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Quiksilver Announces Fiscal 2015 First-Quarter Financial Results

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Quiksilver, Inc. (NYSE:ZQK) today announced financial results for the fiscal 2015 first quarter ended January 31, 2015.

We are encouraged by our first quarter performance, said Andy Mooney, chairman and chief executive officer of Quiksilver, Inc. Revenues adjusted for currencies and licensed categories essentially stabilized in Q1, and operating expenses decreased by $20 million versus the prior year in constant currencies.

Customer feedback on our Spring 15 product offering, across all brands, has been positive. Our order book for the Fall 15 product line continues to develop, and we are confident in our ability to generate revenue increases going forward.

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 adjusted EBITDA; a definition of the Companys emerging markets; and changes in net revenue on a constant currency continuing category basis, which adjusts prior period net revenues for changes in currency exchange rates and excludes prior period wholesale net revenues for product categories now licensed to third parties, as well as removes current period licensing net revenues for the same licensed product categories, in order to provide comparability of net revenues between periods.

First Quarter Review:

The following comparisons refer to results of continuing operations for the first quarter of fiscal 2015 versus the first quarter of fiscal 2014.

Net revenues, as reported, were $341 million compared with $395 million. Net revenues were down 4%, or $14 million, on a constant currency continuing category basis.

  • Americas net revenues, as reported, were $148 million compared with $175 million. Americas net revenues were down 8%, or $13 million, on constant currency continuing category basis.
  • EMEA net revenues, as reported, were $126 million compared with $149 million. EMEA net revenues were down 3%, or $3 million, on constant currency continuing category basis.
  • APAC net revenues, as reported, were $67 million compared with $70 million. APAC net revenues were up 4%, or $2 million, on constant currency continuing category basis.

Gross margin decreased to 49.7% from 50.8%. The 110 basis point decline in gross margin reflects higher discounting, the unfavorable impact of currency exchange rates, and higher freight and distribution costs related to the West coast ports labor dispute, partially offset by the favorable impact of higher sales mix in direct to consumer channels.

SG&A expense decreased $33 million to $171 million from $204 million. The decrease was primarily driven by currency exchange rates, reduced employee compensation, rent, distribution and legal expenses.

Pro-forma Adjusted EBITDA was $10 million compared with $16 million.

Net loss from continuing operations attributable to Quiksilver, Inc. was $18 million, or $0.11 per share, compared with $22 million, or $0.13 per share.

Cash and availability on credit facilities at the end of the quarter was $141 million.

Q1 Net Revenue Highlights:

Net revenues from continuing operations by brand, sales channel and product group for the first quarter of fiscal 2015 compared with the first quarter of fiscal 2014 were as follows.

Brands:

  • Quiksilver net revenues, as reported, were $141 million compared with $164 million. Quiksilver net revenues were down 3%, or $5 million, on a constant currency continuing category basis;
  • Roxy net revenues, as reported, were $100 million compared with $118 million. Roxy net revenues were down 6%, or $7 million, on a constant currency continuing category basis; and
  • DC net revenues, as reported, were $89 million compared with $103 million. DC net revenues were down 4%, or $4 million, on a constant currency continuing category basis.

Distribution channels:

  • Wholesale net revenues, as reported, were $192 million compared with $239 million. Wholesale net revenues were down 9%, or $19 million, on a constant currency continuing category basis;
  • Retail net revenues, as reported, were $119 million compared with $131 million. Retail net revenues were flat on a constant currency continuing category basis. Same-store sales in company-owned retail stores decreased 3%. Company-owned retail stores totaled 713 at the end of the fiscal 2015 first quarter compared with 645 at the end of fiscal 2014 first quarter; and,
  • E-commerce net revenues, as reported, were $27 million compared with $23 million. E-commerce net revenues were up 20%, or $4 million, on a constant currency continuing category basis.

Product groups:

  • Apparel and accessories net revenues, as reported, were $251 million compared with $306 million. Apparel and accessories net revenues were down 7%, or $20 million, on a constant currency continuing category basis; and
  • Footwear net revenues were $89 million compared with $88 million. Footwear net revenues were up 8%, or $6 million, on a constant currency continuing category basis.

Net revenues from emerging markets, as reported, were $54 million compared with $53 million. Net revenues from emerging markets were up 20%, or $9 million, on a constant currency continuing category basis.

Audit Committee Investigation:

As previously announced, the release of our first quarter financial results was postponed due to an Audit Committee investigation of a revenue cut-off issue.

In late February, the Company’s management discovered a deficiency in the Company’s internal controls related to quarter end revenue cut-off, whereby accurate information regarding actual shipment routing and customer delivery was not consistently maintained in the Company’s ERP system in accordance with its procedures. As a result, certain net revenues recorded in the prior period did not meet the criteria for revenue recognition at that time but instead should have been recognized in the following quarter.

Management brought the issue to the attention of the Audit Committee of the Company’s Board of Directors, which then commenced an investigation, with the assistance of independent legal counsel engaged by the Audit Committee and outside forensic accountants, into the scope and causes of this revenue cut-off issue and reported the results of that investigation to the full Board and management. The Company analyzed the impact of this revenue cut-off issue and concluded that it did not have a material impact on its previously issued financial statements.

As a result of the investigation, in presenting the Company’s first quarter 2015 financial results, net revenues for the first quarter of fiscal 2014 have been revised to reflect a $2 million increase.

Outlook:

The Company updated its fiscal 2015 guidance for continuing operations to incorporate February 2015 currency exchange rates and provided guidance for its fiscal 2015 second quarter, as follows:

Fiscal 2015 second quarter net revenues are expected to be approximately $340 million, which is flat to last years second quarter on a constant currency continuing category basis. Gross margins are expected to be approximately 48.0%. SG&A, excluding any restructuring and special charges, is expected to be approximately $175 million. Pro-forma Adjusted EBITDA is expected to be approximately $8 million.

Fiscal year 2015 net revenues are expected to be approximately $1.38 billion to $1.45 billion, which is an increase of approximately 1% to 6% on a constant currency continuing category basis versus the prior year. Gross margins are expected to be between 48.5% and 50%. SG&A, excluding any restructuring and special charges, is expected to be between $685 million and $700 million. Pro-forma Adjusted EBITDA is expected to be between $70 million and $80 million. This revision of 2015 fiscal year guidance is driven by changes in currency exchange rates since October 2014, as well as additional cost reduction initiatives.

The foregoing outlook updates and supersedes all previous guidance provided by the Company.

About Quiksilver:

Quiksilver, Inc., one of the worlds leading outdoor sports lifestyle companies, designs, produces and distributes branded apparel, footwear and accessories. The Companys 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 Companys Quiksilver, Roxy, and DC brands have authentic roots and heritage in surf, snow and skate. The Companys 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 Companys corporate headquarters are in Huntington Beach, California.

Forward-looking statements:

This press release contains forward-looking statements including, but not limited to, statements regarding managements expectations for the Companys order book, net revenues, gross margins, SG&A expense, pro-forma adjusted EBITDA and capital expenditures in fiscal year 2015 and the second quarter thereof. 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 Companys SEC filings and specifically the sections titled Risk Factors, Managements Discussion and Analysis of Financial Condition and Results of Operations and Forward-Looking Statements in the Companys 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)
Three months ended
In thousands, except per share amounts January 31,
2015 2014
Revenues, net $ 340,854 $ 394,910
Cost of goods sold 171,410 194,270
Gross profit 169,444 200,640
Selling, general and administrative expense 170,504 203,784
Asset impairments 255 883
Operating loss (1,315 ) (4,027 )
Interest expense 18,402 19,420
Foreign currency loss 657 2,828
Loss before benefit for income taxes (20,374 ) (26,275 )
Benefit for income taxes (2,084 ) (4,385 )
Loss from continuing operations (18,290 ) (21,890 )
Income from discontinued operations, net of tax 6,732 37,617
Net (loss)/income (11,558 ) 15,727
Less: net loss attributable to non-controlling interest 788 464
Net (loss)/income attributable to Quiksilver, Inc. $ (10,770 ) $ 16,191
Loss per share from continuing operations attributable to Quiksilver, Inc.:
Basic $ (0.11 ) $ (0.13 )
Diluted $ (0.11 ) $ (0.13 )
Income per share from discontinued operations attributable to Quiksilver, Inc.:
Basic $ 0.04 $ 0.22
Diluted $ 0.04 $ 0.22
Weighted average common shares outstanding:
Basic 171,039 169,747
Diluted 171,039 169,747
Amounts attributable to Quiksilver, Inc.:
Loss from continuing operations $ (18,290 ) $ (21,529 )
Income from discontinued operations, net of tax 7,520 37,720
Net (loss)/income $ (10,770 ) $ 16,191
QUIKSILVER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
January 31, 2015 October 31, 2014
In thousands

ASSETS

Current Assets
Cash and cash equivalents $ 60,656 $ 46,664
Restricted cash 1,745 4,687
Trade accounts receivable (net of allowance of $54,819 and $63,991, respectively) 258,952 311,014
Other receivables 51,101 40,847
Inventories 306,119 284,517
Deferred income taxes 4,533 4,926
Prepaid expenses and other current assets 31,315 28,080
Current assets held for sale 20,265
Total Current Assets 714,421 741,000
Restricted cash 3,918 16,514
Fixed assets, net 194,107 213,768
Intangible assets, net 137,165 135,510
Goodwill 79,805 80,622
Other assets 39,946 47,086
Deferred income taxes – long-term 14,352 16,088
Non-current assets held for sale 5,394
TOTAL ASSETS $ 1,183,714 $ 1,255,982

LIABILITIES AND EQUITY

Current Liabilities
Lines of credit $ 31,093 $ 32,929
Accounts payable 174,090 168,307
Accrued liabilities 101,591 112,701
Current portion of long-term debt 2,261 2,432
Income taxes payable 2,505 1,124
Deferred income taxes 19,490 19,628
Liabilities related to assets held for sale 13,266
Total Current Liabilities 331,030 350,387
Long-term debt, net of current portion 770,048 793,229
Other long-term liabilities 34,702 39,342
Deferred income taxes – long-term 21,304 16,790
Total Liabilities 1,157,084 1,199,748
Equity
Common stock 1,743 1,741
Additional paid-in capital 591,173 589,032
Treasury stock (6,778 ) (6,778 )
Accumulated deficit (598,177 ) (587,407 )
Accumulated other comprehensive income 38,669 57,288
Total Quiksilver, Inc. Stockholders’ Equity 26,630 53,876
Non-controlling interest 2,358
Total Equity 26,630 56,234
TOTAL LIABILITIES AND EQUITY $ 1,183,714 $ 1,255,982
QUIKSILVER, INC. AND SUBSIDIARIES
ADJUSTED EBITDA & PRO-FORMA ADJUSTED EBITDA RECONCILIATION (UNAUDITED)
Three months ended
In thousands January 31,
2015 2014
Net loss from continuing operations attributable to Quiksilver, Inc. $ (18,290 ) $ (21,529 )
Benefit for income taxes (2,084 ) (4,385 )
Interest expense 18,402 19,420
Depreciation and amortization 10,751 10,545
Non-cash stock-based compensation expense 1,769 5,063
Non-cash asset impairments 255 883
Adjusted EBITDA 10,803 9,997
Restructuring and other special charges (700 ) 6,448
Pro-forma Adjusted EBITDA 10,103 16,445

Definition of Adjusted EBITDA and Pro-forma Adjusted EBITDA:

Adjusted EBITDA is defined as net 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. Pro-forma Adjusted EBITDA is defined as Adjusted EBITDA excluding restructuring and other special charges (including, but not limited to, reserves and other charges associated with restructuring activities, non-operating charges for gains and losses on lease exit activities, as well as severance and other employee termination costs as a result of downsizing and reorganization). 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 and restructuring and other special charges. 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 certain reserves and charges associated with restructuring activities, non-operating charges for gains and losses on lease exit activities, as well as severance and other employee termination costs as these costs 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.

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.

CONSTANT CURRENCY CONTINUING CATEGORY NET REVENUE RECONCILIATION

We make reference to net revenues on a “constant currency continuing category” basis in order to provide additional comparable information with regard to changes in net revenues. Constant currency continuing category reporting provides valuable comparisons of net revenues as it adjusts for the effect of changes in foreign currency exchange rates and for the impact on our wholesale channel of transitioning certain product categories to a third-party licensing model. Constant currency is calculated by taking the average foreign currency exchange rate for the current period and applying that same rate to the comparable prior year period. Continuing category impacts are determined by removing the comparable prior period net revenues generated from product categories which are now licensed as well as removing current period licensing net revenues generated from those same licensed product categories.

The following table presents net revenues from continuing operations by segment, brand, channel and product group on both an as reported basis and a comparable constant currency continuing category basis for the first quarters ended January 31, 2015 and 2014 (in thousands):

Fiscal 2015 Net Revenues As Reported (GAAP) Less Fiscal 2015 Licensing Revenue from Licensed Product Categories Fiscal 2015 Comparable Net Revenues (Non-GAAP) Fiscal 2014 Net Revenues As Reported (GAAP) Impact of Fiscal 2015 Foreign Exchange Rates on Fiscal 2014 Net Revenues Less Fiscal 2014 Net Revenues from Licensed Product Categories Fiscal 2014 Constant Currency Continuing Category Net Revenues (Non-GAAP) % Fiscal 2015 GAAP Net Revenues vs Fiscal 2014 GAAP Net Revenues % Fiscal 2015 Non-GAAP Net Revenues vs Fiscal 2014 Non-GAAP Net Revenues
By Region:
Americas 147,767 (477 ) 147,290 175,463 (4,036 ) (10,725 ) 160,702 -16 % -8 %
EMEA 125,813 125,813 149,397 (20,220 ) (64 ) 129,113 -16 % -3 %
APAC 66,598 66,598 69,875 (5,579 ) (65 ) 64,231 -5 % 4 %
Corporate 676 676 175 (15 ) 160 286 % 323 %
340,854 (477 ) 340,377 394,910 (29,850 ) (10,853 ) 354,207 -14 % -4 %
By Brand:
Quiksilver 140,796 (70 ) 140,726 163,846 (12,820 ) (5,522 ) 145,504 -14 % -3 %
Roxy 100,303 (344 ) 99,959 118,026 (8,385 ) (2,779 ) 106,862 -15 % -6 %
DC 89,120 (63 ) 89,057 102,989 (7,629 ) (2,553 ) 92,807 -13 % -4 %
Other 10,635 10,635 10,049 (1,016 ) 9,033 6 % 18 %
340,854 (477 ) 340,377 394,910 (29,850 ) (10,853 ) 354,207 -14 % -4 %
By Channel:
Wholesale 192,365 192,365 238,696 (16,712 ) (10,853 ) 211,131 -19 % -9 %
Retail 119,124 119,124 130,568 (11,916 ) 118,652 -9 % 0 %
E-commerce 26,661 26,661 23,474 (1,222 ) 22,252 14 % 20 %
Licensing/Royalties 2,704 (477 ) 2,227 2,172 2,172 24 % 3 %
340,854 (477 ) 340,377 394,910 (29,850 ) (10,853 ) 354,207 -14 % -4 %
By Product Group:

Apparel & Accessories 251,456 (477 ) 250,979 306,408 (24,447 ) (10,853 ) 271,108 -18 % -7 %
Footwear 89,398 89,398 88,502 (5,403 ) 83,099 1 % 8 %
340,854 (477 ) 340,377 394,910 (29,850 ) (10,853 ) 354,207 -14 % -4 %

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