Quiksilver Reports Fiscal 2012 Third Quarter Financial Results

Quiksilver, Inc. (NYSE:ZQK) today announced operating results for the third fiscal quarter ended July 31, 2012.

“During the quarter, we continued to make solid progress on our three long-term initiatives, which are strengthening our brands, expanding our business and driving operational efficiencies throughout the business,” said Robert B. McKnight, Jr., Chairman of the Board, Chief Executive Officer and President of Quiksilver, Inc.

“From a brand perspective, we launched integrated social media marketing campaigns, hosted the premier skate tour in the industry and had outstanding team-rider success in surfing,” continued McKnight. “From a growth standpoint, our business performed admirably. DC posted sales growth of 16% and e-commerce sales more than doubled. European sales grew modestly, which positions us well compared with our peers. In the area of operational efficiencies, we made tough decisions during the quarter regarding SG&A, including effecting staff eliminations in all our regions, as well as reductions in other operating expenses. Also, after implementing our new ERP system in the Americas in the second quarter, we kicked off our European ERP rollout in the third quarter, which will drive efficiencies by helping to integrate our operations and standardize our business processes globally. I applaud our team’s tenacity during this time of transformation and believe we are focusing on the right actions to strengthen our business and drive sustainable value.”

Fiscal Third Quarter Review:

All comparisons are between the third quarter of fiscal 2012 and the third quarter of fiscal 2011. A reconciliation of GAAP results to pro-forma results is provided in the accompanying tables.

Revenues grew 2% to $512.4 million compared with $503.3 million, and grew 8%, or $38 million, in constant currency.
  • Americas revenue increased 10% to $286.1 million from $260.2 million, and was up 12% in constant currency.
  • Europe revenue decreased 13% to $154.1 million from $176.4 million, and was up modestly in constant currency.
  • Asia Pacific revenue increased 9% to $71.6 million from $65.5 million, and was up 13% in constant currency.

Please refer to the accompanying tables to better understand the impact of foreign currency exchange rates on revenue trends.

Gross margin was 49.5% of net revenues compared with 50.7% in the prior year period, primarily driven by lower gross margins in Europe due to higher levels of discounting and unfavorable currency exchange rate comparisons.

SG&A increased to $225.8 million compared with $221.2 million, up 10 basis points as a percentage of sales, primarily driven by $3.9 million of costs associated with staff eliminations and restructuring.

Pro-forma Adjusted EBITDA was $51.2 million compared with $52.7 million, with the decline largely driven by the contraction in gross margin mentioned above.

Net income was $12.6 million, or $0.07 per diluted share, compared with net income of $10.4 million, or $0.06 per diluted share.

Pro-forma income, which excludes $3.8 million of net after-tax restructuring charges and asset impairments, was $16.4 million, or $0.09 per diluted share, compared with pro-forma income of $10.4 million, or $0.06 per diluted share.

Fiscal 2012 Q3 Revenue Highlights:

Revenues increased (in constant currency) across all three brands, all three regions, and all three distribution channels compared with the third quarter of fiscal 2011. Strong revenue growth continued in the company’s emerging markets, including Brazil, Russia and Indonesia.

Brands (constant currency):
  • Quiksilver was up 3.5% to $193.5 million;
  • Roxy increased 4.6% to $131.8 million; and,
  • DC was up 15.5% to $168.2 million.

Distribution channels (constant currency):
  • Wholesale business was up 4.5% to $370.0 million;
  • Retail was up 6.8% to $119.3 million. Third quarter same store sales in company-owned retail stores grew 4.0% on a global basis; and,
  • E-commerce was up 180.2% to $23.2 million.

About Quiksilver:

Quiksilver, Inc. is one of the world’s leading outdoor sports lifestyle companies. Quiksilver designs, produces and distributes a diversified mix of branded apparel, footwear and accessories. The company’s apparel and footwear brands, inspired by the passion for outdoor action sports, represent a casual lifestyle for young-minded people who connect with its boardriding culture and heritage. The company’s Quiksilver, Roxy, DC, Lib Tech and Hawk brands are synonymous with the heritage and culture of surfing, skateboarding and snowboarding. The company’s products are sold in over 90 countries in a wide range of distribution, including surf shops, skate shops, snow shops, its proprietary Boardriders Club shops and other company-owned retail stores, other specialty stores, select department stores and through various e-commerce channels. Quiksilver’s corporate headquarters are in Huntington Beach, California.

Forward looking statements:

This press release contains forward-looking statements including but not limited to statements regarding the company’s anticipated growth initiatives, expense reductions and other future activities. These forward-looking statements are subject to risks and uncertainties, and actual results may differ materially. Please refer to Quiksilver’s SEC filings for more information on the risk factors that could cause actual results to differ materially from expectations, and specifically the sections titled “Risk Factors” and “Forward-Looking Statements” in Quiksilver’s Annual Report on Form 10-K and Quarterly Reports on Form 10-Q.

NOTE: For further information about Quiksilver, Inc., please visit our website at www.quiksilverinc.com . We also invite you to explore our brand sites, www.roxy.com , www.dcshoes.com , www.lib-tech.com and www.hawkclothing.com .
QUIKSILVER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
     
 
Three months ended Nine months ended
In thousands, except per share amounts July 31, July 31,
  2012     2011     2012     2011  
 
Revenues, net $ 512,439 $ 503,317 $ 1,454,273 $ 1,407,860
Cost of goods sold   258,951     248,199     730,686     667,103  
 
Gross profit 253,488 255,118 723,587 740,757
 
Selling, general and administrative expense 225,788 221,172 680,213 648,356
Asset impairments   141     -     556     74,610  
 
Operating income 27,559 33,946 42,818 17,791
 
Interest expense 14,834 15,663 45,464 59,727
Foreign currency gain   (2,242 )   (1,456 )   (4,701 )   (5,886 )
 
Income (loss) before provision for income taxes 14,967 19,739 2,055 (36,050 )
 
Provision for income taxes   2,508     8,996     14,913     49,937  
 
Net income (loss) 12,459 10,743 (12,858 ) (85,987 )
Less: net loss (income) attributable to non-controlling interest   151     (306 )   (2,257 )   (3,169 )
 
Net income (loss) attributable to Quiksilver, Inc. $ 12,610   $ 10,437   $ (15,115 ) $ (89,156 )
 
Net income (loss) per share attributable to Quiksilver, Inc.:
Basic $ 0.08 $ 0.06 $ (0.09 ) $ (0.55 )
Diluted $ 0.07 $ 0.06 $ (0.09 ) $ (0.55 )
 
Weighted average common shares outstanding:
Basic 164,518 162,822 163,930 162,198
Diluted 173,899 183,488 163,930 162,198
 
  QUIKSILVER, INC. AND SUBSIDIARIES  
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 
In thousands July 31, 2012 July 31, 2011
 

ASSETS
Current Assets
Cash and cash equivalents $ 81,903 $ 126,210
Trade accounts receivable (net of allowance of $43,468 and $54,381, respectively) 398,522 385,927
Other receivables 31,444 16,657
Income taxes receivable - 4,674
Inventories 391,052 364,833
Deferred income taxes - short-term 14,691 18,134
Prepaid expenses and other current assets   32,678     31,787  
Total Current Assets 950,290 948,222
 
Fixed assets, net 233,842 237,138
Intangible assets, net 136,745 138,934
Goodwill 258,815 273,549
Other assets 48,267 56,868
Deferred income taxes - long-term   99,125     72,855  
Total Assets $ 1,727,084   $ 1,727,566  
 

LIABILITIES AND EQUITY
Current Liabilities
Lines of credit $ 15,032 $ 8,928
Accounts payable 233,523 238,866
Accrued liabilities 111,140 134,365
Current portion of long-term debt 44,640 4,820
Income taxes payable   3,652     -  
Total Current Liabilities 407,987 386,979
 
Long-term debt, net of current portion 723,772 733,415
Other long-term liabilities   32,249     56,056  
Total Liabilities 1,164,008 1,176,450
 
Equity
Common stock 1,687 1,680
Additional paid-in capital 539,124 527,122
Treasury stock (6,778 ) (6,778 )
Accumulated deficit (47,680 ) (100,463 )
Accumulated other comprehensive income   66,976     117,318  
Total Quiksilver, Inc. Stockholders' Equity 553,329 538,879
Non-controlling interest   9,747     12,237  
Total Equity   563,076     551,116  
 
Total Liabilities and Equity $ 1,727,084   $ 1,727,566  
 
QUIKSILVER, INC. AND SUBSIDIARIES
INFORMATION RELATED TO OPERATING SEGMENTS (UNAUDITED)
       
 
Three months ended Nine months ended
In thousands July 31, July 31,
2012 2011 2012 2011
Revenues, net:
Americas $ 286,136 $ 260,159 $ 712,519 $ 664,618
Europe 154,076 176,438 518,504 548,578
Asia/Pacific 71,623 65,495 220,242 190,636
Corporate operations 604 1,225 3,008 4,028
512,439 503,317 1,454,273 1,407,860
 
Gross Profit:
Americas $ 126,101 $ 115,065 $ 311,738 $ 308,032
Europe 88,136 106,451 298,905 332,083
Asia/Pacific 39,258 34,347 113,361 101,842
Corporate operations (7) (745) (417) (1,200)
253,488 255,118 723,587 740,757
 
SG&A Expense:
Americas $ 92,781 $ 87,984 $ 270,669 $ 256,117
Europe 80,862 85,402 250,160 250,388
Asia/Pacific 37,747 36,314 114,988 108,961
Corporate operations 14,398 11,472 44,396 32,890
225,788 221,172 680,213 648,356
 
Asset Impairments:
Americas $ 141 $ - $ 556 $ 465
Europe - - - -
Asia/Pacific - - - 74,145
Corporate operations - - - -
141 - 556 74,610
 
Operating Income (Loss):
Americas $ 33,179 $ 27,081 $ 40,513 $ 51,450
Europe 7,274 21,049 48,745 81,695
Asia/Pacific 1,511 (1,967) (1,627) (81,264)
Corporate operations (14,405) (12,217) (44,813) (34,090)
27,559 33,946 42,818 17,791
 
QUIKSILVER, INC. AND SUBSIDIARIES
GAAP TO PRO-FORMA RECONCILIATION (UNAUDITED)
     
 
Three months ended Nine months ended
In thousands, except per share amounts July 31, July 31,
  2012   2011   2012     2011  
 
Net income (loss) attributable to Quiksilver, Inc. $ 12,610 $ 10,437 $ (15,115 ) $ (89,156 )
Restructuring charges (credits), net of tax of $204, $0, $204, and $0, respectively 3,688 - 7,307 (2,118 )
Non-cash asset impairments, net of tax of $0, $0, $32, and $0, respectively 141 - 524 74,610
Effect of APAC tax valuation allowance - - - 25,980
Non-cash interest charges, net of tax of $0, $0, $0, and $4,618, respectively   -   -   -     10,691  
 
Pro-forma income (loss) 16,439 10,437 (7,284 ) 20,007
 
Pro-forma income (loss) per share attributable to Quiksilver, Inc.:
Basic $ 0.10 $ 0.06 $ (0.04 ) $ 0.12
Diluted $ 0.09 $ 0.06 $ (0.04 ) $ 0.11
 
Weighted average common shares outstanding:
Basic 164,518 162,822 163,930 162,198
Diluted 173,899 183,488 163,930 182,688
 
QUIKSILVER, INC. AND SUBSIDIARIES
ADJUSTED EBITDA & PRO-FORMA ADJUSTED EBITDA RECONCILIATION (UNAUDITED)
     
 
Three months ended Nine months ended
In thousands

July 31,

July 31,
  2012   2011   2012     2011  
 
Net income (loss) attributable to Quiksilver, Inc. $ 12,610 $ 10,437 $ (15,115 ) $ (89,156 )
Provision for income taxes 2,508 8,996 14,913 49,937
Interest expense 14,834 15,663 45,464 59,727
Depreciation and amortization 12,312 12,684 39,437 40,154
Non-cash stock-based compensation expense 4,872 4,935 17,272 9,916
Non-cash asset impairments   141   -   556     74,610  
 
Adjusted EBITDA 47,277 52,715 102,527 145,188
 
Restructuring charges (credits)   3,892   -   7,511     (2,118 )
 
Pro-forma Adjusted EBITDA 51,169 52,715 110,038 143,070
 

Definition of Adjusted EBITDA:

Adjusted EBITDA is defined as net income (loss) attributable to Quiksilver, Inc. before (i) interest expense, (ii) income tax expense, (iii) depreciation and amortization, (iv) non-cash stock-based compensation expense and (v) asset impairments. Adjusted EBITDA is not defined under generally accepted accounting principles (“GAAP”), and it may not be comparable to similarly titled measures reported by other companies. We use Adjusted EBITDA, along with other GAAP measures, as a measure of profitability because Adjusted EBITDA helps us to compare our performance on a consistent basis by removing from our operating results the impact of our capital structure, the effect of operating in different tax jurisdictions, the impact of our asset base, which can differ depending on the book value of assets, the accounting methods used to compute depreciation and amortization, the existence or timing of asset impairments and the effect of non-cash stock-based compensation expense. We believe EBITDA is useful to investors as it is a widely used measure of performance and the adjustments we make to EBITDA provide further clarity on our profitability. We remove the effect of non-cash stock-based compensation from our earnings which can vary based on share price, share price volatility and the expected life of the equity instruments we grant. In addition, this stock-based compensation expense does not result in cash payments by us. We remove the effect of asset impairments from Adjusted EBITDA for the same reason that we remove depreciation and amortization as it is part of the impact of our asset base. Adjusted EBITDA has limitations as a profitability measure in that it does not include the interest expense on our debts, our provisions for income taxes, the effect of our expenditures for capital assets and certain intangible assets, the effect of non-cash stock-based compensation expense and the effect of asset impairments.

SUPPLEMENTAL EXCHANGE RATE INFORMATION

(Unaudited)
In order to better understand growth rates in our operating segments, we make reference to constant currency. Constant currency reporting improves visibility into actual growth rates as it adjusts for the effect of changing foreign currency exchange rates from period to period. Constant currency is calculated by taking the ending foreign currency exchange rate (for balance sheet items) or the average foreign currency exchange rate (for income statement items) used in translation for the current period and applying that same rate to the prior period. The following table presents revenues by segment in both historical currency and constant currency for the three months ended July 31, 2012 and 2011 (in thousands):
 
 
Historical currency (as reported) Americas Europe Asia/Pacific Corporate Total
 
July 31, 2011 $ 260,159 $ 176,438 $ 65,495 $ 1,225 $ 503,317
July 31, 2012 286,136 154,076 71,623 604 512,439
Percentage increase (decrease) 10 % (13 %) 9 % 2 %
 
Constant currency (current year exchange rates)
 
July 31, 2011 255,553 153,834 63,516 1,199 474,102
July 31, 2012 286,136 154,076 71,623 604 512,439
Percentage increase 12 % 0 % 13 % 8 %
 

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