10-Q 1 a75777e10-q.txt FORM 10-Q PERIOD END JULY 31,2001 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JULY 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 0-15131 QUIKSILVER, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 33-0199426 (State or other jurisdiction o (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 X NO --- --- The number of shares outstanding of issuer's Common Stock, par value $0.01 per share, at September 7, 2001 was 23,164,183 2 QUIKSILVER, INC. FORM 10-Q INDEX Page No. -------- PART I - FINANCIAL INFORMATION Item 1. Financial Statements: Condensed Consolidated Balance Sheets July 31, 2001 and October 31, 2000........................ 2 Condensed Consolidated Statements of Income Three Months Ended July 31, 2001 and 2000................. 3 Condensed Consolidated Statements of Income Nine Months Ended July 31, 2001 and 2000.................. 4 Condensed Consolidated Statements of Comprehensive Income Nine Months Ended July 31, 2001 and 2000.................. 4 Condensed Consolidated Statements of Cash Flows Nine Months Ended July 31, 2001 and 2000.................. 5 Notes to Condensed Consolidated Financial Statements........ 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 8 Part II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8K............................. 12 SIGNATURE............................................................ 12 1 3 PART I - FINANCIAL INFORMATION Item 1. Financial Statements QUIKSILVER, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JULY 31, OCTOBER 31, 2001 2000 ------------- ------------- ASSETS Current assets: Cash and cash equivalents ............................... $ 1,774,000 $ 2,298,000 Trade accounts receivable, less allowance for doubtful accounts of $4,063,000 (2001) and $5,090,000 (2000) ................................ 149,221,000 136,394,000 Other receivables ...................................... 6,557,000 5,654,000 Inventories ............................................ 125,508,000 90,034,000 Prepaid expenses and other current assets .............. 10,491,000 8,993,000 ------------- ------------- Total current assets .............................. 293,551,000 243,373,000 Property and equipment, less accumulated depreciation and amortization of $31,325,000 (2001) and $23,211,000 (2000) 54,187,000 49,834,000 Trademark, less accumulated amortization of $4,265,000 (2001) and $2,825,000 (2000) ................. 46,727,000 43,566,000 Goodwill, less accumulated amortization of $6,641,000 (2001) and $6,022,000 (2000) ................. 19,099,000 18,962,000 Other assets ............................................... 4,097,000 3,007,000 ------------- ------------- Total assets ...................................... $ 417,661,000 $ 358,742,000 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Lines of credit ......................................... $ 70,338,000 $ 49,203,000 Accounts payable ........................................ 38,423,000 40,642,000 Accrued liabilities ..................................... 24,057,000 22,568,000 Current portion of long-term debt ....................... 9,629,000 9,428,000 Income taxes payable .................................... 4,587,000 2,003,000 ------------- ------------- Total current liabilities ......................... 147,034,000 123,844,000 Long-term debt ............................................. 57,460,000 57,284,000 ------------- ------------- Total liabilities ................................. 204,494,000 181,128,000 ------------- ------------- Stockholders' equity Preferred stock, $.01 par value, authorized shares - 5,000,000; issued and outstanding shares - none ........................................ -- -- Common stock, $.01 par value, authorized shares - 30,000,000; issued and outstanding shares - 23,885,483 (2001) and 23,234,036 (2000) ..... 239,000 232,000 Additional paid-in-capital .............................. 52,551,000 42,833,000 Treasury stock, 721,300 shares .......................... (6,778,000) (6,778,000) Retained earnings ....................................... 179,068,000 153,426,000 Accumulated other comprehensive loss .................... (11,913,000) (12,099,000) ------------- ------------- Total stockholders' equity ........................ 213,167,000 177,614,000 ------------- ------------- Total liabilities and stockholders' equity ........ $ 417,661,000 $ 358,742,000 ============= =============
See notes to condensed consolidated financial statements. 2 4 QUIKSILVER, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED JULY 31, ------------------------------- 2001 2000 ------------- ------------- Net sales .................................... $ 155,259,000 $ 122,011,000 Cost of goods sold ........................... 96,381,000 75,226,000 ------------- ------------- Gross profit .............................. 58,878,000 46,785,000 ------------- ------------- Operating expenses: Selling, general and administrative expense 44,887,000 34,194,000 Royalty income ............................ (1,397,000) (888,000) Royalty expense ........................... -- 550,000 ------------- ------------- Total operating expenses ............... 43,490,000 33,856,000 ------------- ------------- Operating income ............................. 15,388,000 12,929,000 Interest expense ............................. 2,514,000 1,713,000 Foreign currency (gain) loss ................. (272,000) 101,000 Other expense ................................ 149,000 131,000 ------------- ------------- Income before provision for income taxes ..... 12,997,000 10,984,000 Provision for income taxes ................... 5,042,000 4,314,000 ------------- ------------- Net income ................................... $ 7,955,000 $ 6,670,000 ============= ============= Net income per share ......................... $ 0.34 $ 0.30 ============= ============= Net income per share, assuming dilution ...... $ 0.33 $ 0.29 ============= ============= Weighted average common shares outstanding ... 23,131,000 22,460,000 ============= ============= Weighted average common shares outstanding, assuming dilution ......................... 24,279,000 23,215,000 ============= =============
See notes to condensed consolidated financial statements. 3 5 QUIKSILVER, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
NINE MONTHS ENDED JULY 31, ------------------------------- 2001 2000 ------------- ------------- Net sales .................................... $ 445,290,000 $ 364,079,000 Cost of goods sold ........................... 271,515,000 220,154,000 ------------- ------------- Gross profit .............................. 173,775,000 143,925,000 ------------- ------------- Operating expenses: Selling, general and administrative expense 127,637,000 100,857,000 Royalty income ............................ (3,871,000) (2,010,000) Royalty expense ........................... -- 3,449,000 ------------- ------------- Total operating expenses ............... 123,766,000 102,296,000 ------------- ------------- Operating income ............................. 50,009,000 41,629,000 Interest expense ............................. 8,178,000 3,944,000 Foreign currency (gain) loss ................. (409,000) 224,000 Other expense ................................ 382,000 391,000 ------------- ------------- Income before provision for income taxes ..... 41,858,000 37,070,000 Provision for income taxes ................... 16,216,000 15,012,000 ------------- ------------- Net income ................................... $ 25,642,000 $ 22,058,000 ============= ============= Net income per share ......................... $ 1.12 $ 0.99 ============= ============= Net income per share, assuming dilution ...... $ 1.06 $ 0.95 ============= ============= Weighted average common shares outstanding ... 22,884,000 22,392,000 ============= ============= Weighted average common shares outstanding, assuming dilution ......................... 24,084,000 23,189,000 ============= =============
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
NINE MONTHS ENDED JULY 31, ----------------------------- 2001 2000 ------------ ------------ Net income ..................................... $ 25,642,000 $ 22,058,000 Other comprehensive gain (loss) -- Foreign currency translation adjustment ..... 958,000 (4,824,000) Net unrealized loss on derivative instruments (1,635,000) -- Income tax effects .......................... 863,000 -- ------------ ------------ Comprehensive income ........................... $ 25,828,000 $ 17,234,000 ============ ============
See notes to condensed consolidated financial statements. 4 6 QUIKSILVER, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED JULY 31, --------------------------- 2001 2000 ------------ ------------ Cash flows from operating activities: Net income .................................................. $ 25,642,000 $ 22,058,000 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization ......................... 10,175,000 7,189,000 Provision for doubtful accounts ....................... 3,143,000 2,348,000 Accretion of interest expense ......................... 1,179,000 137,000 Loss on sale of fixed assets .......................... 22,000 79,000 Foreign currency gain ................................. (266,000) -- Changes in operating assets and liabilities, net of effects from the purchase of Quiksilver International: Trade accounts receivable .......................... (14,563,000) (10,162,000) Other receivables .................................. 553,000 (1,922,000) Inventories ........................................ (35,234,000) (13,631,000) Prepaid expenses and other current assets .......... (1,637,000) (2,389,000) Other assets ....................................... (385,000) (2,860,000) Accounts payable ................................... (2,687,000) 319,000 Accrued liabilities ................................ (1,477,000) 1,750,000 Income taxes payable ............................... 6,332,000 6,471,000 ------------ ------------ Net cash (used in) provided by operating activities (9,203,000) 9,387,000 Cash flows from investing activities: Proceeds from sales of fixed assets ......................... 81,000 2,000 Capital expenditures and other business acquisitions ........ (13,192,000) (13,530,000) Acquisition of Quiksilver International, net of cash acquired -- (23,453,000) ------------ ------------ Net cash used in investing activities .............. (13,111,000) (36,981,000) Cash flows from financing activities: Borrowings on lines of credit ............................... 68,084,000 56,200,000 Payments on lines of credit ................................. (46,732,000) (48,744,000) Borrowings on long-term debt ................................ 2,887,000 40,408,000 Payments on long-term debt .................................. (8,006,000) (16,026,000) Proceeds from stock option exercises ........................ 5,824,000 3,319,000 Purchase of treasury stock .................................. -- (3,724,000) ------------ ------------ Net cash provided by financing activities .......... 22,057,000 31,433,000 Effect of exchange rate changes on cash ........................ (267,000) (127,000) ------------ ------------ Net (decrease) increase in cash and cash equivalents ........... (524,000) 3,712,000 Cash and cash equivalents, beginning of period ................. 2,298,000 1,449,000 ------------ ------------ Cash and cash equivalents, end of period ....................... $ 1,774,000 $ 5,161,000 ============ ============ Supplementary cash flow information: Cash paid during the period for: Interest ................................................. $ 6,695,000 $ 3,679,000 ============ ============ Income taxes ............................................. $ 9,243,000 $ 8,675,000 ============ ============ Non-cash investing and financing activity -- Deferred purchase price obligations ...................... $ 4,267,000 $ 18,054,000 ============ ============
See notes to condensed consolidated financial statements. 5 7 QUIKSILVER, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statement presentation. The Company, in its opinion, has included all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the results of operations for the three and nine months ended July 31, 2001 and 2000. The condensed consolidated financial statements and notes thereto should be read in conjunction with the audited financial statements and notes for the year ended October 31, 2000 included in the Company's Annual Report on Form 10-K. Interim results are not necessarily indicative of results for the full year due to seasonal and other factors. 2. Inventories consist of the following:
JULY 31, OCTOBER 31, 2001 2000 ------------ ----------- Raw Materials ................. $ 26,043,000 $22,191,000 Work-In-Process................ 6,583,000 7,543,000 Finished Goods................. 92,882,000 60,300,000 ------------ ----------- $125,508,000 $90,034,000 ============ ===========
3. Information related to domestic and European operations is as follows:
NINE MONTHS ENDED JULY 31, ---------------------------- 2001 2000 ------------ ------------ Net sales to unaffiliated customers: Domestic ......................... $290,477,000 $236,150,000 Europe ........................... 154,813,000 127,929,000 ------------ ------------ Consolidated .................. $445,290,000 $364,079,000 ============ ============ Gross profit: Domestic ......................... $106,390,000 $ 86,936,000 Europe ........................... 67,385,000 56,989,000 ------------ ------------ Consolidated .................. $173,775,000 $143,925,000 ============ ============ Operating income: Domestic ......................... $ 32,640,000 $ 26,470,000 Europe ........................... 17,369,000 15,159,000 ------------ ------------ Consolidated .................. $ 50,009,000 $ 41,629,000 ============ ============ Identifiable assets: Domestic ......................... $289,514,000 $236,396,000 Europe ........................... 128,147,000 93,950,000 ------------ ------------ Consolidated .................. $417,661,000 $330,346,000 ============ ============
6 8 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. Effective November 1, 2000, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities". 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, and to fluctuations in interest rates related to its variable rate debt. 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 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. In addition, interest rate swaps are used to manage the Company's exposure to the risk of fluctuations in interest rates. For all qualifying cash flow hedges, the changes in the fair value of the derivatives are recorded in other comprehensive income. All other derivatives are marked to market value with corresponding gains or losses recorded in earnings. As of July 31, 2001, the Company was hedging forecasted transactions expected to occur in the following twelve months. Also included in accumulated other comprehensive income at July 31, 2001 is a charge related to cash flow hedges of the Company's long-term debt that is denominated in Australian dollars, which will be amortized into earnings through fiscal 2005 as the debt matures. On the date the Company enters into a derivative contract, management designates the derivative as a hedge of the identified exposure. The Company formally documents all relationships between hedging instruments and hedged items, as well as the risk-management objective and strategy for entering into various hedge transactions. 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 it is determined 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) because 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. The Company enters into forward exchange and other derivative contracts with major banks and is exposed to credit 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 obtain collateral or other security to support the contracts. A summary of derivative contracts at July 31, 2001 is as follows:
July 31, 2001 ---------------------------------------------------- Notional Fair Amount Maturity Value ------------ -------- ----------- British pounds $ 20,253,000 Aug 2001 - Apr 2001 $ 211,000 U.S. dollars 51,200,000 Aug 2001 - Dec 2001 447,000 Australian dollars 21,730,000 Sept 2002 - Sept 2005 (1,121,000) Interest rate swap 20,312,000 Oct 2004 (390,000) Interest rate swap 10,762,000 Jan 2007 (677,000) ------------ ----------- $124,257,000 $(1,530,000) ============ ===========
7 9 PART I - FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations THREE MONTHS ENDED JULY 31, 2001 COMPARED TO THREE MONTHS ENDED JULY 31, 2000 Net sales for the three months ended July 31, 2001 increased 27.3% to $155,259,000 from $122,011,000 in the comparable period of the prior year. Domestic net sales for the three months ended July 31, 2001 increased 26.9% to $101,510,000 from $79,971,000 in the comparable period of the prior year, and European net sales increased 27.9% to $53,749,000 from $42,040,000 for those same periods. As measured in French francs, Quiksilver Europe's functional currency, net sales in the current year's quarter increased 38.4% compared to the prior year. Domestic men's sales increased 18.3% to $57,430,000 from $48,548,000 in the comparable period of the prior year, while domestic women's sales increased 44.6% to $41,047,000 from $28,378,000. In the domestic division, sales of snowboards, boots and bindings amounted to $3,033,000 in the current year's quarter compared to $3,045,000 in the prior year. The domestic men's sales increase came from the Quiksilver Young Mens and Boys divisions, Quiksilveredition and from the Company's new Hawk Clothing and Fidra businesses. The domestic women's sales increase came from the Roxy division. In Europe, men's sales increased 17.3% to $41,762,000 from $35,608,000, while women's sales increased 86.4% to $11,987,000 from $6,432,000. The European men's sales increase came from the Quiksilver Young Mens, Boys and Gotcha divisions. The European women's sales increase came from the Roxy division. These comparisons of sales in Europe were negatively impacted by the strong dollar in comparison to the prior year. As measured in French francs, European men's sales increased 27.0% and European women's sales increased 101.7%. The gross profit margin for the three months ended July 31, 2001 decreased to 37.9% from 38.3% in the comparable period of the prior year. The domestic gross profit margin decreased to 35.8% from 36.7% in the comparable period of the prior year, while the European gross profit margin increased to 41.9% from 41.5% for those same periods. In the domestic division, the positive gross margin effect of a higher level of sales through company-owned retail stores was more than offset by lower gross margins on off-price and clearance sales. Gross profit margins are higher, on a consolidated basis, for sales in company-owned retail stores compared to the Company's normal wholesale distribution. In Europe, the gross profit margin increased primarily due to a higher level of sales through company-owned retail stores, which was partially offset by higher product costs in the local currency that were not passed along to customers. Product costs increased as goods purchased in U.S. dollars were paid for with a weaker local currency in comparison to previous periods. Selling, general and administrative expense ("SG&A") for the three months ended July 31, 2001 increased 31.3% to $44,887,000 from $34,194,000 in the comparable period of the prior year. Domestic SG&A increased 32.6% to $28,593,000 from $21,565,000 in the comparable period of the prior year, and European SG&A increased 29.0% to $16,294,000 from $12,629,000 for those same periods. The increase in both domestic and European SG&A was primarily due to higher personnel and other costs related to increased sales volume. SG&A increased as a percentage of sales domestically primarily due to the operating costs of additional company-owned retail stores and the operating costs of Quiksilver International, which was acquired during the third quarter of fiscal 2000. SG&A increased as a percentage of sales in Europe also due primarily to the operating costs of additional company-owned retail stores. Royalty income for the three months ended July 31, 2001 totaled $1,397,000 versus net royalty income of $338,000 in the comparable period of the prior year. This increase in royalty income came from the acquisition of Quiksilver International, which receives royalties based on sales of Quiksilver products by its licensees in various countries around the world. Royalty expense in the previous year was eliminated with the acquisition, which was effective July 1, 2000. Interest expense for the three months ended July 31, 2001 increased 46.8% to $2,514,000 from $1,713,000 in the comparable period of the prior year. This increase was primarily due to borrowings to acquire Quiksilver International, and to a lesser extent, borrowings to fund retail investments and working capital growth. 8 10 The effective income tax rate for the three months ended July 31, 2001, which is based on current estimates of the annual effective income tax rate, decreased to 38.8% from 39.3% in the comparable period of the prior year. This improvement resulted primarily from an expected lower overall tax rate for Quiksilver Europe. As a result of the above factors, net income for the three months ended July 31, 2001 increased 19.3% to $7,955,000 or $0.33 per share on a diluted basis from $6,670,000 or $0.29 per share on a diluted basis in the comparable period of the prior year. Basic net income per share increased to $0.34 for the three months ended July 31, 2001 from $0.30 in the comparable period of the prior year. NINE MONTHS ENDED JULY 31, 2001 COMPARED TO NINE MONTHS ENDED JULY 31, 2000 Net sales for the nine months ended July 31, 2001 increased 22.3% to $445,290,000 from $364,079,000 in the comparable period of the prior year. Domestic net sales for the nine months ended July 31, 2001 increased 23.0% to $290,477,000 from $236,150,000 in the comparable period of the prior year, and European net sales increased 21.0% to $154,813,000 from $127,929,000 for those same periods. As measured in French francs, Quiksilver Europe's net sales in the first nine months of the current year increased 32.1% compared to the prior year. Domestic men's sales increased 14.5% to $153,575,000 from $134,154,000 in the comparable period of the prior year, while domestic women's sales increased 37.2% to $131,291,000 from $95,707,000. In the domestic division, sales of snowboards, boots and bindings amounted to $5,611,000 in the current year's nine-month period compared to $6,289,000 in the prior year. The domestic men's sales increase came from Quiksilver Young Mens and Boys divisions, the Snow division and from the Company's new Hawk Clothing and Fidra businesses. The domestic women's sales increase came from both the Roxy and Raisins divisions. In Europe, men's sales increased 13.8% to $122,095,000 from $107,306,000, while women's sales increased 58.6% to $32,718,000 from $20,623,000. The European men's sales increase came from the Quiksilver Young Mens and Boys divisions, and the Gotcha division. The European women's sales increase came from the Roxy division. These comparisons of sales in Europe were negatively impacted by the strong dollar in comparison to the prior year. As measured in French francs, European men's sales increased 24.4% and European women's sales increased 71.7%. The gross profit margin for the nine months ended July 31, 2001 decreased to 39.0% from 39.5% in the comparable period of the prior year. The domestic gross profit margin decreased somewhat to 36.6% from 36.8% in the comparable period of the prior year, while the European gross profit margin decreased to 43.5% from 44.5% for those same periods. In the domestic division, the positive gross margin effect of a higher level of sales through company-owned retail stores was more than offset by lower gross margins on off-price and clearance sales in the third quarter of the current year. In Europe, the positive gross profit margin effect of a higher level of sales through company-owned retail stores was more than offset by higher product costs in the local currency that were not passed along to customers. Product costs increased as goods purchased in U.S. dollars were paid for with a weaker local currency in comparison to previous periods. SG&A for the nine months ended July 31, 2001 increased 26.6% to $127,637,000 from $100,857,000 in the comparable period of the prior year. Domestic SG&A increased 31.0% to $82,149,000 from $62,725,000 in the comparable period of the prior year, and European SG&A increased 19.3% to $45,488,000 from $38,132,000 for those same periods. The increase in both domestic and European SG&A was primarily due to higher personnel costs related to increased sales volume. SG&A increased as a percentage of sales domestically primarily due to the operating costs of Quiksilver International, which was acquired in the third quarter of fiscal 2000, and from additional company-owned retail stores. In Europe, SG&A decreased as a percentage of sales as the incremental operating costs of company-owned retail stores were more than offset by general leverage on growth. Royalty income for the nine months ended July 31, 2001 totaled $3,871,000 compared to net royalty expense of $1,439,000 in the comparable period of the prior year. The increase in royalty income came primarily from the acquisition of Quiksilver International. Interest expense for the nine months ended July 31, 2001 increased 107.4% to $8,178,000 from $3,944,000 in the comparable period of the prior year. This increase was primarily due to borrowings to acquire Quiksilver International, and to a lesser extent, borrowings to fund retail investments and working capital growth. 9 11 The effective income tax rate for the nine months ended July 31, 2001, which is based on current estimates of the annual effective income tax rate, decreased to 38.7% from 40.5% in the comparable period of the prior year. This improvement resulted primarily from an expected lower overall tax rate for Quiksilver Europe. As a result of the above factors, net income for the nine months ended July 31, 2001 increased 16.2% to $25,642,000 or $1.06 per share on a diluted basis from $22,058,000 or $0.95 per share on a diluted basis in the comparable period of the prior year. Basic net income per share increased to $1.12 for the nine months ended July 31, 2001 from $0.99 in the comparable period of the prior year. FINANCIAL POSITION, CAPITAL RESOURCES AND LIQUIDITY The Company finances its capital investments and working capital requirements with funds generated by operations and its bank revolving lines of credit. Net cash used in operating activities for the nine months ended July 31, 2001 totaled $9,203,000 compared to cash provided by operating activities of $9,387,000 in the comparable period of the prior year. The $8,084,000 increase in net income and non-cash expenses was more than offset by the $24,609,000 increase in inventories net of changes in accounts payable. For the nine months ended July 31, 2001, cash used for capital expenditures and business acquisitions totaled $13,192,000, which was down slightly from the $13,530,000 used for capital expenditures in the comparable period of the prior year. These investments include company-owned Boardriders Clubs and Quiksvilles, screenprinting and embroidery equipment, and ongoing investments in computer and warehouse equipment. Additionally in the prior year, $23,453,000 was used for the acquisition of Quiksilver International. During the nine months ended July 31, 2001, net cash provided by financing activities decreased 29.8% to $22,057,000 compared to $31,433,000 in the comparable period of the prior year. The additional cash used by operating activities was more than offset by the decrease in cash used in investing activities. Effective July 1, 2000, the Company acquired Quiksilver International, an Australian company that owns the worldwide trademark rights to the "Quiksilver" brand name (other than in the United States, Mexico and Puerto Rico where those rights were already owned by the Company.) The initial purchase price was $23,880,000, which includes cash consideration of $23,380,000 and transaction costs of $500,000. Under the terms of the purchase agreement, two additional payments will be made, one at the end of fiscal 2002 and one at the end of fiscal 2005. Such deferred purchase price payments will be contingent on the computed earnings of Quiksilver International through June 30, 2005. The deferred purchase price payments, which were estimated and discounted to present value, initially totaled $18,054,000. In the third quarter of the current year, the estimated deferred purchase price payment due at the end of fiscal 2002 was increased by $4,267,000 as a result of Quiksilver International's operations through June 30, 2001. The deferred purchase price obligations are reflected in the Condensed Consolidated Balance Sheet as a component of long-term debt. Noncash interest expense is recorded to reflect the calculated financing costs associated with the deferred purchase price obligations. Cash and cash equivalents decreased $524,000 for the nine months ended July 31, 2001 compared to an increase of $3,712,000 in the comparable period of the prior year. Working capital increased $26,988,000 or 22.6% to $146,517,000 at July 31, 2001 from $119,529,000 at October 31, 2000. The Company believes its current lines of credit are adequate to cover its seasonal working capital and other requirements for the foreseeable future and that increases in its lines of credit can be obtained as needed to fund future growth. Accounts receivable increased 9.4% to $149,221,000 at July 31, 2001 from $136,394,000 at October 31, 2000. Domestic accounts receivable increased 0.1% to $87,433,000 at July 31, 2001 from $87,369,000 at October 31, 2000, and European accounts receivable increased 26.0% to $61,788,000 from $49,025,000 for that same period. These increases in accounts receivable are generally consistent with the increases in net sales but fluctuate somewhat due to differences in the timing of shipments in comparison to previous periods. 10 12 Consolidated inventories increased 39.4% to $125,508,000 at July 31, 2001 from $90,034,000 at October 31, 2000. Domestic inventories increased 28.2% to $93,388,000 from $72,860,000 at October 31, 2000, and European inventories increased 87.0% to $32,120,000 from $17,174,000 for that same period. Inventory turnover decreased as of July 31, 2001 in comparison to October 31, 2000 primarily due to early receipts of holiday season product in comparison to the prior year. It is not uncommon for some of the Company's customers to have financial difficulties from time to time. This is normal given the wide variety of the Company's account base, which includes small surf shops, medium-sized retail chains, and some large department store chains. In some cases, customers have ended up in bankruptcy. However, the Company's losses from these situations has been relatively normal and anticipated. To allow for such losses, the Company establishes reserves for doubtful accounts to reduce the value of its receivables. Management believes that the allowance for doubtful accounts at July 31, 2001 is adequate to cover anticipated losses. Throughout the year, the Company monitors developments regarding its major customers. However, if customers experience unforeseen, material financial difficulties, this could have an adverse impact on the Company's profits. FOREIGN CURRENCY The Company's foreign currency risks are discussed in the Company's Annual Report on Form 10-K for the year ended October 31, 2000 in Item 7a. Quiksilver Europe's statements of income are translated from French francs into U.S. dollars at average exchange rates in effect during the reporting period. When the French franc and euro strengthen compared to the U.S. dollar there is a positive effect on Quiksilver Europe's results as reported in the Company's Consolidated Financial Statements. Conversely, when the U.S. dollar strengthens, there is a negative effect. European net sales increased 38.4% in French francs during the three months ended July 31, 2001 compared to the three months ended July 31, 2000. As measured in U.S. dollars and reported in the Company's financial statements, European net sales increased only 27.9% as a result of a stronger U.S. dollar versus the French franc and euro in comparison to the prior year. NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board (FASB) approved Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 prohibits the pooling of interest method of accounting for business combinations initiated after June 30, 2001. SFAS No. 142 requires companies to cease amortizing goodwill that existed at June 30, 2001 on the date of implementation of this standard. Any goodwill resulting from acquisitions completed after June 30, 2001 will not be amortized. SFAS No. 142 also establishes a new method of testing goodwill for impairment on an annual basis or on an interim basis if an event occurs or circumstances change that would reduce the fair value of a reporting unit below its carrying value. These standards must be adopted by the Company by its fiscal year ending October 31, 2002. The Company is currently evaluating the impact of these standards on its financial statements. 11 13 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8K. (a) Exhibits None (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended July 31, 2001. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. QUIKSILVER, INC., a Delaware corporation September 14, 2001 /s/ Steven L. Brink ----------------------------------------- Steven L. Brink Chief Financial Officer and Treasurer (Principal Accounting Officer) 12