10-Q 1 zqk0731201510q.htm 10-Q 10-Q

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 July 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 September 9, 2015 was 172,114,522.



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




PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
QUIKSILVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
 
Three Months Ended July 31,
 
Nine Months Ended July 31,
In thousands, except per share amounts
 
2015
 
2014
 
2015
 
2014
Revenues, net
 
$
336,134

 
$
378,215

 
$
1,010,040

 
$
1,170,066

Cost of goods sold
 
174,742

 
197,144

 
522,406

 
594,065

Gross profit
 
161,392

 
181,071

 
487,634

 
576,001

Selling, general and administrative expense
 
165,923

 
205,374

 
511,606

 
617,079

Goodwill impairment
 
79,583

 
178,197

 
79,583

 
178,197

Asset impairments
 
17,395

 
180

 
18,353

 
5,646

Operating loss
 
(101,509
)
 
(202,680
)
 
(121,908
)
 
(224,921
)
Interest expense, net
 
18,001

 
18,717

 
54,443

 
57,359

Foreign currency loss/(gain)
 
4,738

 
(2,328
)
 
2,137

 
1,387

Loss before provision/(benefit) for income taxes
 
(124,248
)
 
(219,069
)
 
(178,488
)
 
(283,667
)
Provision/(benefit) for income taxes
 
464

 
(760
)
 
2,108

 
(5,588
)
Loss from continuing operations
 
(124,712
)
 
(218,309
)
 
(180,596
)
 
(278,079
)
(Loss)/income from discontinued operations, net of tax (includes net gain on sale of businesses of $6,580 and $30,833 for the nine months ended 2015 and 2014, respectively)
 

 
(4,376
)
 
6,732

 
10,260

Net loss
 
(124,712
)
 
(222,685
)
 
(173,864
)
 
(267,819
)
Less: net loss attributable to non-controlling interest
 

 
2,093

 
788

 
10,294

Net loss attributable to Quiksilver, Inc.
 
$
(124,712
)
 
$
(220,592
)
 
$
(173,076
)
 
$
(257,525
)
Loss per share from continuing operations attributable to Quiksilver, Inc.
 
$
(0.73
)
 
$
(1.28
)
 
$
(1.05
)
 
$
(1.63
)
(Loss)/income per share from discontinued operations attributable to Quiksilver, Inc.
 
$
0.00

 
$
(0.01
)
 
$
0.04

 
$
0.12

Net loss per share attributable to Quiksilver, Inc.
 
$
(0.73
)
 
$
(1.29
)
 
$
(1.01
)
 
$
(1.51
)
Loss per share from continuing operations attributable to Quiksilver, Inc., assuming dilution
 
$
(0.73
)
 
$
(1.28
)
 
$
(1.05
)
 
$
(1.63
)
(Loss)/income per share from discontinued operations attributable to Quiksilver, Inc., assuming dilution
 
$
0.00

 
$
(0.01
)
 
$
0.04

 
$
0.12

Net loss per share attributable to Quiksilver, Inc., assuming dilution
 
$
(0.73
)
 
$
(1.29
)
 
$
(1.01
)
 
$
(1.51
)
Weighted average common shares outstanding, basic
 
171,644

 
170,794

 
171,343

 
170,337

Weighted average common shares outstanding, diluted
 
171,644

 
170,794

 
171,343

 
170,337

Amounts attributable to Quiksilver, Inc.:
 
 
 
 
 
 
 
 
Loss from continuing operations
 
$
(124,712
)
 
$
(218,309
)
 
$
(180,596
)
 
$
(277,718
)
(Loss)/income from discontinued operations, net of tax
 

 
(2,283
)
 
7,520

 
20,193

Net loss
 
$
(124,712
)
 
$
(220,592
)
 
$
(173,076
)
 
$
(257,525
)
See Notes to Condensed Consolidated Financial Statements.

1


QUIKSILVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
 
 
Three Months Ended July 31,
 
Nine Months Ended July 31,
In thousands
 
2015
 
2014
 
2015
 
2014
Net loss
 
$
(124,712
)
 
$
(222,685
)
 
$
(173,864
)
 
$
(267,819
)
Other comprehensive (loss)/income:
 
 
 
 
 
 
 
 
Foreign currency translation adjustment
 
(11,459
)
 
(738
)
 
(44,367
)
 
(11,311
)
Reclassification adjustment for realized loss on derivative instruments transferred to earnings, net of tax (benefit) for the three months of 2015 and 2014, of $(461) and $(92), respectively, and $(1,098) and $(126) for the nine months of 2015 and 2014, respectively
 
(6,031
)
 
690

 
(16,597
)
 
(367
)
Net unrealized gain/(loss) on derivative instruments, net of tax provision of $579 and $6,002 for the three months of 2015 and 2014, respectively, and $1,726 and $5,913 for the nine months of 2015 and 2014, respectively
 
7,354

 
(1,753
)
 
28,057

 
1,136

Comprehensive loss
 
(134,848
)
 
(224,486
)
 
(206,771
)
 
(278,361
)
Comprehensive loss attributable to non-controlling interest
 

 
2,093

 
788

 
10,294

Comprehensive loss attributable to Quiksilver, Inc.
 
$
(134,848
)
 
$
(222,393
)
 
$
(205,983
)
 
$
(268,067
)
See Notes to Condensed Consolidated Financial Statements.

2


QUIKSILVER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
In thousands, except share and per share amounts
 
July 31,
2015
 
October 31,
2014
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
60,904

 
$
46,664

Restricted cash
 
6,373

 
4,687

Trade accounts receivable, less allowances of $44,952 (2015) and $63,991 (2014)
 
218,962

 
311,014

Other receivables
 
35,487

 
40,847

Income taxes receivable
 
10,444

 

Inventories
 
338,432

 
284,517

Deferred income taxes - current
 
4,614

 
4,926

Prepaid expenses and other current assets
 
28,792

 
28,080

Current portion of assets held for sale
 

 
20,265

Total current assets
 
704,008

 
741,000

Restricted cash
 
1,250

 
16,514

Fixed assets, less accumulated depreciation and amortization of $218,333 (2015) and $220,888 (2014)
 
181,329

 
213,768

Intangible assets, net
 
121,841

 
135,510

Goodwill
 

 
80,622

Other assets
 
37,907

 
47,086

Deferred income taxes long-term
 
13,844

 
16,088

Assets held for sale, net of current portion
 

 
5,394

Total assets
 
$
1,060,179

 
$
1,255,982

LIABILITIES AND EQUITY/(DEFICIT)
 
 
 
 
Current liabilities:
 
 
 
 
Lines of credit
 
$
26,505

 
$
32,929

Accounts payable
 
202,422

 
168,307

Accrued liabilities
 
103,752

 
112,701

Long-term debt reclassified to current (See Note 10)
 
791,077

 

Current portion of long-term debt
 
2,190

 
2,432

Income taxes payable
 
9,746

 
1,124

Deferred income taxes - current
 
19,152

 
19,628

Current portion of assets held for sale
 

 
13,266

Total current liabilities
 
1,154,844

 
350,387

Long-term debt, net of current portion
 
2,461

 
793,229

Income taxes payable long-term
 
7,133

 
8,683

Other long-term liabilities
 
24,792

 
30,659

Deferred income taxes long-term
 
19,347

 
16,790

Total liabilities
 
1,208,577

 
1,199,748

Equity/(Deficit):
 
 
 
 
Preferred stock, $0.01 par value, authorized shares - 5,000,000; issued and outstanding shares - none
 

 

Common stock, $0.01 par value, authorized shares - 285,000,000; issued shares - 174,999,722 (2015) and 174,057,410 (2014)
 
1,750

 
1,741

Additional paid-in capital
 
592,732

 
589,032

Treasury stock, 2,885,200 shares
 
(6,778
)
 
(6,778
)
Accumulated deficit
 
(760,483
)
 
(587,407
)
Accumulated other comprehensive income
 
24,381

 
57,288

Total Quiksilver, Inc. stockholders’ equity/(deficit)
 
(148,398
)
 
53,876

Non-controlling interest
 

 
2,358

Total equity/(deficit)
 
(148,398
)
 
56,234

Total liabilities and equity/(deficit)
 
$
1,060,179

 
$
1,255,982

See Notes to Condensed Consolidated Financial Statements.

3


QUIKSILVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Nine Months Ended July 31,
In thousands
 
2015
 
2014
Cash flows from operating activities:
 
 
 
 
Net loss
 
$
(173,864
)

$
(267,819
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
 
Income from discontinued operations
 
(6,732
)
 
(10,260
)
Depreciation and amortization
 
30,366

 
39,864

Stock-based compensation
 
3,122

 
15,810

Provision for doubtful accounts
 
4,843

 
19,834

Loss/(gain) on disposal of fixed assets
 
345

 
(4,899
)
Unrealized foreign currency (gain)/loss
 
(1,984
)
 
820

Goodwill impairment
 
79,583

 
178,197

Asset impairments
 
18,353

 
5,646

Non-cash interest expense
 
2,691

 
2,656

Equity in earnings
 
596

 
907

Deferred income taxes
 
(6,513
)
 
(1,032
)
Subtotal of non-cash reconciling adjustments
 
124,670

 
247,543

Changes in operating assets and liabilities:
 
 
 
 
Trade accounts receivable
 
63,838

 
65,535

Other receivables
 
(381
)
 
(2,985
)
Inventories
 
(71,307
)
 
(1,535
)
Prepaid expenses and other current assets
 
(4,224
)
 
(8,260
)
Other assets
 
202

 
2,149

Accounts payable
 
57,500

 
(4,114
)
Accrued liabilities and other long-term liabilities
 
(6,068
)
 
(9,481
)
Income taxes payable
 
(2,786
)
 
(5,237
)
Subtotal of changes in operating assets and liabilities
 
36,774


36,072

Cash (used in)/provided by operating activities of continuing operations
 
(12,420
)
 
15,796

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

 
(16,011
)
Net cash used in operating activities
 
(7,752
)
 
(215
)
Cash flows from investing activities:
 
 
 
 
Capital expenditures
 
(29,110
)
 
(38,516
)
Proceeds from sale of property
 
460

 
5,354

Changes in restricted cash
 
13,578

 
(23,897
)
Cash used in investing activities of continuing operations
 
(15,072
)
 
(57,059
)
Cash provided by investing activities of discontinued operations
 
10,713

 
77,052

Net cash (used in)/provided by investing activities
 
(4,359
)
 
19,993

Cash flows from financing activities:
 
 
 
 
Borrowings on lines of credit
 
53,004

 
100,523

Payments on lines of credit
 
(55,098
)
 
(95,939
)
Borrowings on long-term debt
 
93,958

 
86,972

Payments on long-term debt
 
(58,574
)
 
(90,552
)
Stock option exercises and employee stock purchases
 
587

 
5,824

Payments of debt issuance costs
 

 
(123
)
Cash provided by financing activities of continuing operations
 
33,877

 
6,705

Net cash provided by financing activities
 
33,877

 
6,705

Effect of exchange rate changes on cash
 
(7,526
)
 
198

Net increase in cash and cash equivalents
 
14,240

 
26,681

Cash and cash equivalents, beginning of period
 
46,664

 
57,280

Cash and cash equivalents, end of period
 
$
60,904

 
$
83,961

Supplementary cash flow information:
 
 
 
 
Cash paid during the period for:
 
 
 
 
Interest
 
$
45,622

 
$
51,347

Income taxes paid
 
$
5,657

 
$
13,211

Summary of significant non-cash transactions:
 
 
 
 
Capital expenditures accrued at period end (investing activities)
 
$
1,167

 
$
5,168

Debt issued for purchase of non-controlling interest (financing activities)
 
$

 
$
17,388

See Notes to Condensed Consolidated Financial Statements.

4


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Note 1 — Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America ("GAAP") for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statement presentation.
Quiksilver, Inc. and its subsidiaries (the “Company”) has included all adjustments, consisting only of normal and recurring adjustments, necessary for a fair presentation of the results of operations for all periods presented. The Company's fiscal year ends on October 31 (for example, “fiscal 2015” refers to the year ending October 31, 2015). The condensed consolidated financial statements and notes thereto should be read in conjunction with the audited financial statements and notes thereto for the fiscal year ended October 31, 2014 included in the Company’s most recent Annual Report on Form 10-K. Interim results are not necessarily indicative of results for the full year.
Principles of Consolidation
The consolidated financial statements include the accounts of Quiksilver, Inc. and its subsidiaries. All intercompany transactions and balances have been eliminated.
The Company completed the sale of Mervin Manufacturing, Inc. ("Mervin") and substantially all of the assets of Hawk Designs, Inc. ("Hawk") during the first quarter of fiscal 2014. In December 2014, the Company sold its majority stake in Surfdome Shop, Ltd. ("Surfdome"). As a result, the Company reported the operating results of Mervin, Hawk and Surfdome in "Income from discontinued operations, net of tax" in its condensed consolidated statements of operations for all periods presented. In addition, the assets and liabilities associated with these businesses are reported as discontinued operations in the condensed consolidated balance sheets (see Note 15 — Discontinued Operations). Unless otherwise indicated, the disclosures accompanying the condensed consolidated financial statements reflect the Company's continuing operations.
Voluntary Reorganization under Chapter 11
On September 9, 2015, Quiksilver and each of its ten wholly owned U.S. subsidiaries, (together with Quiksilver, the “Debtors”), filed voluntary petitions (the "Petitions") in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) for relief under chapter 11 of the United States Bankruptcy Code. The Debtors will continue to operate as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court. The Company's foreign subsidiaries are not directly affected by the Petitions and none are expected to voluntarily commence reorganization proceedings or seek protection from creditors under any insolvency or similar law in the U.S. or elsewhere.
Contemporaneously with the filing of the Petitions, the Company also entered into a Plan Sponsor Agreement (the "PSA") with certain investment funds managed by affiliates of Oaktree Capital Management, L.P. ("Oaktree"), which if implemented per the terms, would provide a plan for the Debtors to emerge from bankruptcy as a going concern. The Company can offer no assurance that it will be able to continue as a going concern or obtain the Bankruptcy Court approval of its plan of reorganization. In addition, the Company can offer no assurance that it will be able to develop and successfully execute its plan of reorganization. The PSA provides for a significant reduction in the Company's outstanding debt and provides for new debtor-in possession financing. For further information on the contemplated restructuring of the Company's capital and debt structure in conjunction with the Petitions, see Note 18 — Subsequent Event - Voluntary Reorganization under Chapter 11.
The accompanying condensed consolidated financial statements presented herein reflect the financial position, results of operations and cash flows of Quiksilver, and have been prepared on the basis of a going concern, although the events leading up to the chapter 11 filing and the chapter 11 bankruptcy proceedings create substantial doubt about the Company's ability to meet its debt obligations as they become due or the Bankruptcy Court confirms a substantially different plan of reorganization. The filing of the Petitions created defaults and cross defaults pursuant to the terms of the Company’s significant credit agreements, which accelerated the due dates for the obligations. As a result, in accordance with the Financial Accounting Standards Board (the "FASB") Accounting Standards Codification ("ASC") Topic 470 - Debt, the Company has presented substantially all of its outstanding debt as of July 31, 2015 as a current liability on its condensed consolidated balance sheet. See Note 10 — Debt for additional information.
The accompanying condensed consolidated financial statements do not include any other adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the outcome of these uncertainties related to the Petitions and the Company's ability to emerge from the bankruptcy

5


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

proceedings as a going concern. The condensed consolidated financial statements do not purport to reflect or provide for the consequences of the Petitions, including the accounting requirements under the FASB ASC Topic 852, Reorganizations (“ASC 852”). As a result, the condensed consolidated financial statements do not segregate liabilities subject to compromise in the condensed consolidated balance sheets and reorganization items are not disclosed in the condensed consolidated statements of operations. Additionally, the condensed consolidated financial statements do not reflect any of the fresh-start reporting adjustments required by ASC 852, which will be required if the Company emerges from the bankruptcy.
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
ASC 820, Fair Value Measurements and Disclosures, 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).
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.

6


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 2 — New Accounting Pronouncements
Accounting Standards Adopted
In November 2014, 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 consolidated financial statements and related 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 consolidated financial statements and related 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) 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. The Company is currently evaluating the impact that this amended guidance will have on its consolidated financial statements and related disclosures. In July 2015, the FASB reached a decision to defer the effective date of the amended guidance. In August 2015, ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, was issued which defers the effective date of ASU 2014-09 to December 15, 2017. Early adoption is not permitted.
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

7


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

for the Company beginning with fiscal year 2017. Early adoption is permitted. The Company is currently evaluating the impact that this amended guidance will have on its consolidated financial statements and related disclosures.
In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, which will require an entity’s management to assess whether they should consolidate certain legal entities. The guidance will be effective for the Company beginning with fiscal year 2017. Early adoption is permitted. The Company is currently evaluating the impact that this amended guidance will have on its consolidated financial statements and related disclosures.
In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issue Costs, which will require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. The guidance will be effective for the Company beginning with fiscal year 2017. Early adoption is permitted. The guidance impacts disclosures only. The Company does not expect the impact of this amended guidance to have a material effect on its consolidated financial statements and related disclosures.
In April 2015, the FASB issued ASU 2015-05, Intangibles - Goodwill and Other Internal-Use Software (Subtopic 350-40): Customer's Accounting for Fees Paid in a Cloud Computing Arrangement, which will require an entity’s management to assess, for each annual and interim period, whether a cloud computing arrangement includes a software license. All software licenses within the scope of Subtopic 350-40 will be accounted for consistent with other licenses of intangible assets. If the arrangement does not include a software license, the arrangement should be accounted for as a service contract. The guidance will be effective for the Company beginning with fiscal year 2017. Early adoption is permitted. The Company is currently evaluating the impact that this amended guidance will have on its consolidated financial statements and related disclosures.
In May 2015, the FASB issued ASU 2015-08, Business Combinations (Topic 805): Pushdown Accounting-Amendments to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 115, which supersedes several paragraphs in ASC 805-50 in response to the November 2014 publication of Staff Accounting Bulletin ("SAB") No. 115 by the Securities Exchange Commission (the "SEC"). The SEC issued SAB No. 115 in connection with the release of the FASB's ASU No. 2014-17, Pushdown Accounting. The guidance is effective immediately and had no impact on the Company's consolidated financial statements and related disclosures.
In June 2015, the FASB issued ASU 2015-10, Technical Corrections and Improvements (Topic 330), which will affect a wide variety of Topics in the FASB's Accounting Standards Codification (the "ASC"). The amendments in this Update represent changes to clarify the ASC, correct unintended application of guidance, or make minor improvements to the ASC that are not expected to have a significant effect on current accounting practice. The amendments in this Update that require transition guidance are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. All other amendments became effective upon issuance. Early adoption is permitted, including adoption in an interim period. The Company does not expect the impact of this amended guidance to have a material effect on its consolidated financial statements and related disclosures.
In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330) - Simplifying the Measurement of Inventory, which will require an entity to measure inventory at the lower of cost or net realizable value. Net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The guidance will be effective for the Company beginning with fiscal year 2018. 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 certain gross profits earned from the Company’s licensees.

8


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Information related to the Company's operating segments, all from continuing operations, is as follows:
 
 
Three Months Ended July 31,
 
Nine Months Ended July 31,
In thousands
 
2015
 
2014
 
2015
 
2014
Revenues, net:
 
 
 
 
 
 
 
 
Americas
 
$
159,754

 
$
189,556

 
$
467,508

 
$
551,266

EMEA
 
115,812

 
126,914

 
357,417

 
427,194

APAC
 
59,197

 
61,658

 
182,071

 
191,254

Corporate Operations
 
1,371

 
87

 
3,044

 
352

Total
 
$
336,134

 
$
378,215

 
$
1,010,040

 
$
1,170,066

Gross profit/(loss):
 
 
 
 
 
 
 
 
Americas
 
$
68,942

 
$
76,353

 
$
200,447

 
$
231,176

EMEA
 
62,619

 
72,062

 
193,023

 
241,635

APAC
 
33,557

 
35,025

 
100,301

 
105,246

Corporate Operations
 
(3,726
)
 
(2,369
)
 
(6,137
)
 
(2,056
)
Total
 
$
161,392

 
$
181,071

 
$
487,634

 
$
576,001

SG&A expense(1):
 
 
 
 
 
 
 
 
Americas
 
$
73,554

 
$
88,929

 
$
222,087

 
$
275,191

EMEA
 
62,626

 
71,606

 
190,181

 
225,529

APAC
 
31,353

 
43,888

 
98,457

 
111,340

Corporate Operations
 
(1,610
)
 
951

 
881

 
5,019

Total
 
$
165,923

 
$
205,374

 
$
511,606

 
$
617,079

Goodwill impairments:
 
 
 
 
 
 
 
 
Americas
 
$
73,376

 
$

 
$
73,376

 
$

EMEA
 

 
178,197

 

 
178,197

APAC
 
6,207

 

 
6,207

 

Corporate Operations
 

 

 

 

Total
 
$
79,583

 
$
178,197

 
$
79,583

 
$
178,197

Asset impairments:
 
 
 
 
 
 
 
 
Americas
 
$
868

 
$
338

 
$
1,410

 
$
4,751

EMEA
 
16,527

 
(158
)
 
16,943

 
895

APAC
 

 

 

 

Corporate Operations
 

 

 

 

Total
 
$
17,395

 
$
180

 
$
18,353

 
$
5,646

Operating loss:
 
 
 
 
 
 
 
 
Americas
 
$
(78,856
)
 
$
(12,914
)
 
$
(96,426
)
 
$
(48,766
)
EMEA
 
(16,534
)
 
(177,583
)
 
(14,101
)
 
(162,986
)
APAC
 
(4,003
)
 
(8,863
)
 
(4,363
)
 
(6,094
)
Corporate Operations
 
(2,116
)
 
(3,320
)
 
(7,018
)
 
(7,075
)
Total
 
$
(101,509
)
 
$
(202,680
)
 
$
(121,908
)
 
$
(224,921
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

9


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 
 
Three Months Ended July 31,
 
Nine Months Ended July 31,
In thousands
 
2015
 
2014
 
2015
 
2014
Depreciation and amortization expense:
 
 
 
 
 
 
 
 
Americas
 
$
3,928

 
$
7,065

 
$
11,863

 
$
17,598

EMEA
 
3,324

 
4,368

 
10,256

 
13,129

APAC
 
1,603

 
2,095

 
5,092

 
5,908

Corporate Operations
 
818

 
729

 
2,319

 
1,988

Total
 
$
9,673

 
$
14,257

 
$
29,530

 
$
38,623

Interest expense:
 
 
 
 
 
 
 
 
Americas
 
$
759

 
$
509

 
$
2,432

 
$
1,738

EMEA
 
3,825

 
4,728

 
11,880

 
14,247

APAC
 
575

 
360

 
1,559

 
1,488

Corporate Operations
 
12,842

 
13,120

 
38,572

 
39,886

Total
 
$
18,001

 
$
18,717

 
$
54,443

 
$
57,359

(1)
SG&A expense by segment for the three and nine months ended July 31, 2014 has been reclassified to conform to the current year presentation, which reflects the Company's centralization of certain global business functions and related transfer pricing allocations.
In thousands
 
July 31,
2015
 
October 31, 2014
Identifiable assets:
 
 
 
 
Americas
 
$
380,722

 
$
464,831

EMEA
 
423,862

 
513,303

APAC
 
198,306

 
202,225

Corporate Operations
 
57,289

 
75,623

Total
 
$
1,060,179

 
$
1,255,982


Note 4 — Earnings per Share and Stock-based Compensation
Voluntary Reorganization under Chapter 11
If the terms of the PSA are implemented, new common shares will be issued to holders of the 7.875% Senior Secured Notes due in 2018 (the "2018 Notes"), and all of the Company’s existing equity securities, including its shares of common stock and warrants, will be cancelled and extinguished without holders receiving any distribution. In addition, pursuant to the PSA, new common shares will be offered to holders of the 2018 Notes in a $122.5 million rights offering and a €50 million rights offering, each of which would be backstopped by Oaktree. For further information on the contemplated restructuring of the Company's capital and debt structure in conjunction with the Petitions, see Note 18 — Subsequent Event - Voluntary Reorganization under Chapter 11.
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.

10


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The table below sets forth the reconciliation of the denominator of each net loss/income per share calculation for the three and nine months ended July 31, 2015 and 2014:
 
 
Three Months Ended July 31,
 
Nine Months Ended July 31,
In thousands
 
2015
 
2014
 
2015
 
2014
Shares used in computing basic net loss/income per share
 
171,644

 
170,794

 
171,343

 
170,337

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
 
171,644

 
170,794

 
171,343

 
170,337

(1)
For the third quarter of fiscal 2015 and 2014, the number of shares used in computing diluted net loss per share do not include 186,000 and 1,572,000, respectively, of stock options and restricted stock because they were anti-dilutive as a result of the Company’s net loss from continuing operations. For the third quarter of fiscal 2014, the number of shares used in computing diluted net loss per share do not include 14,950,000 of warrant shares because they were anti-dilutive as a result of the Company’s net loss from continuing operations.
The following securities could potentially dilute earnings per share in the future. For the third quarter of fiscal 2015 and 2014, certain stock options outstanding of 5,720,000 and 4,660,000, respectively, were excluded from the calculation of diluted weighted-average shares outstanding as the exercise prices were greater than the average market price of the Company's common stock for those periods. Outstanding warrants to purchase 25,654,000 shares of common stock were excluded from the calculation of diluted weighted-average shares outstanding for the three months ended July 31, 2015, as the exercise price was greater than the average market price of the Company's common stock for that period.
For the first nine months of fiscal 2015 and 2014, the number of shares used in computing diluted net loss per share do not include 349,000 and 2,922,000, respectively, of stock options and restricted stock because they were anti-dilutive as a result of the Company’s net loss from continuing operations. For the first nine months of fiscal 2014, the number of shares used in computing diluted net loss per share do not include 18,490,000 of warrant shares because they were anti-dilutive as a result of the Company’s net loss from continuing operations.
The following securities could potentially dilute earnings per share in the future. For the first nine months of fiscal 2015 and 2014, certain stock options outstanding of 6,229,000 and 1,152,000, respectively, were excluded from the calculation of diluted weighted-average shares outstanding as the exercise prices were greater than the average market price of the Company's common stock for those periods. Outstanding warrants to purchase 25,654,000 shares of common stock were excluded from the calculation of diluted weighted-average shares outstanding for the nine months ended July 31, 2015, as the exercise price was greater than the average market price of the Company's common stock for that period.
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 nine months ended July 31, 2015 and 2014 was $1.84 and $5.16, respectively. There were no performance-based options granted in the nine months of fiscal 2015 or 2014.

11


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

 
10,218,508

Granted
 

 
1,844,000

Exercised
 

 

Canceled
 
(124,000
)
 
(2,296,080
)
Outstanding, July 31, 2015
 
516,000

 
9,766,428

As of July 31, 2015, 298,000 of the 516,000 outstanding performance-based stock options were exercisable and none of the performance-based restricted stock units were vested. As of July 31, 2015, the Company had unrecognized compensation expense, net of estimated forfeitures, of approximately $0.1 million related to the performance-based stock options and approximately $2.7 million related to the performance-based restricted stock units, which are not expected to vest. The unrecognized compensation expense related to the performance-based stock options is expected to be recognized over a weighted average period of approximately 1 year.
For non-performance-based stock options, the Company uses the Black-Scholes option-pricing model to value compensation expense. Forfeitures are estimated at the date of grant based on historical rates and reduce the compensation expense recognized. The expected term of stock options granted is derived from historical data on employee exercises. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the date of grant. Expected volatility is based on the historical volatility of the Company’s stock. For the first nine months of fiscal 2015 and 2014, non-performance based options granted were valued assuming a risk free interest rate of 2.0% and 2.2%, respectively, volatility of 82% and 81%, respectively, zero dividend yields and an expected life of 6.6 years and 6.7 years, respectively. The weighted average fair value of the grants was $0.64 and $5.82 for the first nine months of fiscal 2015 and 2014, respectively. The Company records stock-based compensation expense using the graded vested method over the vesting period, which is generally three years. As of July 31, 2015, the Company had approximately $5.9 million of unrecognized compensation expense for non-performance-based stock options expected to be recognized over a weighted average period of approximately 1.9 years.
Changes in shares underlying stock options, excluding performance-based stock options, for the nine months ended July 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
 
9,990,000

 
0.88

 
 
 
 
Exercised
 

 

 
 
 


Canceled
 
(1,770,458
)
 
5.74

 
 
 
 
Outstanding, July 31, 2015
 
15,037,151

 
$
1.96

 
8.0
 
$

Options exercisable, July 31, 2015
 
5,093,817

 
$
3.81

 
4.5
 
$

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

 
$
4.18

Granted
 
9,990,000

 
0.64

Vested
 
(984,668
)
 
2.87

Canceled
 
(183,334
)
 
5.20

Non-vested, July 31, 2015
 
9,943,334

 
$
0.73


12


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The Company may also grant restricted stock and non-performance based restricted stock units under its 2013 Performance Incentive Plan. Restricted stock issued under this plan generally vests in three years while non-performance based restricted stock units issued under this plan generally vest upon the completion of a requisite service period. Vesting of a prorated portion of restricted stock unit awards granted to our former chief executive officer in lieu of a cash annual salary was accelerated in the second quarter of fiscal 2015 upon his departure. Changes in restricted stock and restricted stock units for the nine months ended July 31, 2015 were as follows:
 
 
Restricted Stock
 
Restricted Stock Units
Outstanding, October 31, 2014
 
175,000

 

Granted
 
105,000

 
675,676

Vested
 
(80,000
)
 
(281,532
)
Forfeited
 
(25,000
)
 
(394,144
)
Outstanding, July 31, 2015
 
175,000

 

The fair value of restricted stock is determined using the intrinsic value method on the grant date. Forfeitures are estimated at the date of grant based on historical rates and reduce the compensation expense recognized. The Company monitors the probability of meeting the restricted stock performance criteria, if any, and adjusts the amortization period as appropriate. As of July 31, 2015, there had been no acceleration of amortization periods and the Company had approximately $0.3 million of unrecognized compensation expense expected to be recognized over a weighted average period of approximately 1.4 years.
Note 5 — Restricted Cash
The Company’s restricted cash balance, including both current and non-current portions, was $8 million at July 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 July 31, 2015 included $1 million of the remaining proceeds from the sale of the Surfdome business in the first quarter of fiscal 2015, which is subject to these restrictions. Consequently, since the restricted cash is required to be invested in long-term assets or to repay long-term debt, it is reflected as a long-term asset. The Company expects to utilize these remaining proceeds during fiscal 2015.
Note 6 — Inventories
Inventories consisted of the following as of the dates indicated:
In thousands
 
July 31,
2015
 
October 31,
2014
Raw materials
 
$
2,075

 
$
3,524

Work in-process
 
474

 
467

Finished goods
 
335,883

 
280,526

Total
 
$
338,432

 
$
284,517

Note 7 — Intangible Assets and Goodwill
The Company performs its annual goodwill impairment test during the fourth fiscal quarter. As of October 31, 2014, the fair value of each of its reporting units substantially exceeded their respective carrying values. However, certain factors may result in the need to perform an impairment test prior to the fourth fiscal quarter, including significant under-performance of the Company’s business relative to expected operating results, significant adverse economic and industry trends, a significant decline in the Company’s market capitalization for an extended period of time relative to net book value, or a decision to divest an individual business within a reporting unit. In connection with the preparation of the Company’s financial statements for the third quarter of fiscal 2015, the Company concluded that the significant decline in the Company’s stock price, lowered market prices on its 7.875% Senior Secured Notes due 2018, 10.000% Senior Notes due 2020 and 8.875% Notes due 2017, and the decline in net sales, especially within the wholesale channel, were indicators of impairment. Consequently, the Company performed a two-step interim goodwill impairment test and an intangible asset impairment test using a discounted cash flow analysis to evaluate whether the carrying value of each of its reporting units exceeded its fair value. Based upon the results of step 1, which indicated that the carrying value of the reporting units exceeded their fair value, the Company completed step 2 of the goodwill impairment test, which measures the amount of the goodwill impaired. Based upon its evaluation of the results of

13


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

the interim goodwill impairment test, the Company recorded non-cash goodwill impairment charges in the third quarter of fiscal 2015 of $74 million and $6 million to fully impair goodwill in its Americas and APAC reporting units, respectively.
The Company utilized the income approach and the market approach to estimate the fair value of its indefinite-lived intangible assets. During the third quarter of fiscal 2015, based upon the results of its interim impairment evaluation of long-lived assets other than goodwill, the Company recorded a non-cash asset impairment charge of $16 million in the EMEA reporting unit to reduce the Quiksilver trademark to fair value. The fair value of the Quiksilver trademark in the APAC region exceeded the carrying value by 4%. The fair value of the trademarks in the Americas reporting unit exceeded their carrying value by a substantial amount. Changes in estimates and assumptions used to determine whether impairment exists or changes in actual results compared to expected results could result in additional impairment charges in future periods.
During the third quarter of fiscal 2014, the Company performed an interim impairment test for the EMEA reporting unit due to the significant decline in the Company's stock price and further net revenue deterioration in the EMEA wholesale channel. The results of this impairment evaluation resulted in a non-cash charge of $178 million to fully impair goodwill associated with the EMEA reporting unit.
Intangible Assets
Intangible assets consisted of the following as of the dates indicated:
 
 
July 31, 2015
 
October 31, 2014
In thousands
 
Gross
Amount
 
Accumulated
Amortization
 
Net Book
Value
 
Gross
Amount
 
Accumulated
Amortization
 
Net Book
Value
Non-amortizable trademarks
 
$
108,124

 
$

 
$
108,124

 
$
124,121

 
$

 
$
124,121

Amortizable trademarks
 
24,803

 
(12,898
)
 
11,905

 
21,858

 
(12,508
)
 
9,350

Amortizable licenses
 
9,799

 
(9,799
)
 

 
11,817

 
(11,817
)
 

Other amortizable intangibles
 
8,420

 
(6,608
)
 
1,812

 
8,406

 
(6,367
)
 
2,039

Total
 
$
151,146

 
$
(29,305
)
 
$
121,841

 
$
166,202

 
$
(30,692
)
 
$
135,510

The decrease in non-amortizable trademarks is due primarily to the impairment of EMEA's Quiksilver trademark. 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 nine-month periods ended July 31, 2015 and 2014 was approximately $2 million. Annual amortization expense is estimated to be approximately $3 million in fiscal 2016, $2 million in fiscal years 2017 through 2019, and $1 million in fiscal years 2020 and 2021.
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
Gross goodwill
 
$
74,943

 
$
180,475

 
$
135,752

 
$
391,170

Foreign currency translation
 
(528
)
 
(2,278
)
 

 
(2,806
)
Impairments
 

 
(178,197
)
 

 
(178,197
)
Accumulated impairment losses
 

 

 
(129,545
)
 
(129,545
)
Net goodwill at October 31, 2014
 
$
74,415

 
$

 
$
6,207

 
$
80,622

 
 
 
 
 
 
 
 
 
Gross goodwill
 
$
74,415

 
$
178,197

 
$
135,752

 
$
388,364

Foreign currency translation
 
(1,039
)
 

 

 
(1,039
)
Impairments
 
(73,376
)
 

 
(6,207
)
 
(79,583
)
Accumulated impairment losses
 

 
(178,197
)
 
(129,545
)
 
(307,742
)
Net goodwill at July 31, 2015
 
$

 
$

 
$

 
$


14


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 8 — Income Taxes
Each reporting period, the Company evaluates the realizability of all of its deferred tax assets in each tax jurisdiction. As of July 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 nine months of fiscal 2015 and 2014.
The Company's hedging instruments in Europe generated tax expense of approximately $4 million within other comprehensive income in the first nine months of fiscal 2015. However, as the Company does not expect to pay income tax after application of available loss carryforwards, an offsetting income tax benefit was recognized within continuing operations. Before this tax benefit, the Company generated income tax expense of approximately $6 million in the nine months ended July 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 July 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"). The 2013 Plan covers the global operations of the Company, and as the Company continues to evaluate its structure, processes and costs, additional charges may be incurred in the future under the 2013 Plan that are not yet determined. The 2013 Plan is, in many respects, a continuation and acceleration of the Company’s Fiscal 2011 Cost Reduction Plan (the “2011 Plan”). The Company will no longer incur any new charges under the 2011 Plan, but will continue to make cash payments on amounts previously accrued under the 2011 Plan. Amounts charged to expense under the 2013 Plan and 2011 Plan were primarily recorded in SG&A with a small portion recorded in cost of goods sold ("COGS") in the Company’s condensed consolidated statements of operations.
Activity and liability balances recorded as part of the 2013 Plan and 2011 Plan were as follows:
In thousands
 
Workforce
 
Facility
& Other
 
Total
Balance, October 31, 2013
 
$
12,159

 
$
6,939

 
$
19,098

Charged to expense
 
19,350

 
15,295

 
34,645

Cash payments
 
(19,999
)
 
(9,943
)
 
(29,942
)
Balance, October 31, 2014
 
$
11,510

 
$
12,291

 
$
23,801

Charged to expense
 
7,209

 
5,958

 
13,167

Cash payments
 
(10,684
)
 
(7,158
)
 
(17,842
)
Adjustments
 

 
(1,986
)
 
(1,986
)
Balance, July 31, 2015
 
$
8,035

 
$
9,105

 
$
17,140

Amounts charged to expense during the nine months ended July 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, EMEA and Corporate Operations reporting units. In the first quarter of fiscal 2015, the Company recorded an adjustment to its facility and other restructuring liabilities upon completion of a sub-lease agreement within the Americas reporting unit at more favorable terms than originally expected.

15


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

In addition to the restructuring charges noted above, the Company also recorded $2 million of additional expenses within SG&A during the first nine months of fiscal 2014, related to certain non-core brands and peripheral product categories that have been discontinued, which are not reflected in the table above.
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
 
July 31,
2015
 
October 31,
2014
Lines of credit - 0.8% - 1.5% Floating
 
October 31, 2015
 
$
3,469

 
$

Eurofactor line of credit - 0.6% Floating

October 31, 2016
 
23,036

 
32,929

2017 Notes - 8.875% Fixed

December 15, 2017
 
219,069

 
252,188

ABL Credit Facility - 2.1% to 4.1% Floating

May 24, 2018
 
70,160

 
35,933

2018 Notes - 7.875% Fixed

August 1, 2018
 
279,022

 
278,834

2020 Notes - 10.000% Fixed

August 1, 2020
 
222,826

 
222,582

Capital lease obligations and other borrowings - Various %

Various
 
4,651

 
6,124

Total debt


 
822,233

 
828,590

Less current portion


 
(819,772
)
 
(35,361
)
Long-term debt, net of current portion


 
$
2,461

 
$
793,229

As of July 31, 2015, the Company’s credit facilities allowed for total cash borrowings and letters of credit of $175 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 July 31, 2015, the Company had a total of $97 million of direct borrowings and $55 million in letters of credit outstanding. As of July 31, 2015, the remaining availability for borrowings under the Company's credit facilities was $23 million, $0.1 million of which could also be used for letters of credit in the United States and APAC. As of July 31, 2015, the Company had no additional capacity for letters of credit in EMEA. 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.
As of July 31, 2015, the estimated fair value of the Company’s borrowings under lines of credit and long-term debt was $583 million, compared to a carrying value of $822 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.
Voluntary Reorganization under Chapter 11
The filing of the Petitions on September 9, 2015 created defaults and cross defaults pursuant to the terms of the Company’s Indentures to its 10.000% Senior Notes due 2020 (the "2020 Notes"), 2018 Notes, 8.875% Notes due 2017 (the "2017 Notes"), and the ABL Credit Facility, which accelerated the due dates for the obligations, for accounting purposes. Consequently, under the accounting requirements of the FASB ASC Topic 470 - Debt, the Company has presented its outstanding debt under the 2017 Notes, 2018 Notes, 2020 Notes, and ABL Credit Facility, in current liabilities on its condensed consolidated balance sheet as of July 31, 2015. However, the filing of a petition under the Bankruptcy Code results in the automatic stay of virtually all actions of creditors to collect pre-petition debts, until such time the stay is modified or removed. The automatic stay will apply to the Company’s obligations under the 2018 Notes, the 2020 Notes and the ABL Credit Facility. In addition, with respect to the 2017 Notes, the Company has received waivers for the defaults and cross defaults and the rescission of the acceleration for a period of up to 210 days from September 9, 2015.
Pursuant to the PSA, the Company’s existing debt and accrued interest will be reduced by approximately $500 million, including the extinguishment of all of its 2018 Notes and 2020 Notes and new debtor-in-possession financing of $175 million will be provided. The Company’s 2017 Notes would be reinstated upon the consummation of the transactions set forth in the plan of reorganization under the Petition. For further information on the contemplated restructuring of the Company's capital and debt structure in conjunction with the Petitions, see Note 18 — Voluntary Reorganization under Chapter 11.

16


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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 July 31, 2015, the Company was hedging a portion of forecasted transactions expected to occur through October 2016. Assuming July 31, 2015 exchange rates remain constant, $16 million of gains, net of tax, related to hedges of these transactions are expected to be reclassified into earnings over the next 15 months. For additional information of the gains/losses related to hedging, see Note 14 — Accumulated Other Comprehensive Income/(Loss).
On the date the Company enters into a derivative contract, management designates the derivative as a hedge of the identified exposure. Before entering into various hedge transactions, the Company formally documents all relationships between hedging instruments and hedged items, as well as the risk-management objective and strategy. In this documentation, the Company identifies the asset, liability, firm commitment, or forecasted transaction that has been designated as a hedged item and indicates how the hedging instrument is expected to hedge the risks related to the hedged item. The Company formally measures effectiveness of its hedging relationships both at the hedge inception and on an ongoing basis in accordance with its risk management policy. The Company would discontinue hedge accounting prospectively (i) if management determines that the derivative is no longer effective in offsetting changes in the cash flows of a hedged item, (ii) when the derivative expires or is sold, terminated, or exercised, (iii) if it becomes probable that the forecasted transaction being hedged by the derivative will not occur, (iv) if a hedged firm commitment no longer meets the definition of a firm commitment, or (v) if management determines that designation of the derivative as a hedge instrument is no longer appropriate. As a result of the expiration, sale, termination, or exercise of derivative contracts, the Company reclassified into earnings net gains/(losses) of $6 million and $0.7 million for the three months ended July 31, 2015 and 2014, respectively, and $17 million and $(0.4) million for the nine months ended July 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 July 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
 
$
170,427

 
August 2015 – October 2016
 
$
16,564

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.

17


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The following table reflects the fair values of derivative assets and liabilities measured and recognized at fair value on a recurring basis on the accompanying condensed consolidated balance sheets as of the dates indicated:
 
 
Fair Value Measurements Using
 
Derivative Assets/(Liabilities)
In thousands
 
Level 1
 
Level 2
 
Level 3
 
At Fair Value
Derivative assets:
 
 
 
 
 
 
 
 
Other receivables
 
$

 
$
16,006

 
$

 
$
16,006

Other assets
 

 
558

 

 
558

Total fair value at July 31, 2015
 
$

 
$
16,564

 
$

 
$
16,564

 
 
 
 
 
 
 
 
 
Derivative assets:
 
 
 
 
 
 
 
 
Other receivables
 
$

 
$
16,683

 
$

 
$
16,683

Derivative liabilities:
 
 
 
 
 
 
 
 
Accrued liabilities
 

 
(2
)
 

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

 
$
16,681

 
$

 
$
16,681

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

 
$
2,358

 
$
56,234

Stock-based compensation expense
 
3,122

 

 
3,122

Exercise of stock options
 

 

 

Employee stock purchase plan
 
587

 

 
587

Business disposition(1)
 

 
(1,570
)
 
(1,570
)
Net loss and other comprehensive loss
 
(205,983
)
 
(788
)
 
(206,771
)
Balance, July 31, 2015
 
$
(148,398
)
 
$

 
$
(148,398
)
 
 
 
 
 
 
 
Balance, October 31, 2013
 
$
366,247

 
$
17,952

 
$
384,199

Stock-based compensation expense
 
15,810

 

 
15,810

Exercise of stock options
 
4,501

 

 
4,501

Employee stock purchase plan
 
1,322

 

 
1,322

Transactions with non-controlling interest holders(2)
 
(10,839
)
 
(5,703
)
 
(16,542
)
Net loss and other comprehensive income
 
(268,067
)
 
(10,294
)
 
(278,361
)
Balance, July 31, 2014
 
$
108,974

 
$
1,955

 
$
110,929

(1)
The business disposition reflects the Company's sale of its stake in Surfdome in the first quarter of fiscal 2015. See Note 15 — Discontinued Operations for further information.
(2)
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
In April 2015, two putative securities class action complaints were filed against the Company and two of its former officers in the United States District Court for the Central District of California under the following captions: Leiland Stevens, Individually and on Behalf of All Others Similarly Situated v. Quiksilver, Inc., et al. and Shiva Stein, Individually and on Behalf of All Others Similarly Situated v. Quiksilver, Inc., et al. On June 26, 2015, the court consolidated these lawsuits and named Babulal Parmar

18


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

as the lead plaintiff. On August 25, 2015, lead plaintiff filed an amended complaint in the consolidated action. The amended complaint asserts claims for violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. The putative class period in this action is from June 6, 2014 through March 26, 2015. The complaint seeks designation of this action as a class action, an award of unspecified compensatory damages, interest, costs and expenses, including attorneys’ fees and expert fees, and such other relief as the court deems appropriate. The Company cannot predict the outcome of this matter or estimate the potential impact on its results of operations, financial position or cash flows. The Company has not recorded a liability for this matter.
On June 2, 2015, a shareholder derivative complaint was filed against present and former members of the Company’s Board of Directors and former officers in the Superior Court of the State of California, County of Orange, under the following caption: An H. Vu, Derivatively on Behalf of Quiksilver, Inc. v. Andrew P. Mooney, et al., Defendants, and Quiksilver, Inc., Nominal Defendant. The complaint asserts claims for breach of fiduciary duty, unjust enrichment and gross mismanagement against the individual defendants. The complaint seeks a declaration that plaintiff may maintain the action on behalf of the Company, declaratory relief, unspecified compensatory and exemplary damages, restitution, disgorgement of all profits, benefits and other compensation obtained by the individual defendants, an order directing the Company and the individual defendants to take actions to reform and improve the Company's corporate governance and internal procedures, and all appropriate equitable and/or injunctive relief. The Company cannot predict the outcome of this matter or estimate the potential impact on its results of operations, financial position or cash flows. The Company has not recorded a liability for this matter.
On September 9, 2015, Quiksilver and each of its wholly owned U.S. subsidiaries filed voluntary petitions in Bankruptcy Court seeking relief under the provisions of chapter 11 of the Bankruptcy Code. The Debtors intend to continue to operate their business as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. As a result of the filings, attempts to collect, secure, or enforce remedies with respect to pre-petition claims against the Company are subject to the automatic stay provisions of section 362 of the Bankruptcy Code, and absent further order of the Bankruptcy Court, no party, subject to certain exceptions, may take any action, also subject to certain exceptions, to recover on pre-petition claims against the Debtors. At this time, it is not possible to predict the outcome of the Bankruptcy Cases or their effect on the Company's business.
In addition to the foregoing, 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 cannot determine a range of estimated future payments and has not recorded any liability for these indemnities, commitments and guarantees in the accompanying condensed consolidated balance sheets.

19


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 14 — Accumulated Other Comprehensive Income/(Loss)
The components of accumulated other comprehensive income/(loss) include changes in fair value of derivative instruments qualifying as cash flow hedges and foreign currency translation adjustments. The components of accumulated other comprehensive income/(loss), net of tax, are as follows:
 
 
Derivative
Instruments
 
Foreign
Currency
Adjustments
 
Total
In thousands
 
 
 
Balance, October 31, 2014
 
$
4,093

 
$
53,195

 
$
57,288

Net gains reclassified to COGS
 
(16,597
)
 

 
(16,597
)
Changes in fair value, net of tax
 
28,057

 
(44,367
)
 
(16,310
)
Balance, July 31, 2015
 
$
15,553

 
$
8,828

 
$
24,381

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

 
$
73,918

Net gains reclassified to COGS
 
(367
)
 

 
(367
)
Changes in fair value, net of tax
 
1,136

 
(11,311
)
 
(10,175
)
Balance, July 31, 2014
 
$
(3,822
)
 
$
67,198

 
$
63,376

Note 15 — Discontinued Operations
In November 2013, the Company completed the sale of Mervin Manufacturing, Inc., a manufacturer of snowboards and related products under the "Lib-Technologies" and "GNU" brands, ("Mervin") for $58 million. In January 2014, the Company completed the sale of substantially all of the assets of Hawk Designs, Inc. ("Hawk"), its subsidiary that owned and operated the "Hawk" brand, for $19 million. These transactions resulted in an after-tax gain of approximately $31 million during the first nine months of fiscal 2014, which is included in income from discontinued operations in the table below. In December 2014, the Company sold its majority stake in U.K.-based Surfdome Shop, Ltd., a multi-brand e-commerce retailer, ("Surfdome") for net proceeds of approximately $16 million, which included payments from Surfdome for all outstanding loans and trade receivables. The sale resulted in an after-tax gain of $7 million in the first quarter of fiscal 2015, which is included in income from discontinued operations in the table below. Accordingly, each of the Company's Mervin, Hawk and Surfdome businesses were classified as "held for sale" as of October 31, 2014 and are presented as discontinued operations in the accompanying condensed consolidated financial statements for all periods presented. The Company’s sale of the Mervin and Hawk businesses generated income tax expense of approximately $18 million within discontinued operations during the first nine months of fiscal 2014. However, as the Company did not expect to pay income tax after application of available loss carry-forwards, an offsetting income tax benefit was recognized within continuing operations.
The operating results of discontinued operations for the three and nine months ended July 31, 2015 and 2014 are as follows:
 
 
Three Months Ended July 31,
 
Nine Months Ended July 31,
In thousands
 
2015
 
2014
 
2015
 
2014
Revenues, net
 
$

 
$
15,640

 
$
13,239

 
$
46,916

(Loss)/income before income taxes
 

 
(4,376
)
 
6,785

 
27,093

Provision for income taxes
 

 

 
53

 
16,833

(Loss)/income from discontinued operations
 

 
(4,376
)
 
6,732

 
10,260

Less: net loss attributable to non-controlling interest
 

 
2,093

 
788

 
9,933

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

 
$
(2,283
)
 
$
7,520

 
$
20,193


20


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

There were no assets classified as held for sale at July 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, Quiksilver Inc. and QS Wholesale, Inc. issued $225 million aggregate principal amount of its 2020 Notes. These notes were issued in a private offering that was exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”). They were offered within the United States only to qualified institutional buyers in accordance with Rule 144A under the Securities Act, and outside of the United States only to non-U.S. investors in accordance with Regulation S under the Securities Act. In November 2013, these notes were exchanged for publicly registered notes with identical terms. Obligations under the Company’s 2020 Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by certain of its existing 100% owned domestic subsidiaries.
The Company presents condensed consolidating financial information for Quiksilver, Inc. and its domestic subsidiaries within the notes to the condensed consolidated financial statements in accordance with the criteria established for parent companies in the SEC’s Regulation S-X, Rule 3-10(f). The following condensed consolidating financial information presents the results of operations for the three and nine months ended July 31, 2015 and 2014, the financial position as of July 31, 2015 and October 31, 2014, and cash flows for the nine months ended July 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.

21


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Condensed Consolidating Statement of Operations
Three Months Ended July 31, 2015
In thousands
 
Quiksilver, Inc.
 
QS Wholesale,
Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues, net
 
$
110

 
$
82,220

 
$
77,523

 
$
209,050

 
$
(32,769
)
 
$
336,134

Cost of goods sold
 

 
48,911

 
49,961

 
104,458

 
(28,588
)
 
174,742

Gross profit
 
110

 
33,309

 
27,562

 
104,592

 
(4,181
)
 
161,392

Selling, general and administrative expense
 
2,642

 
39,648

 
22,928

 
102,050

 
(1,345
)
 
165,923

Asset impairments
 

 
61,983

 
11,563

 
23,432

 

 
96,978

Operating loss
 
(2,532
)
 
(68,322
)
 
(6,929
)
 
(20,890
)
 
(2,836
)
 
(101,509
)
Interest expense, net
 
11,676

 
839

 

 
5,486

 

 
18,001

Foreign currency loss/(gain)
 
18

 
(148
)
 
38

 
4,830

 

 
4,738