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QUIKSILVER, INC. (ZQK)

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QUIKSILVER : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

06/06/2014 | 02:33pm US/Eastern
Unless the context indicates otherwise, when we refer to "Quiksilver," "we,"
"us," "our," or the "Company" in this Form 10-Q, we are referring to Quiksilver,
Inc. and its subsidiaries on a consolidated basis. The following discussion and
analysis should be read in conjunction with our unaudited condensed consolidated
financial statements and related notes thereto contained elsewhere in this
report. The information contained in this Quarterly Report on Form 10-Q is not a
complete description of our business or the risks associated with an investment
in our securities. We urge you to carefully review and consider the various
disclosures made by us in this report and in our other reports filed with the
Securities and Exchange Commission, including our Annual Report on Form 10-K for
the year ended October 31, 2013 and subsequent reports on Form 10-Q and
Form 8-K, which discuss our business in greater detail. The section entitled
"Risk Factors" set forth in Item 1A of this Quarterly Report on Form 10-Q and
our Annual Report on Form 10-K, and similar disclosures in our other SEC
filings, discuss some of the important risk factors that may affect our
business, results of operations and financial condition. You should carefully
consider those risks, in addition to the information in this report and in our
other filings with the SEC, before deciding to invest in, or maintain your
investment in, our common stock or senior notes.
Cautionary Note Regarding Forward-Looking Statements
This report on Form 10-Q contains "forward-looking statements" within the
meaning of the safe harbor provisions of the U.S. Private Securities Litigation
Reform Act of 1995. Forward-looking statements are often, but not always,
identified by words such as: "anticipate," "intend," "plan," "goal," "seek,"
"believe," "project," "estimate," "expect," "outlook," "strategy," "future,"
"likely," "may," "should," "could," "will" and similar references to future
periods. Examples of forward-looking statements include, but are not limited to,
statements we make regarding:
•      known or anticipated trends regarding our net revenues, selling, general
       and administrative expenses, Adjusted EBITDA and other operating results;
       and


•      current or future volatility in certain economies, credit markets and
       future market conditions; and


•      our belief that we have sufficient liquidity to fund our business
       operations during the next twelve months; and


•      our expectations regarding the implementation of our multi-year profit
       improvement plan.

Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following: • our ability to execute our mission and strategies;

• our ability to achieve the financial results that we anticipate;

• our ability to successfully implement our multi-year Profit Improvement Plan;


•     our ability to effectively transition our supply chain and certain other
      business processes to global scope;


•     future expenditures for capital projects, including the ongoing
      implementation of our global enterprise-wide reporting system;


•     increases in production costs and raw materials and disruptions in the
      supply chains for these materials;

• deterioration of global economic conditions and credit and capital markets;


•     potential non-cash asset impairment charges for goodwill, intangible assets
      or other fixed assets;

• our ability to continue to maintain our brand image and reputation;

• foreign currency exchange rate and interest rate fluctuations;

• our ability to remain compliant with our debt covenants;

• payments due on contractual commitments and other debt obligations;




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•     changes in political, social and economic conditions and local regulations,
      particularly in Europe and Asia;

• the occurrence of hostilities or catastrophic events;

• changes in customer demand; and


•     disruptions to, or breaches of, our computer systems and software, as well
      as natural events such as severe weather, fires, floods and earthquakes or
      man-made or other disruptions of our operating systems, structures or
      equipment.


Any forward-looking statement made by us in this report is based only on
information currently available to us and speaks only as of the date on which it
is made. We undertake no obligation to publicly update any forward-looking
statement, whether written or oral, that may be made from time to time, whether
as a result of new information, future developments or otherwise.
Business Overview
Quiksilver is one of the world's leading outdoor sports lifestyle companies. We
design, develop and distribute branded apparel, footwear, accessories and
related products. Our brands, inspired by the passion for outdoor action sports,
represent a casual lifestyle for young-minded people who connect with our
board-riding culture and heritage. Our three core brands, Quiksilver, Roxy, and
DC, are synonymous with the heritage and culture of surfing, skateboarding and
snowboarding. Our products combine decades of brand heritage, authenticity and
design experience with the latest technical performance innovations available in
the marketplace.
Our products are sold in over 100 countries through a wide range of distribution
points, including wholesale accounts (surf shops, skate shops, snow shops,
specialty stores, and select department stores), 658 Company-owned retail
stores, licensed stores, and via our e-commerce websites. We have four operating
segments consisting of the Americas, EMEA and APAC, each of which sells a full
range of our products, as well as Corporate Operations. Our Americas segment,
consisting of North, South and Central America, includes revenues primarily from
the United States, Canada, Brazil and Mexico. Our EMEA segment, consisting of
Europe, the Middle East and Africa, includes revenues primarily from continental
Europe, the United Kingdom, Russia and South Africa. Our APAC segment,
consisting of Asia and the Pacific Rim, includes revenue primarily from
Australia, Japan, New Zealand, South Korea, Taiwan and Indonesia. Royalties
earned from various licensees are categorized in Corporate Operations, along
with revenues from sourcing services to our licensees. For information regarding
the revenues, operating income/(loss), and identifiable assets attributable to
our operating segments, see Note 3 of our condensed consolidated financial
statements included in this report. In fiscal 2013, more than 60% of our revenue
was generated outside of the United States.
Multi-Year Profit Improvement Plan
We previously announced a multi-year profit improvement plan ("PIP") designed to
accelerate our three fundamental strategies of strengthening brands, growing
sales and driving operational efficiencies. The PIP's initiatives focus on
prioritizing our three core brands, globalizing key functions and reducing our
cost structure.
Important elements of the PIP include:
•     clarifying the positioning of our three flagship brands (Quiksilver, Roxy

and DC);

• divesting or exiting certain non-core brands;

• globalizing product design and merchandising;

• licensing of secondary or peripheral product categories;


•     reprioritization of marketing investments to emphasize in-store and print
      marketing along with digital and social media;

• continued investment in emerging markets and e-commerce;

• improving sales execution;

• optimizing our supply chain;

• reducing product styles;


•     centralizing global responsibility for key functions, including product
      design, supply chain, marketing, retail stores, licensing and
      administrative functions; and


•     closing under-performing retail stores, reorganizing wholesale sales
      operations, implementing greater pricing discipline, and improving product
      segmentation.



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We expect that the PIP, when fully implemented by the end of fiscal 2017, could
improve our Adjusted EBITDA by approximately $150 million compared to our fiscal
2012 Adjusted EBITDA. The timing of this expected improvement has been deferred
by one year from our original expectations due to several factors impacting our
current operating results (see "Known or Anticipated Trends"). We continue to
expect approximately one-half of this improvement to come from supply chain
optimization and the remainder to be primarily driven by corporate overhead
reductions, licensing opportunities and improved pricing management, along with
net revenue growth. We believe we have made meaningful progress on our PIP
initiatives through the second quarter of fiscal 2014.
Discontinued Operations
One of the elements of the multi-year PIP involves divesting or exiting certain
non-core businesses in order to improve our focus on our three flagship brands.
In November 2013, we completed the sale of Mervin Manufacturing, Inc.
("Mervin"), a manufacturer of snowboards and related products under the Lib
Technologies and GNU brands, for $58 million, subject to a final working capital
adjustment. In January 2014, we completed the sale of substantially all of the
assets of Hawk Designs, Inc. ("Hawk"), our subsidiary that owned and operated
our Hawk brand, for $19 million. The sale of these businesses generated a net
after-tax gain of approximately $31 million, which is included in income from
discontinued operations. As a result, both our Mervin and Hawk businesses were
classified as "held for sale" as of October 31, 2013 and are presented as
discontinued operations in our consolidated financial statements for all periods
presented. The Company's sale of these businesses generated income tax expense
of approximately $18 million within discontinued operations during the first six
months of fiscal 2014. However, as the Company does not expect to pay income tax
after application of available loss carryforwards, an offsetting income tax
benefit was recognized within continuing operations. See Note 15 to our
condensed consolidated financial statements, "Discontinued Operations", for
further discussion of the operating results of our discontinued businesses.
At October 31, 2013, we also classified our equity interest in Surfdome Shop,
Ltd. ("Surfdome"), a multi-brand e-commerce retailer, as "held for sale" based
on the status of our negotiations to sell our majority stake in Surfdome at that
time. During the second quarter of fiscal 2014, we decided to maintain our
investment in Surfdome. As a result, we have reclassified Surfdome back into
continuing operations for all periods presented herein. As a result of the sale
process conducted during the second quarter of fiscal 2014, the Company received
offers to purchase from third parties which indicated that there was an
impairment in the value of Surfdome. We recorded a $15 million impairment in
EMEA continuing operations to write-down Surfdome goodwill and intangible assets
to their estimated fair market value. As a result of our 51% ownership stake in
Surfdome, 49% of this charge, or $7.5 million, is allocated to "net
loss/(income) attributable to non-controlling interest" in our condensed
consolidated statements of operations for the second quarter and six months
ended April 30, 2014. See Note 7 to our condensed consolidated financial
statements, "Intangible Assets and Goodwill", for further discussion on the
impairment charge.
Known or Anticipated Trends
Based on our recent operating results and current perspective on our operating
environment. we anticipate certain trends continuing to impact our operating
results during the second half of fiscal 2014, including:
•      Year-over-year net revenue comparisons continuing to be unfavorable.
       Within this trend, we expect the year-over-year net revenue comparisons to
       be unfavorable in our North America and Europe wholesale channels, and
       favorable in our emerging markets and our e-commerce channel;


•      Year-over-year SG&A comparisons being less favorable in the second half of
       fiscal 2014 due to annualizing against the expense reduction initiatives
       we implemented last year and to the timing of planned marketing campaigns;
       and


•      Fiscal 2014 Adjusted EBITDA being below fiscal 2013 results with third
       quarter year-over-year comparisons being more impacted.



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