<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-15131
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)
1740 MONROVIA AVENUE
COSTA MESA, CALIFORNIA
92627
(Address of principal executive offices)
(Zip Code)
(714) 645-1395
(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 [X] NO [ ]
The number of shares outstanding of issuer's Common Stock,
par value $0.01 per share, at
March 2, 1998 was
7,009,470.
<PAGE> 2
QUIKSILVER, INC.
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION Page No.
- ------------------------------ -------
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets
January 31, 1998 and October 31, 1997........................... 2
Condensed Consolidated Statements of Income
Three Months Ended January 31, 1998 and 1997.................... 3
Condensed Consolidated Statements of Cash Flows
Three Months Ended January 31, 1998 and 1997.................... 4
Notes to Condensed Consolidated Financial Statements................ 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................. 6
Part II - OTHER INFORMATION
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K................................ 9
SIGNATURE............................................................... 10
- ---------
1
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
QUIKSILVER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JANUARY 31, OCTOBER 31,
1998 1997
------------- -------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................. $ 535,000 $ 4,103,000
Trade accounts receivable, less allowance
for doubtful accounts of $2,544,000 (1998)
and $2,725,000 (1997) .............................. 51,902,000 54,668,000
Other receivables .................................... 2,967,000 1,773,000
Inventories - Note 2 ................................. 61,288,000 48,372,000
Prepaid expenses and other current assets ............ 3,146,000 2,841,000
------------- -------------
Total current assets ............................ 119,838,000 111,757,000
Property and equipment, less accumulated depreciation
and amortization of $10,834,000 (1998) and
$10,033,000 (1997) .................................... 16,798,000 16,436,000
Trademark, less accumulated amortization of
$1,695,000 (1998) and $1,646,000 (1997) ............... 1,728,000 1,778,000
Goodwill, less accumulated amortization of
$3,980,000 (1998) and $3,807,000 (1997) ............... 17,960,000 18,141,000
Other assets ............................................. 1,561,000 1,538,000
------------- -------------
Total assets .................................... $ 157,885,000 $ 149,650,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Lines of credit ....................................... $ 19,557,000 $ 18,671,000
Accounts payable ...................................... 20,707,000 13,079,000
Accrued liabilities ................................... 10,000,000 10,725,000
Current portion of notes payable ...................... 1,670,000 1,474,000
Income taxes payable .................................. 703,000 515,000
------------- -------------
Total current liabilities ....................... 52,637,000 44,464,000
Notes payable ............................................ 9,367,000 10,178,000
------------- -------------
Total liabilities ............................... 62,004,000 54,642,000
------------- -------------
Stockholders' equity
Preferred stock, $.01 par value, authorized
shares - 5,000,000; issued and outstanding
shares - none ...................................... -- --
Common stock, $.01 par value, authorized
shares - 30,000,000; issued and outstanding
shares - 7,139,470 ................................. 71,000 71,000
Additional paid-in-capital ............................ 22,657,000 22,657,000
Retained earnings ..................................... 79,158,000 77,043,000
Treasury stock, 130,000 shares ........................ (3,054,000) (3,054,000)
Cumulative foreign currency translation adjustment .... (2,951,000) (1,709,000)
------------- -------------
Total stockholders' equity ...................... 95,881,000 95,008,000
------------- -------------
Total liabilities and stockholders' equity ...... $ 157,885,000 $ 149,650,000
============= =============
See notes to condensed consolidated financial statements.
</TABLE>
2
<PAGE> 4
QUIKSILVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JANUARY 31,
1998 1997
------------ ------------
<S> <C> <C>
Net sales .................................... $ 55,251,000 $ 45,944,000
Cost of goods sold ........................... 33,323,000 28,336,000
------------ ------------
Gross profit .............................. 21,928,000 17,608,000
------------ ------------
Operating expenses:
Selling, general and administrative expense 17,395,000 13,970,000
Royalty income ............................ (457,000) (360,000)
Royalty expense ........................... 774,000 629,000
------------ ------------
Total operating expenses ............... 17,712,000 14,239,000
------------ ------------
Operating income ............................. 4,216,000 3,369,000
Interest expense ............................. 572,000 287,000
Foreign currency loss (gain) ................. (16,000) 72,000
Other expense ................................ 73,000 53,000
------------ ------------
Income before provision for income taxes ..... 3,587,000 2,957,000
Provision for income taxes ................... 1,472,000 1,208,000
------------ ------------
Net income ................................... $ 2,115,000 $ 1,749,000
============ ============
Basic net income per share ................... $ 0.30 $ 0.25
============ ============
Diluted net income per share ................. $ 0.30 $ 0.25
============ ============
Weighted average shares outstanding .......... 7,009,000 6,990,000
============ ============
Diluted weighted average shares outstanding .. 7,152,000 7,078,000
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 5
QUIKSILVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JANUARY 31,
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income ....................................... $ 2,115,000 $ 1,749,000
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization .............. 1,250,000 787,000
Provision for doubtful accounts ............ 536,000 217,000
(Gain) loss on sale of fixed assets ........ (18,000) 72,000
Changes in operating assets and liabilities:
Trade accounts receivable ............... 1,125,000 (1,020,000)
Other receivables ....................... (1,250,000) 410,000
Inventories ............................. (13,634,000) (7,803,000)
Prepaid expenses and other current assets (459,000) (461,000)
Other assets ............................ 62,000 (269,000)
Accounts payable ........................ 8,245,000 1,197,000
Accrued liabilities ..................... 121,000 (1,090,000)
Income taxes payable .................... 213,000 733,000
------------ ------------
Net cash used in operating activities.. (1,694,000) (5,478,000)
Cash flows from investing activities:
Proceeds from sales of fixed assets .............. 46,000 6,000
Capital expenditures ............................. (1,940,000) (1,496,000)
Acquisition of Mervin Manufacturing, Inc. ........ (500,000) --
------------ ------------
Net cash used in investing activities.. (2,394,000) (1,490,000)
Cash flows from financing activities:
Borrowings on lines of credit .................... 11,013,000 5,020,000
Payments on lines of credit ...................... (9,906,000) (1,508,000)
Borrowings on long-term debt ..................... 119,000 166,000
Payments on long-term debt ....................... (562,000) (100,000)
Proceeds from stock option exercises ............. -- 494,000
------------ ------------
Net cash provided by financing activities ........... 664,000 4,072,000
Effect of exchange rate changes on cash ............. (144,000) (55,000)
------------ ------------
Net decrease in cash and cash equivalents ........... (3,568,000) (2,951,000)
Cash and cash equivalents, beginning of period ...... 4,103,000 3,429,000
------------ ------------
Cash and cash equivalents, end of period ............ $ 535,000 $ 478,000
============ ============
Supplementary cash flow information -
Cash paid during the period for:
Interest ...................................... $ 573,000 $ 216,000
============ ============
Income taxes .................................. $ 1,215,000 $ 714,000
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 6
QUIKSILVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles 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 generally
accepted accounting principles for complete financial statement
presentation.
The Company, in its opinion, has included all adjustments, consisting
only of normal recurring accruals, necessary for a fair presentation of
the results of operations for the three months ended January 31, 1998
and 1997. The condensed consolidated financial statements and notes
thereto should be read in conjunction with the audited financial
statements and notes for the year ended October 31, 1997 included in the
Company's Annual Report on Form 10-K. Interim results are not
necessarily indicative of results for the full year due to seasonal and
other factors.
2. Inventories consist of the following:
<TABLE>
<CAPTION>
JANUARY 31, OCTOBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Raw Materials........................ $ 18,465,000 $ 16,754,000
Work-In-Process...................... 8,035,000 5,693,000
Finished Goods....................... 34,788,000 25,925,000
------------ ------------
$ 61,288,000 $ 48,372,000
============ ============
</TABLE>
3. Net income per share - During the three months ended January 31, 1998,
the Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings Per Share", which requires the Company to report
basic and diluted earnings per share ("EPS"). Basic EPS is based on the
weighted average number of shares outstanding during the periods, while
diluted EPS additionally includes the effect of all dilutive common
stock equivalents computed versus the treasury stock method. Prior
period net income per share data was restated for consistency.
5
<PAGE> 7
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
THREE MONTHS ENDED JANUARY 31, 1998 COMPARED TO THREE MONTHS ENDED JANUARY 31,
1997
Net sales for the three months ended January 31, 1998 increased 20.3% to
$55,251,000 from $45,944,000 in the comparable period of the prior year.
Domestic net sales for the three months ended January 31, 1998 increased 15.8%
to $32,603,000 from $28,161,000 in the comparable period of the prior year, and
European net sales increased 27.4% to $22,648,000 from $17,783,000 for those
same periods. Domestic mens sales increased 5.6% to $20,903,000 from $19,803,000
in the comparable period of the prior year, while domestic womens sales
increased 23.1% to $10,288,000 from $8,358,000. Mervin net sales totaled
$1,412,000 for the current quarter. The domestic mens sales increase came from
all divisions except private label. The domestic womens sales increase came from
both the Quiksilver Roxy and Raisins divisions. In Europe, mens sales increased
23.7% to $21,410,000 from $17,302,000, while womens sales increased 157.4% to
$1,238,000 from $481,000.
The gross profit margin for the three months ended January 31, 1998 increased to
39.7% from 38.3% in the comparable period of the prior year. The domestic gross
profit margin increased to 37.2% from 34.9% in the comparable period of the
prior year, and the European gross profit margin decreased to 43.3% from 43.8%
for those same periods. The increase in the domestic gross profit margin
resulted primarily from a change in product mix and the impact of selling excess
raw materials during the prior year's quarter at margins that were less than
normal wholesale. In the current year's quarter, there were less sales of
private label product, which sells at lower average profit margins, and higher
sales of juniors product, which sells at higher average profit margins. In
Europe, the gross profit margin decreased primarily from the residual effects of
exchange rate fluctuations that resulted in higher product costs for the
previous season that could not be fully passed on to customers.
Selling, general and administrative expense ("SG&A") for the three months ended
January 31, 1998 increased 24.5% to $17,395,000 from $13,970,000 in the
comparable period of the prior year. Domestic SG&A increased 23.5% to
$10,259,000 from $8,309,000 in the comparable period of the prior year, and
European SG&A increased 26.1% to $7,136,000 from $5,661,000 for those same
periods. The increase in both domestic and European SG&A was primarily due to
higher personnel costs related to increased sales volume, along with increased
sales and marketing expenses. The increase in European SG&A was primarily due to
higher personnel costs related to increased sales volume and increased sales and
marketing expenses.
Net royalty expense for the three months ended January 31, 1998 increased 17.8%
to $317,000 from $269,000 in the comparable period of the prior year. This
decrease was due primarily to increased royalty expense related to European
sales, which was partially offset by increased domestic royalty income from
increased sales by licensees. The Company receives domestic royalty income from
its Mexico, Japan, wetsuit, watch, sunglass, and outlet store licensees as well
as Raisins international licensees, and Quiksilver Europe pays royalties on
European sales under a trademark agreement with Quiksilver International.
Interest expense for the three months ended January 31, 1998 increased 99.3% to
$572,000 from $287,000 in the comparable period of the prior year. This increase
was primarily due to higher outstanding balances on the Company's domestic line
of credit. In addition to borrowings that provided working capital to support
the Company's growth, funds were borrowed to acquire Mervin, to upgrade the
Company's computer systems and to equip the Company's new warehouse facility in
Huntington Beach, California.
The effective income tax rate for the three months ended January 31, 1998 which
is based on current estimates of the annual effective income tax rate, increased
somewhat to 41.0% from 40.9% in the comparable period of the prior year.
6
<PAGE> 8
As a result of the above factors, net income for the three months ended January
31, 1998 increased 20.9% to $2,115,000 or $0.30 per share on a diluted basis
from $1,749,000 or $0.25 per share on a diluted basis in the comparable period
of the prior year. Basic net income per share also increased to $0.30 for the
three months ended January 31, 1998 from $0.25 in the comparable period of the
prior year.
FINANCIAL POSITION, CAPITAL RESOURCES AND LIQUIDITY
The Company finances its capital investments and seasonal working capital
requirements with funds generated by operations and its bank revolving lines of
credit.
Net cash used in operating activities for the three months ended January 31,
1998 was $1,694,000 compared to net cash used in operating activities of
$5,478,000 in the comparable period of the prior year. This $3,784,000 decrease
in cash used in operating activities was primarily due to increased cash
collections from the Company's domestic customers compared to the prior year
along with an increase in net income plus non-cash expenses.
For the three months ended January 31, 1998, capital expenditures increased
29.7% to $1,940,000 from $1,496,000 in the comparable period of the prior year.
This increase resulted primarily from increased spending on equipment for the
Company's domestic distribution center, offset somewhat by decreased spending on
computer systems both domestically and in Europe.
During the three months ended January 31, 1998, net cash provided by financing
activities totaled $664,000 compared to $4,072,000 in the comparable period of
the prior year. Borrowings were lower during the first quarter of fiscal 1998
primarily as a result of the decrease in cash used in operating activities as
discussed above.
The net decrease in cash and cash equivalents for the three months ended January
31, 1998 was $3,568,000 compared to $2,951,000 in the comparable period of the
prior year. Cash and cash equivalents decreased to $535,000 at January 31, 1998
from $4,103,000 at October 31, 1997, while working capital remained generally
unchanged at January 31, 1998 compared to October 31, 1997. The Company believes
its current cash balance and current lines of credit are adequate to cover its
seasonal working capital and other requirements for the foreseeable future and
that increases in its lines of credit can be obtained as needed to fund future
growth.
Accounts receivable decreased to $51,902,000 at January 31, 1998 from
$54,668,000 at October 31, 1997. Domestic accounts receivable decreased 11.0% to
$32,843,000 at January 31, 1998 from $36,887,000 at October 31, 1997, and
European accounts receivable increased 7.2% to $19,059,000 from $17,781,000 for
that same period. The domestic decrease occurred as receivables related to
higher sales in the fourth quarter of fiscal 1997 were collected in the first
quarter of fiscal 1998. European receivables increased primarily as a result of
higher sales in the latter portion of the first quarter of fiscal 1998 in
relation to the fourth quarter of fiscal 1997.
Consolidated inventories increased 26.7% to $61,288,000 at January 31, 1998 from
$48,372,000 at October 31, 1997. Domestic inventories increased 21.6% to
$47,113,000 from $38,758,000 at October 31, 1997, and European inventories
increased 47.4% to $14,175,000 from $9,614,000 for that same period. The
domestic increase resulted primarily from actual and planned sales increases for
the Spring and Summer seasons. European inventories increased primarily to
support higher sales levels.
In recent years, certain customers of the Company have experienced financial
difficulties, including the filing of reorganization proceedings under
bankruptcy laws. The Company has not incurred significant losses outside the
normal course of business as a result of the financial difficulties of these
customers.
7
<PAGE> 9
FINANCIAL POSITION, CAPITAL RESOURCES AND LIQUIDITY (CONTINUED)
While management believes that allowances for doubtful accounts at January 31,
1998 are adequate, the Company carefully monitors developments regarding its
major customers. Additional material financial difficulties encountered by these
or other significant customers could have an adverse impact on the Company's
financial position or results of operations.
During the three months ended January 31, 1998, the Company adopted SFAS No.
128, "Earnings Per Share" which requires the Company to report basic and diluted
earnings per share ("EPS"). Basic EPS is based on the weighted average number of
shares outstanding during the periods, while diluted EPS additionally includes
the effect of all dilutive common stock equivalents computed versus the treasury
stock method. Prior period net income per share data was restated for
consistency.
FOREIGN CURRENCY
Quiksilver Europe sells in various European countries and collects at future
dates in the customers' local currencies and purchases certain raw materials or
product in currencies other than French Francs. Accordingly, the Company is
exposed to transaction gains and losses that could result from changes in
foreign currency exchange rates. When considered appropriate, management
purchases financial instruments, primarily forward exchange contracts, to reduce
its exposure to these exchange rate fluctuations.
Quiksilver Europe's statements of income are translated from French Francs into
U.S. Dollars at average exchange rates in effect during the reporting period.
When the French Franc strengthens compared to the U.S. Dollar there is a
positive effect on Quiksilver Europe's results as reported in the Company's
Consolidated Financial Statements. Conversely, when the U.S. Dollar strengthens,
there is a negative affect.
European net sales increased 44.5% in French Francs during the three months
ended January 31, 1998 compared to the three months ended January 31, 1997. As
measured in U.S. Dollars and reported in the Company's Consolidated Statements
of Income, European net sales increased 27.4%.
8
<PAGE> 10
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8K
(a) Exhibits
27.0 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended January 31,
1998
9
<PAGE> 11
SIGNATURE
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.
QUIKSILVER, INC., a Delaware Corporation
March 13, 1998 /s/ Steven L. Brink
------------------------------------------
Steven L. Brink
Chief Financial Officer, Secretary and
Treasurer (Principal Accounting Officer)
10
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
QUIKSILVER, INC. JANUARY 31, 1997 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> JAN-31-1998
<CASH> 535,000
<SECURITIES> 0
<RECEIVABLES> 54,446,000
<ALLOWANCES> 2,544,000
<INVENTORY> 61,288,000
<CURRENT-ASSETS> 119,838,000
<PP&E> 27,632,000
<DEPRECIATION> 10,834,000
<TOTAL-ASSETS> 157,885,000
<CURRENT-LIABILITIES> 52,637,000
<BONDS> 9,367,000
0
0
<COMMON> 71,000
<OTHER-SE> 95,810,000
<TOTAL-LIABILITY-AND-EQUITY> 157,885,000
<SALES> 55,251,000
<TOTAL-REVENUES> 55,251,000
<CGS> 33,323,000
<TOTAL-COSTS> 33,323,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 536,000
<INTEREST-EXPENSE> 572,000
<INCOME-PRETAX> 3,587,000
<INCOME-TAX> 1,472,000
<INCOME-CONTINUING> 2,115,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,115,000
<EPS-PRIMARY> 0.30
<EPS-DILUTED> 0.30
</TABLE>
