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EX-32.1 - EXHIBIT 32.1 - QUIKSILVER INCzqk_20140731xex3212.htm
EX-31.2 - EXHIBIT 31.2 - QUIKSILVER INCzqk_20140731xex3122.htm
EX-32.2 - EXHIBIT 32.2 - QUIKSILVER INCzqk_20140731xex3222.htm
EX-31.1 - EXHIBIT 31.1 - QUIKSILVER INCzqk_20140731xex3112.htm
EXCEL - IDEA: XBRL DOCUMENT - QUIKSILVER INCFinancial_Report.xls


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 January 31, 2015
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 February 27, 2015 was 171,370,392.




QUIKSILVER, INC.
FORM 10-Q
INDEX
 
 
Page No.
 
 
 
 
 
 
 
 
 
 
Quiksilver, Inc. Condensed Consolidated Statements of Operations First Quarter (Three Months) Ended January 31, 2015 and 2014
 
 
 
 
Quiksilver, Inc. Condensed Consolidated Statements of Comprehensive (Loss)/Income First Quarter (Three Months) Ended January 31, 2015 and 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
First Quarter (Three Months) Ended January 31, 2015 Compared to First Quarter (Three Months) Ended January 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 





PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
QUIKSILVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
 
Three Months Ended January 31,
In thousands, except per share amounts
 
2015
 
2014
Revenues, net
 
$
340,854

 
$
394,910

Cost of goods sold
 
171,410

 
194,270

Gross profit
 
169,444

 
200,640

Selling, general and administrative expense
 
170,504

 
203,784

Asset impairments
 
255

 
883

Operating loss
 
(1,315
)
 
(4,027
)
Interest expense, net
 
18,402

 
19,420

Foreign currency loss
 
657

 
2,828

Loss before benefit for income taxes
 
(20,374
)
 
(26,275
)
Benefit for income taxes
 
(2,084
)
 
(4,385
)
Loss from continuing operations
 
(18,290
)
 
(21,890
)
Income from discontinued operations, net of tax (includes net gain on sale of businesses of $6,580 (2015) and $38,103 (2014))
 
6,732

 
37,617

Net (loss)/income
 
(11,558
)
 
15,727

Less: net loss attributable to non-controlling interest
 
788

 
464

Net (loss)/income attributable to Quiksilver, Inc.
 
$
(10,770
)
 
$
16,191

Loss per share from continuing operations attributable to Quiksilver, Inc.
 
$
(0.11
)
 
$
(0.13
)
Income per share from discontinued operations attributable to Quiksilver, Inc.
 
$
0.04

 
$
0.22

Net (loss)/income per share attributable to Quiksilver, Inc.
 
$
(0.06
)
 
$
0.10

Loss per share from continuing operations attributable to Quiksilver, Inc., assuming dilution
 
$
(0.11
)
 
$
(0.13
)
Income per share from discontinued operations attributable to Quiksilver, Inc., assuming dilution
 
$
0.04

 
$
0.22

Net (loss)/income per share attributable to Quiksilver, Inc., assuming dilution
 
$
(0.06
)
 
$
0.10

Weighted average common shares outstanding, basic
 
171,039

 
169,747

Weighted average common shares outstanding, diluted
 
171,039

 
169,747

Amounts attributable to Quiksilver, Inc.:
 
 
 
 
Loss from continuing operations
 
$
(18,290
)
 
$
(21,529
)
Income from discontinued operations, net of tax
 
7,520

 
37,720

Net (loss)/income
 
$
(10,770
)
 
$
16,191

See Notes to Condensed Consolidated Financial Statements.

1



QUIKSILVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)/INCOME
(Unaudited)
 
 
Three Months Ended January 31,
In thousands
 
2015
 
2014
Net (loss)/income
 
$
(11,558
)
 
$
15,727

Other comprehensive (loss)/income:
 
 
 
 
Foreign currency translation adjustment
 
(34,143
)
 
(20,715
)
Reclassification adjustment for realized gain/(loss) on derivative instruments transferred to earnings, net of tax provision/(benefit) of $213 (2015) and $(93) (2014)
 
(2,918
)
 
186

Net unrealized gain on derivative instruments, net of tax provision of $1,295 (2015) and $1,414 (2014)
 
18,442

 
6,107

Comprehensive (loss)/income
 
(30,177
)
 
1,305

Comprehensive loss attributable to non-controlling interest
 
788

 
464

Comprehensive (loss)/income attributable to Quiksilver, Inc.
 
$
(29,389
)
 
$
1,769

See Notes to Condensed Consolidated Financial Statements.

2



QUIKSILVER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
In thousands, except share and per share amounts
 
January 31,
2015
 
October 31,
2014
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
60,656

 
$
46,664

Restricted cash
 
1,745

 
4,687

Trade accounts receivable, less allowances of $54,819 (2015) and $63,991 (2014)
 
258,952

 
311,014

Other receivables
 
51,101

 
40,847

Inventories
 
306,119

 
284,517

Deferred income taxes - current
 
4,533

 
4,926

Prepaid expenses and other current assets
 
31,315

 
28,080

Current portion of assets held for sale
 

 
20,265

Total current assets
 
714,421

 
741,000

Restricted cash
 
3,918

 
16,514

Fixed assets, less accumulated depreciation and amortization of $209,823 (2015) and $220,888 (2014)
 
194,107

 
213,768

Intangible assets, net
 
137,165

 
135,510

Goodwill
 
79,805

 
80,622

Other assets
 
39,946

 
47,086

Deferred income taxes long-term
 
14,352

 
16,088

Assets held for sale, net of current portion
 

 
5,394

Total assets
 
$
1,183,714

 
$
1,255,982

LIABILITIES AND EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Lines of credit
 
$
31,093

 
$
32,929

Accounts payable
 
174,090

 
168,307

Accrued liabilities
 
101,591

 
112,701

Current portion of long-term debt
 
2,261

 
2,432

Income taxes payable
 
2,505

 
1,124

Deferred income taxes - current
 
19,490

 
19,628

Current portion of assets held for sale
 

 
13,266

Total current liabilities
 
331,030

 
350,387

Long-term debt, net of current portion
 
770,048

 
793,229

Other long-term liabilities
 
34,702

 
39,342

Deferred income taxes long-term
 
21,304

 
16,790

Total liabilities
 
1,157,084

 
1,199,748

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 - 174,255,592 (2015) and 174,057,410 (2014)
 
1,743

 
1,741

Additional paid-in capital
 
591,173

 
589,032

Treasury stock, 2,885,200 shares
 
(6,778
)
 
(6,778
)
Accumulated deficit
 
(598,177
)
 
(587,407
)
Accumulated other comprehensive income
 
38,669

 
57,288

Total Quiksilver, Inc. stockholders’ equity
 
26,630

 
53,876

Non-controlling interest
 

 
2,358

Total equity
 
26,630

 
56,234

Total liabilities and equity
 
$
1,183,714

 
$
1,255,982

See Notes to Condensed Consolidated Financial Statements.

3



QUIKSILVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Three Months Ended January 31,
In thousands
 
2015
 
2014
Cash flows from operating activities:
 
 
 
 
Net (loss)/income
 
$
(11,558
)

$
15,727

Adjustments to reconcile net loss to net cash provided by/(used in) operating activities:
 
 
 
 
Income from discontinued operations
 
(6,732
)
 
(37,617
)
Depreciation and amortization
 
10,758

 
10,545

Stock-based compensation
 
1,769

 
5,063

Provision for doubtful accounts
 
1,598

 
1,662

Loss/(gain) on disposal of fixed assets
 
342

 
(266
)
Unrealized foreign currency (gain)/loss
 
(647
)
 
3,065

Asset impairments
 
255

 
883

Non-cash interest expense
 
857

 
914

Equity in earnings
 
596

 
352

Deferred income taxes
 
(5,225
)
 
5

Subtotal of non-cash reconciling adjustments
 
3,571

 
(15,394
)
Changes in operating assets and liabilities:
 
 
 
 
Trade accounts receivable
 
32,227

 
61,905

Other receivables
 
(2,313
)
 
(825
)
Inventories
 
(39,724
)
 
(31,169
)
Prepaid expenses and other current assets
 
(5,204
)
 
(7,372
)
Other assets
 
966

 
2,628

Accounts payable
 
25,474

 
(28,498
)
Accrued liabilities and other long-term liabilities
 
(8,528
)
 
124

Income taxes payable
 
274

 
(1,242
)
Subtotal of changes in operating assets and liabilities
 
3,172


(4,449
)
Cash used in operating activities of continuing operations
 
(4,815
)
 
(4,116
)
Cash provided by/(used in) operating activities of discontinued operations
 
4,668

 
(7,195
)
Net cash used in operating activities
 
(147
)
 
(11,311
)
Cash flows from investing activities:
 
 
 
 
Capital expenditures
 
(15,944
)
 
(10,558
)
Proceeds from sale of property
 
455

 

Changes in restricted cash
 
15,538

 
(60,617
)
Cash provided by/(used in) investing activities of continuing operations
 
49

 
(71,175
)
Cash provided by investing activities of discontinued operations
 
10,713

 
76,719

Net cash provided by investing activities
 
10,762

 
5,544

Cash flows from financing activities:
 
 
 
 
Borrowings on lines of credit
 
11,770

 
18,904

Payments on lines of credit
 
(16,575
)
 
(16,591
)
Borrowings on long-term debt
 
42,734

 
52,062

Payments on long-term debt
 
(32,420
)
 
(33,779
)
Stock option exercises and employee stock purchases
 
372

 
3,138

Payments of debt issuance costs
 

 
(335
)
Cash provided by financing activities of continuing operations
 
5,881

 
23,399

Net cash provided by financing activities
 
5,881

 
23,399

Effect of exchange rate changes on cash
 
(2,504
)
 
(4,924
)
Net increase in cash and cash equivalents
 
13,992

 
12,708

Cash and cash equivalents, beginning of period
 
46,664

 
57,280

Cash and cash equivalents, end of period
 
$
60,656

 
$
69,988

Supplementary cash flow information:
 
 
 
 
Cash paid/(received) during the period for:
 
 
 
 
Interest
 
$
11,954

 
$
12,894

Income taxes paid
 
$
1,502

 
$
6,516

Income taxes received
 
$
(440
)
 
$

Summary of significant non-cash transactions:
 
 
 
 
Capital expenditures accrued at period end (investing activities)
 
$
2,148

 
$
3,453

Debt issued for purchase of non-controlling interest (financing activities)
 
$

 
$
17,388

See Notes to Condensed Consolidated Financial Statements.

4



QUIKSILVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 — Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America ("GAAP") for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial 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 2015” refers to the year ending October 31, 2015). 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, 2014 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.
Principles of Consolidation
The consolidated financial statements include the accounts of Quiksilver, Inc. and its subsidiaries. All intercompany transactions and balances have been eliminated.
The Company completed the sale of Mervin Manufacturing, Inc. ("Mervin") and substantially all of the assets of Hawk Designs, Inc. ("Hawk") during the first quarter of fiscal 2014. In December 2014, the Company sold its majority stake in Surfdome Shop, Ltd. ("Surfdome") for net proceeds of approximately $16 million. As a result, the Company reported the operating results of Mervin, Hawk and Surfdome in "Income from discontinued operations, net of tax" in the consolidated statements of operations for all periods presented. In addition, the assets and liabilities associated with these businesses are reported as discontinued operations in the condensed consolidated balance sheets (see Note 15 — Discontinued Operations). Unless otherwise indicated, the disclosures accompanying the condensed consolidated financial statements reflect the Company's continuing operations.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions. Such estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash Equivalents
Cash equivalents represent cash and short-term, highly liquid investments, including commercial paper, U.S. Treasury, U.S. Agency, and corporate debt securities with original maturities of three months or less at the date of purchase. Cash equivalents represent Level 1 fair value investments. See the Fair Value Measurements section below for further details.
Fair Value Measurements
Accounting Standards Codification 820, “Fair Value Measurements and Disclosures,” ("ASC 820") 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.
The Company measures certain financial assets and liabilities at fair value on a recurring basis, including derivatives. Fair value is the price the Company would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. The Company uses a three-level hierarchy established in ASC 820 that prioritizes fair value measurements based on the types of inputs used for the various valuation techniques (market approach, income approach, and cost approach).

5



The levels of hierarchy are described below:
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 assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. Financial assets and liabilities are classified in their entirety based on the most conservative level of input that is significant to the fair value measurement.
Pricing vendors are utilized for certain Level 1 and Level 2 investments. These vendors either provide a quoted market price in an active market or use observable inputs without applying significant adjustments in their pricing. Observable inputs include broker quotes, interest rates and yield curves observable at commonly quoted intervals, volatilities and credit risks. The Company’s fair value processes include controls that are designed to ensure appropriate fair values are recorded. These controls include an analysis of period-over-period fluctuations and comparison to another independent pricing vendor.
Note 2 — New Accounting Pronouncements
Accounting Standards Adopted
In November 2014, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") 2014-17, Pushdown Accounting, which provides an acquired entity with an option to apply pushdown accounting in its separate financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity. The Company adopted this guidance on November 18, 2014, the effective date of ASU 2014-17. The adoption of this guidance did not impact the Company's condensed consolidated financial statements and disclosures.
In January 2015, the FASB issued ASU 2015-01, Income Statement - Extraordinary and Unusual Items, which eliminates the concept of extraordinary items from GAAP, which required certain classification and presentation of extraordinary items in the income statement and disclosures. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. A reporting entity may apply the amendments prospectively. A reporting entity also may apply the amendments retrospectively to all prior periods presented in the financial statements. Early adoption is permitted. The Company adopted this guidance on November 1, 2014. The adoption of this guidance did not impact the Company's condensed consolidated financial statements and disclosures.
Accounting Standards Not Yet Adopted
In April 2014, the FASB issued ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property Plant and Equipment (Topic 360), Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, 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 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 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)

6



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 consolidated financial statements and related disclosures.
In June 2014, the 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 consolidated financial statements and related disclosures.
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements - Going Concern, which will require an entity’s management to assess, for each annual and interim period, whether there is substantial doubt about the entity’s ability to continue as a going concern within one year of the financial statement issuance date. The definition of substantial doubt within the new standard incorporates a likelihood threshold of “probable” similar to the use of that term under current GAAP for loss contingencies. Certain disclosures will be required if conditions give rise to substantial doubt. The guidance will be effective for the Company beginning with fiscal year 2017. Early adoption is permitted. The Company is currently evaluating the impact that this amended guidance will have on its consolidated financial statements and related disclosures.
Note 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 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 profits earned from the Company’s licensees.

7



Information related to the Company's operating segments, all from continuing operations, is as follows:
 
 
Three Months Ended January 31,
In thousands
 
2015
 
2014
Revenues, net:
 
 
 
 
Americas
 
$
147,767

 
$
175,463

EMEA
 
125,813

 
149,397

APAC
 
66,598

 
69,875

Corporate Operations
 
676

 
175

Total
 
$
340,854

 
$
394,910

Gross profit/(loss):
 
 
 
 
Americas
 
$
64,309

 
$
75,914

EMEA
 
70,500

 
87,849

APAC
 
36,850

 
36,808

Corporate Operations
 
(2,215
)
 
69

Total
 
$
169,444

 
$
200,640

SG&A expense:
 
 
 
 
Americas
 
$
70,024

 
$
89,561

EMEA
 
66,129

 
78,208

APAC
 
34,805

 
33,362

Corporate Operations
 
(454
)
 
2,653

Total
 
$
170,504

 
$
203,784

Asset impairments:
 
 
 
 
Americas
 
$
76

 
$
222

EMEA
 
179

 
661

APAC
 

 

Corporate Operations
 

 

Total
 
$
255

 
$
883

Depreciation and amortization expense:
 
 
 
 
Americas
 
$
4,108

 
$
4,516

EMEA
 
3,816

 
3,287

APAC
 
1,741

 
1,888

Corporate Operations
 
762

 
654

Total
 
$
10,427

 
$
10,345

Operating (loss)/income:
 
 
 
 
Americas
 
$
(5,791
)
 
$
(13,869
)
EMEA
 
4,192

 
8,980

APAC
 
2,045

 
3,446

Corporate Operations
 
(1,761
)
 
(2,584
)
Total
 
$
(1,315
)
 
$
(4,027
)
Interest expense:
 
 
 
 
Americas
 
$
730

 
$
902

EMEA
 
4,228

 
4,811

APAC
 
526

 
587

Corporate Operations
 
12,918

 
13,120

Total
 
$
18,402

 
$
19,420

SG&A expense by segment for the first quarter of fiscal 2014 has been reclassified to conform to the current year presentation which reflects the Company's centralization of certain global business functions and related transfer pricing allocations.

8



In thousands
 
January 31,
2015
 
October 31, 2014
Identifiable assets:
 
 
 
 
Americas
 
$
438,171

 
$
464,831

EMEA
 
474,512

 
513,303

APAC
 
199,964

 
202,225

Corporate Operations
 
71,067

 
75,623

Total
 
$
1,183,714

 
$
1,255,982

Note 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 three months ended January 31, 2015 and 2014:
 
 
Three Months Ended January 31,
In thousands
 
2015
 
2014
Shares used in computing basic net loss/income per share
 
171,039

 
169,747

Dilutive effect of stock options and restricted stock(1)
 

 

Dilutive effect of stock warrants(1)
 

 

Shares used in computing diluted net loss/income per share
 
171,039

 
169,747

(1)
For the first quarter of fiscal 2015 and 2014, the shares used in computing diluted net loss per share do not include 234,000 and 3,974,000, respectively, of dilutive stock options and shares of restricted stock, nor 1,982,000 and 19,913,000, respectively, of dilutive warrant shares, as the effect is anti-dilutive given the Company’s net loss from continuing operations. For the first quarter of fiscal 2015 and 2014, additional stock options outstanding of 6,492,000 and 3,856,000, respectively, and additional warrant shares outstanding of 23,672,000 and 5,741,000, 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 ASC 718, “Compensation – Stock Compensation.” Stock-based compensation expense is included in selling, general and administrative expense ("SG&A").
The Company grants performance-based 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 or performance goals. 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. The weighted average fair value of the performance-based restricted stock units granted in the first quarter ended January 31, 2015 was $1.85. There were no performance-based restricted stock units granted in the first quarter of fiscal 2014. There were no performance options granted in the first quarter of fiscal 2015 or 2014.

9



Activity related to these performance-based options and performance-based restricted stock units for the three months ended January 31, 2015 was as follows:
 
 
Performance
Options
 
Performance
Restricted
Stock Units
Outstanding, October 31, 2014
 
640,000

 
10,218,508

Granted
 

 
1,486,000

Exercised
 

 

Canceled
 

 
(16,000
)
Outstanding, January 31, 2015
 
640,000

 
11,688,508

As of January 31, 2015, 164,000 of the 640,000 outstanding performance-based stock options were exercisable and none of the performance-based restricted stock units were exercisable. As of January 31, 2015, the Company had unrecognized compensation expense, net of estimated forfeitures, of approximately $0.3 million related to the performance-based stock options and approximately $1.9 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 1.3 years and 1.8 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 quarter of fiscal 2015 and 2014, there were no options granted. The Company records stock-based compensation expense using the graded vested method over the vesting period, which is generally three years. As of January 31, 2015, the Company had approximately $1.1 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.

10



Changes in shares underlying stock options, excluding performance-based stock options, for the three months ended January 31, 2015 were as follows:
Dollar amounts in thousands,
except per share amounts
 
Shares
 
Weighted
Average
Price
 
Weighted
Average
Life
 
Aggregate
Intrinsic
Value
Outstanding, October 31, 2014
 
6,817,609

 
$
4.52

 
 
 
 
Granted
 

 

 
 
 
 
Exercised
 

 

 
 
 
 
Canceled
 
(270,833
)
 
6.16

 
 
 
 
Outstanding, January 31, 2015
 
6,546,776

 
$
4.46

 
4.8
 
$
33

Options exercisable, January 31, 2015
 
5,930,441

 
$
4.24

 
4.5
 
$
33

Changes in non-vested shares underlying stock options, excluding performance-based stock options, for the three months ended January 31, 2015 were as follows:
 
 
Shares
 
Weighted
Average Grant Date
Fair Value
Non-vested, October 31, 2014
 
1,121,336

 
$
4.18

Granted
 

 

Vested
 
(505,001
)
 
3.59

Canceled
 

 

Non-vested, January 31, 2015
 
616,335

 
$
4.67

The Company may also grant 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 or performance goals. Restricted stock unit awards granted to our chief executive officer in lieu of a cash annual salary in the first quarter of fiscal 2015 vest in one year. Changes in restricted stock and restricted stock units for the three months ended January 31, 2015 were as follows:
 
 
Restricted Stock
 
Restricted Stock Units
Outstanding, October 31, 2014
 
175,000

 

Granted
 

 
675,676

Vested
 

 

Forfeited
 

 

Outstanding, January 31, 2015
 
175,000

 
675,676

Compensation expense for restricted stock is determined using the intrinsic value method. 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 January 31, 2015, there had been no acceleration of amortization periods and the Company had approximately $1.3 million of unrecognized compensation expense expected to be recognized over a weighted average period of approximately 0.9 years.
Note 5 — Restricted Cash
The Company’s restricted cash balance, including both current and non-current portions, was $6 million at January 31, 2015 and $21 million at October 31, 2014. Certain of the Company’s debt agreements contain restrictions on the usage of funds received from the sale of assets. These restrictions generally require such cash to be used for either repayment of indebtedness, capital expenditures, or acquisitions of assets. Restricted cash at January 31, 2015 included $4 million of the remaining proceeds from the sale of the Surfdome business in the first quarter of fiscal 2015, which is subject to these

11



restrictions. Consequently, since the restricted cash is required to be invested in long-term assets or to repay long-term debt, it is reflected as a long-term asset. The Company expects to utilize these remaining proceeds during fiscal 2015.
Note 6 — Inventories
Inventories consisted of the following as of the dates indicated:
In thousands
 
January 31,
2015
 
October 31, 2014
Raw materials
 
$
3,392

 
$
3,524

Work in-process
 
653

 
467

Finished goods
 
302,074

 
280,526

Total
 
$
306,119

 
$
284,517

Note 7 — Intangible Assets and Goodwill
Intangible Assets
Intangible assets consisted of the following as of the dates indicated:
 
 
January 31, 2015
 
October 31, 2014
In thousands
 
Gross
Amount
 
Accumulated
Amortization
 
Net Book
Value
 
Gross
Amount
 
Accumulated
Amortization
 
Net Book
Value
Non-amortizable trademarks
 
$
124,118

 
$

 
$
124,118

 
$
124,121

 
$

 
$
124,121

Amortizable trademarks
 
23,333

 
(12,249
)
 
11,084

 
21,858

 
(12,508
)
 
9,350

Amortizable licenses
 
10,521

 
(10,521
)
 

 
11,817

 
(11,817
)
 

Other amortizable intangibles
 
8,410

 
(6,447
)
 
1,963

 
8,406

 
(6,367
)
 
2,039

Total
 
$
166,382

 
$
(29,217
)
 
$
137,165

 
$
166,202

 
$
(30,692
)
 
$
135,510

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, and are amortized on a straight-line basis over their estimated useful lives of 5 to 18 years. Certain trademarks and licenses will continue to be amortized using estimated useful lives of 10 to 25 years with no residual values. Intangible amortization expense for each of the three months ended January 31, 2015 and 2014 was approximately $0.5 million. Annual amortization expense is estimated to be approximately $2 million in fiscal 2016 and $1 million in fiscal 2017 through fiscal 2020.
Goodwill
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
Net goodwill at October 31, 2013
 
$
74,943

 
$
180,475

 
$
6,207

 
$
261,625

Impairments
 

 
(178,197
)
 

 
(178,197
)
Foreign currency translation and other
 
(528
)
 
(2,278
)
 

 
(2,806
)
Gross goodwill
 
74,415

 
178,197

 
135,752

 
388,364

Accumulated impairment losses
 

 
(178,197
)
 
(129,545
)
 
(307,742
)
Net goodwill at October 31, 2014
 
$
74,415

 
$

 
$
6,207

 
$
80,622

Foreign currency translation and other
 
(817
)
 

 

 
(817
)
Gross goodwill
 
73,598

 
178,197

 
135,752

 
387,547

Accumulated impairment losses
 

 
(178,197
)
 
(129,545
)
 
(307,742
)
Net goodwill at January 31, 2015
 
$
73,598

 
$

 
$
6,207

 
$
79,805

Note 8 — Income Taxes

12



Each reporting period, the Company evaluates the realizability of all of its deferred tax assets in each tax jurisdiction. As of January 31, 2015, 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 for the first quarters of fiscal 2015 and 2014.
The Company's hedging instruments in Europe generated tax expense of approximately $5 million within other comprehensive income in the first quarter of fiscal 2015. 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 in the first quarter ended January 31, 2015 due to being unable to record tax benefits against the losses in certain jurisdictions where the Company has previously recorded valuation allowances.
As of January 31, 2015, 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 $4 million, excluding penalties and interest, for its existing tax positions.
Note 9 — Restructuring Charges
In connection with the globalization of its organizational structure and core processes, as well as its cost reduction efforts, the Company developed and approved a multi-year profit improvement plan in 2013 ("the 2013 Plan"). This plan 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 plan that are not yet determined. The 2013 Plan 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 new 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 2013 Plan and 2011 Plan were primarily recorded in SG&A with a small portion 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 2013 Plan and 2011 Plan were as follows:
In thousands
 
Workforce
 
Facility
& Other
 
Total
Balance, October 31, 2013
 
$
12,159

 
$
6,939

 
$
19,098

Charged to expense
 
19,350

 
15,295

 
34,645

Cash payments
 
(19,999
)
 
(9,943
)
 
(29,942
)
Balance, October 31, 2014
 
$
11,510

 
$
12,291

 
$
23,801

Charged to expense
 
507

 
401

 
908

Cash payments
 
(5,037
)
 
(1,968
)
 
(7,005
)
Adjustments
 

 
(1,976
)
 
(1,976
)
Balance, January 31, 2015
 
$
6,980

 
$
8,748

 
$
15,728

Amounts charged to expense during the three months ended January 31, 2015 were primarily composed of severance charges for employees, as well as early lease exit costs. The majority of these charges were within the Americas and EMEA segments. The Company recorded an adjustment to its facility and other restructuring liabilities upon completion of a sub-lease agreement within the Americas segment at more favorable terms than originally expected.
In addition to the restructuring charges noted above, the Company also recorded $2 million of additional expenses within SG&A during the three months ended January 31, 2014, related to certain non-core brands and peripheral product categories that have been discontinued, which are not reflected in the table above.

13



Note 10 — Debt
A summary of borrowings under lines of credit and long-term debt as of the dates indicated is as follows:
In thousands
 
Maturity
 
January 31,
2015
 
October 31,
2014
Lines of credit - 0.8% Floating

October 31, 2016
 
$
31,093

 
$
32,929

2017 Notes - 8.875% Fixed

December 15, 2017
 
225,959

 
252,188

ABL Credit Facility - 2.1% to 4.6% Floating

May 24, 2018
 
39,869

 
35,933

2018 Notes - 7.875% Fixed

August 1, 2018
 
278,894

 
278,834

2020 Notes - 10.000% Fixed

August 1, 2020
 
222,662

 
222,582

Capital lease obligations and other borrowings - Various %

Various
 
4,925

 
6,124

Total debt


 
803,402

 
828,590

Less current portion


 
(33,354
)
 
(35,361
)
Long-term debt, net of current portion


 
$
770,048

 
$
793,229

As of January 31, 2015, the Company’s credit facilities allowed for total cash borrowings and letters of credit of $169 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 January 31, 2015, the Company had a total of $71 million of direct borrowings and $23 million in letters of credit outstanding. As of January 31, 2015, the remaining availability for borrowings under the Company’s credit facilities was $60 million, $48 million of which could also be used for letters of credit in the United States and APAC. In addition to the $60 million of availability for borrowings, the Company also had $15 million in additional capacity for letters of credit in EMEA as of January 31, 2015. 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.
The estimated fair value of the Company’s borrowings under lines of credit and long-term debt as of January 31, 2015 was $715 million, compared to a carrying value of $803 million. The fair value of the Company’s 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 other debt obligations due to the variable rate nature of those debt obligations.
Note 11 — Derivative Financial Instruments
The Company is exposed to gains and losses resulting from fluctuations in foreign currency exchange rates relating to certain sales, 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 condensed 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. The results of derivative financial instruments are recorded in cash flows from operating activities on the condensed consolidated statements of cash flows.
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 accumulated other comprehensive income 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 January 31, 2015, the Company was hedging a portion of forecasted transactions expected to occur through January 2016. Assuming January 31, 2015 exchange rates remain constant, $20 million of gains, net of tax, related to hedges of these transactions are expected to be reclassified into earnings over the next 12 months. For additional information of the gains/losses related to hedging, see Note 14 — Accumulated Other Comprehensive Income.

14



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 $3 million and $(0.2) million for the three months ended January 31, 2015 and 2014, 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 January 31, 2015, 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
 
$
216,104

 
February 2015 – January 2016
 
$
30,994

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.
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
January 31, 2015:
 
 
Derivative assets:
 
 
 
 
 
 
 
 
Other receivables
 
$

 
$
30,994

 
$

 
$
30,994

Total fair value
 
$

 
$
30,994

 
$

 
$
30,994

 
 
 
 
 
 
 
 
 
October 31, 2014:
 
 
Derivative assets:
 
 
 
 
 
 
 
 
Other receivables
 
$

 
$
16,683

 
$

 
$
16,683

Derivative liabilities:
 
 
 
 
 
 
 
 
Accrued liabilities
 

 
(2
)
 

 
(2
)
Total fair value
 
$

 
$
16,681

 
$

 
$
16,681


15



Note 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
 
 
 
Balance, October 31, 2014
 
$
53,876

 
$
2,358

 
$
56,234

Stock-based compensation expense
 
1,769

 

 
1,769

Employee stock purchase plan
 
374

 

 
374

Business disposition
 

 
(1,570
)
 
(1,570
)
Net loss and other comprehensive loss
 
(29,389
)
 
(788
)
 
(30,177
)
Balance, January 31, 2015
 
$
26,630

 
$

 
$
26,630

 
 
 
 
 
 
 
Balance, October 31, 2013
 
$
366,247

 
$
17,952

 
$
384,199

Stock-based compensation expense
 
5,063

 

 
5,063

Exercise of stock options
 
2,465

 

 
2,465

Employee stock purchase plan
 
673

 

 
673

Transactions with non-controlling interest holders
 
(10,839
)
 
(5,434
)
 
(16,273
)
Net loss and other comprehensive income
 
1,769

 
(464
)
 
1,305

Balance, January 31, 2014
 
$
365,378

 
$
12,054

 
$
377,432

The business disposition in the first quarter of fiscal 2015 reflects the Company's sale of Surfdome. See Note 15 — Discontinued Operations for further information. Transactions with non-controlling interest holders reflect the Company's acquisition of the remaining non-controlling interests of its Brazil and Mexico subsidiaries in the first quarter of fiscal 2014.
Note 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 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.

16



Note 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
 
 
 
Balance, October 31, 2014
 
$
4,093

 
$
53,195

 
$
57,288

Net gains reclassified to COGS
 
(2,918
)
 

 
(2,918
)
Changes in fair value, net of tax
 
18,442

 
(34,143
)
 
(15,701
)
Balance, January 31, 2015
 
$
19,617

 
$
19,052

 
$
38,669

 
 
 
 
 
 
 
Balance, October 31, 2013
 
$
(4,591
)
 
$
78,509

 
$
73,918

Net loss reclassified to COGS
 
186

 

 
186

Changes in fair value, net of tax
 
6,107

 
(20,715
)
 
(14,608
)
Balance, January 31, 2014
 
$
1,702

 
$
57,794

 
$
59,496

Note 15 — Discontinued Operations
One of the elements of the Company’s strategy to improve profitability involves divesting or exiting certain non-core businesses. In November 2013, the Company completed the sale of Mervin Manufacturing, Inc, a manufacturer of snowboards and related products under the "Lib-Technologies" and "GNU" brands, ("Mervin") for $58 million. In January 2014, the Company completed the sale of substantially all of the assets of Hawk Designs, Inc. ("Hawk"), its subsidiary that owned and operated the "Hawk" brand, for $19 million. These transactions resulted in an after-tax gain of approximately $38 million during the first quarter of fiscal 2014, which is included in income from discontinued operations in the table below. In December 2014, the Company sold its majority stake in U.K.-based Surfdome Shop, Ltd., a multi-brand e-commerce retailer, ("Surfdome") for net proceeds of approximately $16 million, which included payments from Surfdome for all outstanding loans and trade receivables. The sale resulted in an after-tax gain of $7 million in the first quarter of fiscal 2015, which is included in income from discontinued operations in the table below. Accordingly, each of the Company's Mervin, Hawk and Surfdome businesses were classified as "held for sale" as of October 31, 2014 and are presented as discontinued operations in the accompanying condensed consolidated financial statements for all periods presented. The Company’s sale of the Mervin and Hawk businesses generated income tax expense of approximately $10 million within discontinued operations during the first quarter of fiscal 2014. However, as the Company does not expect to pay income tax after application of available loss carry-forwards, an offsetting income tax benefit was recognized within continuing operations.

17



The operating results of discontinued operations for the three months ended January 31, 2015 and 2014 are as follows:
 
 
Three Months Ended January 31,
In thousands
 
2015
 
2014
Revenues, net
 
$
13,239

 
$
20,162

Income before income taxes
 
6,785

 
48,094

Provision for income taxes
 
53

 
10,477

Income from discontinued operations
 
6,732

 
37,617

Less: net loss attributable to non-controlling interest
 
788

 
103

Income from discontinued operations attributable to Quiksilver, Inc.
 
$
7,520

 
$
37,720

There were no assets classified as held for sale at January 31, 2015. The components of major assets and liabilities held for sale at October 31, 2014 were as follows:
In thousands
 
October 31, 2014
Assets:
 
 
Inventories
 
$
19,659

Other
 
6,000

Total
 
$
25,659

Liabilities:
 
 
Accounts payable
 
$
12,520

Accrued liabilities
 
120

Deferred tax liabilities
 
626

Total
 
$
13,266

Total assets held for sale as of October 31, 2014 by segment were as follows:
In thousands
 
October 31, 2014
Americas
 
$
28

EMEA
 
25,631

APAC
 

Total
 
$
25,659

Note 16 — Condensed Consolidation 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, jointly and severally, on a senior unsecured basis by certain of its existing 100% owned domestic subsidiaries.
The Company presents condensed consolidating financial information for Quiksilver, Inc. and its domestic 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 months ended January 31, 2015 and 2014, the financial position as of January 31, 2015 and October 31, 2014, and cash flows for the three months ended January 31, 2015 and 2014, of 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.

18



QUIKSILVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statement of Operations
Three Months Ended January 31, 2015
In thousands
 
Quiksilver, Inc.
 
QS Wholesale,
Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues, net
 
$
116

 
$
71,536

 
$
68,535

 
$
229,897

 
$
(29,230
)
 
$
340,854

Cost of goods sold
 

 
44,052

 
45,091

 
109,077

 
(26,810
)
 
171,410

Gross profit
 
116

 
27,484

 
23,444

 
120,820

 
(2,420
)
 
169,444

Selling, general and administrative expense
 
2,475

 
28,778

 
29,705

 
111,496

 
(1,950
)
 
170,504

Asset impairments
 

 

 

 
255

 

 
255

Operating (loss)/income
 
(2,359
)
 
(1,294
)
 
(6,261
)
 
9,069

 
(470
)
 
(1,315
)
Interest expense, net
 
11,645

 
747

 
(2
)
 
6,012

 

 
18,402

Foreign currency (gain)/loss
 
(158
)
 
(618
)
 
402

 
1,031

 

 
657

Equity in earnings
 
(3,106
)
 
(324
)
 

 

 
3,430

 

(Loss)/income before provision/(benefit) for income taxes
 
(10,740
)
 
(1,099
)
 
(6,661
)
 
2,026

 
(3,900
)
 
(20,374
)
Provision/(benefit) for income taxes
 
30

 
146

 
303

 
(2,563
)
 

 
(2,084
)
(Loss)/income from continuing operations
 
(10,770
)
 
(1,245
)
 
(6,964
)
 
4,589

 
(3,900
)
 
(18,290
)
(Loss)/income from discontinued operations
 

 

 
(2
)
 
6,734

 

 
6,732

Net (loss)/income
 
(10,770
)
 
(1,245
)
 
(6,966
)
 
11,323

 
(3,900
)
 
(11,558
)
Net loss attributable to non-controlling interest
 

 

 

 
788

 

 
788

Net (loss)/income attributable to Quiksilver, Inc.
 
(10,770
)
 
(1,245
)
 
(6,966
)
 
12,111

 
(3,900
)
 
(10,770
)
Other comprehensive loss
 
(18,619
)
 

 

 
(18,619
)
 
18,619

 
(18,619
)
Comprehensive (loss)/income attributable to Quiksilver, Inc.
 
$
(29,389
)
 
$
(1,245
)
 
$
(6,966
)
 
$
(6,508
)
 
$
14,719

 
$
(29,389
)

19



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

 
$
85,536

 
$
98,741

 
$
269,770

 
$
(59,253
)
 
$
394,910

Cost of goods sold
 

 
51,264

 
68,202

 
119,784

 
(44,980
)
 
194,270

Gross profit
 
116

 
34,272

 
30,539

 
149,986

 
(14,273
)
 
200,640

Selling, general and administrative expense
 
9,025

 
55,966

 
22,668

 
121,057

 
(4,932
)
 
203,784

Asset impairments
 

 

 
222

 
661

 

 
883

Operating (loss)/income
 
(8,909
)
 
(21,694
)
 
7,649

 
28,268

 
(9,341
)
 
(4,027
)
Interest expense, net
 
11,600

 
1,010

 

 
6,810

 

 
19,420

Foreign currency loss/(gain)
 
36

 
(10
)
 
(224
)
 
3,026

 

 
2,828

Equity in earnings
 
(35,932
)
 
74

 

 

 
35,858

 

Income/(loss) before (benefit)/provision for income taxes
 
15,387

 
(22,768
)
 
7,873

 
18,432

 
(45,199
)
 
(26,275
)
(Benefit)/provision for income taxes
 

 
(6,169
)
 
(3,945
)
 
5,729

 

 
(4,385
)
Income/(loss) from continuing operations
 
15,387

 
(16,599
)
 
11,818

 
12,703

 
(45,199
)
 
(21,890
)
Income from discontinued operations
 

 
23,922

 
13,531

 
164

 

 
37,617

Net income
 
15,387

 
7,323

 
25,349

 
12,867

 
(45,199
)
 
15,727

Net income attributable to non-controlling interest
 

 

 

 
464

 

 
464

Net income attributable to Quiksilver, Inc.
 
15,387

 
7,323

 
25,349

 
13,331

 
(45,199
)
 
16,191

Other comprehensive loss
 
(14,422
)
 

 

 
(14,422
)
 
14,422

 
(14,422
)
Comprehensive income/(loss) attributable to Quiksilver, Inc.
 
$
965

 
$
7,323

 
$
25,349

 
$
(1,091
)
 
$
(30,777
)
 
$
1,769




20



QUIKSILVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Balance Sheet
January 31, 2015
In thousands
 
Quiksilver, 
Inc.
 
QS Wholesale,
Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
157

 
$
17,392

 
$
(4,353
)
 
$
47,460

 
$

 
$
60,656

Restricted cash
 

 

 

 
1,745

 

 
1,745

Trade accounts receivable, net
 

 
44,120

 
22,138

 
192,694

 

 
258,952

Other receivables
 
10

 
2,185

 
1,476

 
47,459

 
(29
)
 
51,101

Inventories
 

 
33,719

 
75,499

 
218,634

 
(21,733
)
 
306,119

Deferred income taxes
 

 
21,554

 

 
4,533

 
(21,554
)
 
4,533

Prepaid expenses and other current assets
 
1,593

 
8,705

 
3,039

 
17,978

 

 
31,315

Intercompany balances
 

 
256,475

 

 

 
(256,475
)
 

Total current assets
 
1,760

 
384,150

 
97,799

 
530,503

 
(299,791
)
 
714,421

Restricted cash
 

 

 

 
3,918

 

 
3,918

Fixed assets, net
 
19,754

 
32,336

 
21,783

 
120,234

 

 
194,107

Intangible assets, net
 
8,533

 
43,655

 
1,109

 
83,868

 

 
137,165

Goodwill
 

 
61,983

 
11,089

 
6,733

 

 
79,805

Other assets
 
6,682

 
4,955

 
916

 
27,393

 

 
39,946

Deferred income taxes long-term
 
30,807

 

 
2,052

 
14,352

 
(32,859
)
 
14,352

Investment in subsidiaries
 
728,200

 
1,849

 

 

 
(730,049
)
 

Total assets
 
$
795,736

 
$
528,928

 
$
134,748

 
$
787,001

 
$
(1,062,699
)
 
$
1,183,714

LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Lines of credit
 
$

 
$

 
$

 
$
31,093

 
$

 
$
31,093

Accounts payable
 
2,373

 
36,163

 
18,760

 
116,794

 

 
174,090

Accrued liabilities
 
29,258

 
12,435

 
6,157

 
53,741

 

 
101,591

Current portion of long-term debt
 

 
600

 

 
1,661

 

 
2,261

Income taxes payable
 

 
720

 

 
1,814

 
(29
)
 
2,505

Deferred income taxes
 
31,450

 

 
4,925

 
4,669

 
(21,554
)
 
19,490

Intercompany balances
 
203,267

 

 
39,528

 
13,680

 
(256,475
)
 

Total current liabilities
 
266,348

 
49,918

 
69,370

 
223,452

 
(278,058
)
 
331,030

Long-term debt
 
501,556

 
28,580

 

 
239,912

 

 
770,048

Other long-term liabilities
 
1,202

 
7,178

 
7,514

 
18,808

 

 
34,702

Deferred income taxes long-term
 

 
38,052

 

 
16,111

 
(32,859
)
 
21,304

Total liabilities
 
769,106

 
123,728

 
76,884

 
498,283

 
(310,917
)
 
1,157,084

Stockholders’/invested equity
 
26,630

 
405,200

 
57,864

 
288,718

 
(751,782
)
 
26,630

Total liabilities and equity
 
$
795,736

 
$
528,928

 
$
134,748

 
$
787,001

 
$
(1,062,699
)
 
$
1,183,714


21



QUIKSILVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Balance Sheet
October 31, 2014
In thousands
 
Quiksilver,
Inc.
 
QS Wholesale,
Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
158

 
$
2,867

 
$
(2,701
)
 
$
46,340

 
$

 
$
46,664

Restricted cash
 

 

 

 
4,687

 

 
4,687

Trade accounts receivable, net
 

 
51,663

 
34,779

 
224,572

 

 
311,014

Other receivables
 
10

 
3,402

 
1,071

 
36,644

 
(280
)
 
40,847

Inventories
 

 
25,681

 
72,761

 
203,529

 
(17,454
)
 
284,517

Deferred income taxes
 

 
21,554

 

 
4,926

 
(21,554
)
 
4,926

Prepaid expenses and other current assets
 
1,579

 
6,209

 
2,941

 
17,351

 

 
28,080

Intercompany balances
 

 
258,808

 

 

 
(258,808
)
 

Current portion of assets held for sale
 

 

 
28

 
20,237

 

 
20,265

Total current assets
 
1,747

 
370,184

 
108,879

 
558,286

 
(298,096
)
 
741,000

Restricted cash
 

 
16,514

 

 

 

 
16,514

Fixed assets, net
 
20,381

 
34,408

 
21,259

 
137,720

 

 
213,768

Intangible assets, net
 
6,674

 
43,815

 
1,150

 
83,871

 

 
135,510

Goodwill
 

 
61,982

 
11,089

 
7,551

 

 
80,622

Other assets
 
7,097

 
5,160

 
1,255

 
33,574

 

 
47,086

Deferred income taxes long-term
 
30,807

 

 
2,052

 
16,088

 
(32,859
)
 
16,088

Investment in subsidiaries
 
722,935

 
1,525

 

 

 
(724,460
)
 

Assets held for sale, net of current portion
 

 

 

 
5,394

 

 
5,394

Total assets
 
$
789,641

 
$
533,588

 
$
145,684

 
$
842,484

 
$
(1,055,415
)
 
$
1,255,982

LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Lines of credit
 
$

 
$

 
$

 
$
32,929

 
$

 
$
32,929

Accounts payable
 
4,582

 
40,942

 
22,008

 
100,775

 

 
168,307

Accrued liabilities
 
17,887

 
15,092

 
7,230

 
72,492

 

 
112,701

Current portion of long-term debt
 

 
600

 

 
1,832

 

 
2,432

Income taxes payable
 

 

 

 
1,404

 
(280
)
 
1,124

Deferred income taxes
 
31,450

 

 
4,925

 
4,807

 
(21,554
)
 
19,628

Intercompany balances
 
179,251

 

 
39,265

 
40,292

 
(258,808
)
 

Current portion of assets held for sale
 

 

 
6

 
13,260

 

 
13,266

Total current liabilities
 
233,170

 
56,634

 
73,434

 
267,791

 
(280,642
)
 
350,387

Long-term debt
 
501,416

 
22,657

 

 
269,156

 

 
793,229

Other long-term liabilities
 
1,179

 
9,800

 
7,420

 
20,943

 

 
39,342

Deferred income taxes long-term
 

 
38,052

 

 
11,597

 
(32,859
)
 
16,790

Total liabilities
 
735,765

 
127,143

 
80,854

 
569,487

 
(313,501
)
 
1,199,748

Stockholders’/invested equity
 
53,876

 
406,445

 
64,830

 
270,639

 
(741,914
)
 
53,876

Non-controlling interest
 

 

 

 
2,358

 

 
2,358

Total liabilities and equity
 
$
789,641

 
$
533,588

 
$
145,684

 
$
842,484

 
$
(1,055,415
)
 
$
1,255,982


22



QUIKSILVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statement of Cash Flows
Three Months Ended January 31, 2015
In thousands
 
Quiksilver, 
Inc.
 
QS Wholesale,
Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
 
 
 
Net (loss)/income
 
$
(10,770
)
 
$
(1,245
)
 
$
(6,966
)
 
$
11,323

 
$
(3,900
)
 
$
(11,558
)
Adjustments to reconcile net (loss)/income to net cash (used in)/provided by operating activities:
 
 
 
 
 
 
 
 
 
 
 
 
Income from discontinued operations
 

 

 
2

 
(6,734
)
 

 
(6,732
)
Depreciation and amortization
 
738

 
2,373

 
1,573

 
6,074

 

 
10,758

Stock-based compensation
 
1,769

 

 

 

 

 
1,769

Provision for doubtful accounts
 

 
82

 
206

 
1,310

 

 
1,598

Asset impairments
 

 

 

 
255

 

 
255

Equity in earnings
 
(3,106
)
 
(324
)
 

 
596

 
3,430

 
596

Non-cash interest expense
 
507

 
299

 

 
51

 

 
857

Deferred income taxes
 

 

 

 
(5,225
)
 

 
(5,225
)
Other adjustments to reconcile net (loss)/income
 
(154
)
 
(615
)
 
384

 
80

 

 
(305
)
Changes in operating assets and liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Trade accounts receivable
 

 
7,461

 
12,437

 
12,329

 

 
32,227

Inventories
 

 
(8,038
)
 
(2,267
)
 
(29,889
)
 
470

 
(39,724
)
Intercompany
 
16,346

 
18,607

 
(28,061
)
 
(6,892
)
 

 

Other operating assets and liabilities
 
8,992

 
(10,697
)
 
(2,109
)
 
14,483

 

 
10,669

Cash (used in)/provided by operating activities of continuing operations
 
14,322

 
7,903

 
(24,801
)
 
(2,239
)
 

 
(4,815
)
Cash used in operating activities of discontinued operations
 

 

 
(2
)
 
4,670

 

 
4,668

Net cash (used in)/provided by operating activities
 
14,322

 
7,903

 
(24,803
)
 
2,431

 

 
(147
)
Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
 
 
 
Proceeds from the sale of properties and equipment
 

 

 

 
455

 

 
455

Capital expenditures
 
(2,000
)
 
(887
)
 
(4,318
)
 
(8,739
)
 

 
(15,944
)
Changes in restricted cash
 

 
16,514

 

 
(976
)
 

 
15,538

Cash used in investing activities of continuing operations
 
(2,000
)
 
15,627

 
(4,318
)
 
(9,260
)
 

 
49

Cash provided by investing activities of discontinued operations
 

 

 

 
10,713

 

 
10,713

Net cash (used in)/provided by investing activities
 
(2,000
)
 
15,627

 
(4,318
)
 
1,453

 

 
10,762

Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
 
 
 
Borrowings on lines of credit
 

 

 

 
11,770

 

 
11,770

Payments on lines of credit
 

 

 

 
(16,575
)
 

 
(16,575
)
Borrowings on long-term debt
 

 
22,515

 

 
20,219

 

 
42,734

Payments on long-term debt
 

 
(16,600
)
 

 
(15,820
)
 

 
(32,420
)
Stock option exercises and employee stock purchases
 
372

 

 

 

 

 
372

Intercompany
 
(12,549
)
 
(14,920
)
 
27,469

 

 

 

Cash provided by financing activities of continuing operations
 
(12,177
)
 
(9,005
)
 
27,469

 
(406
)
 

 
5,881

Net cash provided by financing activities
 
(12,177
)
 
(9,005
)
 
27,469

 
(406
)
 

 
5,881

Effect of exchange rate changes on cash
 
(146
)
 

 

 
(2,358
)
 

 
(2,504
)
Net increase/(decrease) in cash and cash equivalents
 
(1
)
 
14,525

 
(1,652
)
 
1,120

 

 
13,992

Cash and cash equivalents, beginning of period
 
158

 
2,867

 
(2,701
)
 
46,340

 

 
46,664

Cash and cash equivalents, end of period
 
$
157

 
$
17,392

 
$
(4,353
)
 
$
47,460

 
$

 
$
60,656


23



QUIKSILVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statement of Cash Flows
Three Months Ended January 31, 2014
In thousands
 
Quiksilver, 
Inc.
 
QS Wholesale,
Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$
15,387

 
$
7,323

 
$
25,349

 
$
12,867

 
$
(45,199
)
 
$
15,727

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

 
(23,922
)
 
(13,531
)
 
(164
)
 

 
(37,617
)
Depreciation and amortization
 
585

 
2,589

 
1,330

 
6,041

 

 
10,545

Stock-based compensation
 
5,063

 

 

 

 

 
5,063

Provision for doubtful accounts
 

 
1,088

 
(209
)
 
783

 

 
1,662

Asset impairments
 

 

 
222

 
661

 

 
883

Equity in earnings
 
(35,932
)
 
74

 

 
352

 
35,858

 
352

Non-cash interest expense
 
462

 
239

 

 
213

 

 
914

Deferred income taxes
 

 

 

 
5

 

 
5

Other adjustments to reconcile net income
 
35

 
(9
)
 
(219
)
 
2,992

 

 
2,799

Changes in operating assets and liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Trade accounts receivable
 

 
10,795

 
12,403

 
38,707

 

 
61,905

Inventories
 

 
(8,275
)
 
(2,386
)
 
(29,849
)
 
9,341

 
(31,169
)
Other operating assets and liabilities
 
12,141

 
(11,998
)
 
(16,366
)
 
(18,962
)
 

 
(35,185
)
Cash (used in)/provided by operating activities of continuing operations
 
(2,259
)
 
(22,096
)
 
6,593

 
13,646

 

 
(4,116
)
Cash used in by operating activities of discontinued operations
 

 

 
(1,861
)
 
(5,334
)
 

 
(7,195
)
Net cash (used in)/provided by operating activities
 
(2,259
)
 
(22,096
)
 
4,732

 
8,312

 

 
(11,311
)
Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
 
 
 
Capital expenditures
 
(1,970
)
 
(2,397
)
 
(1,299
)
 
(4,892
)
 

 
(10,558
)
Changes in restricted cash
 

 
(60,214
)
 

 
(403
)
 

 
(60,617
)
Cash used in investing activities of continuing operations
 
(1,970
)
 
(62,611
)
 
(1,299
)
 
(5,295
)
 

 
(71,175
)
Cash provided by/(used) in investing activities of discontinued operations
 

 
58,060

 
18,991

 
(332
)
 

 
76,719

Net cash (used in)/provided by investing activities
 
(1,970
)
 
(4,551
)
 
17,692

 
(5,627
)
 

 
5,544

Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
 
 
 
Borrowings on lines of credit
 

 

 

 
18,904

 

 
18,904

Payments on lines of credit
 

 

 

 
(16,591
)
 

 
(16,591
)
Borrowings on long-term debt
 

 
40,500

 

 
11,562

 

 
52,062

Payments on long-term debt
 

 
(18,500
)
 

 
(15,279
)
 

 
(33,779
)
Payments of debt issuance costs
 
(373
)
 
38

 

 

 

 
(335
)
Stock option exercises and employee stock purchases
 
3,138

 

 

 

 

 
3,138

Intercompany
 
1,463

 
8,134

 
(24,659
)
 
15,062

 

 

Cash provided by/(used in) financing activities of continuing operations
 
4,228

 
30,172

 
(24,659
)
 
13,658

 

 
23,399

Net cash provided by/(used in) financing activities
 
4,228

 
30,172

 
(24,659
)
 
13,658

 

 
23,399

Effect of exchange rate changes on cash
 

 

 

 
(4,924
)
 

 
(4,924
)
Net (decrease)/increase in cash and cash equivalents
 
(1
)
 
3,525

 
(2,235
)
 
11,419

 

 
12,708

Cash and cash equivalents, beginning of period
 
35

 
3,733

 
296

 
53,216

 

 
57,280

Cash and cash equivalents, end of period
 
$
34

 
$
7,258

 
$
(1,939
)
 
$
64,635

 
$

 
$
69,988


24



Note 17 — Restatement of Prior Period Financial Statements
Subsequent to the issuance of the Company's consolidated financial statements for the year ended October 31, 2014, the Company identified errors related to inappropriate revenue cutoff (revenues inappropriately recognized prior to meeting the GAAP revenue recognition criteria) that impacted prior periods, including each quarter of fiscal 2014 and earlier periods. The Company determined that certain shipments previously reported as revenue in its Americas wholesale channel did not meet the criteria for revenue recognition until the subsequent quarter when the shipments were delivered to, and accepted by, its wholesale customers. The impact of the inappropriate revenue cutoff was to understate net revenue and gross margin and to overstate accumulated deficit for the three month period ended January 31, 2014. For fiscal 2014 as a whole, the impact of this error was to overstate net revenue and gross margin and to understate accumulated deficit.
The Company assessed the materiality of these errors to each of the 2014, 2013 and 2012 fiscal years, as well as to each quarter of fiscal 2014, in accordance with the Securities and Exchange Commission's Staff Accounting Bulletin ("SAB") No. 99 and concluded that the errors were not material to any of these periods. However, the Company also concluded that recording an out of period correction would be material to the three months ended January 31, 2015, as it would materially understate first quarter results and key revenue trends within its Americas segment. Consequently, in accordance with SAB No. 108, the accompanying condensed consolidated statement of operations for the first quarter ended January 31, 2014 and condensed consolidated balance sheet as of October 31, 2014 have been revised to correct for these immaterial errors.
During the first quarter of fiscal 2015, the Company also identified an error in the recording of estimated non-cash impairment charges within discontinued operations related to Surfdome in the fourth quarter of fiscal 2014. The impact of this error was to understate assets held for sale, accumulated other comprehensive income, and non-controlling interest, and to overstate accumulated deficit as of October 31, 2014. The Company assessed the materiality of this error and concluded it was not material to previously reported annual and interim amounts. The Company corrected the error in the first quarter of fiscal 2015 in connection with the closing of the sale of Surfdome.

25



The table below is a summary of the impact of these corrections:
In thousands
 
As Previously Reported
 
As Restated
Selected Balance Sheet Data:
 
 
 
 
At October 31, 2014:
 
 
 
 
Trade accounts receivable
 
$
319,840

 
$
311,014

Inventories
 
278,780

 
284,517

Total current assets
 
744,089

 
741,000

Assets held for sale, net of current portion
 
2,987

 
5,394

Total assets
 
1,256,664

 
1,255,982

Income taxes payable
 
1,156

 
1,124

Current portion of assets held for sale
 
12,640

 
13,266

Total current liabilities
 
349,793

 
350,387

Total liabilities
 
1,199,154

 
1,199,748

Accumulated deficit
 
(585,263
)
 
(587,407
)
Accumulated other comprehensive income
 
57,298

 
57,288

Total Quiksilver, Inc. stockholders' equity
 
56,030

 
53,876

Non-controlling interest
 
1,480

 
2,358

Total equity
 
57,510

 
56,234

 
 
 
 
 
Selected Statement of Operations Data:
 
 
 
 
For the Three Months Ended January 31, 2014:
 
 
 
 
Revenues, net
 
$
392,612

 
$
394,910

Gross margin
 
199,836

 
200,640

Operating loss
 
(4,831
)
 
(4,027
)
Loss from continuing operations
 
(22,694
)
 
(21,890
)
Net income attributable to Quiksilver, Inc.
 
15,387

 
16,191

Net income per share attributable to Quiksilver, Inc.
 
$
0.09

 
$
0.10

 
 
 
 
 
Selected Americas Segment Data:
 
 
 
 
For the Three Months Ended January 31, 2014:
 
 
 
 
Revenues, net
 
$
173,165

 
$
175,463

Gross margin
 
75,110

 
75,914

Operating loss
 
(14,673
)
 
(13,869
)
 
 
 
 
 
Selected Segment Data:
 
 
 
 
At October 31, 2014:
 
 
 
 
Americas identifiable assets
 
$
467,920

 
$
464,831

EMEA identifiable assets
 
510,896

 
513,303

The correction of these errors had no net impact on the Company’s net cash used in operating activities for the three months ended January 31, 2014.

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 management discussion and analysis (MD&A) 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, 2014 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:
the matters discussed below under "Known or Anticipated Trends"; and
our belief that we have sufficient liquidity to fund our business operations during the next twelve months; and
our expectations regarding our level of capital expenditures in fiscal 2015; and
our expectations regarding the future performance of our business.
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 improve our business performance;
our ability to effectively transition our supply chain and certain other business processes to global scope;
future expenditures for capital projects;
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 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;
our ability to finance our operations;

27



the impact of labor disruptions or restrictions in the timely transportation of products;
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
We began operations in 1976 as a California company making boardshorts for surfers in the United States under a license agreement with the Quiksilver brand founders in Australia. We reincorporated in Delaware and went public in 1986 and, in subsequent years, acquired the worldwide licenses and trademarks that created the global company that we are today. Our business is rooted in the strong heritage and authenticity of our core brands, Quiksilver, Roxy and DC, each of which caters to the casual, outdoor lifestyle associated with surfing, skateboarding, snowboarding, BMX and motocross, among other activities. Today, our products are sold in over 115 countries through a wide range of distribution points, including wholesale accounts (surf shops, skate shops, snow shops, sporting goods stores, discount centers, specialty stores, select department stores, and licensed stores), 713 Company-owned retail stores, and via our e-commerce websites. We operate in the outdoor market of the sporting goods industry in which we design, develop and distribute branded apparel, footwear, accessories and related products. 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 Australia, New Zealand, and Pacific Rim markets, includes revenues primarily from Australia, Japan, New Zealand, South Korea, Taiwan, and Indonesia. Royalties earned from various licensees in other international territories are categorized in Corporate Operations along with revenues from sourcing services for our licensees. For information regarding the operating income and identifiable assets attributed to our operating segments, see Note 3 —Segment Information, to our condensed consolidated financial statements.
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 due primarily to the impact of licensing and currency exchange rates. Within this trend, we expect the rate of year-over-year net revenue erosion to decrease in the North America and EMEA wholesale channels. Also, we expect continued net revenue growth in our emerging markets and our e-commerce channel; and
Year-over-year SG&A reductions continuing due to expense reduction initiatives implemented in fiscal 2014 and 2015, as well as the impact of foreign currency exchange rates; and
Capital expenditures continuing below prior year capital investment levels.
Discontinued Operations
In order to improve our focus on the operations and development of our three core brands (Quiksilver, Roxy and DC), we have divested certain non-core businesses. In November 2013, we completed the sale of Mervin Manufacturing, Inc. ("Mervin"), a manufacturer of snowboards and related products, 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 the "Hawk" brand, for $19 million. The sale of Mervin and Hawk generated a net after-tax gain of approximately $38 million, which is included in income from discontinued operations for the first quarter of fiscal 2014. Our sale of the Mervin and Hawk businesses generated income tax expense of approximately $10 million during the first quarter of fiscal 2014 within discontinued operations. However, as we did not expect to pay income tax on these sales after application of available loss carry-forwards, an offsetting income tax benefit was recognized within continuing operations. In December 2014, we sold our 51% ownership stake in Surfdome Shop Ltd., a multi-brand e-commerce business ("Surfdome"). At the completion of the sale, we received net proceeds of

28



approximately $16 million, which included payments to us from Surfdome for all outstanding loans and trade receivables. The transaction resulted in an after-tax gain of $7 million, which is included in income from discontinued operations.
The Mervin, Hawk and Surfdome businesses are presented as discontinued operations in our condensed consolidated financial statements for all periods presented. See Note 15 — Discontinued Operations, to our condensed consolidated financial statements for further discussion of the operating results of our discontinued businesses.
Restatement of Prior Period Financial Statements
Subsequent to the issuance of our consolidated financial statements for the year ended October 31, 2014, we identified and corrected certain immaterial errors related to inappropriate net revenue cutoff in fiscal 2014, 2013 and 2012. During the first quarter of fiscal 2015, we also identified an error in the recording of estimated non-cash impairment charges within discontinued operations related to Surfdome in the fourth quarter of fiscal 2014. See Note 17 — Restatement of Prior Period Financial Statements, in our condensed consolidated financial statements contained elsewhere in this report for additional details. Consequently, the condensed consolidated statement of operations for the first quarter of fiscal 2014 and balance sheet as of October 31, 2014 have been revised to correct for these immaterial errors. MD&A included herein is based on the revised financial results.
Results of Operations
The following table sets forth selected statement of operations data expressed as a percentage of net revenues for the first quarter of fiscal 2015 and 2014. The discussion of our operating results from continuing operations that follows should be read in conjunction with the table.
 
 
Three Months Ended January 31,
 
 
2015
 
2014
Statements of Operations data
 
 
 
 
Revenues, net
 
100.0
 %
 
100.0
 %
Gross profit
 
49.7
 %
 
50.8
 %
Selling, general and administrative expense
 
50.0
 %
 
51.6
 %
Asset impairments
 
0.1
 %
 
0.2
 %
Operating loss
 
(0.4
)%
 
(1.0
)%
Interest expense, net
 
5.4
 %
 
4.9
 %
Foreign currency loss
 
0.2
 %
 
0.7
 %
Loss before benefit for income taxes
 
(6.0
)%
 
(6.7
)%
First Quarter (Three Months) Ended January 31, 2015 Compared to First Quarter (Three Months) Ended January 31, 2014

Revenues, net
Reconciliation of GAAP Results to Non-GAAP Measures
In order to provide additional information regarding comparable growth rates in our regional operating segments, brands, distribution channels and product groups, we make reference to net revenues on a "constant currency continuing category" basis, which is a non-GAAP measure. Our use of this non-GAAP measure is not intended to be a replacement of net revenues reported on a GAAP basis and readers should not ignore our GAAP-based net revenue results. We believe constant currency continuing category reporting provides additional perspective into the changes in our net revenues, as it adjusts for the effect of changing foreign currency exchange rates from period to period and the net revenue impact from product categories that have been transitioned to a third-party licensing model. Constant currency is calculated by taking the average foreign currency exchange rate for the current period and applying that same rate to the comparable prior year period. Continuing category impacts are determined by removing the comparable prior period wholesale channel net revenues generated from product categories which are now licensed, as well as the current period licensing net revenues generated from those same product categories.
The following tables present net revenues from continuing operations by segment, brand, channel and product group on an as reported (GAAP) basis, and on a constant currency continuing category (non-GAAP) basis, for the first three months of fiscal 2015 and 2014:

29



Revenues, net – by Segment
Net revenues by segment, in both historical and a constant currency continuing category basis, for the first quarter of fiscal 2015 and 2014 were as follows:
In millions

Americas

EMEA

APAC

Corporate

Total
Three Months Ended January 31, 2015










Net revenues as reported

$
148

 
$
126

 
$
66

 
$
1

 
$
341

Less licensing revenues from licensed product categories

(1
)
 

 

 

 
(1
)
Constant currency continuing category net revenues

$
147

 
$
126

 
$
66

 
$
1

 
$
340












Three Months Ended January 31, 2014










Net revenues as reported

$
175

 
$
149

 
$
70

 
$
1

 
$
395

Impact of fiscal 2015 foreign exchange rates

(4
)
 
(20
)
 
(6
)
 

 
(30
)
Less wholesale net revenues from licensed product categories

(11
)
 

 

 

 
(11
)
Constant currency continuing category net revenues

$
160

 
$
129

 
$
64

 
$
1

 
$
354












Change in net revenues as reported ($)

$
(27
)
 
$
(23
)
 
$
(4
)
 
$

 
$
(54
)
Change in net revenues as reported (%)

(15
)%
 
(15
)%
 
(6
)%
 
%
 
(14
)%
Change in constant currency continuing category net revenues ($)

$
(13
)
 
$
(3
)
 
$
2

 
$

 
$
(14
)
Change in constant currency continuing category net revenues (%)

(8
)%
 
(2
)%
 
3
 %
 
%
 
(4
)%
Net revenues in our Americas segment decreased $27 million, or 15%, on an as reported basis during the first quarter of fiscal 2015 versus the comparable prior year period. Changes in foreign currency exchange rates contributed $4 million of this decrease. In addition, our licensing of peripheral product categories contributed $11 million of this decrease. Net revenues on a constant currency continuing category basis decreased by $13 million, or 8%, due to a reduction in apparel category net revenues of $13 million in the Americas wholesale channel. Americas wholesale apparel net revenues decreased across all three core brands, but more significantly in the DC and Roxy brands. Net revenues in the emerging markets of Brazil and Mexico increased by a combined 12% on an as reported basis (23% in constant currency). Net revenues in the Americas retail and e-commerce channels increased on a constant currency continuing category basis in the first quarter of fiscal 2015, offsetting some of the net revenue decline in the wholesale channel.
Net revenues in our EMEA segment decreased $23 million, or 15%, on an as reported basis during the first quarter of fiscal 2015 versus the comparable prior year period. Changes in foreign currency exchange rates contributed $20 million of this decrease. Our licensing of peripheral product categories did not materially affect the EMEA region. Net revenues on a constant currency continuing category basis decreased by $3 million, or 2%, primarily due to a reduction in apparel net revenues of $11 million in the wholesale channel. EMEA wholesale apparel net revenues decreased across all three core brands, but more significantly in the Quiksilver and Roxy brands. Net revenues in the emerging market of Russia decreased 29% on an as reported basis, but increased 13% on a constant currency basis, reflecting the significant negative impact of currency exchange rate changes in Russia. Net revenues in the e-commerce channel increased significantly on a constant currency continuing category basis in the first quarter of fiscal 2015, offsetting some of the net revenue decline in the wholesale channel.
Net revenues in our APAC segment decreased by $4 million, or 6%, on an as reported basis during the first quarter of fiscal 2015 versus the comparable prior year period. Changes in foreign currency exchange rates contributed $6 million of this decrease. Our licensing of peripheral product categories did not affect the APAC region. Net revenues on a constant currency continuing category basis increased by $2 million, or 3%, primarily due to e-commerce channel net revenue growth. Net revenues in the emerging markets of China, South Korea, Taiwan and Indonesia increased by a combined 15% on an as reported basis (20% in constant currency).
Aggregate net revenues in our emerging markets, which include Brazil, Mexico, Russia, Indonesia, South Korea, China, and Taiwan, increased 3% versus the prior year period on an as reported basis (20% in constant currency). These markets are reported within their respective regional segments above.

30



Revenues, net – By Brand
Net revenues by brand, in both historical and a constant currency continuing category basis, for the first quarter of fiscal 2015 and 2014 were as follows:
In millions

Quiksilver

Roxy

DC

Other

Total
Three Months Ended January 31, 2015










Net revenues as reported

$
141

 
$
100

 
$
89

 
$
11

 
$
341

Less licensing revenues from licensed product categories

(1
)
 

 

 

 
(1
)
Constant currency continuing category net revenues

$
140

 
$
100

 
$
89

 
$
11

 
$
340












Three Months Ended January 31, 2014










Net revenues as reported

$
164

 
$
118

 
$
103

 
$
10

 
$
395

Impact of fiscal 2015 foreign exchange rates

(13
)
 
(8
)
 
(8
)
 
(1
)
 
(30
)
Less wholesale net revenues from licensed product categories

(5
)
 
(3
)
 
(3
)
 

 
(11
)
Constant currency continuing category net revenues

$
146

 
$
107

 
$
92

 
$
9

 
$
354












Change in net revenues as reported ($)

$
(23
)
 
$
(18
)
 
$
(14
)
 
$
1

 
$
(54
)
Change in net revenues as reported (%)

(14
)%
 
(15
)%
 
(14
)%
 
10
%
 
(14
)%
Change in constant currency continuing category net revenues ($)

$
(6
)
 
$
(7
)
 
$
(3
)
 
$
2

 
$
(14
)
Change in constant currency continuing category net revenues (%)

(4
)%
 
(7
)%
 
(3
)%
 
22
%
 
(4
)%
Quiksilver brand net revenues decreased $23 million, or 14%, on an as reported basis in the first quarter of fiscal 2015 versus the prior year. Changes in foreign currency exchange rates contributed $13 million of this decrease. Our licensing of peripheral product categories contributed $5 million of this decrease. Net revenues on a constant currency continuing category basis decreased by $6 million, or 4%, primarily due to lower apparel net revenues in the EMEA wholesale channel.
Roxy brand net revenues decreased $18 million, or 15%, on an as reported basis in the first quarter of fiscal 2015 versus the prior year. Changes in foreign currency exchange rates contributed $8 million of this decrease. Our licensing of peripheral product categories contributed $3 million of this decrease. Net revenues on a constant currency continuing category basis decreased $7 million, or 7%, primarily due to lower apparel net revenues in the Americas and EMEA wholesale channels.
DC brand net revenues decreased $14 million, or 14%, on an as reported basis in the first quarter of fiscal 2015 versus the prior year. Changes in foreign currency exchange rates contributed $8 million of this decrease. Our licensing of peripheral product categories contributed $3 million of this decrease. Net revenues on a constant currency continuing category basis decreased $3 million, or 3%, primarily due to lower apparel net revenues in the Americas and EMEA wholesale channels.

31



Revenues, net – By Channel
Net revenues by channel, in both historical and a constant currency continuing category basis, for the first quarter of fiscal 2015 and 2014 were as follows:
In millions
 
Wholesale
 
Retail
 
E-com
 
Licensing
 
Total
Three Months Ended January 31, 2015
 
 
 
 
 
 
 
 
 
 
Net revenues as reported
 
$
192

 
$
119

 
$
27

 
$
3

 
$
341

Less licensing revenues from licensed product categories
 

 

 

 
(1
)
 
(1
)
Constant currency continuing category net revenues
 
$
192

 
$
119

 
$
27

 
$
2

 
$
340

 
 
 
 
 
 
 
 
 
 
 
Three Months Ended January 31, 2014
 
 
 
 
 
 
 
 
 
 
Net revenues as reported
 
$
239

 
$
131

 
$
23

 
$
2

 
$
395

Impact of fiscal 2015 foreign exchange rates
 
(17
)
 
(12
)
 
(1
)
 

 
(30
)
Less wholesale net revenues from licensed product categories
 
(11
)
 

 

 

 
(11
)
Constant currency continuing category net revenues
 
$
211

 
$
119

 
$
22

 
$
2

 
$
354

 
 
 
 
 
 
 
 
 
 
 
Change in net revenues as reported ($)
 
$
(47
)
 
$
(12
)
 
$
4

 
$
1

 
$
(54
)
Change in net revenues as reported (%)
 
(20
)%
 
(9
)%
 
17
%
 
50
%
 
(14
)%
Change in constant currency continuing category net revenues ($)
 
$
(19
)
 
$

 
$
5

 
$

 
$
(14
)
Change in constant currency continuing category net revenues (%)
 
(9
)%
 
 %
 
23
%
 
%
 
(4
)%
Wholesale net revenues decreased $47 million, or 20%, on an as reported basis in the first quarter of fiscal 2015 versus the prior year. Changes in foreign currency exchange rates contributed $17 million of this decrease. Our licensing of peripheral product categories contributed $11 million of this decrease. On a constant currency continuing category basis, wholesale net revenues decreased $19 million, or 9%, primarily due to lower apparel net revenues in our Americas and EMEA wholesale channels. Wholesale channel apparel net revenues decreased in each core brand.
Retail net revenues decreased $12 million, or 9%, on as reported basis in the first quarter of fiscal 2015 versus the prior year. Changes in foreign currency exchange rates accounted for substantially all of this decrease. Our licensing of peripheral product categories did not affect the retail channel. Global retail same-store sales were down 3% in the first quarter of fiscal 2015, which was offset by 68 net new store openings during the previous twelve months. On a constant currency continuing category basis, retail net revenues were flat versus the prior year.
E-commerce net revenues increased $4 million, or 17%, on an as reported basis in the first quarter of fiscal 2015 versus the prior year. Changes in foreign currency exchange rates resulted in a $1 million decrease in net revenues. Our licensing of peripheral product categories did not affect the e-commerce channel. E-commerce net revenues increased in our EMEA and APAC segments as we expanded our online service area. E-commerce net revenues increased across all three core brands.


32



Revenues, net – By Product Group
Net revenues by product group, in both historical and a constant currency continuing category basis, for the first quarter of fiscal 2015 and 2014 were as follows:
In millions
 
Apparel and Accessories
 
Footwear
 
Total
Three Months Ended January 31, 2015
 
 
 
 
 
 
Net revenues as reported
 
$
252

 
$
89

 
$
341

Less licensing revenue from licensed product categories
 
(1
)
 

 
(1
)
Constant currency continuing category net revenues
 
$
251

 
$
89

 
$
340

 
 
 
 
 
 
 
Three Months Ended January 31, 2014
 
 
 
 
 
 
Net revenues as reported
 
$
306

 
$
89

 
$
395

Impact of fiscal 2015 foreign exchange rates
 
(24
)
 
(6
)
 
(30
)
Less licensing revenue from licensed product categories
 
(11
)
 

 
(11
)
Constant currency continuing category net revenues
 
$
271

 
$
83

 
$
354

 
 
 
 
 
 
 
Change in net revenues as reported ($)
 
$
(54
)
 
$

 
$
(54
)
Change in net revenues as reported (%)
 
(18
)%
 
%
 
(14
)%
Change in constant currency continuing category net revenues ($)
 
$
(20
)
 
$
6

 
$
(14
)
Change in constant currency continuing category net revenues (%)
 
(7
)%
 
7
%
 
(4
)%
Apparel and accessories net revenues decreased $54 million, or 18%, on an as reported basis in the first quarter of fiscal 2015 versus the prior year. Changes in foreign currency exchange rates contributed $24 million of this decrease. Our licensing of peripheral product categories contributed $11 million of this decrease. On a constant currency continuing category basis, net revenues decreased $20 million, or 7%, primarily due to net revenue declines in the wholesale channel across all three core brands.
Footwear net revenues were flat on an as reported basis in the first quarter of fiscal 2015 versus the prior year. Changes in foreign currency exchange rates contributed a $6 million decrease in net revenues. Our licensing of peripheral product categories did not affect our footwear product group. On a constant currency continuing category basis, net revenues increased $6 million, or 7%, with increases in each core brand and each channel.
Gross Profit
Gross profit decreased to $169 million in the first quarter of fiscal 2015 from $201 million in the comparable period of the prior year. Gross margin, or gross profit as a percentage of net revenues, declined to 49.7% in the first quarter of fiscal 2015 versus 50.8% in the prior year period. This 110 basis point decrease in gross margin was primarily due to unfavorable foreign currency exchange rate impacts (approximately 130 basis points), increased discounting in the Americas and EMEA wholesale channels (approximately 70 basis points), and increased air freight and other distribution costs associated with the U.S. West Coast port dispute (approximately 20 basis points), partially offset by net revenue growth from our higher margin direct-to-consumer channels (approximately 110 basis points).
Gross margin by regional segment for the first quarter of fiscal 2015 and 2014 was as follows:

 
Three Months Ended January 31,

Basis Point (bp)
Change
Increase (Decrease)
By regional segment
 
2015

2014

Americas
 
43.5
%
 
43.3
%
 
20 bp
EMEA
 
56.0
%
 
58.8
%
 
(280) bp
APAC
 
55.3
%
 
52.7
%
 
260 bp
Consolidated
 
49.7
%
 
50.8
%
 
(110) bp

33



Selling, General and Administrative Expense (“SG&A”)
SG&A from continuing operations decreased $33 million, or 16%, to $171 million in the first quarter of fiscal 2015 from $204 million in the prior year period. Changes in foreign currency exchange rates contributed approximately $13 million of this decrease. Of the remaining $20 million decrease, $11 million was attributable to reductions in employee compensation, $4 million was attributable to reduced professional fees, and the remainder was attributable to smaller savings from logistics, facilities, travel and other expenses.

SG&A by segment (in millions) as reported for the first quarter of fiscal 2015 and 2014 was as follows:
 
 
Three Months Ended January 31,
 
$ Change
Increase
(Decrease)
In millions
 
2015
 
2014
 
Americas
 
$
70


$
90


$
(20
)
EMEA
 
66


78


(12
)
APAC
 
35


33


1

Corporate Operations
 


3


(3
)
Consolidated
 
$
171


$
204


$
(33
)
SG&A by segment for the first quarter of fiscal 2014 has been reclassified to conform to the current year presentation as a result of the Company's centralization of certain global business functions. The decrease in Americas segment SG&A was primarily due to reductions in employee compensation, professional fees, and logistics expenses. The decrease in EMEA segment SG&A was primarily due to changes in foreign currency exchange rates and logistics expense reductions. The increase in APAC segment SG&A was primarily due to the allocation of certain expenses associated with global business functions. The decrease in Corporate Operations SG&A was primarily due to expense reduction initiatives and organizational changes that transitioned responsibility for certain costs to our other segments.
Asset Impairments
Asset impairment charges were $0.3 million in the first quarter of fiscal 2015 compared to $0.9 million in the first quarter of fiscal 2014, all related to under-performing retail stores.
Non-Operating Expenses
Net interest expense for the first quarter of fiscal 2015 was $18 million compared to $19 million in the first quarter of fiscal 2014. This decrease was primarily due to the impact of changes in foreign currency exchange rates on our euro-denominated interest expense and decreased year-over-year average net borrowings on our revolving credit lines.
Our foreign currency loss was $1 million in the first quarter of fiscal 2015 compared to $3 million in the prior year period. The reduction in currency translation loss resulted primarily from classifying certain investments made in our subsidiaries as long-term, which reduced our foreign currency exposure.
Our income tax benefit for the first quarter of fiscal 2015 was $2 million compared to $4 million in the first quarter of fiscal 2014. Our hedging instruments in Europe generated tax expense of approximately $5 million within other comprehensive income in the first quarter of fiscal 2015. 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 quarter of 2015 as we recorded tax expense in certain jurisdictions, but were unable to record certain tax benefits against 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 quarter of fiscal 2015 was $18 million, or $0.11 per share, compared to net loss of $22 million, or $0.13 per share, in the comparable period of the prior year. The lower net loss in the current year was primarily due to net savings in SG&A exceeding the reduction in gross profit generated from lower net revenues compared to the prior year period.

34



Financial Position, Capital Resources and Liquidity
The following table shows our cash, working capital and total indebtedness as of the dates indicated:
In millions
 
January 31,
2015
 
October 31,
2014
 
$ Change
Increase
(Decrease)
 
% Change
Increase
(Decrease)
Cash and cash equivalents
 
$61
 
$47
 
$14
 
30%
Restricted cash
 
6
 
21
 
(15)
 
(71)%
Working capital
 
383
 
391
 
(8)
 
(2)%
Total indebtedness
 
803
 
829
 
(26)
 
(3)%
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. At January 31, 2015, we had $61 million of cash on hand, $6 million in restricted cash, $60 million available on our credit facilities, and $15 million available for additional letters of credit in EMEA. Taken together, this represents cash and credit facility availability of $141 million at January 31, 2015. Our primary credit facilities mature in October 2016 and May 2018. We have no principal payments due on our 2017, 2018 or 2020 Notes before December 2017. Although we have experienced significant operating losses and cash flow volatility in recent years, we believe we have adequate liquidity to continue executing our plans to drive net revenue growth and operating efficiencies, as well as to provide adequate liquidity to each of our segments. Restricted cash at January 31, 2015 includes $4 million of the remaining proceeds from our sale of the Surfdome business during the first quarter of fiscal 2015. We expect to utilize the remaining proceeds during fiscal 2015.
Cash Flows

Cash Flows from Operating Activities
Net cash used in operating activities was $0.1 million for the three months ended January 31, 2015, a decrease in cash used of $11 million versus the comparable prior year period. The following table summarizes the major categories of changes in cash flows from operations for the three months ended January 31, 2015 and 2014:

 
 
Three Months Ended January 31,
 
 
In thousands
 
2015
 
2014
 
Change
Net (loss)/income
 
$
(11,558
)
 
$
15,727

 
$
(27,285
)
Net effect of non-cash reconciling adjustments
 
3,571

 
(15,394
)
 
18,965

Cash provided by/(used in) operating assets and liabilities
 
3,172

 
(4,449
)
 
7,621

Cash used in operating activities of continuing operations
 
(4,815
)
 
(4,116
)
 
(699
)
Cash provided by/(used in) operating activities of discontinued operations
 
4,668

 
(7,195
)
 
11,863

Net cash used in operating activities
 
$
(147
)
 
$
(11,311
)
 
$
11,164


This $11 million improvement in net cash used in operating activities was primarily attributable to a $12 million improvement in cash provided to operating activities from discontinued operations. Net cash used in operating activities of continuing operations was $5 million and $4 million in the first quarter of fiscal 2015 and 2014, respectively.

Cash Flows from Investing Activities
Net cash provided by investing activities was $11 million in the first quarter of fiscal 2015, an increase of $5 million compared to the prior year. This increase was primarily attributable to an improvement in net restricted cash provided of $10 million in the first quarter of fiscal 2015 compared to the prior year, partially offset by an increase in capital expenditures of $5 million. Capital expenditures in the first quarter of fiscal 2015 were primarily focused on company-owned retail stores. We expect capital expenditures in fiscal 2015 to be approximately $25 million. We intend to fund these expenditures from cash on hand, restricted cash, operating cash flows, and availability on our credit facilities.

Cash Flows from Financing Activities
Net cash provided by financing activities was $6 million in the first quarter of fiscal 2015, a decrease of $17 million compared to the prior year. This decrease in cash provided was primarily attributable to reductions in comparative net borrowings under our credit facilities of $15 million and proceeds from stock option exercises of $3 million.

35




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 $52 million to $259 million at January 31, 2015 compared to $311 million at October 31, 2014 due to the typical seasonality of our business. Compared to January 31, 2014, our net trade accounts receivable decreased $72 million, due primarily to our wholesale net revenue decline, and our average days sales outstanding (“DSO”) remained flat.
Our net inventories increased $22 million to $306 million at January 31, 2015 compared to $285 million at October 31, 2014. Compared to January 31, 2014, net inventories decreased $59 million and inventory days on hand decreased 6%. The decrease in net inventories was primarily due to tighter buying practices versus the comparable prior year period.
Income Taxes
As of January 31, 2015, 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, 2014.
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, which is generally at the time of shipment in the wholesale channel, at the point of purchase in the retail channel, and at the point of delivery in the e-commerce channel. 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 as reductions to revenues when revenues are recorded. Related losses have historically been within our expectations, but there can be no assurance that we will continue to experience the same loss rates. If actual or expected future returns were significantly greater or lower than the allowances we have established, we would record a reduction or increase to net revenues in the period when such determination is known.

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. It is not uncommon for some of our customers to have financial difficulties from time to time. This is normal given the wide variety of our account base, which includes small surf shops, medium-sized retail chains, and some large department store chains. Upon determination that a significantly greater or lower reserve is necessary, we record a charge or credit to selling, general and administrative expense in the period when such determination is known.

Inventories
We value inventories at the cost to purchase and/or manufacture the product or the current estimated market value of the inventory, whichever is lower. We regularly review our inventory quantities on hand, and adjust inventory values with a charge to cost of sales in the period in which such determination is known for excess and obsolete inventory based primarily on estimated forecasts of product demand and market value.

36




Long-Lived Assets
We acquire tangible and intangible assets in the normal course of our business. We evaluate the recovery of non-amortizing intangible assets in conjunction with our goodwill evaluation. We evaluate the recoverability of the carrying amount of other 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. Impairment indicators include, but are not limited to, cost factors, financial performance, adverse legal or regulatory developments, industry and market conditions and general economic conditions. 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 in the period in which such determination is known. We use our best judgment based on the most current 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. The estimates we have used are consistent with the plans and estimates that we use to manage our business. It is possible, however, that the plans may change and estimates used may prove to be inaccurate. If our actual results, or the plans and estimates used in future impairment analyses, are lower than the original estimates used to assess the recoverability of these assets, we could incur future impairment charges.

Goodwill
Our business acquisitions have resulted in the recognition of goodwill. Goodwill is not amortized but is subject to annual impairment tests (in the fourth fiscal quarter for us) and between annual tests, if events indicate it is more likely than not that the fair value of a reporting unit is less than its carrying value. Significant judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include deterioration in general economic conditions, negative developments in equity and credit markets, adverse changes in the markets in which we operate, increases in costs that have a negative
effect on earnings and cash flows, or a trend of negative or declining cash flows over multiple periods, among others.

Goodwill is allocated at the reporting unit level, which is defined as an operating segment or one level below an operating segment. We have two reporting units under which we evaluate goodwill for impairment; the Americas and APAC. The application of the goodwill impairment test requires significant judgment, including the identification of the reporting units, and the determination of both the carrying value and the fair value of the reporting units. The carrying value of each reporting unit is determined by assigning the assets and liabilities, including existing goodwill, to those reporting units. The determination of the fair value of each reporting unit requires significant judgment, including our estimation of future cash flows, which is dependent upon internal forecasts, estimation of the long-term rate of growth of our businesses, estimation of the useful lives of the assets which will generate the cash flows, determination of our weighted-average cost of capital and other factors. In determining the appropriate discount rate, we considered the weighted-average cost of capital for each reporting unit which, among other factors, considers the cost of common equity capital and the marginal cost of debt.

The estimates and assumptions used to calculate the fair value of a reporting unit may change from period to period based upon actual operating results, market conditions and our view of future trends, and are subject to a high degree of uncertainty. The estimates we have used are consistent with the plans and estimates that we use to manage our business. It is possible, however, that the plans may change and estimates used may prove to be inaccurate. The estimated fair value of a reporting unit could change materially if different assumptions and estimates were used. If our actual results, or the plans and estimates used in
future impairment analyses, are lower than the original estimates used to assess the recoverability of these assets, we could incur future impairment charges.

We test goodwill for impairment using the two-step method. When performing the two-step impairment test, we use a combination of an income approach, which estimates fair value of the reporting unit based upon future discounted cash flows, and a market approach, which estimates fair value using market multiples for transactions in a set of comparable companies. If the carrying value of the reporting unit exceeds its fair value, we then perform the second step of the impairment test to measure the amount of the impairment loss, if any. The second step requires fair valuation of all the reporting unit’s assets and
liabilities in a manner similar to a purchase price allocation, with any residual fair value being allocated to goodwill. This residual fair value of goodwill is then compared to the carrying value to determine impairment. An impairment charge will be recognized only when the estimated fair value of a reporting unit, including goodwill, is less than its carrying value.

As of October 31, 2014, the fair value of each of our reporting units substantially exceeded their respective carrying values. Goodwill was $74 million for the Americas, zero for EMEA, and $6 million for APAC as of October 31, 2014.


37



Income Taxes
We are subject to income taxes in both domestic and foreign tax jurisdictions. The calculation of income tax expense involves significant judgment in the application of global, complex tax laws and regulations. The provision for income taxes is determined using the applicable statutory tax rates in the relevant jurisdictions, which may be more or less than the U.S. federal statutory rate. 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. Realization of deferred tax assets related to operating loss and credit carry-forwards is dependent upon future taxable income in
specific jurisdictions, the amount and timing of which is uncertain. 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 do not provide for withholding and U.S. taxes for certain unremitted earnings of non-U.S. subsidiaries because we intend to permanently reinvest these earnings in these foreign operations. Income tax expense could be incurred if these earnings were remitted to the United States. It is not practicable to estimate the amount of the deferred tax liability on such unremitted earnings.

We recognize a tax benefit from an uncertain tax position when, in our judgment, 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. Judgment is also used in determining that a tax position will be settled and the possible settlement outcomes. 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.

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 in our statement of financial position.

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 — New Accounting Pronouncements to our condensed consolidated financial statements for a discussion of pronouncements that may affect our future financial reporting.

38



Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to a variety of risks. Two of these risks are foreign currency exchange rate fluctuations and changes in interest rates that affect interest expense. See Note 11 — Derivative Financial Instruments to our consolidated financial statements.

Foreign Currency and Derivatives

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 domestic transactions that are not denominated in U.S. dollars, and to fluctuations in interest rates related to our variable rate debt. Furthermore, we are exposed to gains and losses resulting from the effect that fluctuations in foreign currency exchange rates have on the reported
results in our consolidated financial statements due to the translation of the operating results and financial position of our
international subsidiaries. We use foreign currency exchange contracts and intercompany loans as part of our overall strategy to manage the level of exposure to the risk of fluctuations in foreign currency exchange rates.

On the date we enter into a derivative contract, we designate the derivative as a hedge of the identified exposure. Before entering into various hedge transactions, we formally document all relationships between hedging instruments and hedged items, as well as the risk-management objective and strategy. In this documentation, we identify the asset, liability, firm commitment, or forecasted transaction that has been designated as a hedged item and indicate how the hedging instrument is expected to hedge the risks related to the hedged item. We formally measure effectiveness of our hedging relationships both at the hedge inception and on an ongoing basis in accordance with our risk management policy. We will discontinue hedge accounting prospectively:

• if we determine that the derivative is no longer effective in offsetting changes in the cash flows of a hedged item;

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

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

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

• if we determine that designation of the derivative as a hedge instrument is no longer appropriate.

Derivatives that do not qualify or are no longer deemed effective to qualify for hedge accounting but are used by management to mitigate exposure to currency risks are marked to fair value with corresponding gains or losses recorded in earnings. For all qualifying cash flow hedges, the changes in the fair value of the derivatives are recorded in other comprehensive income. As of January 31, 2015, we were hedging a significant portion of forecasted transactions expected to occur through January 2016. Assuming exchange rates at January 31, 2015 remain constant, $20 million of gains, net of tax, related to hedges of
these transactions are expected to be reclassified into earnings over the next 12 months.

We enter into forward exchange and other derivative contracts with major banks and are exposed to foreign currency losses in the event of nonperformance by these banks. We anticipate, however, that these banks will be able to fully satisfy their obligations under the contracts. Accordingly, we do not obtain collateral or other security to support the contracts.

Translation of Results of International Subsidiaries

As discussed above, 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. We generally do not use foreign currency exchange contracts to hedge the profit and loss effects of such exposure as accounting rules do not allow such types of
contracts to qualify for hedge accounting.

By way of example, when the U.S. dollar strengthens compared to the euro, there is a negative effect on our reported results for EMEA 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 EMEA. In addition, the statements of operations of APAC are translated from Australian dollars and Japanese yen into U.S. dollars, and

39



there is a negative effect on our reported results for APAC when the U.S. dollar is stronger in comparison to the Australian dollar or Japanese yen.

EMEA revenues decreased 15% in U.S. dollars during the three months ended January 31, 2015 compared to the three months ended January 31, 2014 as reported in our condensed consolidated financial statements. In constant currency continuing category, EMEA revenues decreased 2% primarily as a result of a stronger U.S. dollar versus various currencies in EMEA in comparison to the prior fiscal year.

APAC revenues decreased 6% in U.S. dollars during the three months ended January 31, 2015 compared to the three months ended January 31, 2014 in our condensed consolidated financial statements. In constant currency continuing category, APAC revenues increased 3% primarily as a result of a stronger U.S. dollar versus various currencies in APAC in comparison to the prior fiscal year.

Item 4. Controls and Procedures
Evaluation of Disclosure 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 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.
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 January 31, 2015, 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 not effective as of January 31, 2015 due to the material weakness in internal control over financial reporting described below.
Audit Committee Investigation
In February 2015, management identified and brought to the attention of the Audit Committee a revenue cut-off issue. The Audit Committee promptly commenced an investigation, with the assistance of independent legal counsel engaged by the Audit Committee and outside forensic accountants (the "Independent Investigation"), into the scope and causes of this revenue cut-off issue and reported the results of the Independent Investigation to the full Board of Directors and management.
Based on the results of the Independent Investigation and our assessment of the deficiencies in the operational effectiveness of certain of our internal controls, we have determined that the material weakness noted below existed in our internal control over financial reporting as of January 31, 2015. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim consolidated financial statements will not be prevented or detected on a timely basis.
We did not maintain effective controls based on the criteria established in the 1992 COSO Framework. Specifically, in our North America wholesale operations, accurate information regarding actual shipment routing and customer delivery was not consistently maintained in our ERP system in accordance with our procedures. As a result, certain net revenues recorded in the prior period did not meet the criteria for revenue recognition at that time but instead should have been recognized in the following quarter. See Note 17 to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. In addition, certain of our employees took actions inconsistent with our Code of Business Conduct and Ethics. These deficiencies in combination represented a material weakness in our internal control over financial reporting.
We analyzed the impact of the misstatements from this revenue cut-off issue and concluded that it did not have a material impact on our previously issued financial statements. Notwithstanding the material weakness in our internal control over financial reporting, we have concluded that the financial statements and other financial information included in this Quarterly Report on Form 10-Q, fairly present in all material respects our financial condition, results of operations and cash flows as of, and for, the periods presented.
Remediation
We are in the process of developing and implementing remediation plans to address the above material weakness.

40



Changes in Internal Control Over Financial Reporting
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 January 31, 2015 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
However, as noted above, we will be implementing changes to our internal control over financial reporting to address the material weakness described above.

41



PART II – OTHER INFORMATION
Item 1A. RISK FACTORS
We have included in Part I, Item 1A, "Risk Factors", of our Form 10-K for the fiscal year ended October 31, 2014 descriptions of certain risks and uncertainties that our business faces, many of which are beyond our control. There have been no material changes to our risk factors since the date of that filing, other than as noted below. 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.
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.

As reported in “Item 4. Controls and Procedures” of this Quarterly Report on Form 10-Q, we have concluded that there is a material weakness in our internal control over financial reporting and that our disclosure controls and procedures were not effective as of January 31, 2015. We are in the process of developing and implementing remediation plans to address this material weakness. We cannot, however, assure you that we will be able to correct this material weakness in a timely manner or that the processes undertaken to address this material weakness will be effective in identifying and correcting all errors in our historical financial statements. Any failure in the effectiveness of internal control over financial reporting, particularly if it results in material misstatements in our financial statements, could cause us to fail to meet our reporting obligations and result in litigation, regulatory examinations, and negative investor perceptions of our company, any of which could have a material adverse effect on our business, liquidity and financial condition. Further, the material weakness in our internal control over financial reporting could lead to reduced confidence in our financial data or financial performance, which could also adversely impact our reputation.

42



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 October 14, 2014).
 
 
 
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).
 
 
 
10.1
 
Employment Agreement between Alan Vickers and Quiksilver, Inc. dated January 28, 2015 (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed February 3, 2015). (1)
 
 
 
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.
March 17, 2015
QUIKSILVER, INC.
/s/ Richard Shields
Richard Shields
Chief Financial Officer
(Principal Financial and Accounting Officer)


44