10-Q 1 zqk0131201510q.htm 10-Q ZQK.01.31.2015.10Q


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 January 31, 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 February 27, 2015 was 171,370,392.




QUIKSILVER, INC.
FORM 10-Q
INDEX
 
 
Page No.
 
 
 
 
 
 
 
 
 
 
Quiksilver, Inc. Condensed Consolidated Statements of Operations First Quarter (Three Months) Ended January 31, 2015 and 2014
 
 
 
 
Quiksilver, Inc. Condensed Consolidated Statements of Comprehensive (Loss)/Income First Quarter (Three Months) Ended January 31, 2015 and 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
First Quarter (Three Months) Ended January 31, 2015 Compared to First Quarter (Three Months) Ended January 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 





PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
QUIKSILVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
 
Three Months Ended January 31,
In thousands, except per share amounts
 
2015
 
2014
Revenues, net
 
$
340,854

 
$
394,910

Cost of goods sold
 
171,410

 
194,270

Gross profit
 
169,444

 
200,640

Selling, general and administrative expense
 
170,504

 
203,784

Asset impairments
 
255

 
883

Operating loss
 
(1,315
)
 
(4,027
)
Interest expense, net
 
18,402

 
19,420

Foreign currency loss
 
657

 
2,828

Loss before benefit for income taxes
 
(20,374
)
 
(26,275
)
Benefit for income taxes
 
(2,084
)
 
(4,385
)
Loss from continuing operations
 
(18,290
)
 
(21,890
)
Income from discontinued operations, net of tax (includes net gain on sale of businesses of $6,580 (2015) and $38,103 (2014))
 
6,732

 
37,617

Net (loss)/income
 
(11,558
)
 
15,727

Less: net loss attributable to non-controlling interest
 
788

 
464

Net (loss)/income attributable to Quiksilver, Inc.
 
$
(10,770
)
 
$
16,191

Loss per share from continuing operations attributable to Quiksilver, Inc.
 
$
(0.11
)
 
$
(0.13
)
Income per share from discontinued operations attributable to Quiksilver, Inc.
 
$
0.04

 
$
0.22

Net (loss)/income per share attributable to Quiksilver, Inc.
 
$
(0.06
)
 
$
0.10

Loss per share from continuing operations attributable to Quiksilver, Inc., assuming dilution
 
$
(0.11
)
 
$
(0.13
)
Income per share from discontinued operations attributable to Quiksilver, Inc., assuming dilution
 
$
0.04

 
$
0.22

Net (loss)/income per share attributable to Quiksilver, Inc., assuming dilution
 
$
(0.06
)
 
$
0.10

Weighted average common shares outstanding, basic
 
171,039

 
169,747

Weighted average common shares outstanding, diluted
 
171,039

 
169,747

Amounts attributable to Quiksilver, Inc.:
 
 
 
 
Loss from continuing operations
 
$
(18,290
)
 
$
(21,529
)
Income from discontinued operations, net of tax
 
7,520

 
37,720

Net (loss)/income
 
$
(10,770
)
 
$
16,191

See Notes to Condensed Consolidated Financial Statements.

1



QUIKSILVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)/INCOME
(Unaudited)
 
 
Three Months Ended January 31,
In thousands
 
2015
 
2014
Net (loss)/income
 
$
(11,558
)
 
$
15,727

Other comprehensive (loss)/income:
 
 
 
 
Foreign currency translation adjustment
 
(34,143
)
 
(20,715
)
Reclassification adjustment for realized gain/(loss) on derivative instruments transferred to earnings, net of tax provision/(benefit) of $213 (2015) and $(93) (2014)
 
(2,918
)
 
186

Net unrealized gain on derivative instruments, net of tax provision of $1,295 (2015) and $1,414 (2014)
 
18,442

 
6,107

Comprehensive (loss)/income
 
(30,177
)
 
1,305

Comprehensive loss attributable to non-controlling interest
 
788

 
464

Comprehensive (loss)/income attributable to Quiksilver, Inc.
 
$
(29,389
)
 
$
1,769

See Notes to Condensed Consolidated Financial Statements.

2



QUIKSILVER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
In thousands, except share and per share amounts
 
January 31,
2015
 
October 31,
2014
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
60,656

 
$
46,664

Restricted cash
 
1,745

 
4,687

Trade accounts receivable, less allowances of $54,819 (2015) and $63,991 (2014)
 
258,952

 
311,014

Other receivables
 
51,101

 
40,847

Inventories
 
306,119

 
284,517

Deferred income taxes - current
 
4,533

 
4,926

Prepaid expenses and other current assets
 
31,315

 
28,080

Current portion of assets held for sale
 

 
20,265

Total current assets
 
714,421

 
741,000

Restricted cash
 
3,918

 
16,514

Fixed assets, less accumulated depreciation and amortization of $209,823 (2015) and $220,888 (2014)
 
194,107

 
213,768

Intangible assets, net
 
137,165

 
135,510

Goodwill
 
79,805

 
80,622

Other assets
 
39,946

 
47,086

Deferred income taxes long-term
 
14,352

 
16,088

Assets held for sale, net of current portion
 

 
5,394

Total assets
 
$
1,183,714

 
$
1,255,982

LIABILITIES AND EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Lines of credit
 
$
31,093

 
$
32,929

Accounts payable
 
174,090

 
168,307

Accrued liabilities
 
101,591

 
112,701

Current portion of long-term debt
 
2,261

 
2,432

Income taxes payable
 
2,505

 
1,124

Deferred income taxes - current
 
19,490

 
19,628

Current portion of assets held for sale
 

 
13,266

Total current liabilities
 
331,030

 
350,387

Long-term debt, net of current portion
 
770,048

 
793,229

Other long-term liabilities
 
34,702

 
39,342

Deferred income taxes long-term
 
21,304

 
16,790

Total liabilities
 
1,157,084

 
1,199,748

Equity:
 
 
 
 
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 - 174,255,592 (2015) and 174,057,410 (2014)
 
1,743

 
1,741

Additional paid-in capital
 
591,173

 
589,032

Treasury stock, 2,885,200 shares
 
(6,778
)
 
(6,778
)
Accumulated deficit
 
(598,177
)
 
(587,407
)
Accumulated other comprehensive income
 
38,669

 
57,288

Total Quiksilver, Inc. stockholders’ equity
 
26,630

 
53,876

Non-controlling interest
 

 
2,358

Total equity
 
26,630

 
56,234

Total liabilities and equity
 
$
1,183,714

 
$
1,255,982

See Notes to Condensed Consolidated Financial Statements.

3



QUIKSILVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Three Months Ended January 31,
In thousands
 
2015
 
2014
Cash flows from operating activities:
 
 
 
 
Net (loss)/income
 
$
(11,558
)

$
15,727

Adjustments to reconcile net loss to net cash provided by/(used in) operating activities:
 
 
 
 
Income from discontinued operations
 
(6,732
)
 
(37,617
)
Depreciation and amortization
 
10,758

 
10,545

Stock-based compensation
 
1,769

 
5,063

Provision for doubtful accounts
 
1,598

 
1,662

Loss/(gain) on disposal of fixed assets
 
342

 
(266
)
Unrealized foreign currency (gain)/loss
 
(647
)
 
3,065

Asset impairments
 
255

 
883

Non-cash interest expense
 
857

 
914

Equity in earnings
 
596

 
352

Deferred income taxes
 
(5,225
)
 
5

Subtotal of non-cash reconciling adjustments
 
3,571

 
(15,394
)
Changes in operating assets and liabilities:
 
 
 
 
Trade accounts receivable
 
32,227

 
61,905

Other receivables
 
(2,313
)
 
(825
)
Inventories
 
(39,724
)
 
(31,169
)
Prepaid expenses and other current assets
 
(5,204
)
 
(7,372
)
Other assets
 
966

 
2,628

Accounts payable
 
25,474

 
(28,498
)
Accrued liabilities and other long-term liabilities
 
(8,528
)
 
124

Income taxes payable
 
274

 
(1,242
)
Subtotal of changes in operating assets and liabilities
 
3,172


(4,449
)
Cash used in operating activities of continuing operations
 
(4,815
)
 
(4,116
)
Cash provided by/(used in) operating activities of discontinued operations
 
4,668

 
(7,195
)
Net cash used in operating activities
 
(147
)
 
(11,311
)
Cash flows from investing activities:
 
 
 
 
Capital expenditures
 
(15,944
)
 
(10,558
)
Proceeds from sale of property
 
455

 

Changes in restricted cash
 
15,538

 
(60,617
)
Cash provided by/(used in) investing activities of continuing operations
 
49

 
(71,175
)
Cash provided by investing activities of discontinued operations
 
10,713

 
76,719

Net cash provided by investing activities
 
10,762

 
5,544

Cash flows from financing activities:
 
 
 
 
Borrowings on lines of credit
 
11,770

 
18,904

Payments on lines of credit
 
(16,575
)
 
(16,591
)
Borrowings on long-term debt
 
42,734

 
52,062

Payments on long-term debt
 
(32,420
)
 
(33,779
)
Stock option exercises and employee stock purchases
 
372

 
3,138

Payments of debt issuance costs
 

 
(335
)
Cash provided by financing activities of continuing operations
 
5,881

 
23,399

Net cash provided by financing activities
 
5,881

 
23,399

Effect of exchange rate changes on cash
 
(2,504
)
 
(4,924
)
Net increase in cash and cash equivalents
 
13,992

 
12,708

Cash and cash equivalents, beginning of period
 
46,664

 
57,280

Cash and cash equivalents, end of period
 
$
60,656

 
$
69,988

Supplementary cash flow information:
 
 
 
 
Cash paid/(received) during the period for:
 
 
 
 
Interest
 
$
11,954

 
$
12,894

Income taxes paid
 
$
1,502

 
$
6,516

Income taxes received
 
$
(440
)
 
$

Summary of significant non-cash transactions:
 
 
 
 
Capital expenditures accrued at period end (investing activities)
 
$
2,148

 
$
3,453

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") for net proceeds of approximately $16 million. As a result, the Company reported the operating results of Mervin, Hawk and Surfdome in "Income from discontinued operations, net of tax" in the 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 contract(s) with a customer, (ii) identify the performance obligations in the contract(s), (iii) determine the transaction price, (iv)

6



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

7



Information related to the Company's operating segments, all from continuing operations, is as follows:
 
 
Three Months Ended January 31,
In thousands
 
2015
 
2014
Revenues, net:
 
 
 
 
Americas
 
$
147,767

 
$
175,463

EMEA
 
125,813

 
149,397

APAC
 
66,598

 
69,875

Corporate Operations
 
676

 
175

Total
 
$
340,854

 
$
394,910

Gross profit/(loss):
 
 
 
 
Americas
 
$
64,309

 
$
75,914

EMEA
 
70,500

 
87,849

APAC
 
36,850

 
36,808

Corporate Operations
 
(2,215
)
 
69

Total
 
$
169,444

 
$
200,640

SG&A expense:
 
 
 
 
Americas
 
$
70,024

 
$
89,561

EMEA
 
66,129

 
78,208

APAC
 
34,805

 
33,362

Corporate Operations
 
(454
)
 
2,653

Total
 
$
170,504

 
$
203,784

Asset impairments:
 
 
 
 
Americas
 
$
76

 
$
222

EMEA
 
179

 
661

APAC
 

 

Corporate Operations
 

 

Total
 
$
255

 
$
883

Depreciation and amortization expense:
 
 
 
 
Americas
 
$
4,108

 
$
4,516

EMEA
 
3,816

 
3,287

APAC
 
1,741

 
1,888

Corporate Operations
 
762

 
654

Total
 
$
10,427

 
$
10,345

Operating (loss)/income:
 
 
 
 
Americas
 
$
(5,791
)
 
$
(13,869
)
EMEA
 
4,192

 
8,980

APAC
 
2,045

 
3,446

Corporate Operations
 
(1,761
)
 
(2,584
)
Total
 
$
(1,315
)
 
$
(4,027
)
Interest expense:
 
 
 
 
Americas
 
$
730

 
$
902

EMEA
 
4,228

 
4,811

APAC
 
526

 
587

Corporate Operations
 
12,918

 
13,120

Total
 
$
18,402

 
$
19,420

SG&A expense by segment for the first quarter of fiscal 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.

8



In thousands
 
January 31,
2015
 
October 31, 2014
Identifiable assets:
 
 
 
 
Americas
 
$
438,171

 
$
464,831

EMEA
 
474,512

 
513,303

APAC
 
199,964

 
202,225

Corporate Operations
 
71,067

 
75,623

Total
 
$
1,183,714

 
$
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 months ended January 31, 2015 and 2014:
 
 
Three Months Ended January 31,
In thousands
 
2015
 
2014
Shares used in computing basic net loss/income per share
 
171,039

 
169,747

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
 
171,039

 
169,747

(1)
For the first quarter of fiscal 2015 and 2014, the shares used in computing diluted net loss per share do not include 234,000 and 3,974,000, respectively, of dilutive stock options and shares of restricted stock, nor 1,982,000 and 19,913,000, respectively, of dilutive warrant shares, as the effect is anti-dilutive given the Company’s net loss from continuing operations. For the first quarter of fiscal 2015 and 2014, additional stock options outstanding of 6,492,000 and 3,856,000, respectively, and additional warrant shares outstanding of 23,672,000 and 5,741,000, respectively, were excluded from the calculation of diluted EPS, as their effect would have been anti-dilutive based on the application of the treasury stock method.
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 executives with those of its stockholders. The weighted average fair value of the performance-based restricted stock units granted in the first quarter ended January 31, 2015 was $1.85. There were no performance-based restricted stock units granted in the first quarter of fiscal 2014. There were no performance options granted in the first quarter of fiscal 2015 or 2014.

9



Activity related to these performance-based options and performance-based restricted stock units for the three months ended January 31, 2015 was as follows:
 
 
Performance
Options
 
Performance
Restricted
Stock Units
Outstanding, October 31, 2014
 
640,000

 
10,218,508

Granted
 

 
1,486,000

Exercised
 

 

Canceled
 

 
(16,000
)
Outstanding, January 31, 2015
 
640,000

 
11,688,508

As of January 31, 2015, 164,000 of the 640,000 outstanding performance-based stock options were exercisable and none of the performance-based restricted stock units were exercisable. As of January 31, 2015, the Company had unrecognized compensation expense, net of estimated forfeitures, of approximately $0.3 million related to the performance-based stock options and approximately $1.9 million related to the performance-based restricted stock units. This unrecognized compensation expense is expected to be recognized over a weighted average period of approximately 1.3 years and 1.8 years, respectively.
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 quarter of fiscal 2015 and 2014, there were no options granted. The Company records stock-based compensation expense using the graded vested method over the vesting period, which is generally three years. As of January 31, 2015, the Company had approximately $1.1 million of unrecognized compensation expense for non-performance-based stock options expected to be recognized over a weighted average period of approximately 1.8 years.

10



Changes in shares underlying stock options, excluding performance-based stock options, for the three months ended January 31, 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
 

 

 
 
 
 
Exercised
 

 

 
 
 
 
Canceled
 
(270,833
)
 
6.16

 
 
 
 
Outstanding, January 31, 2015
 
6,546,776

 
$
4.46

 
4.8
 
$
33

Options exercisable, January 31, 2015
 
5,930,441

 
$
4.24

 
4.5
 
$
33

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

 
$
4.18

Granted
 

 

Vested
 
(505,001
)
 
3.59

Canceled
 

 

Non-vested, January 31, 2015
 
616,335

 
$
4.67

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 Company’s achievement of a specified common stock price threshold or performance goals. Restricted stock unit awards granted to our chief executive officer in lieu of a cash annual salary in the first quarter of fiscal 2015 vest in one year. Changes in restricted stock and restricted stock units for the three months ended January 31, 2015 were as follows:
 
 
Restricted Stock
 
Restricted Stock Units
Outstanding, October 31, 2014
 
175,000

 

Granted
 

 
675,676

Vested
 

 

Forfeited
 

 

Outstanding, January 31, 2015
 
175,000

 
675,676

Compensation expense for restricted stock is determined using the intrinsic value method. 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 January 31, 2015, there had been no acceleration of amortization periods and the Company had approximately $1.3 million of unrecognized compensation expense expected to be recognized over a weighted average period of approximately 0.9 years.
Note 5 — Restricted Cash
The Company’s restricted cash balance, including both current and non-current portions, was $6 million at January 31, 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 January 31, 2015 included $4 million of the remaining proceeds from the sale of the Surfdome business in the first quarter of fiscal 2015, which is subject to these

11



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
 
January 31,
2015
 
October 31, 2014
Raw materials
 
$
3,392

 
$
3,524

Work in-process
 
653

 
467

Finished goods
 
302,074

 
280,526

Total
 
$
306,119

 
$
284,517

Note 7 — Intangible Assets and Goodwill
Intangible Assets
Intangible assets consisted of the following as of the dates indicated:
 
 
January 31, 2015
 
October 31, 2014
In thousands
 
Gross
Amount
 
Accumulated
Amortization
 
Net Book
Value
 
Gross
Amount
 
Accumulated
Amortization
 
Net Book
Value
Non-amortizable trademarks
 
$
124,118

 
$

 
$
124,118

 
$
124,121

 
$

 
$
124,121

Amortizable trademarks
 
23,333

 
(12,249
)
 
11,084

 
21,858

 
(12,508
)
 
9,350

Amortizable licenses
 
10,521

 
(10,521
)
 

 
11,817

 
(11,817
)
 

Other amortizable intangibles
 
8,410

 
(6,447
)
 
1,963

 
8,406

 
(6,367
)
 
2,039

Total
 
$
166,382

 
$
(29,217
)
 
$
137,165

 
$
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 three months ended January 31, 2015 and 2014 was approximately $0.5 million. Annual amortization expense is estimated to be approximately $2 million in fiscal 2016 and $1 million in fiscal 2017 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
 
(817
)
 

 

 
(817
)
Gross goodwill
 
73,598

 
178,197

 
135,752

 
387,547

Accumulated impairment losses
 

 
(178,197
)
 
(129,545
)
 
(307,742
)
Net goodwill at January 31, 2015
 
$
73,598

 
$

 
$
6,207

 
$
79,805

Note 8 — Income Taxes

12



Each reporting period, the Company evaluates the realizability of all of its deferred tax assets in each tax jurisdiction. As of January 31, 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 quarters of fiscal 2015 and 2014.
The Company's hedging instruments in Europe generated tax expense of approximately $5 million within other comprehensive income in the first quarter 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 in the first quarter ended January 31, 2015 due to being unable to record tax benefits against the losses in certain jurisdictions where the Company has previously recorded valuation allowances.
As of January 31, 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"). This 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 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
 
507

 
401

 
908

Cash payments
 
(5,037
)
 
(1,968
)
 
(7,005
)
Adjustments
 

 
(1,976
)
 
(1,976
)
Balance, January 31, 2015
 
$
6,980

 
$
8,748

 
$
15,728

Amounts charged to expense during the three months ended January 31, 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 and EMEA segments. 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 three months ended January 31, 2014, related to certain non-core brands and peripheral product categories that have been discontinued, which are not reflected in the table above.

13



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
 
January 31,
2015
 
October 31,
2014
Lines of credit - 0.8% Floating

October 31, 2016
 
$
31,093

 
$
32,929

2017 Notes - 8.875% Fixed

December 15, 2017
 
225,959

 
252,188

ABL Credit Facility - 2.1% to 4.6% Floating

May 24, 2018
 
39,869

 
35,933

2018 Notes - 7.875% Fixed

August 1, 2018
 
278,894

 
278,834

2020 Notes - 10.000% Fixed

August 1, 2020
 
222,662

 
222,582

Capital lease obligations and other borrowings - Various %

Various
 
4,925

 
6,124

Total debt


 
803,402

 
828,590

Less current portion


 
(33,354
)
 
(35,361
)
Long-term debt, net of current portion


 
$
770,048

 
$
793,229

As of January 31, 2015, the Company’s credit facilities allowed for total cash borrowings and letters of credit of $169 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 January 31, 2015, the Company had a total of $71 million of direct borrowings and $23 million in letters of credit outstanding. As of January 31, 2015, the remaining availability for borrowings under the Company’s credit facilities was $60 million, $48 million of which could also be used for letters of credit in the United States and APAC. In addition to the $60 million of availability for borrowings, the Company also had $15 million in additional capacity for letters of credit in EMEA as of January 31, 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 January 31, 2015 was $715 million, compared to a carrying value of $803 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 January 31, 2015, the Company was hedging a portion of forecasted transactions expected to occur through January 2016. Assuming January 31, 2015 exchange rates remain constant, $20 million of gains, net of tax, related to hedges of these transactions are expected to be reclassified into earnings over the next 12 months. For additional information of the gains/losses related to hedging, see Note 14 — Accumulated Other Comprehensive Income.

14



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/(losses) of $3 million and $(0.2) million for the three months ended January 31, 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 January 31, 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
 
$
216,104

 
February 2015 – January 2016
 
$
30,994

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 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
 
Assets/(Liabilities)
In thousands
 
Level 1
 
Level 2
 
Level 3
 
At Fair Value
January 31, 2015:
 
 
Derivative assets:
 
 
 
 
 
 
 
 
Other receivables
 
$

 
$
30,994

 
$

 
$
30,994

Total fair value
 
$

 
$
30,994

 
$

 
$
30,994

 
 
 
 
 
 
 
 
 
October 31, 2014:
 
 
Derivative assets:
 
 
 
 
 
 
 
 
Other receivables
 
$

 
$
16,683

 
$

 
$
16,683

Derivative liabilities:
 
 
 
 
 
 
 
 
Accrued liabilities
 

 
(2
)
 

 
(2
)
Total fair value
 
$

 
$
16,681

 
$

 
$
16,681


15



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

 
$
2,358

 
$
56,234

Stock-based compensation expense
 
1,769

 

 
1,769

Employee stock purchase plan
 
374

 

 
374

Business disposition
 

 
(1,570
)
 
(1,570
)
Net loss and other comprehensive loss
 
(29,389
)
 
(788
)
 
(30,177
)
Balance, January 31, 2015
 
$
26,630

 
$

 
$
26,630

 
 
 
 
 
 
 
Balance, October 31, 2013
 
$
366,247

 
$
17,952

 
$
384,199

Stock-based compensation expense
 
5,063

 

 
5,063

Exercise of stock options
 
2,465

 

 
2,465

Employee stock purchase plan
 
673

 

 
673

Transactions with non-controlling interest holders
 
(10,839
)
 
(5,434
)
 
(16,273
)
Net loss and other comprehensive income
 
1,769

 
(464
)
 
1,305

Balance, January 31, 2014
 
$
365,378

 
$
12,054

 
$
377,432

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

16



Note 14 — Accumulated Other Comprehensive Income
The components of accumulated other comprehensive income 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, 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
 
(2,918
)
 

 
(2,918
)
Changes in fair value, net of tax
 
18,442

 
(34,143
)
 
(15,701
)
Balance, January 31, 2015
 
$
19,617

 
$
19,052

 
$
38,669

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

 
$
73,918

Net loss reclassified to COGS
 
186

 

 
186

Changes in fair value, net of tax
 
6,107

 
(20,715
)
 
(14,608
)
Balance, January 31, 2014
 
$
1,702

 
$
57,794

 
$
59,496

Note 15 — Discontinued Operations
One of the elements of the Company’s strategy to improve profitability involves divesting or exiting certain non-core businesses. 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 $38 million during the first quarter 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 $10 million within discontinued operations during the first quarter of fiscal 2014. However, as the Company does not expect to pay income tax after application of available loss carry-forwards, an offsetting income tax benefit was recognized within continuing operations.

17



The operating results of discontinued operations for the three months ended January 31, 2015 and 2014 are as follows:
 
 
Three Months Ended January 31,
In thousands
 
2015
 
2014
Revenues, net
 
$
13,239

 
$
20,162

Income before income taxes
 
6,785

 
48,094

Provision for income taxes
 
53

 
10,477

Income from discontinued operations
 
6,732

 
37,617

Less: net loss attributable to non-controlling interest
 
788

 
103

Income from discontinued operations attributable to Quiksilver, Inc.
 
$
7,520

 
$
37,720

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

18



QUIKSILVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statement of Operations
Three Months Ended January 31, 2015
In thousands
 
Quiksilver, Inc.
 
QS Wholesale,
Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues, net
 
$
116

 
$
71,536

 
$
68,535

 
$
229,897

 
$
(29,230
)
 
$
340,854

Cost of goods sold
 

 
44,052

 
45,091

 
109,077

 
(26,810
)
 
171,410

Gross profit
 
116

 
27,484

 
23,444

 
120,820

 
(2,420
)
 
169,444

Selling, general and administrative expense
 
2,475

 
28,778

 
29,705

 
111,496

 
(1,950
)
 
170,504

Asset impairments
 

 

 

 
255

 

 
255

Operating (loss)/income
 
(2,359
)
 
(1,294
)
 
(6,261
)
 
9,069

 
(470
)
 
(1,315
)
Interest expense, net
 
11,645

 
747

 
(2
)
 
6,012

 

 
18,402

Foreign currency (gain)/loss
 
(158
)
 
(618
)
 
402

 
1,031

 

 
657

Equity in earnings
 
(3,106
)
 
(324
)
 

 

 
3,430

 

(Loss)/income before provision/(benefit) for income taxes
 
(10,740
)
 
(1,099
)
 
(6,661
)
 
2,026

 
(3,900
)
 
(20,374
)
Provision/(benefit) for income taxes
 
30

 
146

 
303

 
(2,563
)
 

 
(2,084
)
(Loss)/income from continuing operations
 
(10,770
)
 
(1,245
)
 
(6,964
)
 
4,589

 
(3,900
)
 
(18,290
)
(Loss)/income from discontinued operations
 

 

 
(2
)
 
6,734

 

 
6,732

Net (loss)/income
 
(10,770
)
 
(1,245
)
 
(6,966
)
 
11,323

 
(3,900
)
 
(11,558
)
Net loss attributable to non-controlling interest
 

 

 

 
788

 

 
788

Net (loss)/income attributable to Quiksilver, Inc.
 
(10,770
)
 
(1,245
)
 
(6,966
)
 
12,111

 
(3,900
)
 
(10,770
)
Other comprehensive loss
 
(18,619
)
 

 

 
(18,619
)
 
18,619

 
(18,619
)
Comprehensive (loss)/income attributable to Quiksilver, Inc.
 
$
(29,389
)
 
$
(1,245
)
 
$
(6,966
)
 
$
(6,508
)
 
$
14,719

 
$
(29,389
)

19



QUIKSILVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statement of Operations
Three Months Ended January 31, 2014
In thousands
 
Quiksilver, 
Inc.
 
QS Wholesale,
Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues, net
 
$
116

 
$
85,536

 
$
98,741

 
$
269,770

 
$
(59,253
)
 
$
394,910

Cost of goods sold
 

 
51,264

 
68,202

 
119,784

 
(44,980
)
 
194,270

Gross profit
 
116

 
34,272

 
30,539

 
149,986

 
(14,273
)
 
200,640

Selling, general and administrative expense
 
9,025

 
55,966

 
22,668

 
121,057

 
(4,932
)
 
203,784

Asset impairments
 

 

 
222

 
661

 

 
883

Operating (loss)/income
 
(8,909
)
 
(21,694
)
 
7,649

 
28,268

 
(9,341
)
 
(4,027
)
Interest expense, net
 
11,600

 
1,010

 

 
6,810

 

 
19,420

Foreign currency loss/(gain)
 
36

 
(10
)
 
(224
)
 
3,026

 

 
2,828

Equity in earnings
 
(35,932
)
 
74

 

 

 
35,858

 

Income/(loss) before (benefit)/provision for income taxes
 
15,387

 
(22,768
)
 
7,873

 
18,432

 
(45,199
)
 
(26,275
)
(Benefit)/provision for income taxes
 

 
(6,169
)
 
(3,945
)
 
5,729

 

 
(4,385
)
Income/(loss) from continuing operations
 
15,387

 
(16,599
)
 
11,818

 
12,703

 
(45,199
)
 
(21,890
)
Income from discontinued operations
 

 
23,922

 
13,531

 
164

 

 
37,617

Net income
 
15,387

 
7,323

 
25,349

 
12,867

 
(45,199
)
 
15,727

Net income attributable to non-controlling interest
 

 

 

 
464

 

 
464

Net income attributable to Quiksilver, Inc.
 
15,387

 
7,323

 
25,349

 
13,331

 
(45,199
)
 
16,191

Other comprehensive loss
 
(14,422
)
 

 

 
(14,422
)
 
14,422

 
(14,422
)
Comprehensive income/(loss) attributable to Quiksilver, Inc.
 
$
965

 
$
7,323

 
$
25,349

 
$
(1,091
)
 
$
(30,777
)
 
$
1,769




20



QUIKSILVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Balance Sheet
January 31, 2015
In thousands
 
Quiksilver, 
Inc.
 
QS Wholesale,
Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
157

 
$
17,392

 
$
(4,353
)
 
$
47,460

 
$

 
$
60,656

Restricted cash
 

 

 

 
1,745

 

 
1,745

Trade accounts receivable, net
 

 
44,120

 
22,138

 
192,694

 

 
258,952

Other receivables
 
10

 
2,185

 
1,476

 
47,459

 
(29
)
 
51,101

Inventories
 

 
33,719

 
75,499

 
218,634

 
(21,733
)
 
306,119

Deferred income taxes
 

 
21,554

 

 
4,533

 
(21,554
)
 
4,533

Prepaid expenses and other current assets
 
1,593

 
8,705

 
3,039

 
17,978

 

 
31,315

Intercompany balances
 

 
256,475

 

 

 
(256,475
)
 

Total current assets
 
1,760

 
384,150

 
97,799

 
530,503

 
(299,791
)
 
714,421

Restricted cash
 

 

 

 
3,918

 

 
3,918

Fixed assets, net
 
19,754

 
32,336

 
21,783

 
120,234

 

 
194,107

Intangible assets, net
 
8,533

 
43,655

 
1,109

 
83,868

 

 
137,165

Goodwill
 

 
61,983

 
11,089

 
6,733

 

 
79,805

Other assets
 
6,682

 
4,955

 
916

 
27,393

 

 
39,946

Deferred income taxes long-term
 
30,807

 

 
2,052

 
14,352

 
(32,859
)
 
14,352

Investment in subsidiaries
 
728,200

 
1,849

 

 

 
(730,049
)
 

Total assets
 
$
795,736

 
$
528,928

 
$
134,748

 
$
787,001

 
$
(1,062,699
)
 
$
1,183,714

LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Lines of credit
 
$

 
$

 
$

 
$
31,093

 
$

 
$
31,093

Accounts payable
 
2,373

 
36,163

 
18,760

 
116,794

 

 
174,090