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8-K - FORM 8-K - QUIKSILVER INC | a56547e8vk.htm |
EX-99.3 - EX-99.3 - QUIKSILVER INC | a56547exv99w3.htm |
EX-10.1 - EX-10.1 - QUIKSILVER INC | a56547exv10w1.htm |
EX-23.1 - EX-23.1 - QUIKSILVER INC | a56547exv23w1.htm |
EX-99.1 - EX-99.1 - QUIKSILVER INC | a56547exv99w1.htm |
Exhibit
99.2
Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read together with our consolidated financial statements and
related notes, which are included in this report, and the Risk Factors information, set forth in
Item 1A in our Annual Report on Form 10-K for the fiscal year ended October 31, 2009, filed on January 12, 2010.
Overview
Over the past 39 years, Quiksilver has been established as a global company representing the
casual, youth lifestyle associated with boardriding sports. 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. Our product offering expanded in the 1980s as we
expanded our distribution channels. After going public in 1986 and purchasing the rights to the
Quiksilver brand in the United States from our Australian licensor, we further expanded our product
offerings and began to diversify. In 1991, we acquired the European licensee of Quiksilver and
introduced Roxy, our surf brand for teenage girls. We also expanded demographically in the 1990s
by adding products for boys, girls, toddlers and men, and we introduced our proprietary retail
store concept, which displays the heritage and products of Quiksilver and Roxy. In 2000, we
acquired the international Quiksilver and Roxy trademarks, and in 2002, we acquired our licensees
in Australia and Japan. In 2004, we acquired DC Shoes, Inc. to expand our presence in action
sports-inspired footwear. In 2005, we acquired Skis Rossignol SA, a wintersports and golf
equipment company. Today our products are sold throughout the world, primarily in surf shops,
skate shops, snow shops and specialty stores.
In November 2008, we completed the sale of our Rossignol business, which included the brands
Rossignol, Dynastar, Look and Lange for an aggregate purchase price of approximately $50.8 million.
We incurred a pre-tax loss on the sale of Rossignol of approximately $212.3 million, partially
offset by a tax benefit of approximately $89.4 million, recognized primarily during the three
months ended January 31, 2009. Our Rossignol business, including both wintersports equipment and
related apparel, is classified as discontinued operations. The assets and related liabilities of
our remaining Rossignol apparel business are classified as held for sale, and the operations are
classified as discontinued in our consolidated financial statements. Also, as part of our
acquisition of Rossignol in 2005, we acquired a majority interest in Roger Cleveland Golf Company,
Inc. Our golf equipment operations were subsequently sold in December 2007 and are also classified
as discontinued operations in our consolidated financial statements. As a result of these
dispositions, the following information has been adjusted to exclude both our Rossignol and golf
equipment businesses.
We operate in the outdoor market of the sporting goods industry in which we design, produce and
distribute branded apparel, footwear, accessories and related products. We operate in three
segments, the Americas, Europe and Asia/Pacific. Our Americas segment includes revenues from the
U.S., Canada and Latin America. Our European segment includes revenues primarily from Western
Europe. Our Asia/Pacific segment includes revenues primarily from Australia, Japan, New Zealand
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.
Revenues by segment from continuing operations are as follows:
Year Ended October 31, | ||||||||||||||||||||
In thousands | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||
Americas |
$ | 929,691 | $ | 1,061,370 | $ | 995,801 | $ | 831,583 | $ | 752,797 | ||||||||||
Europe |
792,627 | 933,119 | 803,395 | 660,127 | 591,228 | |||||||||||||||
Asia/Pacific |
251,596 | 265,067 | 243,064 | 225,128 | 213,277 | |||||||||||||||
Corporate operations |
3,612 | 5,080 | 4,812 | 5,312 | 5,115 | |||||||||||||||
Total revenues, net |
$ | 1,977,526 | $ | 2,264,636 | $ | 2,047,072 | $ | 1,722,150 | $ | 1,562,417 | ||||||||||
We operate in markets that are highly competitive, and our ability to evaluate and respond to
changing consumer demands and tastes is critical to our success. If we are unable to remain
competitive and maintain our consumer loyalty, our business will be negatively affected. We
believe that our historical
1
success is due to the development of an experienced team of designers, artists, sponsored athletes,
technicians, researchers, merchandisers, pattern makers and contractors. Our team and the heritage
and current strength of our brands has helped us remain competitive in our markets. Our success in
the future will depend, in part, on our ability to continue to design products that are acceptable
to the marketplace and competitive in the areas of quality, brand image, technical specifications,
distribution methods, price, customer service and intellectual property protection.
Results of Operations
The table below shows certain components in our statements of operations and other data as a
percentage of revenues:
Year Ended October 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Statements of Operations data |
||||||||||||
Revenues, net |
100.0 | % | 100.0 | % | 100.0 | % | ||||||
Gross profit |
47.1 | 49.5 | 48.1 | |||||||||
Selling, general and administrative expense |
43.1 | 40.4 | 38.2 | |||||||||
Asset impairments |
0.5 | 2.9 | 0.0 | |||||||||
Operating income |
3.5 | 6.2 | 9.9 | |||||||||
Interest expense |
3.2 | 2.0 | 2.3 | |||||||||
Foreign currency and other expense (income) |
0.5 | (0.2 | ) | 0.2 | ||||||||
(Loss) income before provision for income taxes |
(0.2 | )% | 4.4 | % | 7.4 | % | ||||||
Other data |
||||||||||||
Adjusted EBITDA (1) |
6.7 | % | 12.3 | % | 12.7 | % | ||||||
(1) | For a definition of Adjusted EBITDA and a reconciliation of (loss) income from continuing operations attributable to Quiksilver, Inc. to Adjusted EBITDA, see footnote (4) to the table under Item 6. Selected Financial Data. |
Our financial performance has been, and may continue to be, negatively affected by unfavorable
global economic conditions. Continued or further deteriorating economic conditions are likely to
have an adverse impact on our sales volumes, pricing levels and profitability. As domestic and
international economic conditions change, trends in discretionary consumer spending become
unpredictable and subject to reductions due to uncertainties about the future. When consumers
reduce discretionary spending, purchases of apparel and footwear tend to decline. A general
reduction in consumer discretionary spending due to the recession in the domestic and international
economies or uncertainties regarding future economic prospects could have a material adverse effect
on our results of operations.
Fiscal 2009 Compared to Fiscal 2008
Revenues
Our total net revenues decreased 13% in fiscal 2009 to $1,977.5 million from $2,264.6 million in
fiscal 2008. In constant currency, net revenues decreased 8% compared to the prior year. Our net
revenues in each of the Americas, Europe and Asia/Pacific segments include apparel, footwear,
accessories and related products for our Quiksilver, Roxy, DC and other brands, which include Hawk,
Raisins, Leilani, Radio Fiji, Lib Technologies, Gnu and Bent Metal.
In order to better understand growth rates in our foreign operating segments, we make reference to
constant currency. Constant currency improves visibility into actual growth rates as it adjusts
for the effect of changing foreign currency exchange rates from period to period. For income
statement items, constant currency is calculated by taking the average foreign currency exchange
rate used in translation for the current period and applying that same rate to the prior period.
Our European segment is translated into constant currency using euros and our Asia/Pacific segment
is translated into constant currency using Australian dollars as these are the primary functional
currencies of each reporting segment. As such, this methodology does not account for movements in
individual currencies within an
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operating segment (for example, non-euro currencies within our European segment). A constant currency translation
methodology that accounts for movements in each individual currency could yield a different result
compared to using only euros and Australian dollars. The following table presents revenues by
segment in both historical currency and constant currency for the years ended October 31, 2008 and
2009:
In thousands
Americas | Europe | Asia/Pacific | Corporate | Total | ||||||||||||||||
Historical currency (as reported) |
||||||||||||||||||||
October 31, 2008 |
$ | 1,061,370 | $ | 933,119 | $ | 265,067 | $ | 5,080 | $ | 2,264,636 | ||||||||||
October 31, 2009 |
929,691 | 792,627 | 251,596 | 3,612 | 1,977,526 | |||||||||||||||
Percentage decrease |
(12 | %) | (15 | %) | (5 | %) | (13 | %) | ||||||||||||
Constant currency (current year
exchange rates) |
||||||||||||||||||||
October 31, 2008 |
$ | 1,061,370 | $ | 849,423 | $ | 231,137 | $ | 5,080 | $ | 2,147,010 | ||||||||||
October 31, 2009 |
929,691 | 792,627 | 251,596 | 3,612 | 1,977,526 | |||||||||||||||
Percentage (decrease) increase |
(12 | %) | (7 | %) | 9 | % | (8 | %) |
Revenues in the Americas decreased 12% to $929.7 million for fiscal 2009 from $1,061.4
million in the prior year, while European revenues decreased 15% to $792.6 million from
$933.1 million and Asia/Pacific revenues decreased 5% to $251.6 million from $265.1
million for those same periods. In the Americas, the decrease in net revenues came primarily from
the Roxy and Quiksilver brands and, to a lesser extent, our DC brand across all product lines.
European net revenues decreased 7% in constant currency. The constant currency decrease in Europe
was driven by a decrease in revenues from our Roxy brand and, to a lesser extent, our Quiksilver
brand, partially offset by growth in our DC brand. Decreases in Roxy and Quiksilver brand revenues
came primarily from our apparel and, to a lesser extent, our accessories product lines. DC brand
revenue growth came primarily from our apparel and footwear product lines. Asia/Pacifics net
revenues increased 9% in constant currency. This constant currency increase in Asia/Pacifics net
revenues came across all product lines, primarily from our Roxy and Quiksilver brands and, to a
lesser extent, growth in our DC brand.
Gross Profit
Our consolidated gross profit margin decreased to 47.1% in fiscal 2009 from 49.5% in the previous
year. The gross profit margin in the Americas segment decreased to 37.6% from 42.0% in the prior
year, our European segment gross profit margin decreased to 56.4% from 57.0%, and our Asia/Pacific
segment gross profit margin increased to 53.9% from 52.9%. The decrease in the Americas segment
gross profit margin was due primarily to market related price compression in both our company-owned
retail stores and our wholesale business. Our European segment gross profit margin decreased
primarily as a result of negative foreign currency translation effects of certain European
subsidiaries that do not use euros as their functional currency, partially offset by improvements
to our margin due to the foreign currency exchange effect of sourcing goods in U.S. dollars. In
our Asia/Pacific segment, our gross profit margin increase was primarily due to improved margins in
Japan compared to the prior year.
Selling, General and Administrative Expense
Our selling, general and administrative expense (SG&A) decreased 7% in fiscal 2009 to $851.7
million from $915.9 million in fiscal 2008. In the Americas segment, these expenses decreased 2%
to $364.7 million in fiscal 2009 from $372.0 million in fiscal 2008, in our European segment, they
decreased 10% to $341.8 million from $380.4 million, and in our Asia/Pacific segment, SG&A
decreased 4% to $112.4 million from $117.2 million for those same periods. On a consolidated
basis, expense reductions in SG&A were partially offset by approximately $28.8 million in charges
related to restructuring activities, including severance costs. As a percentage of revenues, SG&A
increased to 43.1% of revenues in fiscal 2009 compared to 40.4% in fiscal 2008. In the Americas,
SG&A as a percentage of revenues increased to 39.2% compared to 35.0%. In Europe, SG&A as a
percentage of revenues increased to 43.1% compared to 40.8% and in Asia/Pacific, SG&A as a
percentage of revenues increased to 44.7%
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compared to 44.2% in the prior year. The increase in
SG&A as a percentage of revenues in our Americas segment was primarily due to lower revenues.
Expense reductions were partially offset by $22.9 million in charges
related to restructuring activities, including severance costs, and by $3.0 million of incremental
bad debt charges. The increase in SG&A as a percentage of revenues in our European segment was
primarily caused by lower revenues and, to a lesser extent, the cost of operating additional retail
stores and severance costs of $4.1 million. In our Asia/Pacific segment, the slight increase in
SG&A as a percentage of revenues primarily related to the cost of operating additional retail
stores.
Asset Impairments
Asset impairment charges totaled approximately $10.7 million in fiscal 2009 compared to
approximately $65.8 million in fiscal 2008. The current year charge relates to the impairment of
leasehold improvements and other assets in certain retail stores, whereas the prior year charge
included $55.4 million of goodwill impairment in addition to approximately $10.4 million of
impairment of leasehold improvements and other assets in certain retail stores. We analyzed the
profitability of our retail stores and determined that a total of 14 stores were not generating
sufficient cash flows to recover our investment, 6 of which are scheduled to close in 2010. We are
evaluating the timing of the closure of the remaining 8 stores and any costs associated with future
rent commitments for these stores will be charged to future earnings upon store closure. With
respect to the fiscal 2008 impairment, we determined 25 stores were not generating sufficient cash
flows to recover our investment. Of these 25 stores, 15 still remain open and are planned to close
at lease expiration or sooner if an early termination agreement can be reached.
Non-operating Expenses
Net interest expense increased to $63.9 million in fiscal 2009 compared to $45.3 million in fiscal
2008. This increase was primarily due to our recognition of additional interest expense that was
previously allocated to the discontinued operations of Rossignol in the prior year and higher
interest rates during the three months ended October 31, 2009 on our newly refinanced debt in
Europe and the United States, partially offset by lower interest rates on our variable rate debt in
Europe and the United States during the nine months ended July 31, 2009. Including both continuing
and discontinued operations for the years ended October 31, 2009 and 2008, interest expense was
$64.3 million and $59.3 million, respectively. In fiscal 2008, the discontinued Rossignol business
was allocated interest based on intercompany borrowings.
Our foreign currency loss amounted to $8.6 million in fiscal 2009 compared to a gain of $5.8
million in fiscal 2008. This current year loss primarily resulted from the foreign currency
exchange effect of certain non-U.S. dollar denominated liabilities and the settlement of certain
foreign currency exchange contracts.
Our income tax expense was $66.7 million in fiscal 2009 compared to $33.0 million in fiscal 2008.
Income tax expense in fiscal 2009 was unfavorably impacted by a non-cash valuation allowance
adjustment of $72.8 million recorded against our deferred tax assets in the United States.
Loss / income from continuing operations and Adjusted EBITDA
Our loss from continuing operations attributable to Quiksilver, Inc. in fiscal 2009 was $73.2
million, or $0.58 per share on a diluted basis, compared to income from continuing operations
attributable to Quiksilver, Inc. of $65.5 million, or $0.51 per share on a diluted basis for fiscal
2008. Adjusted EBITDA decreased to $131.5 million in fiscal 2009 compared to $278.9 million in
fiscal 2008.
Fiscal 2008 Compared to Fiscal 2007
Revenues
Our total net revenues increased 11% in fiscal 2008 to $2,264.6 million from $2,047.1 million in
fiscal 2007 primarily as a result of changes in foreign currency exchange rates and higher unit
sales. The effect of foreign currency exchange rates accounted for approximately $105.7 million of
the increase in total net revenues. Our net revenues in each of the Americas, Europe and
Asia/Pacific segments include apparel, footwear, accessories and related products for our
Quiksilver, Roxy, DC and other brands which
4
include Hawk, Raisins, Leilani, Radio Fiji, Lib
Technologies, Gnu and Bent Metal. Revenues in the Americas increased 7% to $1,061.4 million for
fiscal 2008 from $995.8 million in the prior year, while European revenues increased 16% to $933.1
million from $803.4 million and Asia/Pacific revenues increased 9% to
$265.1 million from $243.1 million for those same periods. In the Americas, the increase in
revenues came primarily from DC brand revenues, partially offset by small decreases in our
Quiksilver and Roxy brand revenues. The increase in DC brand revenues came primarily from growth
in our footwear and apparel product lines. The decrease in Quiksilver and Roxy came across all
product lines except for increases in our Quiksilver footwear and Roxy apparel product lines.
Approximately $89.6 million of Europes revenue increase was attributable to the positive effects
of changes in foreign currency exchange rates. The currency adjusted increase in Europe came
primarily from growth in our DC brand and, to a lesser extent, growth in our Roxy brand, partially
offset by a slight decrease in our Quiksilver brand. The increase in DC brand revenues came
primarily from growth in footwear and apparel product lines, while increases in Roxy came primarily
from growth in the accessories and apparel product lines. Approximately $16.1 million of
Asia/Pacifics revenue increase was attributable to the positive effects of changes in foreign
currency exchange rates. The currency adjusted increase in Asia/Pacific revenues came primarily
from our DC and Quiksilver brands, partially offset by a decrease in our Roxy brand revenues.
Gross Profit
Our consolidated gross profit margin increased to 49.5% in fiscal 2008 from 48.1% in the previous
year. The gross profit margin in the Americas segment remained constant at 42.0%, our European
segment gross profit margin increased to 57.0% from 55.1%, and our Asia/Pacific segment gross
profit margin increased to 52.9% from 49.5%. The Americas gross profit margin would have increased
due to higher percentages of sales through company-owned retail stores, where we earn both
wholesale and retail margins, and improved sourcing costs, but such improvements were wholly offset
by market related price compression. Our European gross profit margin increases were primarily due
to a higher percentage of our sales through company-owned stores and improved sourcing costs. In
Asia/Pacific, the gross profit margin increase compared to the prior year was primarily a result of
the change in mix to higher retail sales compared to the prior year.
Selling, General and Administrative Expense
Our SG&A increased 17% in fiscal 2008 to $915.9 million from $782.3 million in fiscal 2007. In the
Americas segment, these expenses increased 19% to $372.0 million in fiscal 2008 from $311.8 million
in fiscal 2007, in our European segment they increased 20% to $380.4 million from $316.9 million,
and in our Asia/Pacific segment, SG&A increased 16% to $117.2 million from $100.9 million for those
same periods. As a percentage of revenues, SG&A increased to 40.4% of revenues in fiscal 2008
compared to 38.2% in fiscal 2007. In the Americas, SG&A as a percentage of revenues increased to
35.0% compared to 31.3%. In Europe, SG&A as a percentage of revenues increased to 40.8% compared
to 39.4% and in Asia/Pacific, SG&A as a percentage of revenues increased to 44.2% compared to 41.5%
in the prior year. The increase in SG&A as a percentage of revenues in our Americas segment was
primarily due to the cost of opening and operating additional retail stores, increased costs
resulting from the consolidation of our recently acquired Brazilian subsidiary and increased
marketing costs. The increase in SG&A costs as a percentage of revenues in our European segment
was primarily due to the costs of opening and operating additional retail stores and increased
distribution costs. In our Asia/Pacific segment, the increase in SG&A as a percentage of revenues
is primarily related to the cost of opening and operating additional retail stores and, to a lesser
extent, a legal settlement on a retail store lease.
Asset Impairments
Asset impairment charges totaled $65.8 million in fiscal 2008 compared to zero in fiscal 2007. Of
these charges, approximately $55.4 million related to Asia/Pacific goodwill, and approximately
$10.4 million related to the impairment of leasehold improvements and other assets in certain
retail stores. The goodwill and other impairment charges were recorded as a result of our annual
impairment test, where it was determined that the carrying values of our assets were more than
their estimated fair values as of October 31, 2008. The retail store impairment included 25
stores, primarily in the U.S., which were not generating sufficient cash flows to recover our
investment.
5
Non-operating Expenses
Net interest expense decreased to $45.3 million in fiscal 2008 compared to $46.6 million in fiscal
2007 primarily as a result of lower interest rates on our variable-rate debt in the United States.
Our foreign currency gain amounted to $5.8 million in fiscal 2008 compared to a loss of $4.9
million in fiscal 2007. This current year gain resulted primarily from the foreign exchange effect
of certain non-U.S. dollar denominated liabilities.
Our income tax rate increased to 33.3% in fiscal 2008 from 22.8% in fiscal 2007. The fiscal 2008
rate increased significantly over the fiscal 2007 rate due to the non-deductibility of the goodwill
asset impairment recorded in fiscal 2008. This increase was partially offset by changes in accrual
amounts for certain tax contingencies accounted for under ASC 740, Income Taxes.
Income from continuing operations and Adjusted EBITDA
Income from continuing operations attributable to Quiksilver, Inc. in fiscal 2008 decreased to
$65.5 million, and earnings per share on a diluted basis decreased to $0.51 compared to income from
continuing operations attributable to Quiksilver, Inc. of $116.7 million and diluted earnings per
share of $0.90 for fiscal 2007. Adjusted EBITDA increased to $278.9 million in fiscal 2008
compared to $260.8 million in fiscal 2007.
Financial Position, Capital Resources and Liquidity
We generally finance our working capital needs and capital investments with operating cash flows
and bank revolving lines of credit. Multiple banks in the United States, Europe and Australia make
these lines of credit available to us. Term loans are also used to supplement these lines of
credit and are typically used to finance long-term assets. In fiscal 2005, we issued $400 million
of senior notes to fund a portion of the purchase price for our acquisition of Rossignol and to
refinance certain existing indebtedness, and in July 2009, we closed a $153.1 million five year
senior secured term loan to provide additional liquidity to our business. The cost of obtaining
this additional liquidity was in the form of a higher interest rate on the five year senior secured
term loan as compared to the debt that it replaced. This higher interest rate is reflected in our
net interest expense of $63.9 million for the fiscal year ended October 31, 2009, which represents
an increase of $18.6 million in interest expense over the fiscal year ended October 31, 2008.
However, $3.4 million of this additional interest expense was non-cash interest. As of October 31,
2009, we had a total of $1,039.3 million of indebtedness.
We are highly leveraged; however, we believe that our cash flows from operations, together with our
existing credit facilities and term loans will be adequate to fund our capital requirements for at
least the next twelve months. During fiscal 2009, we closed a $153.1 million five year senior
secured term loan, refinanced our existing asset-based credit facility with a new $200 million
three year asset-based credit facility for our Americas segment, and we refinanced our short-term
uncommitted lines of credit in Europe with a new 268 million multi-year facility. The closing of
these transactions enabled us to extend a significant portion of our short-term maturities to a
long-term basis. However, the applicable interest rates on these refinanced obligations,
particularly the five year senior secured term loan, are higher than on the obligations they
replaced.
Unrestricted cash and cash equivalents totaled $99.5 million at October 31, 2009 versus $53.0
million at October 31, 2008. Working capital amounted to $561.7 million at October 31, 2009,
compared to $631.3 million at October 31, 2008, a decrease of 11%.
Operating Cash Flows
Operating activities of continuing operations provided cash of $192.4 million in fiscal 2009
compared to $179.5 million in fiscal 2008. This $12.9 million increase was primarily due to
increased cash provided from working capital of $145.2 million, partially offset by the effect of
our net loss and other non-cash charges, which amounted to $132.3 million.
6
Capital Expenditures
We have historically avoided high levels of capital expenditures for our apparel manufacturing
functions by using independent contractors for a majority of our production.
Fiscal 2009 capital expenditures were $54.6 million, which was approximately $36.4 million less
than the $90.9 million we spent in fiscal 2008. In fiscal 2009, we invested in company-owned
retail stores, warehouse equipment and computer systems.
Capital expenditures for new company-owned retail stores are expected to be reduced in fiscal 2010.
A campus facility is being constructed for our European headquarters and computer hardware and
software will also be purchased to continuously improve our systems. Capital spending for these
and other projects in fiscal 2010 is expected to be around $50 million. We expect to fund our
capital expenditures primarily from our operating cash flows.
Acquisitions and Dispositions
We completed the sale of our Rossignol business in November 2008 for a sale price of approximately
$50.8 million, comprised of $38.1 million in cash and a $12.7 million sellers note. The note was
canceled in October 2009 in connection with the completion of the final working capital adjustment.
The business sold included the related brands of Rossignol, Dynastar, Look and Lange. In December
2007, we sold our golf equipment business for a transaction value of $132.5 million.
Debt Structure
We generally finance our working capital needs and capital investments with operating cash flows
and bank revolving lines of credit. Multiple banks in the United States, Europe and Australia make
these lines of credit available to us. Term loans are also used to supplement these lines of
credit and are typically used to finance long-term assets. In July 2005, we issued $400 million in
senior notes to fund a portion of the acquisition of Rossignol and to refinance certain existing
indebtedness, and in July 2009, we closed a $153.1 million five year senior secured term loan to
provide additional liquidity to our business. Our debt structure at October 31, 2009 includes
short-term lines of credit and long-term loans as follows:
In thousands | U.S. Dollar | Non U.S. Dollar | Total | |||||||||
European short-term credit arrangements |
$ | | $ | 14 | $ | 14 | ||||||
Asia/Pacific short-term credit arrangements |
| 32,578 | 32,578 | |||||||||
Short-term lines of credit |
| 32,592 | 32,592 | |||||||||
Americas credit facility |
| | | |||||||||
European long-term debt |
| 325,685 | 325,685 | |||||||||
European credit facilities |
| 75,252 | 75,252 | |||||||||
Rhône term loan |
109,329 | 26,335 | 135,664 | |||||||||
Senior Notes |
400,000 | | 400,000 | |||||||||
Deferred purchase price obligation |
| 49,144 | 49,144 | |||||||||
Capital lease obligations and other borrowings |
2,639 | 18,277 | 20,916 | |||||||||
Long-term debt |
511,968 | 494,693 | 1,006,661 | |||||||||
Total |
$ | 511,968 | $ | 527,285 | $ | 1,039,253 | ||||||
7
In July 2005, we issued $400 million in senior notes, which bear a coupon interest rate of 6.875%
and are due April 15, 2015. The senior notes were issued at par value and sold in accordance with
Rule 144A and Regulation S. In December 2005, these senior notes were exchanged for publicly
registered notes with identical terms. The senior notes are guaranteed on a senior unsecured basis
by certain of our domestic subsidiaries that guarantee any of our indebtedness or our subsidiaries
indebtedness, or are obligors under our existing asset-based credit facility in the Americas
segment. We may redeem some or all of the senior notes after April 15, 2010 at fixed redemption
prices as set forth in the indenture.
The indenture for our senior notes includes covenants that limit our ability to, among other
things: incur additional debt; pay dividends on our capital stock or repurchase our capital stock;
make certain investments; enter into certain types of transactions with affiliates; limit dividends
or other payments by our restricted subsidiaries to us; use assets as security in other
transactions; and sell certain assets or merge with or into other companies. If we experience a
change of control (as defined in the indenture), we will be required to offer to purchase the
senior notes at a purchase price equal to 101% of the principal amount, plus accrued and unpaid
interest. We currently are in compliance with the covenants of the indenture. In addition, we
have approximately $7.1 million in unamortized debt issuance costs included in other assets as of
October 31, 2009.
On July 31, 2009, we entered into a $153.1 million five year senior secured term loan with funds
affiliated with Rhône Capital LLC. In connection with the term loan, we issued warrants to
purchase approximately 25.7 million shares of our common stock, representing 19.99% of our
outstanding equity at the time, with an exercise price of $1.86 per share. The warrants are fully
vested and have a seven year term. The estimated fair value of these warrants at issuance was
$23.6 million. This amount was recorded as a debt discount and is being amortized into interest
expense over the term of the loan. In addition, we incurred approximately $15.8 million in debt
issuance costs which are included in prepaid expenses (short-term) and other assets (long-term) and
are being amortized into interest expense over the five year term of the loan. The term loan is
primarily secured by certain of our trademarks in the Americas and a first or second priority
interest in substantially all property related to our Americas business. The term loan bears an
interest rate of 15% on a $125 million tranche, with 6% of that interest payable in kind or in
cash, at our option. The remaining tranche is denominated in euros (20 million) and also bears an
interest rate of 15%, with the full 15% payable in kind or cash at our option. Net proceeds from
the new term loan were used to reduce other borrowings and increase our cash reserves. The term
loan contains customary restrictive covenants and default provisions for loans of its type. We are
currently in compliance with such covenants.
On July 31, 2009, we also entered into a new $200 million three year asset-based credit facility
for our Americas segment (with the option to expand the facility to $250 million on certain
conditions) which replaced our existing credit facility which was to expire in April 2010. The new
credit facility, which expires in July 2012, includes a $100 million sublimit for letters of credit
and bears interest at a rate of LIBOR plus a margin of 4.0% to 4.5%, depending upon availability.
In connection with obtaining the credit facility, we incurred approximately $9.1 million in debt
issuance costs which are included in prepaid expenses (short-term) and other assets (long-term) and
are being amortized into interest expense over the term of the credit facility. As of October 31,
2009, there were no borrowings outstanding under this credit facility, other than outstanding
letters of credit, which totaled $34.7 million.
The Americas credit facility is guaranteed by Quiksilver, Inc. and certain of our domestic and
Canadian subsidiaries. The facility is secured by our U.S. and Canadian accounts receivable,
inventory, certain intangibles, a second priority interest in substantially all other personal
property and a second priority pledge of shares of certain of our domestic subsidiaries. The
borrowing base is limited to certain percentages of eligible accounts receivable and inventory from
our participating subsidiaries. The facility contains customary default provisions and restrictive
covenants for facilities of its type. We are currently in compliance with such covenants.
On July 31, 2009, we entered into a commitment with a group of lenders in Europe to refinance our
European indebtedness. This refinancing, which closed and was funded on September 29, 2009,
consists of two term loans totaling approximately $251.7 million (170 million), an $85.9
million
(58
8
million) credit facility and a line of credit of $59.2 million (40 million) for issuances of
letters of credit. Together, these are referred to as our European Facilities. The maturity of
these European Facilities is July 31, 2013. The term loans have minimum principal repayments due
on January 31 and July 31 of each year, with 14.0 million due for each semi-annual payment in
2010, 17.0 million due for each semi-annual payment in 2011 and 27.0 million due for each
semi-annual payment in 2012 and 2013. Amounts outstanding under the European Facilities bear
interest at a rate of Euribor plus a margin of between 4.25% and 4.75%. The weighted average
borrowing rate on the European Facilities was 5.09% as of October 31, 2009. In connection with
obtaining the European Facilities, we incurred approximately $19.3 million in debt issuance costs
which are included in prepaid expenses (short-term) and other assets (long-term) and
are being amortized into interest expense over the term of the European Facilities. As of October
31, 2009, there were borrowings of approximately $251.7 million outstanding on the two term loans,
approximately $37.0 million outstanding on the credit facility, and approximately $26.6 million of
outstanding letters of credit.
The European Facilities are guaranteed by Quiksilver, Inc. and secured by pledges of certain assets
of our European subsidiaries, including certain trademarks of our European business and shares of
certain European subsidiaries. The European Facilities contain customary default provisions and
covenants for transactions of this type. We are currently in compliance with such covenants.
In connection with the closing of the European Facilities, we refinanced an additional European
term loan of $74.0 million (50 million) such that its maturity date aligns with the European
Facilities. This term loan has principal repayments due on January 31 and July 31 of each year,
with 8.9 million due in the aggregate in 2011, 12.6 million due in the aggregate in 2012 and
28.5 million due in the aggregate in 2013. This extended term loan currently bears an interest
rate of 3.23%, but will change to a variable rate of Euribor plus a margin of 4.8% beginning in
July 2010. This term loan has the same security as the European Facilities and it contains
customary default provisions and covenants for loans of its type. We are currently in compliance
with such covenants.
In August 2008, certain of our European subsidiaries entered into a $148.0 million (100 million)
secured financing facility which expires in August 2011. Under this facility, we may borrow up to
100.0 million based upon the amount of accounts receivable that are pledged to the lender to
secure the debt. Outstanding borrowings under this facility accrue interest at a rate of Euribor
plus a margin of 0.55% (currently 1.34%). As of October 31, 2009, we had approximately $38.2
million of borrowings outstanding under this facility. This facility contains customary default
provisions and covenants for facilities of its type. We are currently in compliance with such
covenants.
In Asia/Pacific, we have uncommitted revolving lines of credit with banks that provide up to
approximately $45.8 million ($50.3 million Australian dollars) for cash borrowings and letters of
credit. These lines of credit are generally payable on demand, although we believe the banks will
continue to make these lines of credit available to us. The amount outstanding on these lines of
credit at October 31, 2009 was $32.6 million, in addition to $3.4 million in outstanding letters of
credit, at an average borrowing rate of 2.2%.
Our current credit facilities allow for total maximum cash borrowings and letters of credit of
$357.7 million. Our total maximum borrowings and actual availability fluctuate depending on the
extent of assets comprising our borrowing base under certain credit facilities. We had
approximately $107.8 million of borrowings drawn on these credit facilities as of October 31, 2009,
and letters of credit issued at that time totaled $64.8 million. The amount of availability for
borrowings under these facilities as of October 31, 2009 was $142.7 million, all of which was
committed. Of this $142.7 million in committed capacity, $93.8 million can also be used for
letters of credit. In addition to the $142.7 million of availability for borrowings, we also had
$42.4 million in additional capacity for letters of credit in Europe and Asia/Pacific as of October
31, 2009.
In connection with our acquisition of Rossignol, we deferred payment of a portion of the purchase
price. This deferred purchase price obligation is expected to be paid in 2010 and accrues interest
equal to the 3-month Euribor plus 2.35% (currently 3.14%) and is denominated in euros. The
carrying amount of the obligation fluctuates based on changes in the exchange rate between euros
and U.S. dollars. We have a
9
cash collateralized guarantee to the former owner of Rossignol of
$52.7 million to secure this deferred purchase price obligation. The cash related to this
guarantee is classified as restricted cash on our balance sheet as of October 31, 2009. As of
October 31, 2009, the deferred purchase price obligation totaled $49.1 million.
We also had approximately $20.9 million in capital leases and other borrowings as of October 31,
2009.
Our financing activities from continuing operations used cash of $104.9 million in fiscal 2009, and
provided cash of $191.8 million and $176.6 million in fiscal 2008 and 2007, respectively. In
fiscal 2009 we used the proceeds from the sale of Rossignol to pay down debt, while in fiscal 2008
and 2007, our debt increased
to fund the operations of Rossignol and the business acquisitions and capital expenditures
discussed above.
Contractual Obligations and Commitments
We lease certain land and buildings under non-cancelable operating leases. The leases expire at
various dates through 2028, excluding renewals at our option, and contain various provisions for
rental adjustments including, in certain cases, adjustments based on increases in the Consumer
Price Index. The leases generally contain renewal provisions for varying periods of time. We also
have long-term debt related to business acquisitions. Our deferred purchase price obligation
related to the Rossignol acquisition totals $49.1 million and is included in the current portion of
long-term debt as of October 31, 2009. Our significant contractual obligations and commitments are
summarized in the following table:
Payments Due by Period | ||||||||||||||||||||
Two to | Four to | After | ||||||||||||||||||
One | Three | Five | Five | |||||||||||||||||
In thousands | Year | Years | Years | Years | Total | |||||||||||||||
Operating lease obligations |
$ | 107,900 | $ | 184,455 | $ | 135,007 | $ | 144,669 | $ | 572,031 | ||||||||||
Long-term debt obligations(1) |
95,231 | 207,080 | 304,350 | 400,000 | 1,006,661 | |||||||||||||||
Professional athlete sponsorships(2) |
18,649 | 19,049 | 7,132 | 500 | 45,330 | |||||||||||||||
Certain other obligations(3) |
64,753 | | | | 64,753 | |||||||||||||||
$ | 286,533 | $ | 410,584 | $ | 446,489 | $ | 545,169 | $ | 1,688,775 | |||||||||||
(1) | Excludes required interest payments. See note 7 of our consolidated financial statements for interest terms. | |
(2) | We establish relationships with professional athletes in order to promote our products and brands. We have entered into endorsement agreements with professional athletes in sports such as surfing, skateboarding, snowboarding, bmx and motocross. Many of these contracts provide incentives for magazine exposure and competitive victories while wearing or using our products. It is not possible to determine the amounts we may be required to pay under these agreements as they are subject to many variables. The amounts listed are the approximate amounts of minimum obligations required to be paid under these contracts. The estimated maximum amount that could be paid under existing contracts is approximately $61.9 million and would assume that all bonuses, victories, etc. are achieved during a five-year period. The actual amounts paid under these agreements may be higher or lower than the amounts listed as a result of the variable nature of these obligations. Under our current sponsorship agreement with Kelly Slater, in addition to the cash payment obligations included in the above table, we have agreed to propose to our shareholders a grant to Mr. Slater of 3 million shares of restricted stock. This restricted stock grant is subject to shareholder approval and would vest over a four year period. Should the grant not be approved by our shareholders, we may be required to compensate Mr. Slater with additional cash payments, which are not included in the table above. | |
(3) | Certain other obligations include approximately $64.8 million of contractual letters of credit with maturity dates of less than one year. We also enter into unconditional purchase obligations with various vendors and suppliers of goods and services in the normal course of operations through purchase orders or other documentation or that are undocumented except for an invoice. Such unconditional purchase obligations are generally outstanding for periods less than a year and are settled by cash payments upon delivery of goods and services and are not reflected in this line item. In addition, in certain circumstances we are required to acquire additional equity interests from our minority interest partners in Brazil and Mexico. These purchase requirements are generally based on revenue targets in U.S. dollars which can be significantly impacted by currency fluctuations. The purchase price applicable to these obligations is typically based on formulas that will be used to value the |
10
subsidiaries operations at the time of purchase. We do not expect any payments related to these commitments in fiscal 2010 and these potential purchase amounts generally cannot be determined beyond one year and are not included in this line item. We have approximately $54.4 million of tax contingencies related to ASC 740, Income Taxes, as disclosed in note 12 of our consolidated financial statements. Based on the uncertainly of the timing of these contingencies, these amounts have not been included in this line item. |
Off Balance Sheet Arrangements
Other than certain obligations and commitments described in the table above, we did not have any
material off balance sheet arrangements as of October 31, 2009.
Trade Accounts Receivable and Inventories
Our trade accounts receivable were $430.9 million at October 31, 2009, compared to $470.1 million
the year before, a decrease of 8%. Receivables in the Americas decreased 22%, while European
receivables increased 6% and Asia/Pacific receivables increased 11%. In constant currency,
consolidated trade accounts receivable decreased 16%. European receivables in constant currency
decreased 6% and Asia/Pacific receivables in constant currency decreased 17%. Included in trade
accounts receivable are approximately $24.9 million of Value Added Tax and Goods and Services Tax
related to foreign accounts receivable. Such taxes are not reported as net revenues and as such,
must be subtracted from accounts receivable to more accurately compute days sales outstanding.
Overall days sales outstanding increased by approximately 2 days at October 31, 2009 compared to
October 31, 2008.
Consolidated inventories totaled $267.7 million as of October 31, 2009, compared to $312.1 million
the year before, a decrease of 14%. Inventories in the Americas decreased 32%, while European
inventories decreased 7% and Asia/Pacific inventories increased 32%. In constant currency,
consolidated inventories decreased 22%. European inventories in constant currency decreased 18%
and Asia/Pacific inventories in constant currency decreased 2%. Consolidated average inventory
turnover increased to 3.6 times per year at October 31, 2009 compared to 3.5 times per year at
October 31, 2008.
Inflation
Inflation has been modest during the years covered by this report. Accordingly, inflation has had
an insignificant impact on our sales and profits.
New Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (FASB) issued the Accounting Standard
Codification (ASC) Subtopic 105 Generally Accepted Accounting Principles, which establishes the
Accounting Standards Codification as the single source of authoritative accounting principles
recognized by the FASB to be applied by nongovernmental entities in the preparation of financial
statements in conformity with GAAP. Rules and interpretive releases of the Securities and Exchange
Commission under authority of federal securities laws are also sources of authoritative GAAP for
SEC registrants. The subsequent issuances of new standards will be in the form of Accounting
Standards Updates that will be included in the codification. This ASC is effective for financial
statements issued for interim and annual periods ending after September 15, 2009. We updated our
historical U.S. GAAP references to comply with the codification at the beginning of our fiscal
quarter ended October 31, 2009. The adoption of this guidance did not have a material effect on
our consolidated financial position, results of operations or cash flows.
In September 2006, the FASB issued authoritative guidance included in ASC Subtopic 820 Fair Value
Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles, and expands disclosures about fair value
measurements. This guidance is effective for financial statements issued for fiscal years
beginning after November 15, 2007. We adopted this guidance at the beginning of our fiscal year
ended October 31, 2009. The adoption of this guidance did not have a material effect on our
consolidated financial position, results of operations or cash flows. See note 15 for certain
required disclosures related to this guidance.
11
In February 2007, the FASB issued authoritative guidance included in ASC Subtopic 825 Financial
Instruments, which permits companies to choose to measure certain financial instruments and other
items at fair value that are not currently required to be measured at fair value. This guidance is
effective for financial statements issued for fiscal years beginning after November 15, 2007. We
adopted this guidance at the beginning of our fiscal year ended October 31, 2009. The adoption of
this guidance did not have a material effect on our consolidated financial position, results of
operations or cash flows, since we did not elect the fair value option for any assets or
liabilities.
In December 2007, the FASB issued authoritative guidance included in ASC Subtopic 805 Business
Combinations, which requires us to record fair value estimates of contingent consideration and
certain other potential liabilities during the original purchase price allocation, expense
acquisition costs as incurred and does not permit certain restructuring activities to be recorded
as a component of purchase
accounting. In April 2009, the FASB issued additional guidance that requires that assets acquired
and liabilities assumed in a business combination that arise from contingencies be recognized at
fair value, only if fair value can be reasonably estimated and eliminates the requirement to
disclose an estimate of the range of outcomes of recognized contingencies at the acquisition date.
This guidance is effective for financial statements issued for fiscal years beginning on or after
December 15, 2008. We will adopt this guidance at the beginning of our fiscal year ending October
31, 2010 for all prospective business acquisitions. We have not determined the effect that the
adoption of this guidance will have on our consolidated financial statements, but the impact will
be limited to any future acquisitions beginning in fiscal 2010, except for certain tax treatment of
previous acquisitions.
In December 2007, the FASB issued authoritative guidance included in ASC Subtopic 810
Consolidation, which requires noncontrolling interests in subsidiaries to be included in the
equity section of the balance sheet. This guidance is effective for financial statements issued
for fiscal years beginning after December 15, 2008. We will adopt this guidance at the beginning
of our fiscal year ending October 31, 2010. In the year of adoption, presentation and disclosure
requirements apply retrospectively to all periods presented. These presentation and disclosure requirements resulted in the reclassification of minority
interest liability to equity on our accompanying consolidated balance sheets and the movement of
minority interest expense to a separate line after net loss on our accompanying consolidated
statements of operations. Other than these presentation and disclosure changes, the adoption of
this guidance did not have a material effect on our consolidated financial position, results of
operations or cash flows.
In March 2008, the FASB issued authoritative guidance included in ASC Subtopic 815 Derivatives and
Hedging, which requires enhanced disclosures to enable investors to better understand how and why
derivatives are used and their effects on an entitys financial position, financial performance and
cash flows. This guidance is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008. We adopted this guidance at the beginning of our fiscal
quarter ended April 30, 2009. The adoption of this guidance did not have a material effect on our
consolidated financial position, results of operations or cash flows. See note 15 for certain
required disclosures related to this guidance.
In April 2009, the FASB issued authoritative guidance included in ASC Subtopic 825 Financial
Instruments, which enhances consistency in financial reporting by increasing the frequency of fair
value disclosures. This guidance is effective for interim periods ending after June 15, 2009 and
we adopted this guidance during the three months ended July 31, 2009. The adoption of this
guidance did not have a material effect on our consolidated financial position, results of
operations or cash flows. See note 15 for certain required disclosures related to this guidance.
In May 2009, the FASB issued authoritative guidance included in ASC Subtopic 855 Subsequent
Events, which establishes general standards of accounting for and disclosure of events that occur
after the balance sheet date, but before financial statements are issued or are available to be
issued. Specifically, this guidance provides (i) the period after the balance sheet date during
which management of a reporting entity should evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements; (ii) the circumstances under which
an entity should recognize events or transactions occurring after the balance sheet date in its
financial statements; and (iii) the disclosures that an entity should make about events or
transactions that occurred after the balance sheet date. This guidance is effective for interim or
annual financial periods ending after June 15, 2009, and is to be applied prospectively. We
adopted this guidance as of July 31, 2009. The adoption of this
12
guidance did not have a material
effect on our consolidated financial position, results of operations or cash flows. See note 1 for
certain required disclosures related to this standard.
Critical Accounting Policies
Our 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.
13
Revenue Recognition
Revenues are recognized when the risk of ownership and title passes to our customers. Generally,
we extend credit to our customers and do not require collateral. None of our sales agreements with
any of our customers provide for any rights of return. However, we do approve returns on a
case-by-case basis at our sole discretion to protect our brands and our image. We provide
allowances for estimated returns when revenues are recorded, and related losses have historically
been within our expectations. If returns are higher than our estimates, our results of operations
would be adversely affected.
Accounts Receivable
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. Throughout the year, we
perform credit evaluations of our customers, and we adjust credit limits based on payment history
and the customers 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. 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. Unforeseen, material financial difficulties of
our customers could have an adverse impact on our results of operations.
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 for excess and obsolete inventory based primarily
on estimated forecasts of product demand and market value. Demand for our products could fluctuate
significantly. The demand for our products could be negatively affected by many factors, including
the following:
| weakening economic conditions; | |
| terrorist acts or threats; | |
| unanticipated changes in consumer preferences; | |
| reduced customer confidence; and | |
| unseasonable weather. |
Some of these factors could also interrupt the production and/or importation of our products or
otherwise increase the cost of our products. As a result, our operations and financial performance
could be negatively affected. Additionally, our estimates of product demand and/or market value
could be inaccurate, which could result in an understated or overstated provision required for
excess and obsolete inventory.
Long-Lived Assets
We acquire tangible and intangible assets in the normal course of our business. We evaluate the
recoverability of the carrying amount of these long-lived assets (including fixed assets,
trademarks, licenses and other amortizable intangibles) whenever events or changes in circumstances
indicate that the carrying value of an asset may not be recoverable. An impairment loss is
recognized when the carrying value exceeds the undiscounted future cash flows estimated to result
from the use and eventual disposition of the asset. Impairments are recognized in operating
earnings. We continually use judgment 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 reasonableness of our judgment could significantly affect the
carrying value of our long-lived assets.
Goodwill
We evaluate the recoverability of goodwill at least annually based on a two-step impairment test.
The first step compares the fair value of each reporting unit with its carrying amount, including
goodwill. We have three reporting units under which we evaluate goodwill for impairment, the
Americas, Europe and Asia/Pacific. We estimate the fair value of our reporting units using a
combination of a discounted cash flow approach and market approach. Material assumptions in our
test for impairment include future cash
14
flows of each reporting unit, discount rates applied to
these cash flows and current market estimates of
value. The discount rates used approximate our cost of capital. Future cash flows assume future
levels of growth in each reporting units business. If any of these assumptions significantly
change, including a change in expected future growth rates or valuation multiples, we may be
required to record future impairments of goodwill. If the carrying amount exceeds fair value under
the first step of our goodwill impairment test, then the second step of the impairment test is
performed to measure the amount of any impairment loss.
As of October 31, 2009, the fair value of the Americas reporting unit substantially exceeded its
carrying value. For our Europe and Asia/Pacific reporting units, the fair value exceeded the
carrying value by approximately 7% and 5%, respectively. Goodwill allocated to our Europe and
Asia/Pacific reporting units was $184.8 million and $71.1 million, respectively, as of October 31,
2009. Based on the uncertainty of future growth rates and other assumptions used to estimate
goodwill recoverability in these reporting units, future reductions in our expected cash flows for
Europe or Asia/Pacific could cause a material impairment of goodwill.
Income Taxes
Current income tax expense is the amount of income taxes expected to be payable for the current
year. A deferred income tax asset or liability is established for the expected future consequences
of temporary differences in the financial reporting and tax bases of assets and liabilities. We
consider future taxable income and ongoing prudent and feasible tax planning strategies in
assessing the value of our deferred tax assets. If we determine that it is more likely than not
that these assets will not be realized, we would reduce the value of these assets to their expected
realizable value, thereby decreasing net income. Evaluating the value of these assets is
necessarily based on our judgment. If we subsequently determined that the deferred tax assets,
which had been written down would, in our judgment, be realized in the future, the value of the
deferred tax assets would be increased, thereby increasing net income in the period when that
determination was made.
On November 1, 2007, we adopted the authoritative guidance included in ASC Subtopic 740 Income
Taxes, which clarifies the accounting for uncertainty in income taxes recognized in the financial
statements. This guidance provides that a tax benefit from an uncertain tax position may be
recognized when it is more likely than not that the position will be sustained upon examination,
including resolutions of any related appeals or litigation processes, based on the technical merits
of the tax position. We recognize accrued interest and penalties related to unrecognized tax
benefits as a component of our provision for income taxes. The application of this guidance can
create significant variability in our tax rate from period to period based upon changes in or
adjustments to our uncertain tax positions.
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 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.
Foreign Currency Translation
A significant portion of our revenues are generated in Europe, where we operate with the euro as
our functional currency, and a smaller portion of our revenues are generated in Asia/Pacific, where
we operate with the Australian dollar and Japanese yen as our functional currencies. Our European
revenues in the United Kingdom are denominated in British pounds, and substantial portions of our
European and Asia/Pacific 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. Our assets
and liabilities that are denominated in foreign currencies are translated at the rate of exchange
on the balance sheet date. Revenues and expenses are translated using the average exchange rate
for the period. Gains and losses from translation of foreign subsidiary financial statements into
U.S. dollars are included in accumulated other comprehensive income or loss.
15
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 various 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 derivatives in other comprehensive income or loss.
Forward-Looking Statements
All statements included in this report, other than statements or characterizations of historical
fact, are forward-looking statements within the meaning of the Private Securities Litigation Reform
Act of 1995. Examples of forward-looking statements include, but are not limited to, statements
regarding the trends and uncertainties in our financial condition, liquidity and results of
operations. These forward-looking statements are based on our current expectations, estimates and
projections about our industry, managements beliefs, and certain assumptions made by us and speak
only as of the date of this report. Forward-looking statements can often be identified by words
such as anticipates, expects, intends, plans, predicts, believes, seeks, estimates,
may, will, likely, should, would, could, potential, continue, ongoing, and
similar expressions, and variations or negatives of these words. In addition, any statements that
refer to expectations, projections, guidance, forecasts or other characterizations of future events
or circumstances, including any underlying assumptions, are forward-looking statements. These
statements are not guarantees of future results and are subject to risks, uncertainties and
assumptions that are difficult to predict. Therefore, our actual results could differ materially
and adversely from those expressed in any forward-looking statement as a result of various factors,
including, but not limited to, the following:
| continuing deterioration of global economic conditions and credit and capital markets; | |
| our ability to remain compliant with our debt covenants; | |
| our ability to achieve the financial results that we anticipate; | |
| payments due on contractual commitments and other debt obligations; | |
| future expenditures for capital projects; | |
| our ability to continue to maintain our brand image and reputation; | |
| foreign currency exchange rate fluctuations; and | |
| changes in political, social and economic conditions and local regulations, particularly in Europe and Asia. |
These forward-looking statements are based largely on our expectations and are subject to a number
of risks and uncertainties, many of which are beyond our control. Actual results could differ
materially from these forward-looking statements as a result of the risks described in Item 1A.
Risk Factors included in this report, and other factors. We undertake no obligation to publicly
update or revise any forward-looking statements, whether as a result of new information, future
events or otherwise. In light of these risks and uncertainties, we cannot assure you that the
forward-looking information contained herein will, in fact, transpire.
16