<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, 1999
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)
(949) 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, 1999 was
14,674,507.
<PAGE> 2
QUIKSILVER, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page No.
- ------------------------------ --------
<S> <C>
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets
January 31, 1999 and October 31, 1998 2
Condensed Consolidated Statements of Income
Three Months Ended January 31, 1999 and 1998 3
Condensed Consolidated Statements of Cash Flows
Three Months Ended January 31, 1999 and 1998 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
</TABLE>
1
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
QUIKSILVER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JANUARY 31, OCTOBER 31,
1999 1998
------------- ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 75,000 $ 3,029,000
Trade accounts receivable, less allowance
for doubtful accounts of $4,120,000 (1999)
and $3,738,000 (1998) 73,187,000 78,390,000
Other receivables 3,549,000 3,720,000
Inventories - Note 2 85,004,000 70,575,000
Prepaid expenses and other current assets 5,044,000 4,350,000
------------- -------------
Total current assets 166,859,000 160,064,000
Property and equipment, less accumulated depreciation
and amortization of $15,734,000 (1999) and
$14,557,000 (1998) 35,629,000 31,996,000
Trademark, less accumulated amortization of
$1,894,000 (1999) and $1,845,000 (1998) 1,542,000 1,589,000
Goodwill, less accumulated amortization of
$4,682,000 (1999) and $4,484,000 (1998) 17,182,000 17,381,000
Other assets 1,926,000 2,041,000
------------- -------------
Total assets $ 223,138,000 $ 213,071,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Lines of credit $ 20,096,000 $ 17,465,000
Accounts payable 28,691,000 26,340,000
Accrued liabilities 15,673,000 17,269,000
Current portion of notes payable 3,361,000 3,293,000
Income taxes payable 3,905,000 3,376,000
------------- -------------
Total current liabilities 71,726,000 67,743,000
Notes payable 26,740,000 27,669,000
------------- -------------
Total liabilities 98,466,000 95,412,000
------------- -------------
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 - 14,934,507 149,000 146,000
Additional paid-in-capital 30,773,000 25,920,000
Retained earnings 98,360,000 95,006,000
Treasury stock, 260,000 shares (3,054,000) (3,054,000)
Cumulative foreign currency translation adjustment (1,556,000) (359,000)
------------- -------------
Total stockholders' equity 124,672,000 117,659,000
------------- -------------
Total liabilities and stockholders' equity $ 223,138,000 $ 213,071,000
============= =============
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE> 4
QUIKSILVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JANUARY 31,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Net sales $ 85,947,000 $ 55,251,000
Cost of goods sold 52,526,000 33,323,000
------------ ------------
Gross profit 33,421,000 21,928,000
------------ ------------
Operating expenses:
Selling, general and administrative expense 25,991,000 17,395,000
Royalty income (398,000) (457,000)
Royalty expense 1,079,000 774,000
------------ ------------
Total operating expenses 26,672,000 17,712,000
------------ ------------
Operating income 6,749,000 4,216,000
Interest expense 848,000 572,000
Foreign currency loss (gain) 20,000 (16,000)
Other expense 127,000 73,000
------------ ------------
Income before provision for income taxes 5,754,000 3,587,000
Provision for income taxes 2,400,000 1,472,000
------------ ------------
Net income $ 3,354,000 $ 2,115,000
============ ============
Basic net income per share $ 0.23 $ 0.15
============ ============
Diluted net income per share $ 0.22 $ 0.15
============ ============
Weighted average shares outstanding 14,451,000 14,018,000
============ ============
Diluted weighted average shares outstanding 15,231,000 14,304,000
============ ============
</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,
--------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,354,000 $ 2,115,000
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 1,829,000 1,250,000
Provision for doubtful accounts 587,000 536,000
Gain on sale of fixed assets (9,000) (18,000)
Changes in operating assets and liabilities:
Trade accounts receivable 3,724,000 1,125,000
Other receivables 8,000 (1,250,000)
Inventories (15,314,000) (13,634,000)
Prepaid expenses and other current assets (727,000) (459,000)
Other assets (149,000) 62,000
Accounts payable 3,003,000 8,245,000
Accrued liabilities (1,245,000) 121,000
Income taxes payable 607,000 213,000
------------ ------------
Net cash used in operating activities (4,332,000) (1,694,000)
Cash flows from investing activities:
Proceeds from sales of fixed assets 9,000 46,000
Capital expenditures (5,777,000) (1,940,000)
Acquisition of Mervin Manufacturing, Inc. -- (500,000
------------ ------------
Net cash used in investing activities (5,768,000) (2,394,000)
Cash flows from financing activities:
Borrowings on lines of credit 16,146,000 11,013,000
Payments on lines of credit (13,514,000) (9,906,000)
Borrowings on long-term debt 579,000 119,000
Payments on long-term debt (827,000) (562,000)
Proceeds from stock option exercises 4,852,000 --
------------ ------------
Net cash provided by financing activities 7,236,000 664,000
Effect of exchange rate changes on cash (90,000) (144,000)
------------ ------------
Net decrease in cash and cash equivalents (2,954,000) (3,568,000)
Cash and cash equivalents, beginning of period 3,029,000 4,103,000
------------ ------------
Cash and cash equivalents, end of period $ 75,000 $ 535,000
============ ============
Supplementary cash flow information --
Cash paid during the period for:
Interest $ 797,000 $ 573,000
============ ============
Income taxes $ 1,666,000 $ 1,215,000
============ ============
</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, 1999
and 1998. 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, 1998 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,
1999 1998
------------ ------------
<S> <C> <C>
Raw Materials $19,850,000 $18,531,000
Work-In-Process 10,375,000 9,323,000
Finished Goods 54,779,000 42,721,000
----------- -----------
$85,004,000 $70,575,000
=========== ===========
</TABLE>
3. During the three months ended April 30, 1998, the Company's Board of
Directors approved a two-for-one split of the Company's Common Stock.
The split was effected in the form of a dividend on April 24, 1998 to
shareholders of record on April 16, 1998. All share and per-share
information has been restated to reflect the stock dividend.
4. Effective February 12, 1999, the Company's loan agreement with a U.S.
bank was amended to increase the Company's short-term borrowing
capacity by $10,000,000 through July 30, 1999.
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, 1999 COMPARED TO THREE MONTHS ENDED
JANUARY 31, 1998
Net sales for the three months ended January 31, 1999 increased 55.6% to
$85,947,000 from $55,251,000 in the comparable period of the prior year.
Domestic net sales for the three months ended January 31, 1999 increased 59.9%
to $52,145,000 from $32,603,000 in the comparable period of the prior year, and
European net sales increased 49.2% to $33,802,000 from $22,648,000 for those
same periods. As measured in French Francs, Quiksilver Europe's functional
currency, net sales in the current year's quarter increased 41.2% compared to
the prior year. Domestic mens sales increased 35.0% to $28,216,000 from
$20,903,000 in the comparable period of the prior year, while domestic womens
sales increased 113.8% to $22,000,000 from $10,288,000. In the domestic
division, sales of snowboards, boots and bindings amounted to $1,930,000 for the
current year's quarter compared to $1,412,000 in the prior year (from the date
of the Mervin acquisition). The domestic mens sales increase came from the
Quiksilver Young Mens and Boys divisions. The domestic womens sales increase
came from both the Quiksilver Roxy and Raisins divisions. In Europe, mens sales
increased 46.0% to $31,268,000 from $21,410,000, while womens sales increased
104.6% to $2,533,000 from $1,238,000. The european mens sales increase came from
all divisions with significant growth in the WinterSports division.
The gross profit margin for the three months ended January 31, 1999 decreased to
38.9% from 39.7% in the comparable period of the prior year. The domestic gross
profit margin decreased to 36.4% from 37.2% in the comparable period of the
prior year, and the European gross profit margin decreased to 42.8% from 43.3%
for those same periods. The decrease in the domestic gross profit margin
resulted primarily from an increase in the sale of clearance goods. An increase
in sales of private label juniors product, which sells at lower average profit
margins, offset the effect of more sales of juniors sportswear and accessories
product, which sells at higher average profit margins. In Europe, the gross
profit margin decreased primarily from higher sampling costs and markdowns taken
to sell excess current fall/winter product. Sample expenses increased in Europe
as additional samples were produced to support expanded sales efforts in the
Boys and Roxy divisions.
Selling, general and administrative expense ("SG&A") for the three months ended
January 31, 1999 increased 49.4% to $25,991,000 from $17,395,000 in the
comparable period of the prior year. Domestic SG&A increased 52.4% to
$15,634,000 from $10,259,000 in the comparable period of the prior year, and
European SG&A increased 45.1% to $10,357,000 from $7,136,000 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. Primarily as a result
of sales growth in excess of plans that was supported without additional
infrastructure growth, SG&A decreased as a percentage of sales to 30.2% from
31.5%.
Net royalty expense for the three months ended January 31, 1999 increased 114.8%
to $681,000 from $317,000 in the comparable period of the prior year. This
increase was due primarily to higher royalty expense related to European sales.
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, 1999 increased 48.2% to
$848,000 from $572,000 in the comparable period of the prior year. This increase
was primarily due to (i) higher outstanding balances on the Company's domestic
line of credit to provide working capital to support the Company's growth, and
(ii) increased long-term debt in Europe to fund the opening of two company-owned
Boardriders Club stores in Paris.
The effective income tax rate for the three months ended January 31, 1999, which
is based on current estimates of the annual effective income tax rate, increased
to 41.7% from 41.0% 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, 1999 increased 58.6% to $3,354,000 or $0.22 per share on a diluted basis
from $2,115,000 or $0.15 per share on a diluted basis in the comparable period
of the prior year. Basic net income per share increased to $0.23 for the three
months ended January 31, 1999 from $0.15 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,
1999 was $4,332,000 compared to $1,694,000 in the comparable period of the prior
year. This $2,638,000 increase in cash used in operating activities was
primarily due to inventories, which increased to support higher sales for the
Spring and Summer seasons of the current year. This cash flow effect of the
increase in inventories was offset, in part, by a decrease in trade accounts
receivable and higher net income in comparison to the prior year.
For the three months ended January 31, 1999, capital expenditures increased
197.8% to $5,777,000 from $1,940,000 in the comparable period of the prior year.
This increase resulted primarily from spending on leasehold improvements for the
new domestic headquarters and to a lesser extent, increased investments in
Quiksvilles and company-owned Boardriders Clubs in comparison to the prior year.
During the three months ended January 31, 1999, net cash provided by financing
activities totaled $7,236,000 compared to $664,000 in the comparable period of
the prior year. Borrowings were higher during the first quarter of fiscal 1999
primarily as a result of the increase in cash used in operating and investing
activities as discussed above.
The net decrease in cash and cash equivalents for the three months ended January
31, 1999 was $2,954,000 compared to $3,568,000 in the comparable period of the
prior year. Cash and cash equivalents decreased to $75,000 at January 31, 1999
from $3,029,000 at October 31, 1998, while working capital increased to
$95,133,000 at January 31, 1999 compared to $92,321,000 at October 31, 1998. 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 $73,187,000 at January 31, 1999 from
$78,390,000 at October 31, 1998. Domestic accounts receivable decreased 9.9% to
$48,944,000 at January 31, 1999 from $54,327,000 at October 31, 1998, and
European accounts receivable were basically unchanged, increasing 0.7% to
$24,243,000 for that same period. The domestic decrease occurred as receivables
related to higher sales in the fourth quarter of fiscal 1998 were collected in
the first quarter of fiscal 1999. The small change in European receivables is
expected as European sales in the first quarter of fiscal 1999 were similar in
amount to the fourth quarter of fiscal 1998.
Consolidated inventories increased 20.4% to $85,004,000 at January 31, 1999 from
$70,575,000 at October 31, 1998. Domestic inventories increased 19.4% to
$63,636,000 from $53,295,000 at October 31, 1998, and European inventories
increased 23.7% to $21,368,000 from $17,280,000 for that same period. The
domestic and European increases resulted primarily from actual and planned sales
increases for the Spring and Summer seasons.
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.
While management believes that allowances for doubtful accounts at January 31,
1999 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.
7
<PAGE> 9
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 41.2% in French Francs during the three months
ended January 31, 1999 compared to the three months ended January 31, 1998. As
measured in U.S. Dollars and reported in the Company's Consolidated Statements
of Income, European net sales increased 49.2%.
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,
1999
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 11, 1999 /s/ Steven L. Brink
----------------------------------
Steven L. Brink
Chief Financial Officer,
Secretary and Treasurer
(Principal Accounting Officer)
10
<PAGE> 12
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
27.0 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
Quiksilver, Inc. January 31, 1998 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-31-1999
<PERIOD-END> JAN-31-1999
<CASH> 75,000
<SECURITIES> 0
<RECEIVABLES> 77,307,000
<ALLOWANCES> 4,120,000
<INVENTORY> 85,004,000
<CURRENT-ASSETS> 166,859,000
<PP&E> 51,363,000
<DEPRECIATION> 15,734,000
<TOTAL-ASSETS> 223,138,000
<CURRENT-LIABILITIES> 71,726,000
<BONDS> 26,740,000
0
0
<COMMON> 149,000
<OTHER-SE> 124,523,000
<TOTAL-LIABILITY-AND-EQUITY> 223,138,000
<SALES> 85,947,000
<TOTAL-REVENUES> 85,947,000
<CGS> 52,526,000
<TOTAL-COSTS> 52,526,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 587,000
<INTEREST-EXPENSE> 848,000
<INCOME-PRETAX> 5,754,000
<INCOME-TAX> 2,400,000
<INCOME-CONTINUING> 3,354,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,354,000
<EPS-PRIMARY> 0.23
<EPS-DILUTED> 0.22
</TABLE>
