, our common stock or senior notes.
Our profit improvement plan may not be successful in improving our results of operations or financial condition.
At various times since May 2013, we have discussed plans, progress, status, and expectations regarding a multi-year profit improvement plan designed to improve upon our Adjusted EBITDA. The plan includes certain changes in our strategic focus, senior management, operational processes and organizational structure and calls for further supply chain optimization, reduction of corporate overhead, divestiture of certain non-core brands, licensing of certain product categories, reprioritization of marketing investments, revenue growth and improved pricing management. It may take longer than anticipated to generate the expected benefits from these changes and there can be no guarantee that these changes will result in improved operating results. If we are not successful in implementing these changes and executing the plan in a timely and efficient manner, we may not realize the benefits we expect. Additionally, as we work to globalize certain business processes, changes in existing processes may result in unforeseen issues and complications that could have an adverse impact on our results of operations and financial condition.

We may be unable to continue to generate savings in SG&A at the same pace as in recent quarters.
Over the past several quarters, we have undertaken various restructuring activities related to the implementation of our multi-year profit improvement plan, including, among other items, employee severance, discontinuation of certain product categories or brands, and facility exit costs. We believe these activities have contributed to reducing overall SG&A levels on a go forward basis. However, if we do not undertake additional restructuring activities, or decrease the pace of such restructuring activities, we will be unable to sustain further SG&A reductions in future periods, which could be perceived negatively and, as a result, our stock price could decline.
Financial and competitive difficulties of our wholesale customers (independent retailers) may negatively impact our revenues and profitability.
Our wholesale business has been negatively impacted in certain jurisdictions due to financial and competitive difficulties experienced by various independent retailers that purchase our products. Our business may continue to be adversely impacted in the future as a result of such difficulties of such retailers. Any continuation of financial and competitive difficulties for, or deterioration in the financial health of, our current or prospective wholesale customers could result in decreased sales, uncollectible receivables, increased product returns, or an inability to generate new business. Also, any consolidation of retail accounts, or concentration of market share in a specific area, could significantly increase our credit risk. Any or all of these factors could have a material adverse effect on our business, financial condition, and results of operations.
Additionally, as consumers become more confident shopping online, our wholesale channel customers face increased competition from online competitors, including, but not limited to, Amazon in the Americas, Zalando in EMEA, and Taobao in China. These online competitors may have lower cost structures, higher sales volumes, wider product assortments, and faster marketing response times than some or our traditional wholesale channel customers. In addition, our smaller independent wholesale accounts may face competitive challenges from large multi-location accounts that benefit from better pricing and terms due to higher purchasing volume, larger marketing investments, higher levels of support from suppliers, and superior financial condition. Also, we have made, and plan to make, changes to our wholesale sales force structure whereby wholesale accounts generating less than a minimum annual order volume will not be serviced by a salesperson, but will instead be provided a self-service website from which they may order our products. Lastly, our plans to reduce the size of our product assortment available to wholesale customers could have the effect of reducing wholesale revenues. We have experienced, and expect to continue to experience, difficulties in expanding or maintaining our wholesale channel revenues due to these and other factors. Such difficulties in our wholesale channel could have a material adverse impact on our operating results, financial condition and stock price.
Unfavorable economic conditions could have a material adverse effect on our business, results of operations and financial condition.
Our financial performance has been, and may continue to be, negatively affected by unfavorable economic conditions. Continued or further recessionary economic conditions, uncertainty concerning the euro, unemployment in the Euro Zone, or other macro economic factors may have an adverse impact on our sales volumes, pricing levels and profitability. As domestic

44


and international economic conditions change, trends in discretionary consumer spending become unpredictable and subject to reductions due to uncertainties about the future. When consumers reduce discretionary spending, purchases of specialty apparel and footwear, like our products, tend to decline which may result in reduced orders from retailers for our products, order cancellations, and/or unanticipated discounts. A continuation of the general reduction in consumer discretionary spending in the domestic and international economies, as well as the impact of tight credit markets on us, our suppliers, other vendors or customers, could have a material adverse effect on our results of operations and financial condition.
The apparel, footwear and accessories industries are each highly competitive, and if we fail to compete effectively, we could lose our market position.
The apparel, footwear and accessories industries are each highly competitive. We compete against a number of domestic and international brands, manufacturers, retailers and distributors of apparel, footwear and accessories. In order to compete effectively, we must (1) maintain the image of our brands and our reputation for authenticity in our markets; (2) be flexible and innovative in responding to rapidly changing market demands; and (3) offer consumers a wide variety of high quality products at competitive prices.
The purchasing decisions of consumers are highly subjective and can be influenced by many factors, such as brand image, marketing programs and product design. Several of our global competitors enjoy substantial competitive advantages, including greater financial resources for competitive activities, such as sales, marketing, strategic acquisitions and athlete endorsements. The number of our direct competitors and the intensity of competition may increase as we expand into other product lines or as other companies expand into our product categories. Our competitors may enter into business combinations or alliances that strengthen their competitive positions or prevent us from taking advantage of such combinations or alliances. Our competitors also may be able to respond more quickly and effectively than we can to new or changing opportunities, standards or consumer preferences. Our competitors may offers sales terms and conditions that we are unwilling to match. If we fail to retain our competitive position, our sales could decline significantly which would have a material adverse impact on our results of operations, financial condition and liquidity.
If we are unable to develop innovative and stylish products in response to rapid changes in consumer demands and fashion trends, we may suffer a decline in our revenues and market share.
The apparel, footwear and accessories industries are subject to rapidly changing consumer demands based on fashion trends and performance features. Our success depends, in part, on our ability to anticipate, gauge and respond to these changing consumer preferences in a timely manner while preserving the authenticity and image of our brands and the quality of our products.
As is typical with new products, market acceptance of new designs and products we may introduce is subject to uncertainty. In addition, we generally make decisions regarding product designs months in advance of the time when consumer acceptance can be measured. If trends shift away from our products, or if we misjudge the market for our product lines, we may be faced with significant amounts of unsold inventory or other conditions which could have a material adverse effect on our results of operations and financial condition.
The failure of new product designs or new product lines to gain market acceptance could also adversely affect our business and the image of our brands. Achieving market acceptance for new products may also require substantial marketing efforts and expenditures to expand consumer demand. These requirements could strain our management, financial and operational resources. If we do not continue to develop stylish and innovative products that provide better design and performance attributes than the products of our competitors, or if our future product lines misjudge consumer demands, we may lose consumer loyalty, which could result in a decline in our revenues and market share.
Our business could be harmed if we fail to maintain proper inventory levels.
We maintain an inventory of selected products that we anticipate will be in demand. We may be unable to sell the products we have ordered in advance from manufacturers or that we have in our inventory. Inventory levels in excess of customer demand may result in inventory writedowns or the sale of excess inventory at discounted or closeout prices. These events could significantly harm our operating results and impair the image of our brands. Conversely, if we underestimate consumer demand for our products or if our manufacturers fail to supply quality products in a timely manner, we may experience inventory shortages, which might result in unfilled orders, negatively impact customer relationships, diminish brand loyalty and result in lost revenues, any of which could harm our business.

45


Our business could be harmed if we fail to execute our internal plans to transition our supply chain and certain other business processes to global scope.
We are in the process of transitioning our supply chain and certain other business processes to global scope. If our globalization efforts fail to produce planned efficiencies, or the transition is not managed effectively, we may experience excess inventories, inventory shortage, late deliveries, lost revenues, or increased costs. Any business disruption arising from our globalization efforts, or our failure to effectively execute our internal plans for globalization, could adversely impact our results of operations and financial condition.
Our business could be harmed if we are unable to accurately forecast demand for our products.
To ensure adequate inventory supply, we forecast inventory needs and place orders with our manufacturers before firm orders are placed by our customers. If we fail to accurately forecast customer demand, we may experience excess inventory levels or a shortage of product to deliver to our customers. Inventory levels in excess of customer demand may result in inventory writedowns or write-offs and the sale of excess inventory at discounted prices, which would have an adverse effect on gross margin. In addition, if we underestimate the demand for our products, our manufacturers may not be able to produce products to meet our customer requirements, and this could result in delays in the shipment of our products and our ability to satisfy customer demand, as well as damage to our reputation and customer relationships. A failure to accurately predict the level of demand for our products could cause a decline in revenue and adversely impact our results of operations and financial condition.
The demand for our products is seasonal and is dependent upon several unpredictable factors.
Consumer demand for our products can fluctuate significantly from quarter to quarter and year to year. Consumer demand is dependent on many factors, including customer acceptance of our product designs, fashion trends, economic conditions, changes in consumer spending, weather patterns during peak selling periods, and numerous other factors beyond our control. The seasonality of our business and/or misjudgment in anticipating consumer demands could have a material adverse effect on our financial condition and results of operations.
Our industry is subject to pricing pressures that may adversely impact our financial performance.
We source many of our products offshore because manufacturing costs, particularly labor costs, are generally less than in the U.S. Many of our competitors also source their products offshore, possibly at lower costs than ours, and they may use these cost savings to reduce prices. To remain competitive, we may be forced to adjust our prices from time to time in response to these pricing pressures. As a result, our financial performance may be negatively affected if we are forced to reduce our prices while we are unable to reduce production costs or our production costs increase and we are unable to proportionately increase our prices. Any inability on our part to effectively respond to changing prices and sourcing costs could have a material adverse impact on our results of operations, financial condition and liquidity.
Fluctuations in the cost and availability of raw materials, labor, and transportation could cause manufacturing delays and increase our costs.
The prices of the fabrics used to manufacture our products depend largely on the 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. In addition, the cost of labor at many of our third party manufacturers has been increasing significantly. The cost of logistics and transportation fluctuates in large part due to the price of oil. Any fluctuations in the cost and availability of any of our raw materials or other sourcing costs could have a material adverse effect on our gross margins and our ability to meet consumer demands.
Factors affecting international commerce and our international operations may seriously harm our financial condition.
We generate the majority of our revenues from outside of the United States, and we anticipate that revenue from our international operations could account for an increasingly larger portion of our revenue in the future. Our international operations are directly related to, and dependent on, the volume of international trade and foreign market conditions. International commerce and our international operations are subject to many risks, including:
•
recessions in foreign economies;
•
fluctuations in foreign currency exchange rates;
•
the adoption and expansion of trade restrictions;
•
limitations on repatriation of earnings;

46


•
difficulties in protecting our intellectual property or enforcing our intellectual property rights under the laws of other countries;
•
longer receivables collection periods and greater difficulty in collecting accounts receivable;
•
social, political and economic instability or hostilities;
•
unexpected changes in regulatory requirements;
•
fluctuations in foreign tax rates;
•
tariffs, sanctions, and other trade barriers; and
•
U.S. government licensing requirements for exports.
The occurrence or consequences of any of these risks may restrict our ability to operate in the affected regions and decrease the profitability of our international operations, which may harm our financial condition.
We have established, and may continue to establish, joint ventures in various foreign territories with independent third party business partners to distribute and sell Quiksilver, Roxy, DC and other branded products in such territories. These joint ventures are subject to substantial risks and liabilities associated with their operations, as well as the risk that our relationships with our joint venture partners do not succeed in the manner that we anticipate. If our joint venture operations, or our relationships with our joint venture partners, are not successful, we could face litigation or legal costs in connection with exiting the relationship or delays in making planned changes to our operations in the applicable territories, and our results of operations and financial condition may be adversely affected.
We have operations in certain emerging markets and developing countries where the risk of asset misappropriation, civil unrest or social instability, theft, other crimes, or frivolous claims is higher than in more developed countries. Likewise, there is less protection for intellectual property rights of foreign companies in these jurisdictions. These risks can significantly increase the cost of operations in such markets.
In addition, as we continue to expand our overseas operations, we are subject to certain U.S. laws, including the Foreign Corrupt Practices Act, in addition to the laws of the foreign countries in which we operate. We must use all commercially reasonable efforts to ensure our employees comply with these laws. If any of our overseas operations, or our employees or agents, violates such laws, we could become subject to sanctions or other penalties that could negatively affect our reputation, business and operating results.
Uncertainty of changing international trade regulations and quotas on imports of textiles and apparel may adversely affect our business.
Quotas, duties or tariffs may have a material adverse effect on our business, financial condition and results of operations. We currently import raw materials and/or finished garments into the majority of countries in which we sell our products. Substantially all of our import operations are subject to customs duties.
In addition, the countries in which our products are manufactured or into which they are imported may, from time to time, impose new quotas, duties, tariffs, requirements as to where raw materials must be purchased, new workplace regulations or other restrictions on our imports, or otherwise adversely modify existing restrictions. Adverse changes in these costs and restrictions could harm our business.
We rely on third party manufacturers and problems with, or loss of, our suppliers or raw materials could harm our business and results of operations.
Substantially all of our products are produced by independent manufacturers. We face the risk that these third party manufacturers with whom we contract to produce our products may not produce and deliver our products on a timely basis, or at all. We cannot be certain that we will not experience operational difficulties with our manufacturers, such as reductions in the availability of production capacity, errors in complying with product specifications and regulatory and customer requirements, insufficient quality control, failures to meet production deadlines, increases in materials and manufacturing costs or other business interruptions or failures due to deteriorating economies. The failure of any manufacturer to perform to our expectations could result in supply shortages or delays for certain products and harm our business. Our business may also be harmed by material increases to our cost of goods as a result of increasing labor costs, which manufacturers have recently faced.
If our independent manufacturers fail to comply with appropriate laws, regulations, safety codes, employment practices, human rights, quality standards, environmental standards, production practices, or other obligations and norms, our reputation and

47


brand image could be negatively impacted and we could be exposed to litigation and additional costs which would adversely affect our operational efficiency and results of operations.
The capacity of our manufacturers to manufacture our products also is dependent, in part, upon the availability of raw materials. Our manufacturers may experience shortages of raw materials, which could result in delays in deliveries of our products by our manufacturers or increased costs to us. Any shortage of raw materials or inability of a manufacturer to manufacture or ship our products in a timely manner, or at all, could impair our ability to ship orders of our products in a cost efficient, timely manner and could cause us to miss the delivery requirements of our customers. As a result, we could experience cancellations of orders, refusals to accept deliveries or reductions in our prices and margins, any of which could harm our financial performance and results of operations.
Labor disruptions at our suppliers, manufacturers, common carriers or ports may adversely affect our business.
Our business depends on our ability to source and distribute products in a timely manner. As a result, we rely on the timely and free flow of goods through open and operational ports worldwide and on a consistent basis from our suppliers and manufacturers. Labor disputes or disruptions at various ports, our common carriers, or at our suppliers or manufacturers create significant risks for our business, particularly if these disputes result in work slowdowns, lockouts, strikes or other disruptions during our peak importing or manufacturing seasons, and could have an adverse effect on our business, potentially resulting in cancelled orders by customers, unanticipated inventory accumulation or shortages and an adverse impact on our results of operations and financial condition.
Our business could suffer if we lose key management or are unable to attract and retain the talent required for our business.
Our performance is significantly impacted by the efforts and abilities of our senior management team. If we lose the services of one or more of our key executives, we may not be able to successfully manage our business or achieve our business objectives. If we are unable to recruit and retain qualified management personnel in a timely manner, our results of operations and financial condition could suffer.
We have granted performance based restricted stock units to our senior management team that have the potential to generate compensation that could be substantial to them as individuals. These restricted stock units vest upon achievement of specified common stock price thresholds and completion of the required service period. There is not a required post-vesting service period for the grantees. If our outstanding restricted stock units held by members of our senior management team ultimately vest, the risk of management turnover would be heightened and a departure of any portion of the senior management team could have an adverse impact on our operations and financial condition.
Our debt obligations expose us to certain risks.
Our levels of debt and leverage may have negative consequences to us, including the following:
•
we may have difficulty satisfying our obligations with respect to our indebtedness, and, if we fail to comply with these requirements, an event of default could result;
•
we may be required to dedicate a substantial portion of our cash flow from operations to required interest and, where applicable, principal payments on indebtedness, thereby reducing the availability of cash flow for working capital, capital expenditures and other general corporate activities;
•
covenants relating to our indebtedness may limit our ability to obtain additional financing for working capital, capital expenditures and other general corporate activities;
•
we may be subject to credit reductions and other changes in our business relationships with our suppliers, vendors and customers if they perceive that we would be unable to pay our debts to them in a timely manner;
•
we have credit facilities that are subject to periodic review and renewal, and we may be unable to extend these facilities at terms favorable to us, requiring the use of cash on hand or reducing our available credit;
•
we have several unsecured short term credit facilities, and agreements to provide letters of credit, in which the related banks may elect not to continue the facility which could reduce our available borrowing capacity; and
•
we may be placed at a competitive disadvantage against less leveraged competitors.

48


The agreements governing our debt obligations contain various covenants that impose restrictions on us that may affect our ability to operate our business.
The agreements, including indentures, governing our indebtedness impose, and future financing agreements are likely to impose, operating and financial restrictions on our activities. These restrictions require us to comply with or maintain certain financial tests and ratios. In addition, the agreements limit or prohibit our ability to, among other things:
•
incur additional debt and guarantees;
•
pay distributions or dividends and repurchase stock;
•
make other restricted payments, including without limitation, certain restricted investments;
•
create liens;
•
enter into agreements that restrict dividends from subsidiaries;
•
engage in transactions with affiliates; and
•
enter into mergers, consolidations or sales of substantially all of our assets, including restrictions on the use of proceeds from sales of certain asset groups.
These restrictions on our ability to operate our business could seriously harm our business by, among other things, limiting our ability to take advantage of financing, merger and acquisition and other corporate opportunities.
Various risks, uncertainties and events beyond our control could affect our ability to comply with these covenants. Failure to comply with any of the covenants in our existing or future financing agreements could result in a default under those agreements and under other agreements containing cross-default provisions. A default would permit lenders to accelerate the maturity of the debt under these agreements and to foreclose upon any collateral securing the debt. Under these circumstances, we might not have sufficient funds or other resources to satisfy all of our obligations. In addition, the limitations imposed by financing agreements on our ability to incur additional debt and to take other actions might significantly impair our ability to obtain other financing. We cannot assure you that we will be granted waivers or amendments to these agreements if, for any reason, we are unable to comply with these agreements or that we will be able to refinance our debt on terms acceptable to us, or at all.
We lease retail stores, office space, and distribution center facilities under operating leases, and if we terminate such leases prior to their contractual expiration, we could be liable for substantial payments for remaining lease liabilities.
We operate in excess of 600 retail stores, as well as various offices, showrooms, and distribution centers, under non-cancelable operating leases. We have, at times, closed certain underperforming stores prior to the termination of their related lease agreements. As a result, we have incurred mutually negotiated lease termination costs with landlords. We may close additional underperforming stores, or other leased facilities, prior to the termination of their related lease agreements in the future. If we fail to select appropriate new store locations, we may consider exiting such leases before the end of the lease term. Consequently, we may incur substantial lease termination payments that could decrease our profitability, reduce our cash balances or amounts available under credit facilities, and thereby have an adverse effect on our business, financial condition, and results of operations.
Our success is dependent on our ability to protect our worldwide intellectual property rights, and our inability to enforce these rights could harm our business.
Our success depends to a significant degree upon our ability to protect and preserve our intellectual property, including copyrights, trademarks, patents, service marks, trade dress, trade secrets and similar intellectual property. We rely on the intellectual property, patent, trademark and copyright laws of the United States and other countries to protect our proprietary rights. However, we may be unable to prevent third parties from using our intellectual property without our authorization, particularly in those countries where the laws do not protect our proprietary rights as fully as in the United States. The use of our intellectual property or similar intellectual property by others could reduce or eliminate any competitive advantage we have developed, causing us to lose sales or otherwise harm our business. From time to time, we resort to litigation to protect these rights, and these proceedings can be burdensome and costly and we may not prevail.
We have obtained some U.S. and foreign trademarks, patents and service mark registrations, and have applied for additional ones, but cannot guarantee that any of our pending applications will be approved by the applicable governmental authorities. The loss of trademarks, patents and service marks, or the loss of the exclusive use of our trademarks, patents and service marks, could have a material adverse effect on our business, financial condition and results of operations. Accordingly, we devote substantial resources to the establishment and protection of our trademarks, patents and service marks on a worldwide basis and

49


continue to evaluate the registration of additional trademarks, patents and service marks, as appropriate. There can be no assurance that our actions taken to establish and protect our trademarks, patents and service marks will be adequate to prevent imitation of our products by others or to prevent others from seeking to block sales of our products as violations of their trademark, patent or other proprietary rights.
We may be subject to claims that our products have infringed upon the intellectual property rights of others, which may cause us to incur unexpected costs or prevent us from selling our products.
We cannot be certain that our products do not and will not infringe the intellectual property rights of others. We may be subject to legal proceedings and claims in the ordinary course of our business, including claims of alleged infringement of the intellectual property rights of third parties by us or our customers in connection with their use of our products. Any such claims, whether or not meritorious, could result in costly litigation and divert the efforts of our personnel. Moreover, should we be found liable for infringement, we may be required to enter into licensing agreements (if available on acceptable terms or at all) or to pay damages and cease making or selling certain products. Moreover, we may need to redesign, discontinue or rename some of our products to avoid future infringement liability. Any of the foregoing could cause us to incur significant costs and prevent us from manufacturing or selling our products.
If we are unable to maintain our endorsements by professional athletes, our ability to market and sell our products may be harmed.
A valuable element of our marketing strategy has been to obtain endorsements from prominent athletes, which contribute to the authenticity and image of our brands. We believe that this strategy has been an effective means of gaining brand exposure worldwide and creating broad appeal for our products. We cannot be certain that we will be able to maintain our existing relationships with these individuals in the future or that we will be able to attract new athletes to endorse our products. We also are subject to risks related to the selection of athletes whom we choose to endorse our products. We may select athletes who are unable to perform at expected levels or who are not sufficiently marketable. In addition, negative publicity concerning any of our athletes could harm our brand and adversely impact our business. If we are unable in the future to secure prominent athletes and arrange athlete endorsements of our products on terms we deem to be reasonable, we may be required to modify our marketing platform and to rely more heavily on other forms of marketing and promotion, which may not prove to be effective. Our inability to obtain endorsements from professional athletes could adversely affect our ability to market and sell our products, resulting in loss of revenues and a loss of profitability.
In some cases, we sign multi-year contracts with sponsored athletes. If we should later wish to terminate the contract prior to the expiration date, we could be required to pay an early termination penalty, or negotiated release payment, which could have an adverse effect on our business and results of operations.
Difficulties in implementing our new global Enterprise Resource Planning system and other technologies could impact our ability to design, produce and ship our products on a timely basis.
We are in the process of implementing the SAP Apparel and Footwear Solution in addition to certain peripheral technologies as our core operational and financial system (together, “ERP”). The ongoing implementation of the ERP is a key part of our continuing efforts to manage our business more effectively by eliminating redundancies and enhancing our overall cost structure and margin performance. Difficulties in implementing SAP and integrating peripheral technologies to this new ERP could impact our ability to design, produce and ship our products on a timely basis, and thereby have an adverse effect on our business, financial condition and results of operations.
We rely significantly on information technology and any failure, inadequacy, interruption or security lapse of that technology could harm our ability to effectively operate our business.
Our ability to effectively manage and maintain our supply chain, ship products to customers, and invoice customers on a timely basis depends significantly on several key information systems. The failure of these systems to operate effectively or to integrate with other systems, or a breach in security of any of these systems, could cause delays in product fulfillment and reduced efficiency of our operations, and it could require significant capital investments to remediate any such failure, problem or breach.
In addition, hackers and data thieves are increasingly sophisticated and operate large scale and complex automated attacks. Despite security measures that we and our third party vendors have in place, any breach of our or our third party service providers’ networks may result in the loss of valuable business data, our customers’ or employees’ personal information, or a disruption of our business, which could give rise to unwanted media attention, damage our customer relationships and reputation, and result in lost sales, fines or lawsuits. In addition, we must comply with increasingly complex regulatory standards enacted to protect this business and personal data. Any inability to maintain compliance with these regulatory

50


standards could expose us to risks of litigation and liability, and adversely impact our results of operations and financial condition.
Changes in foreign currency exchange rates could affect our reported revenues and costs.
We are exposed to gains and losses resulting from fluctuations in foreign currency exchange rates relating to certain sales, royalty income, 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 U.S. transactions that are not denominated in U.S. dollars. If we are unsuccessful in hedging these potential losses, our operating results could be negatively impacted and our cash flows could be significantly reduced. In some cases, as part of our risk management strategies, we may choose not to hedge such risks. If we misjudge these risks, there could be a material adverse effect on our operating results and financial position. We may use foreign currency exchange contracts, or other derivatives, to hedge certain currency exchange risks. Such derivatives may expose us to counterparty risks and there can be no guarantee that such derivatives will be effective as hedges.
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 statements of operations and balance sheets of our international subsidiaries into U.S. dollars. We may (but generally do not) use foreign currency exchange contracts to hedge the profit and loss effects of this translation effect because such exposures are generally non-cash in nature and because accounting rules would require us to mark these contracts to fair value in the statement of operations at the end of each financial reporting period. We translate our revenues and expenses at average exchange rates during the period. As a result, the reported revenues and expenses of our international subsidiaries would decrease if the U.S. dollar increased in value in relation to other currencies, including the euro, Australian dollar or Japanese yen.
Future sales of our common stock in the public market, or the issuance of other equity securities, may adversely affect the market price of our common stock and the value of our senior notes.
Sales of a substantial number of shares of our common stock or other equity-related securities in the public market could depress the market price of our common stock, senior notes, or both. We cannot predict the effect that future sales of our common stock or other equity-related securities, including the exercise and/or sale of the equity securities held by entities affiliated with Rhône Capital LLC, would have on the market price of our common stock or the value of our senior notes.
Actions by our licensee partners could adversely impact our brand reputation.
We have licensed certain product categories to third party licensees which have the right to design, source, and sell certain products bearing our trademarks. Failure of our licensees to source quality products, execute sales plans, or comply with laws, regulations, or other standards could harm the reputation of our brands and thereby have an adverse effect on our business, financial condition, and results of operations.
Employment related matters may affect our profitability.
As of July 31, 2014, we had no unionized employees, but certain French employees are represented by workers’ councils. As we have little control over union activities, we could face difficulties in the future should our workforce become unionized. There can be no assurance that we will not experience work stoppages or other labor problems in the future with our non-unionized employees or employees represented by workers’ councils.
We employ staff in jurisdictions where regulations or business practices dictate that we provide employees we intend to terminate with offer notification periods, or severance payments, which are significantly in excess of those traditionally provided in the United States. Consequently, our costs to terminate employees may be greater than the costs of other companies that do not employ significant numbers of employees in these jurisdictions.
The effects of war, acts of terrorism, natural disasters or other unforeseen wide-scale events could have a material adverse effect on our operating results and financial condition.
The continued threat of terrorism, and associated heightened security measures and military actions in response to acts of terrorism, has disrupted commerce and has intensified uncertainties in the U.S. and international economies. Any further acts of terrorism, escalated hostilities, a future war, or a widespread natural or other disaster, such as the earthquake and resulting tsunami and radioactivity issues in Japan, may disrupt commerce, undermine consumer confidence and lead to a further downturn in the U.S. or international economies, which could negatively impact our revenues. Furthermore, an act of terrorism, war or the implementation of trade sanctions, or the threat thereof, or any natural or other disaster that results in unforeseen interruptions of commerce could negatively impact our business by interfering with our ability to obtain products from our manufacturers.

51


Failure to maintain adequate financial and management processes and controls could lead to errors in our financial reporting and could adversely affect our business.
We are required to document and test our internal controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (“SOX 404”). As a result, we have incurred and expect to continue to incur substantial expenses to comply with SOX 404 requirements. If, for any reason, our SOX 404 compliance efforts fail to result in an unqualified opinion regarding the effectiveness of our internal controls, we could be subject to regulatory scrutiny and a loss of public confidence, which could have a material adverse effect on our business, stock price and ability to attract credit. In addition, if we do not maintain adequate financial and management personnel, processes and controls, we may not be able to: (1) accurately report our financial performance on a timely basis, which could cause a decline in our stock price and adversely affect our ability to raise capital, our results of operations, and our financial condition; and (2) appropriately manage or control our operations, which could adversely impact our results of operations.
If our goodwill, other intangible assets, or other fixed assets become impaired, we may be required to record a significant charge to our earnings.
We may be required to record future impairments of goodwill to the extent the fair value of any of our reporting units becomes less than its carrying value. Our estimates of fair value are based on assumptions about future cash flows of each reporting unit, discount rates applied to these cash flows and current market estimates of value. Based on the uncertainty of future revenue growth rates, gross profit performance, and other assumptions used to estimate goodwill recoverability, future reductions in our expected cash flows could cause a material non-cash impairment charge of goodwill, which could have a material adverse effect on our results of operations and financial condition.
We also have certain other intangible assets including, but not limited to, intellectual property and deferred tax assets, as well as fixed assets in our Company-owned retail stores, which could be at risk of impairment or may require valuation reserves based upon anticipated future benefits to be derived from such assets. Any change in the valuation of such assets could have a material effect on our profitability.


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Item 6. Exhibits
 
 
2.1
 
Stock Purchase Agreement dated October 22, 2013 by and among Quiksilver, Inc., QS Wholesale, Inc. and Extreme Holdings, Inc. (incorporated by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K filed on October 28, 2013).
 
 
 
3.1
 
Restated Certificate of Incorporation of Quiksilver, Inc., as amended (incorporated by reference to Exhibit 3.1 of the Company’s Annual Report on Form 10-K for the year ended October 31, 2004).
 
 
 
3.2
 
Certificate of Amendment of Restated Certificate of Incorporation of Quiksilver, Inc. (incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended April 30, 2005).
 
 
 
3.3
 
Certificate of Designation of the Series A Convertible Preferred Stock of Quiksilver, Inc. (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed on August 4, 2009).
 
 
 
3.4
 
Certificate of Amendment of Restated Certificate of Incorporation of Quiksilver, Inc. (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed on April 1, 2010).
 
 
 
3.5
 
Amended and Restated Bylaws of Quiksilver, Inc. (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed on January 3, 2013).
 
 
 
4.1
 
Indenture, dated as of December 10, 2010, by and among Boardriders S.A., Quiksilver, Inc., as guarantor, the subsidiary guarantor parties thereto, and Deutsche Trustee Company Limited, as trustee, Deutsche Bank Luxembourg S.A., as registrar and transfer agent, and Deutsche Bank AG, London Branch, as principal paying agent and common depositary (incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed December 13, 2010).
 
 
 
4.2
 
Indenture, dated as of July 16, 2013, related to the $280,000,000 aggregate principal amount 7.875% Senior Secured Notes due 2018, by and among Quiksilver, Inc., QS Wholesale, Inc., the subsidiary guarantor parties thereto, and Wells Fargo Bank, National Association, as trustee and collateral agent, including the Form of Note attached thereto (incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed July 16, 2013).
 
 
 
4.3
 
Indenture, dated as of July 16, 2013, related to the $225,000,000 aggregate principal amount of their 10.000% Senior Notes due 2020, by and among Quiksilver, Inc., QS Wholesale, Inc., the subsidiary guarantor parties thereto, and Wells Fargo Bank, National Association, as trustee, including the Form of Note attached thereto (incorporated by reference to Exhibit 4.2 of the Company’s Current Report on Form 8-K filed July 16, 2013).
 
 
 
31.1
 
Rule 13a-14(a)/15d-14(a) Certifications – Principal Executive Officer
 
 
 
31.2
 
Rule 13a-14(a)/15d-14(a) Certifications – Principal Financial Officer
 
 
 
32.1
 
Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 – Chief Executive Officer
 
 
 
32.2
 
Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 – Chief Financial Officer
 
 
 
(1)
 
Management contract or compensatory plan.
 
 
 
101.INS
 
XBRL Instance Document
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document

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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.
September 5, 2014
QUIKSILVER, INC.
/s/ Richard Shields
Richard Shields
Chief Financial Officer
(Principal Financial and Accounting Officer)


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