Quiksilver Reports Second Quarter Financial Results

Company Provides Outlook for Fiscal 2014

HUNTINGTON BEACH, Calif.--- Quiksilver, Inc. (NYSE:ZQK) today announced financial results for the fiscal 2014 second quarter ended April 30, 2014. 

“We made progress on our Profit Improvement Plan,” said Andy Mooney, President and Chief Executive Officer of Quiksilver, Inc. “During the second quarter, we again reduced our expense structure, increased sales in our direct to consumer channels and emerging markets, and drove improvements in gross margins.

These improvements were offset by decreased net revenues in our wholesale channel, especially in the developed markets in North America and Europe. Consequently, pro-forma adjusted EBITDA decreased versus the prior year.”

All of the results presented below represent the Company’s continuing operations.
Please refer to the accompanying tables for a reconciliation of GAAP results from continuing operations to certain non-GAAP results from continuing operations, including pro-forma loss from continuing operations, pro-forma loss from continuing operations per share, adjusted EBITDA and pro-forma adjusted EBITDA, for all periods presented, net revenues in historical and constant currency, and a definition of the Company’s emerging markets.
 
Second Quarter Review:

The following comparisons refer to results of continuing operations for the second quarter of fiscal 2014 versus the second quarter of fiscal 2013.
 
Net revenues were $408 million compared with $456 million, and were down 9%, or $42 million, in constant currency.

• Americas net revenues decreased 18% to $186 million from $226 million, and were down 16% in constant currency.
• EMEA net revenues decreased 2% to $162 million from $165 million, and were down 5% in constant currency.
• APAC net revenues decreased 6% to $60 million from $64 million, but were up 3% in constant currency.

Gross margin increased to 48.7% from 45.9%. The 280 basis point improvement in gross margin reflects the sales growth in our direct to consumer channels, reduced clearance activity in the wholesale channel of certain regions and benefits of licensing activities.
 
SG&A expense decreased $3 million to $214 million from $217 million, primarily due to reduced selling expenses associated with the decline in net revenues, reduced employee compensation expenses and event spending, partially offset by an increase in bad debt expense.
 
Asset impairments increased to $20 million from $5 million due to a $15 million write-down of Surfdome goodwill and intangible assets in connection with the reclassification of Surfdome from discontinued operations to continuing operations.
 
Pro-forma Adjusted EBITDA decreased to $12 million from $18 million.
 
Net loss from continuing operations attributable to Quiksilver, Inc. was $46 million, or $0.27 per share, compared with $33 million, or $0.20 per share.
 
Pro-forma loss from continuing operations, which excludes the after-tax impact of restructuring and other special charges and non-cash asset impairments, increased to $25 million, or $0.15 per share, compared with $21 million, or $0.12 per share.
 
Q2 Net Revenue Highlights:
Net revenues from continuing operations by brand and channel for the second quarter of fiscal 2014 compared with the second quarter of fiscal 2013 were as follows.

 

Brands (constant currency):

• Quiksilver decreased $13 million, or 7%, to $167 million.
• Roxy decreased $7 million, or 6%, to $121 million.
• DC decreased $24 million, or 19%, to $103 million.

Distribution channels (constant currency):

• Wholesale revenues decreased 15% to $286 million.
• Retail revenues were flat at $90 million. Same-store sales in company-owned retail stores increased 1%. Company-owned retail stores totaled 658 at the end of the fiscal 2014 second quarter compared with 630 at the end of the fiscal 2013 second quarter.
• E-commerce revenues grew 23% to $30 million.

Emerging markets generated net revenue growth of 28% in constant currency.
 
Outlook:

The Company anticipates that the general sales trends of recent quarters compared to the same prior year period will continue into the second half of fiscal 2014 with continued net revenue declines in the North America and Europe wholesale channels being partially offset by net revenue growth in emerging markets and e-commerce. The Company also anticipates some continued year-over-year gross margin improvements in the second half of fiscal 2014, and that pro-forma adjusted EBITDA for fiscal 2014 will be below the $118 million achieved in fiscal 2013.

The Company said that it has revised the timing for achieving its Profit Improvement Plan adjusted EBITDA target to the end of fiscal 2017.
 
About Quiksilver:

Quiksilver, Inc., one of the world’s leading outdoor sports lifestyle companies, designs, produces and distributes branded apparel, footwear and accessories. The Company’s apparel and footwear brands, inspired by a passion for outdoor action sports, represent a casual lifestyle for young-minded people who connect with its boardriding culture and heritage. The Company’s Quiksilver, Roxy, and DC brands have authentic roots and heritage in surf, snow and skate. The Company’s products are sold in more than 100 countries in a wide range of distribution, including surf shops, skate shops, snow shops, its proprietary Boardriders Club shops and other Company-owned retail stores, other specialty stores, select department stores and through various e-commerce channels. The Company’s corporate headquarters are in Huntington Beach, California.
 
Forward-looking statements:
 
This press release contains forward-looking statements including, but not limited to, statements regarding management’s expectations for future revenues, gross margins, pro-forma adjusted EBITDA, and the timing of achieving objectives of the company’s profit improvement plan. These forward-looking statements are subject to risks and uncertainties, and actual results may differ materially. The Company undertakes no obligation to update these statements, which are made only as of the date of this press release. For the factors that could cause actual results to differ materially from expectations, please refer to the Company’s SEC filings and specifically the sections titled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Forward-Looking Statements” in the Company’s Annual Report on Form 10-K and Quarterly Reports on Form 10-Q.

NOTE: For further information about Quiksilver, Inc., please visit our website at www.quiksilverinc.com. We also invite you to explore our brand sites, www.quiksilver.com, www.roxy.com and www.dcshoes.com.

QUIKSILVER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
				Second quarter ended												First half ended
				April 30,												April 30,
				2014						2013						2014						2013
In thousands, except per share amounts
Revenues, net				$	408,215					$	455,563					$	819,383					$	880,604
Cost of goods sold					209,344						246,562						412,403						455,339
Gross profit					198,871						209,001						406,980						425,265
Selling, general and administrative expense					213,647						216,922						425,466						438,946
Asset impairments					19,961						5,332						20,844						8,500
Operating loss					(34,737	)					(13,253	)					(39,330	)					(22,181	)
Interest expense					19,240						15,342						38,695						30,850
Foreign currency loss/(gain)					893						(2,696	)					3,753						390
Loss before (benefit)/provision for income taxes					(54,870	)					(25,899	)					(81,778	)					(53,421	)
(Benefit)/provision for income taxes					(1,173	)					6,828						(5,503	)					10,005
Loss from continuing operations					(53,697	)					(32,727	)					(76,275	)					(63,426	)
(Loss)/income from discontinued operations, net of tax					(7,113	)					509						30,400						584
Net loss					(60,810	)					(32,218	)					(45,875	)					(62,842	)
Less: net loss/(income) attributable to non-controlling interest					7,737						(177	)					8,201						(682	)
Net loss attributable to Quiksilver, Inc.				$	(53,073	)				$	(32,395	)				$	(37,674	)				$	(63,524	)
Loss per share from continuing operations attributable to Quiksilver, Inc.:
Basic				$	(0.27	)				$	(0.20	)				$	(0.40	)				$	(0.39	)
Diluted				$	(0.27	)				$	(0.20	)				$	(0.40	)				$	(0.39	)
(Loss)/income per share from discontinued operations attributable to Quiksilver, Inc.:
Basic				$	(0.04	)				$	0.00					$	0.18					$	0.00
Diluted				$	(0.04	)				$	0.00					$	0.18					$	0.00
Weighted average common shares outstanding:
Basic					170,475						166,815						170,105						166,282
Diluted					170,475						166,815						170,105						166,282
Amounts attributable to Quiksilver, Inc.:
Loss from continuing operations				$	(45,960	)				$	(32,904	)				$	(68,074	)				$	(64,108	)
(Loss)/income from discontinued operations, net of tax					(7,113	)					509						30,400						584
Net loss				$	(53,073	)				$	(32,395	)				$	(37,674	)				$	(63,524	)

QUIKSILVER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
						April 30, 2014											April 30, 2013
In thousands
ASSETS
Current Assets
	Cash and cash equivalents (includes restricted cash of $56,047 and $0, respectively)					$	119,585										$	47,893
	Trade accounts receivable (net of allowance of $62,783 and $57,134, respectively)						351,744											371,293
	Other receivables						29,604											29,835
	Inventories						320,589											355,077
	Deferred income taxes - short-term						9,696											25,696
	Prepaid expenses and other current assets						30,966											32,637
	Current assets held for sale						-											18,188
		Total Current Assets					862,184											880,619
Fixed assets, net							224,276											232,335
Intangible assets, net							135,510											137,817
Goodwill							265,565											272,764
Other assets							50,376											43,759
Deferred income taxes - long-term							-											114,391
Non-current assets held for sale							-											1,552
		Total Assets				$	1,537,911										$	1,683,237
LIABILITIES AND EQUITY
Current Liabilities
	Accounts payable					$	138,125										$	184,684
	Accrued liabilities						111,456											100,401
	Current portion of long-term debt						49,873											44,834
	Income taxes payable						1,577											451
	Liabilities related to assets held for sale						-											2,965
		Total Current Liabilities					301,031											333,335
Long-term debt, net of current portion							846,949											769,108
Other long-term liabilities							34,649											34,780
Deferred income taxes - long-term							22,046											-
Non-current liabilities related to assets held for sale							-											178
		Total Liabilities					1,204,675											1,137,401
Equity
	Common stock						1,738											1,705
	Additional paid-in capital						582,612											560,303
	Treasury stock						(6,778	)										(6,778	)
	Accumulated deficit						(313,560	)										(106,845	)
	Accumulated other comprehensive income						65,177											77,799
		Total Quiksilver, Inc. Stockholders' Equity					329,189											526,184
	Non-controlling interest						4,047											19,652
		Total Equity					333,236											545,836
		Total Liabilities and Equity				$	1,537,911										$	1,683,237

QUIKSILVER, INC. AND SUBSIDIARIES
GAAP TO PRO-FORMA LOSS FROM CONTINUING OPERATIONS RECONCILIATION (UNAUDITED)
				Second quarter ended												First half ended
				April 30,												April 30,
				2014						2013						2014						2013
In thousands, except per share amounts
Net loss from continuing operations attributable to Quiksilver, Inc.				$	(45,960	)				$	(32,904	)				$	(68,074	)				$	(64,108	)
Restructuring and other special charges, net of tax of $1,003, $221, $1,043 and $625, respectively					8,448						7,049						13,757						9,650
Non-cash asset impairments, net of tax of $56, $136, $56 and $692, respectively					12,446						5,196						13,329						7,808
Pro-forma loss from continuing operations attributable to Quiksilver, Inc.					(25,066	)					(20,659	)					(40,988	)					(46,650	)
Pro-forma loss per share from continuing operations attributable to Quiksilver, Inc. (basic and diluted)				$	(0.15	)				$	(0.12	)				$	(0.24	)				$	(0.28	)
Weighted average common shares outstanding (basic and diluted)					170,475						166,815						170,105						166,282

QUIKSILVER, INC. AND SUBSIDIARIES
ADJUSTED EBITDA & PRO-FORMA ADJUSTED EBITDA RECONCILIATION (UNAUDITED)
				Second quarter ended												First half ended
				April 30,												April 30,
				2014						2013						2014						2013
In thousands
Loss from continuing operations attributable to Quiksilver, Inc.				$	(45,960	)				$	(32,904	)				$	(68,074	)				$	(64,108	)
(Benefit)/provision for income taxes					(1,173	)					6,828						(5,503	)					10,005
Interest expense					19,240						15,342						38,695						30,850
Depreciation and amortization					14,703						12,734						25,614						24,885
Non-cash stock-based compensation expense					6,525						3,887						11,588						11,223
Non-cash asset impairments, net					12,502						5,332						13,385						8,500
Adjusted EBITDA					5,837						11,219						15,705						21,355
Restructuring and other special charges					6,382						6,833						12,830						9,838
Pro-forma Adjusted EBITDA					12,219						18,052						28,535						31,193

Definition of Adjusted EBITDA and Pro-forma Adjusted EBITDA:   Adjusted EBITDA is defined as loss from continuing operations attributable to Quiksilver, Inc. before (i) interest expense, (ii) (benefit)/provision for income taxes, (iii) depreciation and amortization, (iv) non-cash stock-based compensation expense and (v) non-cash asset impairments, net of non-controlling interest. For the quarter ended April 30, 2014, non-cash asset impairments reflect Quiksilver, Inc.'s 51% share of the Surfdome impairment charge. Pro-forma Adjusted EBITDA is defined as Adjusted EBITDA excluding restructuring and other special charges. Such charges include, but are not limited to, a) gains and losses on early lease terminations; severance and other termination costs for employees or independent agents; contractual or other termination costs paid to sever business relationships with sponsored athletes, vendors, customers, and other business partners; write-offs of inventory and other assets devalued as a direct result of restructuring activities; and other expenses associated with planning and implementing profit improvement plan activities; and b) other significant, non-recurring and unusual items. Adjusted EBITDA and Pro-forma Adjusted EBITDA are not defined under generally accepted accounting principles (“GAAP”), and may not be comparable to similarly titled measures reported by other companies. We use Adjusted EBITDA and Pro-forma Adjusted EBITDA, along with other GAAP measures, as measures of profitability because Adjusted EBITDA and Pro-forma Adjusted EBITDA compare our performance on a consistent basis by removing from our operating results the impact of our capital structure, the effect of operating in different tax jurisdictions, the impact of our asset base, which can differ depending on the book value of assets, the accounting methods used to compute depreciation and amortization, the existence or timing of asset impairments, the effect of non-cash stock-based compensation expense, the impact of implementing restructuring activities, and other significant, non-recurring and unusual items. We believe EBITDA is useful to investors as it is a widely used measure of performance and the adjustments we make to EBITDA provide further clarity on our profitability. We remove the effect of non-cash stock-based compensation from our earnings which can vary based on share price, share price volatility and the expected life of the equity instruments we grant. In addition, this stock-based compensation expense does not result in cash payments by us. We remove the effect of asset impairments from Adjusted EBITDA for the same reason that we remove depreciation and amortization as it is part of the non-cash impact of our asset base. We also remove from Pro-forma Adjusted EBITDA the impact of restructuring and other special charges, as these items are not typically part of normal, day-to-day operations. Adjusted EBITDA and Pro-forma Adjusted EBITDA have limitations as profitability measures in that they do not include the interest expense on our debts, our provisions for income taxes, the effect of our expenditures for capital assets and certain intangible assets, the effect of non-cash stock-based compensation expense, the effect of asset impairments and the effect of restructuring and other special charges.

QUIKSILVER, INC. AND SUBSIDIARIES
SUPPLEMENTAL EXCHANGE RATE INFORMATION (UNAUDITED)
In order to better understand growth rates in our operating segments, we make reference to constant currency. Constant currency reporting improves visibility into actual growth rates as it adjusts for the effect of changing foreign currency exchange rates from period to period. Constant currency is calculated by taking the ending foreign currency exchange rate (for balance sheet items) or the average foreign currency exchange rate (for income statement items) used in translation for the current period and applying that same rate to the prior period. The following table presents revenues by segment in both historical currency and constant currency for the second quarter ended April 30, 2014 and 2013 (in thousands):
				Americas						EMEA						APAC						Corporate					Total
Historical currency (as reported):
April 30, 2014				$	186,427					$	161,977					$	59,721					$	90				$	408,215
April 30, 2013					226,302						164,725						63,581						955					455,563
Percentage decrease					-18	%					-2	%					-6	%										-10	%
Constant currency (current year exchange rates):
April 30, 2014					186,427						161,977						59,721						90					408,215
April 30, 2013					221,552						170,001						57,887						976					450,416
Percentage (decrease)/increase					-16	%					-5	%					3	%										-9	%
Definition of emerging markets:
The Company's references to emerging markets in this press release refer to net revenues generated in Brazil, Mexico, Korea, China, Indonesia, Taiwan and Russia, collectively.

Contacts
Quiksilver, Inc./Robert Jaffe/Investor Relations/424-288-4098 /zqk@quiksilver.com


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