QUIKSILVER INC - FORM 10-Q - June 9, 2015

Attached files

file filename
EX-32.1 - EXHIBIT 32.1 - QUIKSILVER INCzqk_20140731xex32121.htm
EX-31.2 - EXHIBIT 31.2 - QUIKSILVER INCzqk_20140731xex31221.htm
EX-31.1 - EXHIBIT 31.1 - QUIKSILVER INCzqk_20140731xex31121.htm
EXCEL - IDEA: XBRL DOCUMENT - QUIKSILVER INCFinancial_Report.xls
EX-32.2 - EXHIBIT 32.2 - QUIKSILVER INCzqk_20140731xex32221.htm


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 April 30, 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 May 29, 2015 was 171,731,924.



QUIKSILVER, INC.
FORM 10-Q
INDEX
 
 
Page No.
 
 
 
 
 
 
 
 
 
 
Quiksilver, Inc. Condensed Consolidated Statements of Operations Second Quarter (Three Months) and Six Months Ended April 30, 2015 and 2014
 
 
 
 
Quiksilver, Inc. Condensed Consolidated Statements of Comprehensive Loss Second Quarter (Three Months) and Six Months Ended April 30, 2015 and 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Second Quarter (Three Months) Ended April 30, 2015 Compared to Second Quarter (Three Months) Ended April 30, 2014
 
 
 
 
Six Months Ended April 30, 2015 Compared to Six Months Ended April 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
QUIKSILVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
 
Three Months Ended April 30,
 
Six Months Ended April 30,
In thousands, except per share amounts
 
2015
 
2014
 
2015
 
2014
Revenues, net
 
$
333,052

 
$
396,941

 
$
673,906

 
$
791,851

Cost of goods sold
 
176,254

 
202,651

 
347,664

 
396,921

Gross profit
 
156,798

 
194,290

 
326,242

 
394,930

Selling, general and administrative expense
 
175,179

 
207,921

 
345,683

 
411,705

Asset impairments
 
703

 
4,583

 
958

 
5,466

Operating loss
 
(19,084
)
 
(18,214
)
 
(20,399
)
 
(22,241
)
Interest expense, net
 
18,040

 
19,222

 
36,442

 
38,642

Foreign currency (gain)/loss
 
(3,258
)
 
887

 
(2,601
)
 
3,715

Loss before provision/(benefit) for income taxes
 
(33,866
)
 
(38,323
)
 
(54,240
)
 
(64,598
)
Provision/(benefit) for income taxes
 
3,728

 
(443
)
 
1,644

 
(4,828
)
Loss from continuing operations
 
(37,594
)
 
(37,880
)
 
(55,884
)
 
(59,770
)
(Loss)/income from discontinued operations, net of tax (includes net gain on sale of businesses of $6,580 (for the six months ended 2015) and $30,833 (for the six months ended 2014)
 
—

 
(22,981
)
 
6,732

 
14,636

Net loss
 
(37,594
)
 
(60,861
)
 
(49,152
)
 
(45,134
)
Less: net loss attributable to non-controlling interest
 
—

 
7,737

 
788

 
8,201

Net loss attributable to Quiksilver, Inc.
 
$
(37,594
)
 
$
(53,124
)
 
$
(48,364
)
 
$
(36,933
)
Loss per share from continuing operations attributable to Quiksilver, Inc.
 
$
(0.22
)
 
$
(0.22
)
 
$
(0.33
)
 
$
(0.35
)
(Loss)/income per share from discontinued operations attributable to Quiksilver, Inc.
 
$
0.00

 
$
(0.09
)
 
$
0.04

 
$
0.13

Net loss per share attributable to Quiksilver, Inc.
 
$
(0.22
)
 
$
(0.31
)
 
$
(0.28
)
 
$
(0.22
)
Loss per share from continuing operations attributable to Quiksilver, Inc., assuming dilution
 
$
(0.22
)
 
$
(0.22
)
 
$
(0.33
)
 
$
(0.35
)
(Loss)/income per share from discontinued operations attributable to Quiksilver, Inc., assuming dilution
 
$
0.00

 
$
(0.09
)
 
$
0.04

 
$
0.13

Net loss per share attributable to Quiksilver, Inc., assuming dilution
 
$
(0.22
)
 
$
(0.31
)
 
$
(0.28
)
 
$
(0.22
)
Weighted average common shares outstanding, basic
 
171,343

 
170,475

 
171,188

 
170,105

Weighted average common shares outstanding, diluted
 
171,343

 
170,475

 
171,188

 
170,105

Amounts attributable to Quiksilver, Inc.:
 
 
 
 
 
 
 
 
Loss from continuing operations
 
$
(37,594
)
 
$
(37,880
)
 
$
(55,884
)
 
$
(59,409
)
(Loss)/income from discontinued operations, net of tax
 
—

 
(15,244
)
 
7,520

 
22,476

Net loss
 
$
(37,594
)
 
$
(53,124
)
 
$
(48,364
)
 
$
(36,933
)
See Notes to Condensed Consolidated Financial Statements.

1


QUIKSILVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
 
 
Three Months Ended April 30,
 
Six Months Ended April 30,
In thousands
 
2015
 
2014
 
2015
 
2014
Net loss
 
$
(37,594
)
 
$
(60,861
)
 
$
(49,152
)
 
$
(45,134
)
Other comprehensive (loss)/income:
 
 
 
 
 
 
 
 
Foreign currency translation adjustment
 
1,235

 
10,142

 
(32,908
)
 
(10,573
)
Reclassification adjustment for realized loss on derivative instruments transferred to earnings, net of tax benefit for the three months of 2015 and 2014, of $424 and $278, respectively, and $637 and $371 for the six months of 2015 and 2014, respectively
 
(7,648
)
 
(1,243
)
 
(10,566
)
 
(1,057
)
Net unrealized gain/(loss) on derivative instruments, net of tax (benefit)/provision of $(148) and $(1,167) for the three months of 2015 and 2014, respectively, and $1,147 and $248 for the six months of 2015 and 2014, respectively
 
2,261

 
(3,218
)
 
20,703

 
2,889

Comprehensive loss
 
(41,746
)
 
(55,180
)
 
(71,923
)
 
(53,875
)
Comprehensive loss attributable to non-controlling interest
 
—

 
7,737

 
788

 
8,201

Comprehensive loss attributable to Quiksilver, Inc.
 
$
(41,746
)
 
$
(47,443
)
 
$
(71,135
)
 
$
(45,674
)
See Notes to Condensed Consolidated Financial Statements.

2


QUIKSILVER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
In thousands, except share and per share amounts
 
April 30,
2015
 
October 31,
2014
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
48,078

 
$
46,664

Restricted cash
 
4,449

 
4,687

Trade accounts receivable, less allowances of $52,940 (2015) and $63,991 (2014)
 
251,947

 
311,014

Other receivables
 
42,800

 
40,847

Income taxes receivable
 
494

 
—

Inventories
 
291,248

 
284,517

Deferred income taxes - current
 
4,838

 
4,926

Prepaid expenses and other current assets
 
30,425

 
28,080

Current portion of assets held for sale
 
—

 
20,265

Total current assets
 
674,279

 
741,000

Restricted cash
 
2,868

 
16,514

Fixed assets, less accumulated depreciation and amortization of $215,094 (2015) and $220,888 (2014)
 
189,673

 
213,768

Intangible assets, net
 
138,038

 
135,510

Goodwill
 
80,102

 
80,622

Other assets
 
39,450

 
47,086

Deferred income taxes long-term
 
14,182

 
16,088

Assets held for sale, net of current portion
 
—

 
5,394

Total assets
 
$
1,138,592

 
$
1,255,982

LIABILITIES AND EQUITY/(DEFICIT)
 
 
 
 
Current liabilities:
 
 
 
 
Lines of credit
 
$
33,037

 
$
32,929

Accounts payable
 
149,968

 
168,307

Accrued liabilities
 
105,446

 
112,701

Current portion of long-term debt
 
2,248

 
2,432

Income taxes payable
 
—

 
1,124

Deferred income taxes - current
 
19,167

 
19,628

Current portion of assets held for sale
 
—

 
13,266

Total current liabilities
 
309,866

 
350,387

Long-term debt, net of current portion
 
785,482

 
793,229

Other long-term liabilities
 
35,747

 
39,342

Deferred income taxes long-term
 
22,130

 
16,790

Total liabilities
 
1,153,225

 
1,199,748

Equity/(Deficit):
 
 
 
 
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 - 174,642,124 (2015) and 174,057,410 (2014)
 
1,743

 
1,741

Additional paid-in capital
 
591,656

 
589,032

Treasury stock, 2,885,200 shares
 
(6,778
)
 
(6,778
)
Accumulated deficit
 
(635,771
)
 
(587,407
)
Accumulated other comprehensive income
 
34,517

 
57,288

Total Quiksilver, Inc. stockholders’ equity/(deficit)
 
(14,633
)
 
53,876

Non-controlling interest
 
—

 
2,358

Total equity/(deficit)
 
(14,633
)
 
56,234

Total liabilities and equity/(deficit)
 
$
1,138,592

 
$
1,255,982

See Notes to Condensed Consolidated Financial Statements.

3


QUIKSILVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Six Months Ended April 30,
In thousands
 
2015
 
2014
Cash flows from operating activities:
 
 
 
 
Net loss
 
$
(49,152
)

$
(45,134
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
 
Income from discontinued operations
 
(6,732
)
 
(14,636
)
Depreciation and amortization
 
20,465

 
24,818

Stock-based compensation
 
2,252

 
11,588

Provision for doubtful accounts
 
3,370

 
15,240

Loss/(gain) on disposal of fixed assets
 
345

 
(493
)
Unrealized foreign currency (gain)/loss
 
(7,708
)
 
4,206

Asset impairments
 
958

 
5,466

Non-cash interest expense
 
1,760

 
1,702

Equity in earnings
 
596

 
1,144

Deferred income taxes
 
(4,091
)
 
529

Subtotal of non-cash reconciling adjustments
 
11,215

 
49,564

Changes in operating assets and liabilities:
 
 
 
 
Trade accounts receivable
 
38,800

 
37,913

Other receivables
 
(3,505
)
 
(6,146
)
Inventories
 
(20,158
)
 
29,217

Prepaid expenses and other current assets
 
(4,738
)
 
(7,744
)
Other assets
 
807

 
1,608

Accounts payable
 
3,832

 
(66,232
)
Accrued liabilities and other long-term liabilities
 
(3,927
)
 
(15,287
)
Income taxes payable
 
(1,588
)
 
(1,007
)
Subtotal of changes in operating assets and liabilities
 
9,523


(27,678
)
Cash used in operating activities of continuing operations
 
(28,414
)
 
(23,248
)
Cash provided by/(used in) operating activities of discontinued operations
 
4,668

 
(16,978
)
Net cash used in operating activities
 
(23,746
)
 
(40,226
)
Cash flows from investing activities:
 
 
 
 
Capital expenditures
 
(22,974
)
 
(23,687
)
Proceeds from sale of property
 
460

 
665

Changes in restricted cash
 
13,884

 
(56,047
)
Cash used in investing activities of continuing operations
 
(8,630
)
 
(79,069
)
Cash provided by investing activities of discontinued operations
 
10,713

 
77,051

Net cash provided by/(used in) investing activities
 
2,083

 
(2,018
)
Cash flows from financing activities:
 
 
 
 
Borrowings on lines of credit
 
40,739

 
91,625

Payments on lines of credit
 
(34,516
)
 
(67,258
)
Borrowings on long-term debt
 
57,701

 
75,574

Payments on long-term debt
 
(34,916
)
 
(38,429
)
Payments on short-term debt
 
—

 
(15,223
)
Stock option exercises and employee stock purchases
 
372

 
5,150

Payments of debt issuance costs
 
—

 
(771
)
Cash provided by financing activities of continuing operations
 
29,380

 
50,668

Net cash provided by financing activities
 
29,380

 
50,668

Effect of exchange rate changes on cash
 
(6,303
)
 
1,430

Net increase in cash and cash equivalents
 
1,414

 
9,854

Cash and cash equivalents, beginning of period
 
46,664

 
57,280

Cash and cash equivalents, end of period
 
$
48,078

 
$
67,134

Supplementary cash flow information:
 
 
 
 
Cash paid during the period for:
 
 
 
 
Interest
 
$
34,821

 
$
38,530

Income taxes paid
 
$
5,034

 
$
9,599

Summary of significant non-cash transactions:
 
 
 
 
Capital expenditures accrued at period end (investing activities)
 
$
2,224

 
$
5,211

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"). As a result, the Company reported the operating results of Mervin, Hawk and Surfdome in "Income from discontinued operations, net of tax" in the condensed 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

6


contract(s) with a customer, (ii) identify the performance obligations in the contract(s), (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract(s), and (v) recognize revenue when, or as, the entity satisfies a performance obligation. ASU 2014-09 is effective for annual periods (and interim periods therein) beginning on or after December 15, 2016. Early adoption is not permitted. The Company is currently 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.
In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, which will require an entity’s management to assess whether they should consolidate certain legal entities. 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.
In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issue Costs, which will require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. The guidance will be effective for the Company beginning with fiscal year 2017. Early adoption is permitted. The guidance impacts disclosures only. The Company does not expect the impact of this amended guidance to have a material effect on its consolidated financial statements and related disclosures.
In April 2015, the FASB issued ASU 2015-05, Intangibles - Goodwill and Other Internal-Use Software (Subtopic 350-40): Customer's Accounting for Fees Paid in a Cloud Computing Arrangement, which will require an entity’s management to assess, for each annual and interim period, whether a cloud computing arrangement includes a software license. All software licenses within the scope of Subtopic 350-40 will be accounted for consistent with other licenses of intangible assets. If the arrangement does not include a software license, the arrangement should be accounted for as a service contract. 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

7


Operations. Corporate Operations also includes sourcing income and certain gross profits earned from the Company’s licensees.

8


Information related to the Company's operating segments, all from continuing operations, is as follows:
 
 
Three Months Ended April 30,
 
Six Months Ended April 30,
In thousands
 
2015
 
2014
 
2015
 
2014
Revenues, net:
 
 
 
 
 
 
 
 
Americas
 
$
159,987

 
$
186,247

 
$
307,754

 
$
361,710

EMEA
 
115,792

 
150,883

 
241,605

 
300,280

APAC
 
56,276

 
59,721

 
122,874

 
129,596

Corporate Operations
 
997

 
90

 
1,673

 
265

Total
 
$
333,052

 
$
396,941

 
$
673,906

 
$
791,851

Gross profit/(loss):
 
 
 
 
 
 
 
 
Americas
 
$
67,196

 
$
78,909

 
$
131,505

 
$
154,823

EMEA
 
59,904

 
81,724

 
130,404

 
169,573

APAC
 
29,894

 
33,413

 
66,744

 
70,221

Corporate Operations
 
(196
)
 
244

 
(2,411
)
 
313

Total
 
$
156,798

 
$
194,290

 
$
326,242

 
$
394,930

SG&A expense:
 
 
 
 
 
 
 
 
Americas
 
$
78,509

 
$
96,701

 
$
148,533

 
$
186,262

EMEA
 
61,426

 
75,715

 
127,555

 
153,923

APAC
 
32,299

 
34,089

 
67,104

 
67,452

Corporate Operations
 
2,945

 
1,416

 
2,491

 
4,068

Total
 
$
175,179

 
$
207,921

 
$
345,683

 
$
411,705

Asset impairments:
 
 
 
 
 
 
 
 
Americas
 
$
466

 
$
4,191

 
$
542

 
$
4,413

EMEA
 
237

 
392

 
416

 
1,053

APAC
 
—

 
—

 
—

 
—

Corporate Operations
 
—

 
—

 
—

 
—

Total
 
$
703

 
$
4,583

 
$
958

 
$
5,466

Operating (loss)/income:
 
 
 
 
 
 
 
 
Americas
 
$
(11,779
)
 
$
(21,983
)
 
$
(17,570
)
 
$
(35,852
)
EMEA
 
(1,759
)
 
5,617

 
2,433

 
14,597

APAC
 
(2,405
)
 
(676
)
 
(360
)
 
2,769

Corporate Operations
 
(3,141
)
 
(1,172
)
 
(4,902
)
 
(3,755
)
Total
 
$
(19,084
)
 
$
(18,214
)
 
$
(20,399
)
 
$
(22,241
)
Depreciation and amortization expense:
 
 
 
 
 
 
 
 
Americas
 
$
3,827

 
$
6,017

 
$
7,935

 
$
10,533

EMEA
 
3,116

 
5,474

 
6,932

 
8,761

APAC
 
1,748

 
1,925

 
3,489

 
3,813

Corporate Operations
 
739

 
605

 
1,501

 
1,259

Total
 
$
9,430

 
$
14,021

 
$
19,857

 
$
24,366

Interest expense:
 
 
 
 
 
 
 
 
Americas
 
$
943

 
$
327

 
$
1,673

 
$
1,229

EMEA
 
3,827

 
4,708

 
8,055

 
9,519

APAC
 
458

 
541

 
984

 
1,128

Corporate Operations
 
12,812

 
13,646

 
25,730

 
26,766

Total
 
$
18,040

 
$
19,222

 
$
36,442

 
$
38,642


9


SG&A expense by segment for the three and six months ended 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.
In thousands
 
April 30,
2015
 
October 31, 2014
Identifiable assets:
 
 
 
 
Americas
 
$
438,138

 
$
464,831

EMEA
 
438,696

 
513,303

APAC
 
197,437

 
202,225

Corporate Operations
 
64,321

 
75,623

Total
 
$
1,138,592

 
$
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 and six months ended April 30, 2015 and 2014:
 
 
Three Months Ended April 30,
 
Six Months Ended April 30,
In thousands
 
2015
 
2014
 
2015
 
2014
Shares used in computing basic net loss/income per share
 
171,343

 
170,475

 
171,188

 
170,105

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
 
171,343

 
170,475

 
171,188

 
170,105

(1)
For the second quarter of fiscal 2015 and 2014, the shares used in computing diluted net loss per share do not include 232,000 and 3,229,000, respectively, of stock options and shares of restricted stock, nor 1,279,000 and 19,113,000, respectively, of warrant shares that would have normally been dilutive if the Company had net income for the periods, as the effect is anti-dilutive given the Company’s net loss from continuing operations. In addition, for the second quarter of fiscal 2015 and 2014, additional stock options outstanding of 5,712,000 and 685,000, respectively, are excluded from the calculation of diluted weighted-average shares outstanding as the exercise prices were greater than the average market price of the Company's common stock for those periods. These securities could potentially dilute earnings per share in the future.
For the first six months of fiscal 2015 and 2014, the shares used in computing diluted net loss per share do not include 233,000 and 3,603,000, respectively, of stock options and shares of restricted stock, nor 1,633,000 and 19,542,000, respectively, of warrant shares that would have been dilutive if the Company had net income for the periods, as the effect is anti-dilutive given the Company’s net loss from continuing operations. In addition, for the first six months of fiscal 2015 and 2014, additional stock options outstanding of 5,880,000 and 595,000, respectively, are excluded from the calculation of diluted weighted-average shares outstanding as the exercise prices were greater than the average market price of the Company's common stock for those periods. These securities could potentially dilute earnings per share in the future.
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

10


executives with those of its stockholders. The weighted average fair value of the performance-based restricted stock units granted in the six months ended April 30, 2015 and 2014 was $1.85 and $5.16. There were no performance-based options granted in the six months of fiscal 2015 or 2014.
Activity related to these performance-based options and performance-based restricted stock units for the six months ended April 30, 2015 was as follows:
 
 
Performance
Options
 
Performance
Restricted
Stock Units
Outstanding, October 31, 2014
 
640,000

 
10,218,508

Granted
 
—

 
1,824,000

Exercised
 
—

 
—

Canceled
 
—

 
(2,263,502
)
Outstanding, April 30, 2015
 
640,000

 
9,779,006

As of April 30, 2015, 204,000 of the 640,000 outstanding performance-based stock options were exercisable and none of the performance-based restricted stock units were vested. As of April 30, 2015, the Company had unrecognized compensation expense, net of estimated forfeitures, of approximately $0.2 million related to the performance-based stock options and approximately $2.7 million related to the performance-based restricted stock units, which are not expected to vest. The unrecognized compensation expense related to the performance-based stock options is expected to be recognized over a weighted average period of approximately 1 year.
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 six months of fiscal 2015 and 2014, non-performance based options granted were valued assuming a risk free interest rate of 1.81% and 2.2%, respectively, volatility of 86% and 81%, respectively, zero dividend yields and an expected life of 6.6 years and 6.7 years, respectively. The weighted average fair value of the grants was $1.27 and $5.94 for the first six months of fiscal 2015 and 2014, respectively. The Company records stock-based compensation expense using the graded vested method over the vesting period, which is generally three years. As of April 30, 2015, the Company had approximately $0.9 million of unrecognized compensation expense for non-performance-based stock options expected to be recognized over a weighted average period of approximately 1.7 years.
Changes in shares underlying stock options, excluding performance-based stock options, for the six months ended April 30, 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
 
275,000

 
1.70

 
 
 
 
Exercised
 
—

 
—

 
 
 


Canceled
 
(765,667
)
 
5.87

 
 
 
 
Outstanding, April 30, 2015
 
6,326,942

 
$
4.24

 
4.6
 
$
14

Options exercisable, April 30, 2015
 
5,927,274

 
$
4.12

 
4.4
 
$
14


11


Changes in non-vested shares underlying stock options, excluding performance-based stock options, for the six months ended April 30, 2015 were as follows:
 
 
Shares
 
Weighted
Average Grant Date
Fair Value
Non-vested, October 31, 2014
 
1,121,336

 
$
4.18

Granted
 
275,000

 
1.27

Vested
 
(813,334
)
 
2.89

Canceled
 
(183,334
)
 
5.20

Non-vested, April 30, 2015
 
399,668

 
$
4.32

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 completion of a requisite service period. Vesting of a prorated portion of restricted stock unit awards granted to our former chief executive officer in lieu of a cash annual salary was accelerated in the second quarter of fiscal 2015 upon his departure. Changes in restricted stock and restricted stock units for the six months ended April 30, 2015 were as follows:
 
 
Restricted Stock
 
Restricted Stock Units
Outstanding, October 31, 2014
 
175,000

 
—

Granted
 
105,000

 
675,676

Vested
 
(70,000
)
 
(281,532
)
Forfeited
 
—

 
(394,144
)
Outstanding, April 30, 2015
 
210,000

 
—

The fair value of restricted stock is determined using the intrinsic value method on the grant date. 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 April 30, 2015, there had been no acceleration of amortization periods and the Company had approximately $0.4 million of unrecognized compensation expense expected to be recognized over a weighted average period of approximately 1.5 years.
Note 5 — Restricted Cash
The Company’s restricted cash balance, including both current and non-current portions, was $7 million at April 30, 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 April 30, 2015 included $3 million of the remaining proceeds from the sale of the Surfdome business in the first quarter of fiscal 2015, which is subject to these 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
 
April 30,
2015
 
October 31, 2014
Raw materials
 
$
2,666

 
$
3,524

Work in-process
 
422

 
467

Finished goods
 
288,160

 
280,526

Total
 
$
291,248

 
$
284,517


12


Note 7 — Intangible Assets and Goodwill
Intangible Assets
Intangible assets consisted of the following as of the dates indicated:
 
 
April 30, 2015
 
October 31, 2014
In thousands
 
Gross
Amount
 
Accumulated
Amortization
 
Net Book
Value
 
Gross
Amount
 
Accumulated
Amortization
 
Net Book
Value
Non-amortizable trademarks
 
$
124,143

 
$
—

 
$
124,143

 
$
124,121

 
$
—

 
$
124,121

Amortizable trademarks
 
24,550

 
(12,543
)
 
12,007

 
21,858

 
(12,508
)
 
9,350

Amortizable licenses
 
10,766

 
(10,766
)
 
—

 
11,817

 
(11,817
)
 
—

Other amortizable intangibles
 
8,416

 
(6,528
)
 
1,888

 
8,406

 
(6,367
)
 
2,039

Total
 
$
167,875

 
$
(29,837
)
 
$
138,038

 
$
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 six-month periods ended April 30, 2015 and 2014 was approximately $1 million. Annual amortization expense is estimated to be approximately $2 million in fiscal 2016 through fiscal 2018 and $1 million in fiscal 2019 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
 
(520
)
 
—

 
—

 
(520
)
Gross goodwill
 
73,895

 
178,197

 
135,752

 
387,844

Accumulated impairment losses
 
—

 
(178,197
)
 
(129,545
)
 
(307,742
)
Net goodwill at April 30, 2015
 
$
73,895

 
$
—

 
$
6,207

 
$
80,102

Note 8 — Income Taxes
Each reporting period, the Company evaluates the realizability of all of its deferred tax assets in each tax jurisdiction. As of April 30, 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 six months of fiscal 2015 and 2014.
The Company's hedging instruments in Europe generated tax expense of approximately $4 million within other comprehensive income in the first six months 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 of approximately $6 million in the six months ended April 30, 2015 due to being unable to record tax benefits against the losses in certain jurisdictions where the Company has previously recorded valuation allowances.

13


As of April 30, 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"). The 2013 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 2013 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
 
6,435

 
5,057

 
11,492

Cash payments
 
(7,507
)
 
(4,076
)
 
(11,583
)
Adjustments
 
—

 
(1,986
)
 
(1,986
)
Balance, April 30, 2015
 
$
10,438

 
$
11,286

 
$
21,724

Amounts charged to expense during the six months ended April 30, 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, EMEA and Corporate Operations segments. In the first quarter of fiscal 2015, 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 first six months of fiscal 2014, related to certain non-core brands and peripheral product categories that have been discontinued, which are not reflected in the table above.

14


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
 
April 30,
2015
 
October 31,
2014
Lines of credit - 0.7% Floating

October 31, 2016
 
$
33,037

 
$
32,929

2017 Notes - 8.875% Fixed

December 15, 2017
 
220,590

 
252,188

ABL Credit Facility - 2.1% to 4.6% Floating

May 24, 2018
 
60,779

 
35,933

2018 Notes - 7.875% Fixed

August 1, 2018
 
278,957

 
278,834

2020 Notes - 10.000% Fixed

August 1, 2020
 
222,743

 
222,582

Capital lease obligations and other borrowings - Various %

Various
 
4,661

 
6,124

Total debt


 
820,767

 
828,590

Less current portion


 
(35,285
)
 
(35,361
)
Long-term debt, net of current portion


 
$
785,482

 
$
793,229

As of April 30, 2015, the Company’s credit facilities allowed for total cash borrowings and letters of credit of $184 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 April 30, 2015, the Company had a total of $94 million of direct borrowings and $28 million in letters of credit outstanding. As of April 30, 2015, the remaining availability for borrowings under the Company’s credit facilities was $45 million, $20 million of which could also be used for letters of credit in the United States and APAC. In addition to the $45 million of availability for borrowings, the Company also had $18 million in additional capacity for letters of credit in EMEA as of April 30, 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 April 30, 2015 was $710 million, compared to a carrying value of $821 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 April 30, 2015, the Company was hedging a portion of forecasted transactions expected to occur through October 2016. Assuming April 30, 2015 exchange rates remain constant, $14 million of gains, net of tax, related to hedges of these transactions are expected to be reclassified into earnings over the next 18 months. For

15


additional information of the gains/losses related to hedging, see Note 14 — Accumulated Other Comprehensive Income/(Loss).
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 of $8 million and $1 million for the three months ended April 30, 2015 and 2014, respectively, and $11 million and $1 million for the six months ended April 30, 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 April 30, 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
 
$
238,686

 
May 2015 – October 2016
 
$
19,427

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 derivative 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
 
Derivative Assets/(Liabilities)
In thousands
 
Level 1
 
Level 2
 
Level 3
 
At Fair Value
Other receivables
 
$
—

 
$
20,871

 
$
—

 
$
20,871

Derivative liabilities:
 
 
 
 
 
 
 
 
Accrued liabilities
 
—

 
(749
)
 
—

 
(749
)
Other long-term liabilities
 
—

 
(695
)
 
—

 
(695
)
Total fair value at April 30, 2015
 
$
—

 
$
19,427

 
$
—

 
$
19,427

 
 
 
 
 
 
 
 
 
Other receivables
 
$
—

 
$
16,683

 
$
—

 
$
16,683

Accrued liabilities
 
—

 
(2
)
 
—

 
(2
)
Total fair value at October 31, 2014
 
$
—

 
$
16,681

 
$
—

 
$
16,681


16


Note 12 — Stockholders' Equity/(Deficit) and Non-controlling Interest
The following tables summarize the changes in equity/(deficit) attributable to Quiksilver, Inc. and the non-controlling interests of its consolidated subsidiaries:
 
 
Attributable to
Quiksilver,
Inc.
 
Non-
controlling
Interest
 
Total
Stockholders’
Equity/(Deficit)
In thousands
 
 
 
Balance, October 31, 2014
 
$
53,876

 
$
2,358

 
$
56,234

Stock-based compensation expense
 
2,252

 
—

 
2,252

Employee stock purchase plan
 
374

 
—

 
374

Business disposition
 
—

 
(1,570
)
 
(1,570
)
Net loss and other comprehensive loss
 
(71,135
)
 
(788
)
 
(71,923
)
Balance, April 30, 2015
 
$
(14,633
)
 
$
—

 
$
(14,633
)
 
 
 
 
 
 
 
Balance, October 31, 2013
 
$
366,247

 
$
17,952

 
$
384,199

Stock-based compensation expense
 
11,588

 
—

 
11,588

Exercise of stock options
 
4,476

 
—

 
4,476

Employee stock purchase plan
 
673

 
—

 
673

Transactions with non-controlling interest holders
 
(10,839
)
 
(5,704
)
 
(16,543
)
Net loss and other comprehensive income
 
(45,674
)
 
(8,201
)
 
(53,875
)
Balance, April 30, 2014
 
$
326,471

 
$
4,047

 
$
330,518

The business disposition reflects the Company's sale of its stake in Surfdome in the first quarter of fiscal 2015. 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.

17


Note 14 — Accumulated Other Comprehensive Income/(Loss)
The components of accumulated other comprehensive income/(loss) 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/(loss), 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
 
(10,566
)
 
—

 
(10,566
)
Changes in fair value, net of tax
 
20,703

 
(32,908
)
 
(12,205
)
Balance, April 30, 2015
 
$
14,230

 
$
20,287

 
$
34,517

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

 
$
73,918

Net gains reclassified to COGS
 
(1,057
)
 
—

 
(1,057
)
Changes in fair value, net of tax
 
2,889

 
(10,573
)
 
(7,684
)
Balance, April 30, 2014
 
$
(2,759
)
 
$
67,936

 
$
65,177

Note 15 — Discontinued Operations
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 $31 million during the first six months 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 $18 million within discontinued operations during the first six months of fiscal 2014. However, as the Company did not expect to pay income tax after application of available loss carry-forwards, an offsetting income tax benefit was recognized within continuing operations.
The operating results of discontinued operations for the three and six months ended April 30, 2015 and 2014 are as follows:
 
 
Three Months Ended April 30,
 
Six Months Ended April 30,
In thousands
 
2015
 
2014
 
2015
 
2014
Revenues, net
 
$
—

 
$
11,114

 
$
13,239

 
$
31,276

(Loss)/income before income taxes
 
—

 
(16,625
)
 
6,785

 
31,469

Provision for income taxes
 
—

 
6,356

 
53

 
16,833

(Loss)/income from discontinued operations
 
—

 
(22,981
)
 
6,732

 
14,636

Less: net loss attributable to non-controlling interest
 
—

 
7,737

 
788

 
7,840

(Loss)/income from discontinued operations attributable to Quiksilver, Inc.
 
$
—

 
$
(15,244
)
 
$
7,520

 
$
22,476


18


There were no assets classified as held for sale at April 30, 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 and six months ended April 30, 2015 and 2014, the financial position as of April 30, 2015 and October 31, 2014, and cash flows for the six months ended April 30, 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.

19


QUIKSILVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statement of Operations
Three Months Ended April 30, 2015
In thousands
 
Quiksilver, Inc.
 
QS Wholesale,
Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues, net
 
$
118

 
$
83,703

 
$
63,086

 
$
209,322

 
$
(23,177
)
 
$
333,052

Cost of goods sold
 
—

 
51,307

 
42,793

 
104,876

 
(22,722
)
 
176,254

Gross profit
 
118

 
32,396

 
20,293

 
104,446

 
(455
)
 
156,798

Selling, general and administrative expense
 
4,662

 
47,400

 
21,083

 
103,446

 
(1,412
)
 
175,179

Asset impairments
 
—

 
—

 
466

 
237

 
—

 
703

Operating (loss)/income
 
(4,544
)
 
(15,004
)
 
(1,256
)
 
763

 
957

 
(19,084
)
Interest expense, net
 
11,660

 
962

 
(2
)
 
5,420

 
—

 
18,040

Foreign currency (gain)/loss
 
(205
)
 
330

 
28

 
(3,411
)
 
—

 
(3,258
)
Equity in earnings
 
21,565

 
419

 
—

 
—

 
(21,984
)
 
—

Loss before provision for income taxes
 
(37,564
)
 
(16,715
)
 
(1,282
)
 
(1,246
)
 
22,941

 
(33,866
)
Provision for income taxes
 
30

 
146

 
236

 
3,316

 
—

 
3,728

Net loss
 
(37,594
)
 
(16,861
)
 
(1,518
)
 
(4,562
)
 
22,941

 
(37,594
)
Other comprehensive loss
 
(4,152
)
 
—

 
—

 
(4,152
)
 
4,152

 
(4,152
)
Comprehensive loss
 
$
(41,746
)
 
$
(16,861
)
 
$
(1,518
)
 
$
(8,714
)
 
$
27,093

 
$
(41,746
)


20


QUIKSILVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statement of Operations
Three Months Ended April 30, 2014
In thousands
 
Quiksilver, 
Inc.
 
QS Wholesale,
Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues, net
 
$
116

 
$
90,937

 
$
79,964

 
$
257,018

 
$
(31,094
)
 
$
396,941

Cost of goods sold
 
193

 
55,274

 
62,839

 
122,224

 
(37,879
)
 
202,651

Gross profit
 
(77
)
 
35,663

 
17,125

 
134,794

 
6,785

 
194,290

Selling, general and administrative expense
 
6,378

 
59,138

 
21,227

 
122,808

 
(1,630
)
 
207,921

Asset impairments
 
—

 
765

 
3,255

 
563

 
—

 
4,583

Operating (loss)/income
 
(6,455
)
 
(24,240
)
 
(7,357
)
 
11,423

 
8,415

 
(18,214
)
Interest expense, net
 
11,618

 
455

 
—

 
7,149

 
—

 
19,222

Foreign currency loss
 
124

 
7

 
220

 
536

 
—

 
887

Equity in earnings
 
34,927

 
(692
)
 
—

 
—

 
(34,235
)
 
—

(Loss)/income before (benefit)/provision for income taxes
 
(53,124
)
 
(24,010
)
 
(7,577
)
 
3,738

 
42,650

 
(38,323
)
(Benefit)/provision for income taxes
 
—

 
(4,120
)
 
(2,933
)
 
6,610

 
—

 
(443
)
Loss from continuing operations
 
(53,124
)
 
(19,890
)
 
(4,644
)
 
(2,872
)
 
42,650

 
(37,880
)
Loss from discontinued operations
 
—

 
(4,165
)
 
(2,948
)
 
(15,868
)
 
—

 
(22,981
)
Net loss
 
(53,124
)
 
(24,055
)
 
(7,592
)
 
(18,740
)
 
42,650

 
(60,861
)
Net loss attributable to non-controlling interest
 
—

 
—

 
—

 
7,737

 
—

 
7,737

Net loss attributable to Quiksilver, Inc.
 
(53,124
)
 
(24,055
)
 
(7,592
)
 
(11,003
)
 
42,650

 
(53,124
)
Other comprehensive income
 
5,681

 
—

 
—

 
5,681

 
(5,681
)
 
5,681

Comprehensive loss attributable to Quiksilver, Inc.
 
$
(47,443
)
 
$
(24,055
)
 
$
(7,592
)
 
$
(5,322
)
 
$
36,969

 
$
(47,443
)


21


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statement of Operations
Six Months Ended April 30, 2015
In thousands
 
Quiksilver, Inc.
 
QS Wholesale,
Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues, net
 
$
234

 
$
155,239

 
$
131,621

 
$
439,219

 
$
(52,407
)
 
$
673,906

Cost of goods sold
 
—

 
95,359

 
87,884

 
213,953

 
(49,532
)
 
347,664

Gross profit
 
234

 
59,880

 
43,737

 
225,266

 
(2,875
)
 
326,242

Selling, general and administrative expense
 
7,137

 
76,178

 
50,788

 
214,942

 
(3,362
)
 
345,683

Asset impairments
 
—

 
—

 
466

 
492

 
—

 
958

Operating (loss)/income
 
(6,903
)
 
(16,298
)
 
(7,517
)
 
9,832

 
487

 
(20,399
)
Interest expense, net
 
23,305

 
1,709

 
(4
)
 
11,432

 
—

 
36,442

Foreign currency (gain)/loss
 
(363
)
 
(288
)
 
430

 
(2,380
)
 
—

 
(2,601
)
Equity in earnings
 
18,459

 
95

 
—

 
—

 
(18,554
)
 
—

(Loss)/income before provision for income taxes
 
(48,304
)
 
(17,814
)
 
(7,943
)
 
780

 
19,041

 
(54,240
)
Provision for income taxes
 
60

 
292

 
539

 
753

 
—

 
1,644

(Loss)/income from continuing operations
 
(48,364
)
 
(18,106
)
 
(8,482
)
 
27

 
19,041

 
(55,884
)
(Loss)/income from discontinued operations
 
—

 
—

 
(2
)
 
6,734

 
—

 
6,732

Net (loss)/income
 
(48,364
)
 
(18,106
)
 
(8,484
)
 
6,761

 
19,041

 
(49,152
)
Net loss attributable to non-controlling interest
 
—

 
—

 
—

 
788

 
—

 
788

Net (loss)/income attributable to Quiksilver, Inc.
 
(48,364
)
 
(18,106
)
 
(8,484
)
 
7,549

 
19,041

 
(48,364
)
Other comprehensive loss
 
(22,771
)
 
—

 
—

 
(22,771
)
 
22,771

 
(22,771
)
Comprehensive (loss) attributable to Quiksilver, Inc.
 
$
(71,135
)
 
$
(18,106
)
 
$
(8,484
)
 
$
(15,222
)
 
$
41,812

 
$
(71,135
)




22


QUIKSILVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statement of Operations
Six Months Ended April 30, 2014
In thousands
 
Quiksilver, 
Inc.
 
QS Wholesale,
Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues, net
 
$
232

 
$
176,473

 
$
178,705

 
$
526,788

 
$
(90,347
)
 
$
791,851

Cost of goods sold
 
193

 
106,538

 
131,041

 
242,008

 
(82,859
)
 
396,921

Gross profit
 
39

 
69,935

 
47,664

 
284,780

 
(7,488
)
 
394,930

Selling, general and administrative expense
 
15,403

 
115,104

 
43,895

 
243,865

 
(6,562
)
 
411,705

Asset impairments
 
—

 
765

 
3,477

 
1,224

 
—

 
5,466

Operating (loss)/income
 
(15,364
)
 
(45,934
)
 
292

 
39,691

 
(926
)
 
(22,241
)
Interest expense, net
 
23,218

 
1,465

 
—

 
13,959

 
—

 
38,642

Foreign currency loss/(gain)
 
160

 
(3
)
 
(4
)
 
3,562

 
—

 
3,715

Equity in earnings
 
(1,809
)
 
(618
)
 
—

 
—

 
2,427

 
—

(Loss)/income before (benefit)/provision for income taxes
 
(36,933
)
 
(46,778
)
 
296

 
22,170

 
(3,353
)
 
(64,598
)
(Benefit)/provision for income taxes
 
—

 
(10,289
)
 
(6,878
)
 
12,339

 
—

 
(4,828
)
(Loss)/income from continuing operations
 
(36,933
)
 
(36,489
)
 
7,174

 
9,831

 
(3,353
)
 
(59,770
)
Income/(loss) from discontinued operations
 
—

 
19,757

 
10,583

 
(15,704
)
 
—

 
14,636

Net (loss)/income
 
(36,933
)
 
(16,732
)
 
17,757

 
(5,873
)
 
(3,353
)
 
(45,134
)
Net loss attributable to non-controlling interest
 
—

 
—

 
—

 
8,201

 
—

 
8,201

Net (loss)/income attributable to Quiksilver, Inc.
 
(36,933
)
 
(16,732
)
 
17,757

 
2,328

 
(3,353
)
 
(36,933
)
Other comprehensive loss
 
(8,741
)
 
—

 
—

 
(8,741
)
 
8,741

 
(8,741
)
Comprehensive (loss)/income attributable to Quiksilver, Inc.
 
$
(45,674
)
 
$
(16,732
)
 
$
17,757

 
$
(6,413
)
 
$
5,388

 
$
(45,674
)


23


QUIKSILVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Balance Sheet
April 30, 2015
In thousands
 
Quiksilver, 
Inc.
 
QS Wholesale,
Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
157

 
$
11,555

 
$
—

 
$
39,758

 
$
(3,392
)
 
$
48,078

Restricted cash
 
—

 
—

 
—

 
4,449

 
—

 
4,449

Trade accounts receivable, net
 
—

 
51,993

 
19,581

 
180,373

 
—

 
251,947

Other receivables
 
10

 
1,989

 
1,084

 
39,717

 
—

 
42,800

Income taxes receivable
 
—

 
—

 
—

 
938

 
(444
)
 
494

Inventories
 
—

 
32,866

 
74,357

 
204,346

 
(20,321
)
 
291,248

Deferred income taxes
 
—

 
21,554

 
—

 
4,838

 
(21,554
)
 
4,838

Prepaid expenses and other current assets
 
1,639

 
8,340

 
3,402

 
17,044

 
—

 
30,425

Intercompany balances
 
—

 
264,452

 
—

 
132

 
(264,584
)
 
—

Total current assets
 
1,806

 
392,749

 
98,424

 
491,595

 
(310,295
)
 
674,279

Restricted cash
 
—

 
—

 
—

 
2,868

 
—

 
2,868

Fixed assets, net
 
19,192

 
31,249

 
21,277

 
117,955

 
—

 
189,673

Intangible assets, net
 
9,636

 
43,495

 
1,071

 
83,836

 
—

 
138,038

Goodwill
 
—

 
61,983

 
11,089

 
7,030

 
—

 
80,102

Other assets
 
6,253

 
4,531

 
662

 
28,004

 
—

 
39,450

Deferred income taxes long-term
 
30,807

 
—

 
2,052

 
14,182

 
(32,859
)
 
14,182

Investment in subsidiaries
 
706,629

 
1,430

 
—

 
—

 
(708,059
)
 
—

Total assets
 
$
774,323

 
$
535,437

 
$
134,575

 
$
745,470

 
$
(1,051,213
)
 
$
1,138,592

LIABILITIES AND EQUITY/(DEFICIT)
 
 
 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Lines of credit
 
$
—

 
$
—

 
$
—

 
$
33,037

 
$
—

 
$
33,037

Accounts payable
 
3,092

 
42,219

 
22,149

 
82,508

 
—

 
149,968

Accrued liabilities
 
19,014

 
13,637

 
9,387

 
66,800

 
(3,392
)
 
105,446

Current portion of long-term debt
 
—

 
600

 
—

 
1,648

 
—

 
2,248

Income taxes payable
 
—

 
443

 
1

 
—

 
(444
)
 
—

Deferred income taxes
 
31,450

 
—

 
4,925

 
4,346

 
(21,554
)
 
19,167

Intercompany balances
 
231,536

 
—

 
33,048

 
—

 
(264,584
)
 
—

Total current liabilities
 
285,092

 
56,899

 
69,510

 
188,339

 
(289,974
)
 
309,866

Long-term debt
 
501,699

 
46,103

 
—

 
237,680

 
—

 
785,482

Other long-term liabilities
 
2,165

 
6,044

 
8,719

 
18,819

 
—

 
35,747

Deferred income taxes long-term
 
—

 
38,052

 
—

 
16,937

 
(32,859
)
 
22,130

Total liabilities
 
788,956

 
147,098

 
78,229

 
461,775

 
(322,833
)
 
1,153,225

Stockholders’/invested equity/(deficit)
 
(14,633
)
 
388,339

 
56,346

 
283,695

 
(728,380
)
 
(14,633
)
Total liabilities and equity/(deficit)
 
$
774,323

 
$
535,437

 
$
134,575

 
$
745,470

 
$
(1,051,213
)
 
$
1,138,592


24


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


25


QUIKSILVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statement of Cash Flows
Six Months Ended April 30, 2015
In thousands
 
Quiksilver, 
Inc.
 
QS Wholesale,
Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
 
 
 
Net (loss)/income
 
$
(48,364
)
 
$
(18,106
)
 
$
(8,484
)
 
$
6,761

 
$
19,041

 
$
(49,152
)
Adjustments to reconcile net (loss)/income to net cash provided by/(used in) operating activities:
 
 
 
 
 
 
 
 
 
 
 
 
Income from discontinued operations
 
—

 
—

 
2

 
(6,734
)
 
—

 
(6,732
)
Depreciation and amortization
 
1,453

 
4,717

 
2,808

 
11,487

 
—

 
20,465

Stock-based compensation
 
2,252

 
—

 
—

 
—

 
—

 
2,252

Provision for doubtful accounts
 
—

 
647

 
314

 
2,409

 
—

 
3,370

Asset impairments
 
—

 
—

 
466

 
492

 
—

 
958

Equity in earnings
 
18,459

 
95

 
—

 
596

 
(18,554
)
 
596

Non-cash interest expense
 
1,030

 
632

 
—

 
98

 
—

 
1,760

Deferred income taxes
 
—

 
—

 
—

 
(4,091
)
 
—

 
(4,091
)
Other adjustments to reconcile net (loss)/income
 
(1,185
)
 
(281
)
 
47

 
(5,944
)
 
—

 
(7,363
)
Changes in operating assets and liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Trade accounts receivable
 
—

 
(977
)
 
14,886

 
24,891

 
—

 
38,800

Inventories
 
—

 
(7,185
)
 
(2,083
)
 
(10,403
)
 
(487
)
 
(20,158
)
Intercompany
 
67,233

 
1,020

 
(50,764
)
 
(17,489
)
 
—

 
—

Other operating assets and liabilities
 
1,176

 
(4,251
)
 
6,772

 
(9,424
)
 
(3,392
)
 
(9,119
)
Cash provided by/(used in) operating activities of continuing operations
 
42,054

 
(23,689
)
 
(36,036
)
 
(7,351
)
 
(3,392
)
 
(28,414
)
Cash (used in)/provided by operating activities of discontinued operations
 
—

 
—

 
(2
)
 
4,670

 
—

 
4,668

Net cash provided by/(used in) operating activities
 
42,054

 
(23,689
)
 
(36,038
)
 
(2,681
)
 
(3,392
)
 
(23,746
)
Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
 
 
 
Proceeds from sale of property
 
—

 
—

 
—

 
460

 
—

 
460

Capital expenditures
 
(3,194
)
 
(1,674
)
 
(6,249
)
 
(11,857
)
 
—

 
(22,974
)
Changes in restricted cash
 
—

 
16,514

 
—

 
(2,630
)
 
—

 
13,884

Cash (used in)/provided by investing activities of continuing operations
 
(3,194
)
 
14,840

 
(6,249
)
 
(14,027
)
 
—

 
(8,630
)
Cash provided by investing activities of discontinued operations
 
—

 
—

 
—

 
10,713

 
—

 
10,713

Net cash (used in)/provided by investing activities
 
(3,194
)
 
14,840

 
(6,249
)
 
(3,314
)
 
—

 
2,083

Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
 
 
 
Borrowings on lines of credit
 
—

 
—

 
—

 
40,739

 
—

 
40,739

Payments on lines of credit
 
—

 
—

 
—

 
(34,516
)
 
—

 
(34,516
)
Borrowings on long-term debt
 
—

 
43,038

 
—

 
14,663

 
—

 
57,701

Payments on long-term debt
 
—

 
(19,600
)
 
—

 
(15,316
)
 
—

 
(34,916
)
Stock option exercises and employee stock purchases
 
372

 
—

 
—

 
—

 
—

 
372

Intercompany
 
(39,087
)
 
(5,901
)
 
44,988

 
—

 
—

 
—

Cash (used in )/provided by financing activities of continuing operations
 
(38,715
)
 
17,537

 
44,988

 
5,570

 
—

 
29,380

Net cash (used in)/provided by financing activities
 
(38,715
)
 
17,537

 
44,988

 
5,570

 
—

 
29,380

Effect of exchange rate changes on cash
 
(146
)
 
—

 
—

 
(6,157
)
 
—

 
(6,303
)
Net (decrease)/increase in cash and cash equivalents
 
(1
)
 
8,688

 
2,701

 
(6,582
)
 
(3,392
)
 
1,414

Cash and cash equivalents, beginning of period
 
158

 
2,867

 
(2,701
)
 
46,340

 
—

 
46,664

Cash and cash equivalents, end of period
 
$
157

 
$
11,555

 
$
—

 
$
39,758

 
$
(3,392
)
 
$
48,078


26


QUIKSILVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statement of Cash Flows
Six Months Ended April 30, 2014
In thousands
 
Quiksilver, 
Inc.
 
QS Wholesale,
Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
 
 
 
Net (loss)/income
 
$
(36,933
)
 
$
(16,732
)
 
$
17,757

 
$
(5,873
)
 
$
(3,353
)
 
$
(45,134
)
Adjustments to reconcile net (loss)/income to net cash (used in)/provided by operating activities:
 
 
 
 
 
 
 
 
 
 
 
 
Income from discontinued operations
 
—

 
(19,757
)
 
(10,583
)
 
15,704

 
—

 
(14,636
)
Depreciation and amortization
 
1,157

 
5,298

 
4,355

 
14,008

 
—

 
24,818

Stock-based compensation
 
11,588

 
—

 
—

 
—

 
—

 
11,588

Provision for doubtful accounts
 
—

 
12,458

 
158

 
2,624

 
—

 
15,240

Asset impairments
 
—

 
765

 
3,477

 
1,224

 
—

 
5,466

Equity in earnings
 
(1,809
)
 
(618
)
 
—

 
1,144

 
2,427

 
1,144

Non-cash interest expense
 
942

 
491

 
—

 
269

 
—

 
1,702

Deferred income taxes
 
—

 
—

 
—

 
529

 
—

 
529

Other adjustments to reconcile net income
 
157

 
(13
)
 
(288
)
 
3,857

 
—

 
3,713

Changes in operating assets and liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Trade accounts receivable
 
—

 
(7,671
)
 
17,124

 
28,460

 
—

 
37,913

Inventories
 
—

 
9,210

 
10,607

 
8,474

 
926

 
29,217

Intercompany
 
26,610

 
(3,121
)
 
(35,129
)
 
11,640

 
—

 
—

Other operating assets and liabilities
 
(1,824
)
 
(29,289
)
 
(22,034
)
 
(41,661
)
 
—

 
(94,808
)
Cash (used in)/provided by operating activities of continuing operations
 
(112
)
 
(48,979
)
 
(14,556
)
 
40,399

 
—

 
(23,248
)
Cash used in operating activities of discontinued operations
 
—

 
—

 
(1,861
)
 
(15,117
)
 
—

 
(16,978
)
Net cash (used in)/provided by operating activities
 
(112
)
 
(48,979
)
 
(16,417
)
 
25,282

 
—

 
(40,226
)
Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
 
 
 
Proceeds from sale of property
 
—

 
11

 
505

 
149

 
—

 
665

Capital expenditures
 
(4,139
)
 
(5,159
)
 
(3,262
)
 
(11,127
)
 
—

 
(23,687
)
Changes in restricted cash
 
—

 
(50,214
)
 
—

 
(5,833
)
 
—

 
(56,047
)
Cash used in investing activities of continuing operations
 
(4,139
)
 
(55,362
)
 
(2,757
)
 
(16,811
)
 
—

 
(79,069
)
Cash provided by investing activities of discontinued operations
 
—

 
58,060

 
18,991

 
—

 
—

 
77,051

Net cash (used in)/provided by investing activities
 
(4,139
)
 
2,698

 
16,234

 
(16,811
)
 
—

 
(2,018
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
 
 
 
Borrowings on lines of credit
 
—

 
—

 
—

 
91,625

 
—

 
91,625

Payments on lines of credit
 
—

 
—

 
—

 
(67,258
)
 
—

 
(67,258
)
Borrowings on long-term debt
 
—

 
69,000

 
—

 
6,574

 
—

 
75,574

Payments on long-term debt
 
—

 
(26,500
)
 
—

 
(11,929
)
 
—

 
(38,429
)
Payments on short-term debt
 
—

 
—

 
—

 
(15,223
)
 
—

 
(15,223
)
Stock option exercises and employee stock purchases
 
5,150

 
—

 
—

 
—

 
—

 
5,150

Payments of debt issuance costs
 
(809
)
 
38

 
—

 
—

 
—

 
(771
)
Cash provided by financing activities of continuing operations
 
4,341

 
42,538

 
—

 
3,789

 
—

 
50,668

Net cash provided by financing activities
 
4,341

 
42,538

 
—

 
3,789

 
—

 
50,668

Effect of exchange rate changes on cash
 
—

 
—

 
—

 
1,430

 
—

 
1,430

Net increase/(decrease) in cash and cash equivalents
 
90

 
(3,743
)
 
(183
)
 
13,690

 
—

 
9,854

Cash and cash equivalents, beginning of period
 
35

 
3,733

 
296

 
53,216

 
—

 
57,280

Cash and cash equivalents, end of period
 
$
125

 
$
(10
)
 
$
113

 
$
66,906

 
$
—

 
$
67,134


27


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 cut-off (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 cut-off was to overstate net revenue and gross margin for the three months ended April 30, 2014, and to understate net revenue and gross margin for the six months ended April 30, 2014. Accumulated deficit was understated for the three months ended April 30, 2014, and overstated for the six months ended April 30, 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 three and six months periods ended April 30, 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.
The table below is a summary of the impact of these corrections on selected balance sheet data:
 
 
October 31, 2014
In thousands
 
As Previously Reported
 
As Restated
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 Segment Data:
 
 
 
 
Americas identifiable assets
 
$
467,920

 
$
464,831

EMEA identifiable assets
 
510,896

 
513,303


28


The table below is a summary of the impact of these corrections on selected statements of operations data:
 
 
Three Months Ended April 30, 2014
 
Six Months Ended April 30, 2014
In thousands
 
As Previously Reported
 
As Restated
 
As Previously Reported
 
As Restated
Revenues, net
 
$
397,121

 
$
396,941

 
$
789,733

 
$
791,851

Gross profit
 
194,354

 
194,290

 
394,189

 
394,930

Operating loss
 
(18,152
)
 
(18,214
)
 
(22,982
)
 
(22,241
)
Loss from continuing operations
 
(37,817
)
 
(37,880
)
 
(60,511
)
 
(59,770
)
Net loss attributable to Quiksilver, Inc.
 
(53,061
)
 
(53,124
)
 
(37,674
)
 
(36,933
)
Net loss per share attributable to Quiksilver, Inc.
 
$
(0.31
)
 
$
(0.31
)
 
$
(0.22
)
 
$
(0.22
)
 
 
 
 
 
 
 
 
 
Selected Americas Segment Data:
 
 
 
 
 
 
 
 
Revenues, net
 
$
186,427

 
$
186,247

 
$
359,592

 
$
361,710

Gross margin
 
78,972

 
78,909

 
154,082

 
154,823

Operating loss
 
(21,920
)
 
(21,983
)
 
(36,593
)
 
(35,852
)
The correction of these errors had no net impact on the Company's net cash used in operating activities for the six months ended April 30, 2014.



29


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 (the "SEC"), 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 at least 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;

30


•
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), 719 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 and gross margin comparisons continuing to be unfavorable due primarily to the impact of currency exchange rates and licensing. We also expect our net revenues and margins to be unfavorably impacted by late deliveries and an evolving distribution channel strategy, particularly in North America and expect continued net revenue growth in our emerging markets.
•
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 $31 million, which is included in income from discontinued operations for the six months of fiscal 2014. Our sale of the Mervin and Hawk businesses generated income tax expense of approximately $18 million during the first six months 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

31


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 in the first quarter of fiscal 2015, 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 cut-off in fiscal 2014 and prior periods. 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 three and six months ended April 30, 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 second quarter and first six months 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 April 30,
 
Six Months Ended April 30,
 
 
2015
 
2014
 
2015
 
2014
Revenues, net
 
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Gross profit
 
47.1
 %
 
48.9
 %
 
48.4
 %
 
49.9
 %
Selling, general and administrative expense
 
52.6
 %
 
52.4
 %
 
51.3
 %
 
52.0
 %
Asset impairments
 
0.2
 %
 
1.2
 %
 
0.1
 %
 
0.7
 %
Operating loss
 
(5.7
)%
 
(4.6
)%
 
(3.0
)%
 
(2.8
)%
Interest expense, net
 
5.4
 %
 
4.8
 %
 
5.4
 %
 
4.9
 %
Foreign currency (gain)/loss
 
(1.0
)%
 
0.2
 %
 
(0.4
)%
 
0.5
 %
Loss before benefit for income taxes
 
(10.2
)%
 
(9.7
)%
 
(8.0
)%
 
(8.2
)%
Second Quarter (Three Months) Ended April 30, 2015 Compared to Second Quarter (Three Months) Ended April 30, 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 second quarter of fiscal 2015 and 2014:

32


Revenues, net – by Segment
Net revenues by segment, on both an as reported and a constant currency continuing category basis, for the second quarter of fiscal 2015 and 2014 were as follows:
In millions
 
Americas
 
EMEA
 
APAC
 
Corporate
 
Total
Three Months Ended April 30, 2015
 
 
 
 
 
 
 
 
 
 
Net revenues as reported
 
$
160

 
$
116

 
$
56

 
$
1

 
$
333

Less licensing revenues from licensed product categories
 
(1
)
 
—

 
—

 
—

 
(1
)
Constant currency continuing category net revenues
 
$
159

 
$
116

 
$
56

 
$
1

 
$
332

 
 
 
 
 
 
 
 
 
 
 
Three Months Ended April 30, 2014
 
 
 
 
 
 
 
 
 
 
Net revenues as reported
 
$
186

 
$
151

 
$
60

 
$
—

 
$
397

Impact of fiscal 2015 foreign exchange rates
 
(7
)
 
(31
)
 
(7
)
 
—

 
(45
)
Less wholesale net revenues from licensed product categories
 
(14
)
 
—

 
—

 
—

 
(14
)
Constant currency continuing category net revenues
 
$
165

 
$
120

 
$
53

 
$
—

 
$
338

 
 
 
 
 
 
 
 
 
 
 
Change in net revenues as reported ($)
 
$
(26
)
 
$
(35
)
 
$
(4
)
 
$
1

 
$
(64
)
Change in net revenues as reported (%)
 
(14
)%
 
(23
)%
 
(7
)%
 
—
%
 
(16
)%
Change in constant currency continuing category net revenues ($)
 
$
(6
)
 
$
(4
)
 
$
3

 
$
1

 
$
(6
)
Change in constant currency continuing category net revenues (%)
 
(4
)%
 
(3
)%
 
6
 %
 
—
%
 
(2
)%
Net revenues in our Americas segment decreased $26 million, or 14%, on an as reported basis during the second quarter of fiscal 2015 versus the comparable prior year period. Changes in foreign currency exchange rates contributed $7 million of this decrease. In addition, our licensing of peripheral product categories contributed $14 million of this decrease. Net revenues on a constant currency continuing category basis decreased by $6 million, or 4%, primarily due to a decrease in apparel and accessories category net revenues in the Americas wholesale channel. Net revenues in the emerging market of Mexico increased by 11% on an as reported basis (27% in constant currency) while net revenues in the emerging market of Brazil decreased by 29% on an as reported basis (7% in constant currency) reflecting the economic slowdown in Brazil in the second quarter of fiscal 2015. Net revenues in the Americas retail channel increased 2% on an as reported basis due to new store openings. Net revenues in the Americas e-commerce channel decreased 30% on an as reported basis in the second quarter of fiscal 2015, primarily due to reduced discounting resulting in lower revenues but improved gross margins.
Net revenues in our EMEA segment decreased $35 million, or 23%, on an as reported basis during the second quarter of fiscal 2015 versus the comparable prior year period. Changes in foreign currency exchange rates contributed $31 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 $4 million, or 3%, primarily due to a reduction in DC footwear net revenues of $5 million in the EMEA wholesale channel. Net revenues in the emerging market of Russia decreased 31% on an as reported basis, but increased 15% on a constant currency basis, reflecting the significant adverse impact of currency exchange rate changes. Net revenues in the e-commerce channel increased 28% on a constant currency continuing category basis in the second quarter of fiscal 2015, offsetting the 7% net revenue decline in the wholesale channel.
Net revenues in our APAC segment decreased by $4 million, or 7%, on an as reported basis during the second quarter of fiscal 2015 versus the comparable prior year period. Changes in foreign currency exchange rates contributed $7 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 $3 million, or 6%, primarily due to new store openings in the retail channel and a 28% increase in e-commerce channel net revenues. Net revenues in the emerging markets of China, South Korea, Taiwan and Indonesia increased by a combined 9% on an as reported basis (17% in constant currency).
Aggregate net revenues in our emerging markets, which include Brazil, Mexico, Russia, Indonesia, South Korea, China, and Taiwan, decreased 13% versus the comparable prior year period on an as reported basis, but increased 10% in constant currency, reflecting the significant adverse impact of the strengthening U.S. dollar on local currency results. These markets are reported within their respective regional segments above.

33


Revenues, net – By Brand
Net revenues by brand, on both an as reported and a constant currency continuing category basis, for the second quarter of fiscal 2015 and 2014 were as follows:
In millions
 
Quiksilver
 
Roxy
 
DC
 
Other
 
Total
Three Months Ended April 30, 2015
 
 
 
 
 
 
 
 
 
 
Net revenues as reported
 
$
139

 
$
105

 
$
81

 
$
8

 
$
333

Less licensing revenues from licensed product categories
 
—

 
(1
)
 
—

 
—

 
(1
)
Constant currency continuing category net revenues
 
$
139

 
$
104

 
$
81

 
$
8

 
$
332

 
 
 
 
 
 
 
 
 
 
 
Three Months Ended April 30, 2014
 
 
 
 
 
 
 
 
 
 
Net revenues as reported
 
$
167

 
$
120

 
$
103

 
$
7

 
$
397

Impact of fiscal 2015 foreign exchange rates
 
(20
)
 
(12
)
 
(12
)
 
(1
)
 
(45
)
Less wholesale net revenues from licensed product categories
 
(7
)
 
(5
)
 
(2
)
 
—

 
(14
)
Constant currency continuing category net revenues
 
$
140

 
$
103

 
$
89

 
$
6

 
$
338

 
 
 
 
 
 
 
 
 
 
 
Change in net revenues as reported ($)
 
$
(28
)
 
$
(15
)
 
$
(22
)
 
$
1

 
$
(64
)
Change in net revenues as reported (%)
 
(17
)%
 
(13
)%
 
(21
)%
 
14
%
 
(16
)%
Change in constant currency continuing category net revenues ($)
 
$
(1
)
 
$
1

 
$
(8
)
 
$
2

 
$
(6
)
Change in constant currency continuing category net revenues (%)
 
(1
)%
 
1
 %
 
(9
)%
 
33
%
 
(2
)%
Quiksilver brand net revenues decreased $28 million, or 17%, on an as reported basis in the second 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 contributed $7 million of this decrease. Net revenues on a constant currency continuing category basis decreased by $1 million, or 1%, primarily due to decreased net revenues in the EMEA wholesale channel.
Roxy brand net revenues decreased $15 million, or 13%, on an as reported basis in the second quarter of fiscal 2015 versus the comparable prior year period. Changes in foreign currency exchange rates contributed $12 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 increased $1 million, or 1%, primarily due to increased apparel net revenues in the APAC retail channel.
DC brand net revenues decreased $22 million, or 21%, on an as reported basis in the second quarter of fiscal 2015 versus the comparable prior year period. Changes in foreign currency exchange rates contributed $12 million of this decrease. Our licensing of peripheral product categories contributed $2 million of this decrease. Net revenues on a constant currency continuing category basis decreased $8 million, or 9%, primarily due to lower footwear net revenues in the EMEA wholesale channel.

34


Revenues, net – By Channel
Net revenues by channel, on both an as reported and a constant currency continuing category basis, for the second quarter of fiscal 2015 and 2014 were as follows:
In millions
 
Wholesale
 
Retail
 
E-com
 
Licensing
 
Total
Three Months Ended April 30, 2015
 
 
 
 
 
 
 
 
 
 
Net revenues as reported
 
$
230

 
$
84

 
$
16

 
$
3

 
$
333

Less licensing revenues from licensed product categories
 
—

 
—

 
—

 
(1
)
 
(1
)
Constant currency continuing category net revenues
 
$
230

 
$
84

 
$
16

 
$
2

 
$
332

 
 
 
 
 
 
 
 
 
 
 
Three Months Ended April 30, 2014
 
 
 
 
 
 
 
 
 
 
Net revenues as reported
 
$
286

 
$
89

 
$
19

 
$
3

 
$
397

Impact of fiscal 2015 foreign exchange rates
 
(33
)
 
(11
)
 
(1
)
 
—

 
(45
)
Less wholesale net revenues from licensed product categories
 
(14
)
 
—

 
—

 
—

 
(14
)
Constant currency continuing category net revenues
 
$
239

 
$
78

 
$
18

 
$
3

 
$
338

 
 
 
 
 
 
 
 
 
 
 
Change in net revenues as reported ($)
 
$
(56
)
 
$
(5
)
 
$
(3
)
 
$
—

 
$
(64
)
Change in net revenues as reported (%)
 
(20
)%
 
(6
)%
 
(16
)%
 
—
 %
 
(16
)%
Change in constant currency continuing category net revenues ($)
 
$
(9
)
 
$
6

 
$
(2
)
 
$
(1
)
 
$
(6
)
Change in constant currency continuing category net revenues (%)
 
(4
)%
 
8
 %
 
(11
)%
 
(33
)%
 
(2
)%
Wholesale net revenues decreased $56 million, or 20%, on an as reported basis in the second quarter of fiscal 2015 versus the comparable prior year period. Changes in foreign currency exchange rates contributed $33 million of this decrease. Our licensing of peripheral product categories contributed $14 million of this decrease. On a constant currency continuing category basis, wholesale net revenues decreased $9 million, or 4%, compared to the prior year period, primarily due to wholesale net revenue declines in the DC brand.
Retail net revenues decreased $5 million, or 6%, on as reported basis in the second quarter of fiscal 2015 versus the comparable prior year period. Changes in foreign currency exchange rates contributed $11 million of this decrease. Global retail same-store sales were down 3% in the second quarter of fiscal 2015 on an as reported basis. On a constant currency continuing category basis, retail net revenues increased $6 million, or 8%, versus the prior year, due to 61 net new store openings during the previous twelve months.
E-commerce net revenues decreased $3 million, or 16%, on an as reported basis in the second quarter of fiscal 2015 versus the comparable prior year period. Changes in foreign currency exchange rates resulted in a $1 million decrease in net revenues. E-commerce net revenues increased in our EMEA and APAC segments as we expanded our online service area. E-commerce net revenues decreased 30% in the Americas due to a significant reduction in discounting which resulted in improved gross margins.


35


Revenues, net – By Product Group
Net revenues by product group, on both an as reported and a constant currency continuing category basis, for the second quarter of fiscal 2015 and 2014 were as follows:
In millions
 
Apparel and Accessories
 
Footwear
 
Total
Three Months Ended April 30, 2015
 
 
 
 
 
 
Net revenues as reported
 
$
232

 
$
101

 
$
333

Less licensing revenue from licensed product categories
 
(1
)
 
—

 
(1
)
Constant currency continuing category net revenues
 
$
231

 
$
101

 
$
332

 
 
 
 
 
 
 
Three Months Ended April 30, 2014
 
 
 
 
 
 
Net revenues as reported
 
$
283

 
$
114

 
$
397

Impact of fiscal 2015 foreign exchange rates
 
(33
)
 
(12
)
 
(45
)
Less licensing revenue from licensed product categories
 
(14
)
 
—

 
(14
)
Constant currency continuing category net revenues
 
$
236

 
$
102

 
$
338

 
 
 
 
 
 
 
Change in net revenues as reported ($)
 
$
(51
)
 
$
(13
)
 
$
(64
)
Change in net revenues as reported (%)
 
(18
)%
 
(11
)%
 
(16
)%
Change in constant currency continuing category net revenues ($)
 
$
(5
)
 
$
(1
)
 
$
(6
)
Change in constant currency continuing category net revenues (%)
 
(2
)%
 
(1
)%
 
(2
)%
Apparel and accessories net revenues decreased $51 million, or 18%, on an as reported basis in the second quarter of fiscal 2015 versus the comparable prior year period. Changes in foreign currency exchange rates contributed $33 million of this decrease. Our licensing of peripheral product categories contributed $14 million of this decrease. On a constant currency continuing category basis, apparel and accessories net revenues decreased $5 million, or 2%, primarily due to a wholesale net revenue decrease in the Americas segment.
Footwear net revenues decreased $13 million, or 11%, on an as reported basis in the second quarter of fiscal 2015 versus the comparable prior year period. Changes in foreign currency exchange rates contributed a $12 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 decreased $1 million, or 1%, with decreases in DC brand footwear within the EMEA segment partially offset by increases in all channels within the APAC segment.
Gross Profit
Gross profit decreased to $157 million in the second quarter of fiscal 2015 from $194 million in the comparable period of the prior year. Gross margin, or gross profit as a percentage of net revenues, declined to 47.1% in the second quarter of fiscal 2015 versus 48.9% in the comparable prior year period. This 180 basis point decrease in gross margin was primarily due to increased discounting in the wholesale and retail channels of all three regional segments (approximately 260 basis points) and higher freight expenses due to late deliveries, partially offset by net revenue growth from our higher margin direct-to-consumer channels (approximately 80 basis points).
Gross margin by regional segment for the second quarter of fiscal 2015 and 2014 was as follows:
 
 
Three Months Ended April 30,
 
Basis Point (bp)
Change
Increase (Decrease)
By regional segment
 
2015
 
2014
 
Americas
 
42.0
%
 
42.4
%
 
(40) bp
EMEA
 
51.7
%
 
54.2
%
 
(250) bp
APAC
 
53.1
%
 
55.9
%
 
(280) bp
Consolidated
 
47.1
%
 
48.9
%
 
(180) bp

36


Selling, General and Administrative Expense (“SG&A”)
SG&A from continuing operations decreased $33 million, or 16%, to $175 million in the second quarter of fiscal 2015 from $208 million in the comparable prior year period. Changes in foreign currency exchange rates contributed approximately $22 million of this decrease. The remaining $11 million decrease was primarily attributable to reduced bad debt expenses and employee compensation expenses.

SG&A by segment (in millions) as reported for the second quarter of fiscal 2015 and 2014 was as follows:
 
 
Three Months Ended April 30,
 
$ Change
Increase
(Decrease)
In millions
 
2015
 
2014
 
Americas
 
$
79

 
$
97

 
$
(18
)
EMEA
 
61

 
76

 
(14
)
APAC
 
32

 
34

 
(2
)
Corporate Operations
 
3

 
1

 
2

Consolidated
 
$
175

 
$
208

 
$
(33
)
SG&A by segment for the second 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 bad debt expenses, employee compensation, and changes in foreign currency exchange rates. The decrease in EMEA and APAC segment SG&A was almost entirely due to changes in foreign currency exchange rates.
Asset Impairments
Asset impairment charges were $1 million in the second quarter of fiscal 2015 compared to $5 million in the second quarter of fiscal 2014, all related to under-performing retail stores.
Non-Operating Expenses
Net interest expense for the second quarter of fiscal 2015 was $18 million compared to $19 million in the second 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.
Our foreign currency gain was $3 million in the second quarter of fiscal 2015 compared to a loss of $1 million in the comparable prior year period.
Our income tax expense for the second quarter of fiscal 2015 was $4 million compared to a benefit of $0.4 million in the second quarter of fiscal 2014. We generated income tax expense in the second quarter of fiscal 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. The tax benefit generated in the second quarter of fiscal 2014 was due to the recognition of an offsetting income tax benefit within continuing operations generated from our sale of our former Mervin and Hawk businesses.
Net Loss from Continuing Operations Attributable to Quiksilver, Inc.
Our net loss from continuing operations attributable to Quiksilver, Inc. for the second quarter of each of fiscal 2015 and 2014 was $38 million, or $0.22 per share.
Six Months Ended April 30, 2015 Compared to Six Months Ended April 30, 2014
Revenues, net

37


Revenues, net – by Segment
Net revenues by segment, on both an as reported and a constant currency continuing category basis, for the first six months of fiscal 2015 and 2014 were as follows:
In millions
 
Americas
 
EMEA
 
APAC
 
Corporate
 
Total
Six Months Ended April 30, 2015
 
 
 
 
 
 
 
 
 
 
Net revenues as reported
 
$
308

 
$
242

 
$
123

 
$
1

 
$
674

Less licensing revenues from licensed product categories
 
(2
)
 
—

 
—

 
—

 
(2
)
Constant currency continuing category net revenues
 
$
306

 
$
242

 
$
123

 
$
1

 
$
672

 
 
 
 
 
 
 
 
 
 
 
Six Months Ended April 30, 2014
 
 
 
 
 
 
 
 
 
 
Net revenues as reported
 
$
362

 
$
300

 
$
130

 
$
—

 
$
792

Impact of fiscal 2015 foreign exchange rates
 
(11
)
 
(51
)
 
(13
)
 
—

 
(75
)
Less wholesale net revenues from licensed product categories
 
(25
)
 
—

 
—

 
—

 
(25
)
Constant currency continuing category net revenues
 
$
326

 
$
249

 
$
117

 
$
—

 
$
692

 
 
 
 
 
 
 
 
 
 
 
Change in net revenues as reported ($)
 
$
(54
)
 
$
(58
)
 
$
(7
)
 
$
1

 
$
(118
)
Change in net revenues as reported (%)
 
(15
)%
 
(19
)%
 
(5
)%
 
—
%
 
(15
)%
Change in constant currency continuing category net revenues ($)
 
$
(20
)
 
$
(7
)
 
$
6

 
$
1

 
$
(20
)
Change in constant currency continuing category net revenues (%)
 
(6
)%
 
(3
)%
 
5
 %
 
—
%
 
(3
)%
Net revenues in our Americas segment decreased $54 million, or 15%, on an as reported basis during the first six months of fiscal 2015 versus the comparable prior year period. Changes in foreign currency exchange rates contributed $11 million of this decrease. In addition, our licensing of peripheral product categories contributed $25 million of this decrease. Net revenues on a constant currency continuing category basis decreased by $20 million, or 6%, primarily due to a reduction in DC brand apparel category net revenues of $9 million in the Americas wholesale channel. Net revenues in the emerging market of Mexico increased by 24% on an as reported basis (39% in constant currency). Net revenues in the emerging market of Brazil decreased by 14% on an as reported basis, reflecting the adverse impact of foreign currency changes and the economic slowdown in Brazil during the second quarter of fiscal 2015, but increased 4% in constant currency. Net revenues in the Americas retail channel increased 3% due to new store openings. Net revenues in the Americas e-commerce channel decreased 14% in the first six months of fiscal 2015 as a result of the second quarter decline noted previously.
Net revenues in our EMEA segment decreased $58 million, or 19%, on an as reported basis during the first six months of fiscal 2015 versus the comparable prior year period. Changes in foreign currency exchange rates contributed $51 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 $7 million, or 3%, primarily due to a reduction in apparel net revenues of $12 million in the wholesale channel. EMEA wholesale apparel net revenues decreased across all three core brands, but more significantly in the Quiksilver brand. Net revenues in the emerging market of Russia decreased 30% on an as reported basis, but increased 14% on a constant currency basis, reflecting the significant adverse impact of currency exchange rate changes. Net revenues in the e-commerce channel increased significantly on a constant currency continuing category basis in the first six months of fiscal 2015, offsetting some of the net revenue decline in the wholesale channel.
Net revenues in our APAC segment decreased by $7 million, or 5%, on an as reported basis during the first six months of fiscal 2015 versus the comparable prior year period. Changes in foreign currency exchange rates contributed $13 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 $6 million, or 5%, primarily due to retail and e-commerce channel net revenue growth. Net revenues in the emerging markets of China, South Korea, Taiwan and Indonesia increased by a combined 13% on an as reported basis (19% in constant currency).
Aggregate net revenues in our emerging markets, which include Brazil, Mexico, Russia, Indonesia, South Korea, China, and Taiwan, decreased 5% versus the comparable prior year period on an as reported basis, but increased 16% in constant currency, reflecting the significant adverse impact of the stronger U.S. dollar on local currency results. These markets are reported within their respective regional segments above.

38


Revenues, net – By Brand
Net revenues by brand, on both an as reported and a constant currency continuing category basis, for the first six months of fiscal 2015 and 2014 were as follows:
In millions
 
Quiksilver
 
Roxy
 
DC
 
Other
 
Total
Six Months Ended April 30, 2015
 
 
 
 
 
 
 
 
 
 
Net revenues as reported
 
$
279

 
$
205

 
$
170

 
$
20

 
$
674

Less licensing revenues from licensed product categories
 
—

 
(2
)
 
—

 
—

 
(2
)
Constant currency continuing category net revenues
 
$
279

 
$
203

 
$
170

 
$
20

 
$
672

 
 
 
 
 
 
 
 
 
 
 
Six Months Ended April 30, 2014

 
 
 
 
 
 
 
 
 
 
Net revenues as reported
 
$
331

 
$
238

 
$
206

 
$
17

 
$
792

Impact of fiscal 2015 foreign exchange rates
 
(33
)
 
(21
)
 
(19
)
 
(2
)
 
(75
)
Less wholesale net revenues from licensed product categories
 
(12
)
 
(8
)
 
(5
)
 
—

 
(25
)
Constant currency continuing category net revenues
 
$
286

 
$
209

 
$
182

 
$
15

 
$
692

 
 
 
 
 
 
 
 
 
 
 
Change in net revenues as reported ($)
 
$
(52
)
 
$
(33
)
 
$
(36
)
 
$
3

 
$
(118
)
Change in net revenues as reported (%)
 
(16
)%
 
(14
)%
 
(17
)%
 
18
%
 
(15
)%
Change in constant currency continuing category net revenues ($)
 
$
(7
)
 
$
(6
)
 
$
(12
)
 
$
5

 
$
(20
)
Change in constant currency continuing category net revenues (%)
 
(2
)%
 
(3
)%
 
(7
)%
 
33
%
 
(3
)%
Quiksilver brand net revenues decreased $52 million, or 16%, on an as reported basis in the first six months of fiscal 2015 versus the comparable prior year period. Changes in foreign currency exchange rates contributed $33 million of this decrease. Our licensing of peripheral product categories contributed $12 million of this decrease. Net revenues on a constant currency continuing category basis decreased by $7 million, or 2%, primarily due to lower apparel net revenues in the EMEA wholesale channel.
Roxy brand net revenues decreased $33 million, or 14%, on an as reported basis in the first six months of fiscal 2015 versus the comparable prior year period. Changes in foreign currency exchange rates contributed $21 million of this decrease. Our licensing of peripheral product categories contributed $8 million of this decrease. Net revenues on a constant currency continuing category basis decreased $6 million, or 3%, primarily due to lower apparel net revenues in the Americas and EMEA wholesale channels.
DC brand net revenues decreased $36 million, or 17%, on an as reported basis in the six months of fiscal 2015 versus the comparable prior year period. Changes in foreign currency exchange rates contributed $19 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 $12 million, or 7%, primarily due to lower apparel net revenues in the Americas and EMEA wholesale channels.

39


Revenues, net – By Channel
Net revenues by channel, on both an as reported and a constant currency continuing category basis, for the first six months of fiscal 2015 and 2014 were as follows:
In millions
 
Wholesale
 
Retail
 
E-com
 
Licensing
 
Total
Six Months Ended April 30, 2015
 
 
 
 
 
 
 
 
 
 
Net revenues as reported
 
$
422

 
$
203

 
$
43

 
$
6

 
$
674

Less licensing revenues from licensed product categories
 
—

 
—

 
—

 
(2
)
 
(2
)
Constant currency continuing category net revenues
 
$
422

 
$
203

 
$
43

 
$
4

 
$
672

 
 
 
 
 
 
 
 
 
 
 
Six Months Ended April 30, 2014
 
 
 
 
 
 
 
 
 
 
Net revenues as reported
 
$
525

 
$
220

 
$
42

 
$
5

 
$
792

Impact of fiscal 2015 foreign exchange rates
 
(50
)
 
(22
)
 
(3
)
 
—

 
(75
)
Less wholesale net revenues from licensed product categories
 
(25
)
 
—

 
—

 
—

 
(25
)
Constant currency continuing category net revenues
 
$
450

 
$
198

 
$
39

 
$
5

 
$
692

 
 
 
 
 
 
 
 
 
 
 
Change in net revenues as reported ($)
 
$
(103
)
 
$
(17
)
 
$
1

 
$
1

 
$
(118
)
Change in net revenues as reported (%)
 
(20
)%
 
(8
)%
 
2
%
 
20
 %
 
(15
)%
Change in constant currency continuing category net revenues ($)
 
$
(28
)
 
$
5

 
$
4

 
$
(1
)
 
$
(20
)
Change in constant currency continuing category net revenues (%)
 
(6
)%
 
3
 %
 
10
%
 
(20
)%
 
(3
)%
Wholesale net revenues decreased $103 million, or 20%, on an as reported basis in the six months of fiscal 2015 versus the comparable prior year period. Changes in foreign currency exchange rates contributed $50 million of this decrease. Our licensing of peripheral product categories contributed $25 million of this decrease. On a constant currency continuing category basis, wholesale net revenues decreased $28 million, or 6%, 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 $17 million, or 8%, on an as reported basis in the six months of fiscal 2015 versus the comparable prior year period. Changes in foreign currency exchange rates accounted for $22 million of this decrease. Global retail same-store sales were down 3% in the first six months of fiscal 2015, which was more than offset by 61 net new store openings during the previous twelve months. On a constant currency continuing category basis, retail net revenues were up $5 million, or 3%, versus the prior year.
E-commerce net revenues increased $1 million, or 2%, on an as reported basis in the six months of fiscal 2015 versus the comparable prior year period. Changes in foreign currency exchange rates resulted in a $3 million decrease in net revenues. On a constant currency continuing category basis, e-commerce net revenues increased $4 million, or 10%, versus the prior year. E-commerce net revenues increased significantly in our EMEA and APAC segments as we expanded our online service area, while Americas e-commerce net revenues decreased 14% as a result of a reduction in discounting. E-commerce net revenues increased 16% in the Quiksilver and DC brands and decreased 4% in the Roxy brand.

40


Revenues, net – By Product Group
Net revenues by product group, on both an as reported and a constant currency continuing category basis, for the first six months of fiscal 2015 and 2014 were as follows:
In millions
 
Apparel and Accessories
 
Footwear
 
Total
Six Months Ended April 30, 2015
 
 
 
 
 
 
Net revenues as reported
 
$
483

 
$
191

 
$
674

Less licensing revenue from licensed product categories
 
(2
)
 
—

 
(2
)
Constant currency continuing category net revenues
 
$
481

 
$
191

 
$
672

 
 
 
 
 
 
 
Six Months Ended April 30, 2014
 
 
 
 
 
 
Net revenues as reported
 
$
589

 
$
203

 
$
792

Impact of fiscal 2015 foreign exchange rates
 
(57
)
 
(18
)
 
(75
)
Less licensing revenue from licensed product categories
 
(25
)
 
—

 
(25
)
Constant currency continuing category net revenues
 
$
507

 
$
185

 
$
692

 
 
 
 
 
 
 
Change in net revenues as reported ($)
 
$
(106
)
 
$
(12
)
 
$
(118
)
Change in net revenues as reported (%)
 
(18
)%
 
(6
)%
 
(15
)%
Change in constant currency continuing category net revenues ($)
 
$
(26
)
 
$
6

 
$
(20
)
Change in constant currency continuing category net revenues (%)
 
(5
)%
 
3
 %
 
(3
)%
Apparel and accessories net revenues decreased $106 million, or 18%, on an as reported basis in the first six months of fiscal 2015 versus the comparable prior year period. Changes in foreign currency exchange rates contributed $57 million of this decrease. Our licensing of peripheral product categories contributed $25 million of this decrease. On a constant currency continuing category basis, net revenues decreased $26 million, or 5%, primarily due to net revenue declines in the Americas and EMEA wholesale channels across all three core brands.
Footwear net revenues decreased $12 million, or 6%, on an as reported basis in the first six months of fiscal 2015 versus the comparable prior year period. Changes in foreign currency exchange rates contributed $18 million of this decrease. 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 3%, with increases in Quiksilver and Roxy brands in each channel.
Gross Profit
Gross profit decreased to $326 million in the first six months of fiscal 2015 from $395 million in the comparable period of the prior year. Gross margin, or gross profit as a percentage of net revenues, declined to 48.4% in the first six months of fiscal 2015 versus 49.9% in the comparable prior year period. This 150 basis point decrease in gross margin was primarily due to increased discounting in the Americas and EMEA wholesale channels (approximately 230 basis points) and higher freight expenses due to late deliveries, partially offset by net revenue growth from our higher margin direct-to-consumer channels (approximately 80 basis points).
Gross margin by regional segment for the first six months of fiscal 2015 and 2014 was as follows:
 
 
Six Months Ended April 30,
 
Basis Point (bp)
Change
Increase (Decrease)
By regional segment
 
2015
 
2014
 
Americas
 
42.7
%
 
42.8
%
 
(10) bp
EMEA
 
54.0
%
 
56.5
%
 
(250) bp
APAC
 
54.3
%
 
54.2
%
 
10 bp
Consolidated
 
48.4
%
 
49.9
%
 
(150) bp

41


Selling, General and Administrative Expense (“SG&A”)
SG&A from continuing operations decreased $66 million, or 16%, to $346 million in the first six months of fiscal 2015 from$412 million in the comparable prior year period. Changes in foreign currency exchange rates contributed approximately $35 million of this decrease. Of the remaining $31 million decrease, $17 million was attributable to reductions in employee compensation and $13 million was attributable to reduced bad debt expenses.

SG&A by segment (in millions) as reported for the first six months of fiscal 2015 and 2014 was as follows:
 
 
Six Months Ended April 30,
 
$ Change
Increase
(Decrease)
In millions
 
2015
 
2014
 
Americas
 
$
149

 
$
186

 
$
(38
)
EMEA
 
128

 
154

 
(26
)
APAC
 
67

 
67

 
—

Corporate Operations
 
2

 
4

 
(2
)
Consolidated
 
$
346

 
$
412

 
$
(66
)
SG&A by segment for the first six months 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 bad debt expenses, employee compensation, early lease termination costs, and changes in foreign currency exchange rates. The decrease in EMEA segment SG&A was almost entirely due to changes in foreign currency exchange rates. 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 $1 million in the six months of fiscal 2015 compared to $5 million in the six months of fiscal 2014. Asset impairment charges for fiscal 2014 included $4 million related to a restructuring of our e-commerce platform. All other impairment charges for fiscal 2015 and 2014 relate to under-performing retail stores.
Non-Operating Expenses
Net interest expense for the first six months of fiscal 2015 was $36 million compared to $39 million in the first six months of fiscal 2014. This decrease was primarily due to the impact of changes in foreign currency exchange rates on our euro-denominated interest expense.
Our foreign currency gain was $3 million in the first six months of fiscal 2015 compared to a loss of $4 million in the comparable prior year period.
Our income tax expense for the first six months of fiscal 2015 was $2 million compared to a benefit of $5 million in the first six months of fiscal 2014. Our hedging instruments in Europe generated tax expense of approximately $4 million within other comprehensive income in the first six months 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 six months 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 six months of fiscal 2015 was $56 million, or $0.33 per share, compared to net loss of $59 million, or $0.35 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.

42


Financial Position, Capital Resources and Liquidity
The following table shows our cash, working capital and total indebtedness in millions as of the dates indicated:
In millions
 
April 30,
2015
 
October 31,
2014
 
$ Change
Increase(Decrease)
 
% Change
Increase(Decrease)
Cash and cash equivalents
 
$48
 
$47
 
$1
 
2%
Restricted cash
 
7
 
21
 
(14)
 
(67)%
Working capital
 
364
 
391
 
(27)
 
(7)%
Total indebtedness
 
821
 
829
 
(8)
 
(1)%
We believe that our cash flows from operations, cash on hand, and restricted cash, together with access to our existing credit facilities, will be adequate to fund our capital requirements for at least the next twelve months. At April 30, 2015, we had $48 million of cash on hand, $7 million in restricted cash, $45 million available on our credit facilities, and $18 million available for additional letters of credit in EMEA. Taken together, this represents cash and credit facility availability of $118 million at April 30, 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. Restricted cash at April 30, 2015 includes $3 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.
Our liquidity assessment is based upon significant judgments and estimates regarding expected future costs and expected future revenue and assumes the renewal or replacement of our EMEA lines of credit and overdraft facilities in fiscal 2015. Our costs may exceed or our revenues may fall short of our estimates, our estimates may change, and future developments may affect our estimates. Any of these factors may increase our need for additional capital, which would require us to seek additional financing, which financing may not be available on terms acceptable to us or at all, or to sell or monetize existing assets to continue implementing our current operating plans. Specifically, we may not be successful in renewing or replacing our EMEA lines of credit and overdraft facilities, in which event we will need to raise additional funds to implement our current operating plans in our EMEA segment. Further, we may seek additional financing, such as the sale of additional equity and debt securities, or sell assets to undertake initiatives not contemplated by our current operating plans or for other business reasons, or seek to refinance or renegotiate certain of our other obligations. Our ability to obtain additional financing or refinancing depends on several factors, including credit markets and future market conditions, our ability to increase net revenues and operating efficiencies, our future creditworthiness, and restrictions contained in our debt agreements, among others. Our liquidity, financial condition and results of operations could be materially and adversely impacted if our judgments or estimates prove to be materially incorrect.

Cash Flows

Cash Flows from Operating Activities
The following table summarizes the major categories of changes in cash flows from operations for the six months ended April 30, 2015 and 2014:

 
 
Six Months Ended April 30,
 
 
In thousands
 
2015
 
2014
 
Change
Net loss
 
$
(49,152
)
 
$
(45,134
)
 
$
(4,018
)
Net effect of non-cash reconciling adjustments
 
11,215

 
49,564

 
(38,349
)
Cash provided by/(used in) operating assets and liabilities
 
9,523

 
(27,678
)
 
37,201

Cash used in operating activities of continuing operations
 
(28,414
)
 
(23,248
)
 
(5,166
)
Cash provided by/(used in) operating activities of discontinued operations
 
4,668

 
(16,978
)
 
21,646

Net cash used in operating activities
 
$
(23,746
)
 
$
(40,226
)
 
$
16,480


Net cash used in operating activities was $24 million for the six months ended April 30, 2015 compared to $40 million in the comparable period of the prior year. Net cash used by our continuing operations increased by $5 million to fund our losses from operating activities for the six months ended April 30, 2015, but net cash used by our discontinued operations decreased by $22 million for the same period.

43



Cash Flows from Investing Activities
Net cash provided by investing activities was $2 million in the first six months of fiscal 2015, an increase of $4 million compared to the same period prior year. This increase was primarily attributable to an improvement in net restricted cash provided of $4 million in the first six months of fiscal 2015 compared to the prior year. Capital expenditures in the first six months of fiscal 2015 were $23 million and 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 $29 million in the first six months of fiscal 2015, a decrease of $21 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 $17 million and proceeds from stock option exercises of $5 million.

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 $59 million to $252 million at April 30, 2015 compared to $311 million at October 31, 2014 primarily due to the typical seasonality of our business. Compared to April 30, 2014, our net trade accounts receivable decreased $92 million, due primarily to our wholesale net revenue decline, and our average days sales outstanding (“DSO”) improved by 6%, or 5 days.
Our net inventories increased $6 million to $291 million at April 30, 2015 compared to $285 million at October 31, 2014. Compared to April 30, 2014, net inventories decreased $18 million and inventory days on hand increased 7%, or 10 days. The increase in inventory days on hand is the result of lower revenues compared to the comparable prior year period. The decrease in net inventories was primarily due to tighter buying practices versus the comparable prior year period.
Income Taxes
As of April 30, 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

44


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.

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.


45


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.

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

46


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.

47


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 condensed 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 April 30, 2015, we were hedging a portion of forecasted transactions expected to occur through October 2016. Assuming exchange rates at April 30, 2015 remain constant, $14 million of gains, net of tax, related to hedges of these transactions are expected to be reclassified into earnings over the next 18 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

48


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 23% in U.S. dollars during the three months ended April 30, 2015 compared to the three months ended April 30, 2014 as reported in our condensed consolidated financial statements, primarily as a result of a stronger U.S. dollar versus various currencies in EMEA in comparison to the prior fiscal year period. On a constant currency continuing category basis, EMEA revenues decreased 3%.
EMEA revenues decreased 19% in U.S. dollars during the six months ended April 30, 2015 compared to the six months ended April 30, 2014 as reported in our condensed consolidated financial statements, primarily as a result of a stronger U.S. dollar versus various currencies in EMEA in comparison to the prior fiscal year period. On a constant currency continuing category basis, EMEA revenues decreased 3%.
APAC revenues decreased 7% in U.S. dollars during the three months ended April 30, 2015 compared to the three months ended April 30, 2014 in our condensed consolidated financial statements, primarily as a result of a stronger U.S. dollar compared to various APAC currencies. On a constant currency continuing category basis, APAC revenues increased 6%.
APAC revenues decreased 5% in U.S. dollars during the six months ended April 30, 2015 compared to the six months ended April 30, 2014 in our condensed consolidated financial statements, primarily as a result of a stronger U.S. dollar compared to various APAC currencies. On a constant currency continuing category basis, APAC revenues increased 5%.
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 April 30, 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 effective as of April 30, 2015.
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 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. 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.

49


Remediation of Material Weakness
As a result of the material weakness that existed as of January 31, 2015, we took certain steps to remediate the issues giving rise to the material weakness including, but not limited to, implementing an additional internal control related to shipment routing, enhancing pre-existing internal controls related to revenue recognition, conducting employee training sessions, and increasing management and board oversight related to revenue recognition issues.
Changes in Internal Control Over Financial Reporting
As noted above, we have implemented changes to our internal control over financial reporting to remediate the material weakness described above that existed as of January 31, 2015. Other than as described above, there have been no other 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 April 30, 2015 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

50


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 and in Part II, Item 1A, "Risk Factors" of our Form 10-Q for the three months ended January 31, 2015, 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 those filings. 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.

51


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 Greg Healy and Ug Manufacturing Co. Pty Ltd dated February 1, 2012 (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed April 1, 2015). (1)
 
 
 
10.2
 
Amendment to Employment Agreement between Greg Healy and Ug Manufacturing Pty. Ltd., dated April 7, 2015 (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K/A filed April 10, 2015). (1)
 
 
 
10.3
 
Separation Agreement between Andrew Mooney and Quiksilver, Inc., dated March 26, 2015 (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K/A filed April 10, 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
 
 
 

52


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

53


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.
June 9, 2015
QUIKSILVER, INC.
/s/ Thomas Chambolle
Thomas Chambolle
Chief Financial Officer
(Principal Financial and Accounting Officer)


54

Stock widget

Investing forum

QUIKSILVER INC Reports