UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended March 31, 2008
or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
Commission file number: 000-51382
Volcom, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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33-0466919
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(State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification No.)
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Volcom, Inc.
1740 Monrovia Avenue
Costa Mesa, CA 92627
(Address of principal executive offices, including zip code)
(949) 646-2175
(Registrants 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 requirements for the past 90 days. Yes
þ
No
o
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):
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Large accelerated filer
þ
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Accelerated filer
o
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Non-accelerated filer
o
(Do not check if a smaller reporting company)
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Smaller reporting company
o
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes
o
No
þ
As of May 1, 2008, there were 24,349,520 shares of the registrants common stock, par value $0.001,
outstanding.
VOLCOM, INC.
FORM 10-Q
INDEX
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
VOLCOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except share data)
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March 31, 2008
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December 31, 2007
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Assets
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Current assets:
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Cash and cash equivalents
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$
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72,031
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$
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92,962
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Short-term investments
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302
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Accounts receivable net of allowances of
$3,836 (2008) and $2,783 (2007)
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66,919
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58,270
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Inventories
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18,958
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20,440
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Prepaid expenses and other current assets
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2,402
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1,720
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Income taxes receivable
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326
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Deferred income taxes
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3,164
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2,956
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Total current assets
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163,776
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176,674
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Property and equipment net
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26,164
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24,427
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Investments in unconsolidated investees
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330
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298
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Deferred income taxes
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268
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Intangible assets net
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23,840
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363
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Goodwill
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2,557
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Other assets
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415
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464
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Total assets
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$
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217,082
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$
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202,494
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Liabilities and Stockholders Equity
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Current liabilities:
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Accounts payable
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$
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11,175
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$
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18,694
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Accrued expenses and other current liabilities
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13,407
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10,561
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Income taxes payable
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4,429
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Current portion of capital lease obligations
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100
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72
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Total current liabilities
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29,111
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29,327
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Long-term capital lease obligations
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92
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33
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Other long-term liabilities
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574
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190
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Income taxes payable noncurrent
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91
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89
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Deferred income taxes
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1,249
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Commitments and contingencies (Note 10)
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Stockholders equity:
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Common stock, $.001 par value 60,000,000
shares authorized; 24,349,520 (2008 and 2007)
shares issued and outstanding
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24
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24
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Additional paid-in capital
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89,422
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89,185
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Retained earnings
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89,566
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80,226
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Accumulated other comprehensive income
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6,953
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3,420
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Total stockholders equity
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185,965
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172,855
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Total liabilities and stockholders equity
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$
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217,082
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$
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202,494
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See accompanying notes to condensed consolidated financial statements
3
VOLCOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except share and per share data)
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Three Months Ended
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March 31,
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2008
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2007
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Revenues:
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Product revenues
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$
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79,987
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$
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49,425
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Licensing revenues
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567
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1,393
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Total revenues
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80,554
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50,818
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Cost of goods sold
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38,379
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24,411
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Gross profit
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42,175
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26,407
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Selling, general and administrative expenses
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27,777
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18,345
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Operating income
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14,398
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8,062
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Other income:
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Interest income, net
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469
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1,081
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Foreign currency (loss) gain
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(156
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39
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Total other income
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313
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1,120
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Income before provision for income taxes
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14,711
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9,182
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Provision for income taxes
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5,371
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3,700
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Net income
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$
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9,340
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$
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5,482
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Net income per share:
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Basic
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$
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0.38
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$
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0.23
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Diluted
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$
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0.38
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$
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0.22
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Weighted average shares outstanding:
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Basic
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24,326,015
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24,273,178
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Diluted
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24,330,994
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24,374,647
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See accompanying notes to condensed consolidated financial statements
4
VOLCOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
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Three Months Ended
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March 31,
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2008
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2007
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Cash flows from operating activities:
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Net income
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$
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9,340
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$
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5,482
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Adjustments to reconcile net income to net cash provided by operating activities:
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Depreciation and amortization
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1,743
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533
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Provision for doubtful accounts
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163
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146
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Excess tax benefits related to exercise of stock options
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(173
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Loss on disposal of property and equipment
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16
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15
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Stock-based compensation
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247
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210
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Deferred income taxes
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(79
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(63
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Changes in operating assets and liabilities, net of effects of acquisition:
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Accounts receivable
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(3,138
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684
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Inventories
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5,801
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2,032
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Prepaid expenses and other current assets
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(473
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(986
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Income taxes receivable/payable
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4,632
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2,993
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Other assets
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77
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(66
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Accounts payable
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(12,810
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)
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(2,760
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Accrued expenses and other current liabilities
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221
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1,272
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Other long-term liabilities
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(112
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(4
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Net cash provided by operating activities
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5,628
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9,315
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Cash flows from investing activities:
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Purchase of property and equipment
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(1,026
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(6,458
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Business acquisition, net of cash acquired
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(26,856
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Purchase of intangible assets
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(300
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)
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Purchase of short-term investments
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(281
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)
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Purchase of additional shares in cost method investee
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(32
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Proceeds from sale of property and equipment
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15
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Net cash used in investing activities
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(28,495
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(6,443
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Cash flows from financing activities:
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Principal payments on capital lease obligations
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(46
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(20
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Cash received from government grants
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463
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Proceeds from exercise of stock options
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465
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Excess tax benefits related to exercise of stock options
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173
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Net cash provided by financing activities
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417
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618
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Effect of exchange rate changes on cash
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1,519
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64
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Net (decrease)/increase in cash and cash equivalents
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(20,931
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)
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3,554
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Cash and cash equivalents
Beginning of period
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92,962
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85,414
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Cash and cash equivalents
End of period
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$
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72,031
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$
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88,968
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Supplemental disclosures of cash flow information:
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Cash paid during the period for:
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Interest
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$
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19
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$
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7
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Income taxes
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$
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827
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$
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770
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Supplemental disclosures of noncash investing and financing activities:
At March 31, 2008 and 2007, the Company accrued for $134,000 and $103,000 of property and
equipment purchases, respectively.
Upon adoption of Financial Accounting Standards Board Interpretation No. 48,
Accounting for
Uncertainty in Income Taxes
, on January 1, 2007, the Company recorded a $128,000 increase to income
taxes payable and a reduction to retained earnings.
See accompanying notes to condensed consolidated financial statements
5
VOLCOM, INC. AND SUBSIDIARIES
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 accounting principles generally accepted 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 statements.
In the opinion of management, the unaudited condensed consolidated financial statements
contain all adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of the condensed consolidated balance sheet as of March 31, 2008, the condensed
consolidated statement of operations for the three months ended March 31, 2008 and 2007, and the
condensed consolidated statement of cash flows for the three months ended March 31, 2008 and 2007.
The results of operations for the three months ended March 31, 2008 are not necessarily indicative
of the results to be expected for the year ending December 31, 2008. The condensed consolidated
financial statements and notes thereto should be read in conjunction with the Companys
consolidated annual financial statements and notes thereto included in the Companys Annual Report
on Form 10-K for the fiscal year ended December 31, 2007.
Note 2
Stock-Based Compensation
The Company accounts for stock-based compensation under the fair value recognition provisions
of Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004),
Share-Based Payment
(SFAS No. 123(R)). SFAS No. 123(R) requires that the Company account for all stock-based
compensation using a fair-value method and recognize the fair value of each award as an expense
over the service period. The Company is using the Black-Scholes option-pricing model to value
compensation expense. Forfeitures are estimated at the date of grant based on historical employee
turnover rates and reduce the compensation expense recognized. The expected option term is
estimated based upon historical data on employee exercises and managements expectation of exercise
behavior. For options granted concurrently with the Companys initial public offering of common
stock, the expected volatility of the Companys stock price was based upon the historical
volatility of similar entities whose share prices were publicly available. For options granted
subsequent to the Companys offering, expected volatility is based on the historical volatility of
the Companys stock. The risk-free interest rate is based upon the current yield on U.S. Treasury
securities having a term similar to the expected option term. Dividend yield is estimated at zero
because the Company does not anticipate paying dividends in the foreseeable future. The fair value
of employee stock-based awards is amortized using the straight-line method over the vesting period.
During the three months ended March 31, 2008 and 2007, the Company recognized approximately
$247,000, or $157,000 net of tax, and $210,000, or $125,000 net of tax, respectively, in
stock-based compensation expense, which includes the impact of all stock-based awards and is
included in selling, general and administrative expenses.
Stock Compensation Plans
In June 2005, the Companys Board of Directors and stockholders
approved the 2005 Incentive Award Plan (the Incentive Plan), as amended in February 2007. A total
of 2,300,000 shares of common stock were initially authorized and reserved for issuance under the
Incentive Plan for incentives such as stock options, stock appreciation rights, restricted stock
awards, restricted stock units, performance shares and deferred stock awards. The actual number of
awards reserved for issuance under the Incentive Plan automatically increases on the first trading
day in January of each calendar year by an amount equal to 2% of the total number of shares of
common stock outstanding on the last trading day in December of the preceding calendar year, but in
no event will any such annual increase exceed 750,000 shares. As of March 31, 2008, there were
3,125,655 shares available for issuance pursuant to new stock option grants or other equity awards.
Under the Incentive Plan, stock options have been granted at an exercise price equal to the fair
market value of the Companys stock at the time of grant. The vesting period for stock options is
determined by the Board of Directors or the Compensation Committee of the Board of Directors, as
applicable, and the stock options generally expire ten years from the date of grant or 90 days
after employment or services are terminated.
6
Stock Option Awards
In June 2005, the Companys Board of Directors approved the grant of
586,526 options to purchase the Companys common stock. The Company granted these options under the
Incentive Plan at the effective date of the Companys initial public offering at an exercise price
of $19.00, which was equal to the initial public offering price of the Companys common stock. The
stock options have vesting terms whereby 10,526 options vested immediately, 210,000 options vested
on December 15, 2005 and the remaining 366,000 options vest 20% per annum over 5 years. The fair
value of these awards was calculated through the use of the Black-Scholes option-pricing model
assuming an exercise price equal to the fair market value of the Companys stock and the following
additional significant weighted average assumptions: expected life of 4.2 years; volatility of
47.5%; risk-free interest rate of 3.73%; and no dividends during the expected term.
In May 2007, the Companys Board of Directors approved the grant of 2,000 options to purchase
the Companys common stock to each independent member of the Companys Board of Directors (10,000
options in total). The Company granted these options at the fair market value of the Companys
common stock on the date of grant. The stock options vest one year from the date of grant. The fair
value of these awards was calculated through the use of the Black-Scholes option-pricing model
assuming an exercise price equal to the fair market value of the Companys stock and the following
additional significant weighted average assumptions: expected life of 2.0 years; volatility of
55.7%; risk-free interest rate of 4.68%; and no dividends during the expected term.
A summary of the Companys stock option activity under the Incentive Plan for the three months
ended March 31, 2008 is as follows:
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Weighted-
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Average
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Weighted-Average
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Number of
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Exercise
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Remaining
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Options
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Price
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Contractual Term
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Outstanding at January 1, 2008
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442,400
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$
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19.52
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Granted
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Exercised
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Canceled or forfeited
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Outstanding at March 31, 2008
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442,400
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$
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19.52
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7.3 years
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Exercisable at March 31, 2008
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228,700
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$
|
19.00
|
|
|
7.3 years
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2008, there was unrecognized compensation expense of $1.4 million related to
unvested stock options, which the Company expects to recognize over a weighted-average period of
2.2 years. The aggregate intrinsic value of options exercised during the three months ended March
31, 2008 and 2007 was zero and $447,000, respectively. The aggregate intrinsic value of options
outstanding and options exercisable as of March 31, 2008 was $523,000 and $277,000, respectively.
Additional information regarding stock options outstanding as of March 31, 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted-
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Number of
|
|
Remaining
|
|
Exercise
|
|
Number of
|
|
Exercise
|
Range of exercise price
|
|
Options
|
|
Life (yrs)
|
|
Price
|
|
Options
|
|
Price
|
$19.00
|
|
|
432,400
|
|
|
|
7.3
|
|
|
$
|
19.00
|
|
|
|
228,700
|
|
|
$
|
19.00
|
|
$42.07
|
|
|
10,000
|
|
|
|
9.1
|
|
|
$
|
42.07
|
|
|
|
|
|
|
|
|
|
As of March 31, 2008, the total number of outstanding options vested or expected to vest
(based on anticipated forfeitures) was 430,178, which had a weighted-average exercise price of
$19.54. The weighted-average remaining life of these options was 7.3 years and the aggregate
intrinsic value was $508,000 at March 31, 2008.
Restricted Stock Awards
The Companys Incentive Plan provides for awards of restricted
shares of common stock. Restricted stock awards have time-based vesting and are subject to
forfeiture if employment terminates prior to the end of the service period. Restricted stock awards
are valued at the grant date based upon the market price of the Companys common stock and the fair
value of each award is charged to expense over the service period.
7
In 2005, the Company granted a total of 20,000 shares of restricted stock to employees. The
restricted stock awards have a purchase price of $.001 per share and vest 20% per year over a
five-year period. The total fair value of the restricted stock awards is $660,000, of which $33,000
was amortized to expense during each of the three month periods ended March 31, 2008 and 2007.
In 2006, the Company granted a total of 15,000 shares of restricted stock to employees. The
restricted stock awards have a purchase price of $.001 per share and vest 20% per year over a
five-year period. The total value of the restricted stock awards is $405,000, of which $20,000 was
amortized to expense during each of the three month periods ended March 31, 2008 and 2007.
Restricted stock activity for the three months ended March 31, 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
Shares of
|
|
|
Grant-Date
|
|
|
|
Restricted Stock
|
|
|
Fair Value
|
|
Unvested restricted stock at January 1, 2008
|
|
|
24,000
|
|
|
$
|
30.00
|
|
Granted
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(1,500
|
)
|
|
$
|
34.65
|
|
Canceled or forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested restricted stock at March 31, 2008
|
|
|
22,500
|
|
|
$
|
30.72
|
|
|
|
|
|
|
|
|
As of March 31, 2008, there was unrecognized compensation expense of $556,000 related to all
unvested restricted stock awards, which the Company expects to recognize on a straight-line basis
over a weighted average period of approximately 2.7 years.
Note 3
New Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS No. 157),
which defines fair value, establishes a framework for measuring fair value and expands disclosures
about fair value measurements. SFAS No.157 applies to other accounting pronouncements that require
or permit fair value measurements. The new guidance is effective for financial statements issued
for fiscal years beginning after November 15, 2007, and for interim periods within those fiscal
years. The Company adopted the provisions of SFAS No.157 as of January 1, 2008. The adoption of
SFAS No. 157 did not have a material impact on the Companys financial position.
In February 2008, the FASB issued FASB Staff Position No. 157-2, which deferred the effective
date for certain portions of SFAS No. 157 related to nonrecurring measurements of nonfinancial
assets and liabilities. That provision of SFAS No. 157 will be effective for the Companys fiscal
year 2009. The Company is currently evaluating the effect, if any, that the adoption of SFAS No.
157-2 will have on its consolidated results of operations, financial position and cash flows.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and
Financial Liabilities
Including an Amendment of SFAS No. 115
(SFAS No. 159). SFAS No. 159
provides reporting entities an option to measure certain financial assets and liabilities and other
eligible items at fair value on an instrument-by-instrument basis. Unrealized gains and losses on
items for which the fair value option has been elected are reported in earnings at each subsequent
reporting date. SFAS No. 159 was adopted on January 1, 2008. The adoption of SFAS No. 159 did not
have a significant impact on the Companys consolidated financial position or results of
operations.
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations
(SFAS No. 141(R)).
SFAS No. 141(R) requires reporting entities to record fair value estimates of contingent
consideration and certain other potential liabilities during the original purchase price
allocation, expense acquisition costs as incurred and does not permit certain restructuring
activities previously allowed under EITF 95-3 to be recorded as a component of purchase accounting.
SFAS No. 141(R) is effective for fiscal periods beginning after December 15, 2008 and should
be applied prospectively for all business acquisitions entered into after the date of
adoption. The Company is currently evaluating the impact the adoption of SFAS No. 141(R) will have
on its consolidated financial position or results of operations.
8
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interest in Consolidated
Financial Statements
an amendment of ARB No. 51
(SFAS No. 160). SFAS No. 160 requires (i) that
noncontrolling (minority) interests be reported as a component of shareholders equity, (ii) that
net income attributable to the parent and to the noncontrolling interest be separately identified
in the consolidated statement of operations, (iii) that changes in a parents ownership interest
while the parent retains its controlling interest be accounted for as equity transactions, (iv)
that any retained noncontrolling equity investment upon the deconsolidation of a subsidiary be
initially measured at fair value, and (v) that sufficient disclosures are provided that clearly
identify and distinguish between the interests of the parent and the interests of the
noncontrolling owners. SFAS No. 160 is effective for fiscal periods beginning after December 15,
2008. The Company is currently evaluating the impact the adoption of SFAS No. 160 will have on its
consolidated financial position or results of operations.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and
Hedging Activities an amendment of FASB Statement No. 133
(SFAS No. 161). SFAS No. 161 requires
expanded disclosures about an entitys derivative instruments and hedging activities. It is
effective for fiscal years beginning after November 15, 2008, including interim periods within
those fiscal periods. The Company does not expect the adoption of SFAS No. 161 to have a material
effect on its consolidated financial position or results of operations.
In April 2008, the FASB issued FASB Staff Position 142-3,
Determination of the Useful Lives of
Intangible Assets
(FSP 142-3), which amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful life of a recognized intangible asset
under FASB No. 142,
Goodwill and Other Intangible Assets
. The intent of FSP 142-3 is to improve the
consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the
period of expected cash flows used to measure the fair value of the asset under SFAS No. 141(R) and
other U.S. generally accepted accounting principles. The Company does not expect the adoption of
FSP 142-3 to have a material effect on its consolidated financial position or results of
operations.
Note 4
Acquisitions
Effective January 17, 2008, the Company acquired all of the outstanding membership interests
of Electric Visual Evolution, LLC (Electric), a core action sports lifestyle brand with growing
product lines including sunglasses, goggles, t-shirts, bags, hats, belts and other accessories. The
operations of Electric have been included in the Companys results since January 17, 2008. The
purchase price of approximately $27.3 million, excluding transaction costs, consisted of cash
consideration of $25.3 million and a working capital adjustment of $2.0 million in cash, and is
subject to certain indemnities and post-closing adjustments. Transaction costs totaled $1.1
million. The sellers also will be eligible to earn up to an additional $21.0 million in cash over
the next three years upon achieving certain financial milestones. Electric will operate as a
wholly-owned subsidiary of the Company and will be maintained as a stand-alone brand. Goodwill
arises from the synergies the Company believes can be achieved by the integration of certain
aspects of Electrics production of softgoods and accessories. Approximately $929,000 of this
goodwill is estimated to be deductible for tax purposes, which is subject to change upon
finalization of the valuation of identified intangible assets. Amortizing intangible assets consist
of customer relationships, non-compete agreements, backlog and athlete contracts with estimated
useful lives of 20 years, 4 years, 3 months and 15 months, respectively. These intangible assets
are amortized in a manner that reflects the pattern in which the economic benefits of the
intangible assets are consumed.
9
The assets and liabilities of Electric were recorded at estimated fair value as of the date of
acquisition under the purchase method of accounting. The following table summarizes the estimated
preliminary allocation of the purchase price to the fair values of the assets acquired and the
liabilities assumed at the date of acquisition and is subject to change upon finalization of the
valuation of identified intangible assets:
|
|
|
|
|
|
|
(In thousands)
|
|
Current assets
|
|
$
|
10,453
|
|
Property and equipment
|
|
|
1,110
|
|
Other assets
|
|
|
19
|
|
Amortizing intangible assets
|
|
|
13,260
|
|
Non-amortizing trademarks
|
|
|
10,500
|
|
Goodwill
|
|
|
2,557
|
|
|
|
|
|
Total assets acquired
|
|
|
37,899
|
|
Liabilities assumed
|
|
|
(9,477
|
)
|
|
|
|
|
Net assets acquired
|
|
$
|
28,422
|
|
|
|
|
|
The results of operations for the acquisition are included in the Condensed Consolidated
Statements of Operations from the acquisition date. Assuming the acquisition had occurred as of
the beginning of each period, proforma consolidated total revenues would have been $80.9 million and $56.0 million
for the three months ended March 31, 2008 and 2007, respectively. Proforma net income would have
been $8.6 million and $5.3 million, respectively, for those same periods, and proforma diluted
earnings per share would have been $0.35 and $0.22, respectively.
Note 5
Inventories
Inventories are as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008
|
|
|
December 31, 2007
|
|
|
|
(In thousands)
|
|
Finished goods
|
|
$
|
18,116
|
|
|
$
|
19,849
|
|
Work-in-process
|
|
|
422
|
|
|
|
214
|
|
Raw materials
|
|
|
420
|
|
|
|
377
|
|
|
|
|
|
|
|
|
|
|
$
|
18,958
|
|
|
$
|
20,440
|
|
|
|
|
|
|
|
|
Note 6
Property and Equipment
Property and equipment are as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008
|
|
|
December 31, 2007
|
|
|
|
(In thousands)
|
|
Furniture and fixtures
|
|
$
|
4,690
|
|
|
$
|
3,547
|
|
Office equipment
|
|
|
2,744
|
|
|
|
1,724
|
|
Computer equipment
|
|
|
5,405
|
|
|
|
4,959
|
|
Leasehold improvements
|
|
|
7,707
|
|
|
|
7,379
|
|
Building
|
|
|
7,925
|
|
|
|
7,489
|
|
Land
|
|
|
4,723
|
|
|
|
4,723
|
|
Construction in progress
|
|
|
355
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
33,549
|
|
|
|
29,851
|
|
Less accumulated depreciation
|
|
|
(7,385
|
)
|
|
|
(5,424
|
)
|
|
|
|
|
|
|
|
Property and equipment net
|
|
$
|
26,164
|
|
|
$
|
24,427
|
|
|
|
|
|
|
|
|
In February 2007, the Company completed the construction of its European headquarters in
Anglet, France. Costs incurred related to such construction totaled approximately 4.6 million Euros
(approximately $7.3 million based on a 1 Euro to $1.58 U.S. dollar exchange rate as of March 31,
2008).
The Company has applied for and received approval to obtain local government grants totaling
approximately 800,000 Euros (approximately $1.3 million based on a 1 Euro to $1.58 U.S. dollar
exchange rate as of March 31, 2008). Such grants have been paid to the Company at various times
during and after the European headquarters construction period and generally require the Company to
maintain and operate the European headquarters for five years. To the extent that the Company does
not maintain and operate the European headquarters for a five year period, certain amounts of the
grants will have to be repaid to the local government at that time. As of March 31, 2008, the
Company has received all of the grant money from the local government. The Company has recorded
10
$529,000 of the cash received for these grants against property and equipment, as these grants
support the construction of the European headquarters and will offset depreciation expense over the
estimated useful life of the European headquarters, and $733,000 as an other long-term liability,
as this grant relates to the Companys employment requirements over the next five years, and will
be amortized against operating expenses on a straight-line basis over the five-year period of the
employment requirements.
Note 7
Investments in Unconsolidated Investees
Since 1998, the Company has held an ownership interest in the common stock of Volcom
Australia, a licensee of the Companys products located in Australia. In February 2008, the Company
purchased an additional .4% ownership in Volcom Australia for $32,000, bringing the total ownership
interest to 13.9%. The investment is accounted for under the cost method, as the Company does not
have the ability to exercise significant influence over the financial and operating policies of the
investee. At March 31, 2008 and December 31, 2007, the Companys investment in Volcom Australia was
$330,000 and $298,000, respectively.
Note 8
Intangible Assets and Goodwill
Intangible assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2008
|
|
|
As of December 31, 2007
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
|
|
(In thousands)
|
|
Amortizing intangible assets
|
|
$
|
13,773
|
|
|
$
|
749
|
|
|
$
|
463
|
|
|
$
|
100
|
|
Non-amortizing trademarks
|
|
|
10,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non-amortizing intangible assets
|
|
|
316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
24,589
|
|
|
$
|
749
|
|
|
$
|
463
|
|
|
$
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizing intangible assets include customer relationships, non-compete agreements, backlog,
athlete contracts and reacquired license rights. Other non-amortizing intangible assets consist of
land use rights. Amortizable intangible assets are amortized by the Company using estimated useful
lives of 3 months to 20 years with no residual values. Fluctuations in the gross carrying amounts
of intangible assets associated with the Companys international subsidiaries are due to the effect
of changes in foreign currency exchange rates. Intangible amortization expense for the three months
ended March 31, 2008 and 2007 was approximately $637,000 and $11,000, respectively. The Companys
annual amortization expense is estimated to be approximately $2.4 million in the fiscal years
ending December 31, 2008 and 2009, and approximately $2.0 million, $1.6 million and $1.3 million in
the fiscal years ending December 31, 2010, 2011 and 2012, respectively.
Goodwill of $2.6 million associated with the Electric acquisition is included in the Electric
operating segment.
Note 9
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008
|
|
|
December 31, 2007
|
|
|
|
(In thousands)
|
|
Payroll and related accruals
|
|
$
|
4,968
|
|
|
$
|
4,000
|
|
Other
|
|
|
8,439
|
|
|
|
6,561
|
|
|
|
|
|
|
|
|
|
|
$
|
13,407
|
|
|
$
|
10,561
|
|
|
|
|
|
|
|
|
Note 10
Commitments and Contingencies
Litigation
The Company is involved from time to time in litigation incidental to its
business. In the opinion of management, the resolution of any such matter currently pending will
not have a material adverse effect on the Companys consolidated financial position or results of
operations.
11
Indemnities and Guarantees
During its normal course of business, the Company has made
certain indemnities and guarantees under which it may be required to make payments in relation to
certain transactions. These include (i) intellectual property indemnities to the Companys
customers and licensees in connection with the use, sale and license of Company products, (ii)
indemnities to various lessors in connection with facility leases for certain claims arising from
such facility or lease, (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 on the maximum potential
future payments the Company could be obligated to make. The Company has not been required to record
nor has it recorded any liability for these indemnities, commitments and guarantees in the
accompanying condensed consolidated balance sheets.
Note 11
Earnings Per Share
The Company calculates net income per share in accordance with SFAS No. 128,
Earnings Per
Share
, as amended by SFAS No. 123(R) (SFAS No. 128). Under SFAS No. 128, basic net income per
common share is calculated by dividing net income by the weighted average number of common shares
outstanding during the reporting period. Diluted net income per common share reflects the effects
of potentially dilutive securities, which consists solely of restricted stock and stock options
using the treasury stock method. A reconciliation of the numerator and denominator used in the
calculation of basic and diluted net income per share is as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except share data)
|
|
Numerator Net income
|
|
$
|
9,340
|
|
|
$
|
5,482
|
|
|
|
|
|
|
|
|
Denominator: Weighted average common
stock outstanding for basic earnings
per share
|
|
|
24,326,015
|
|
|
|
24,273,178
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Stock options and restricted stock
|
|
|
4,979
|
|
|
|
101,469
|
|
|
|
|
|
|
|
|
Adjusted weighted average common
stock and assumed conversions for
diluted earnings per share
|
|
|
24,330,994
|
|
|
|
24,374,647
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2008, 442,400 stock options and 4,500 shares of
restricted stock were excluded from the weighted-average number of shares outstanding because their
effect would be antidilutive.
Note 12
Segment Information
Operating segments are defined as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. The Company operates exclusively
in the consumer products industry in which the Company designs, produces and distributes clothing,
accessories, eyewear and related products. Based on the nature of the financial information that is
received by the chief operating decision maker and the Companys internal reporting structure, the
Company operates in three operating and reportable segments, the United States, Europe and
Electric. The United States segment primarily includes Volcom product revenues generated from
customers in the United States, Canada, Asia Pacific, Central America and South America that are
served by the Companys United States operations, as well as licensing revenues and revenues
generated from Company-owned retail stores. The European segment primarily includes Volcom
product revenues generated from customers in Europe that are served by the Companys European
operations. The Electric segment includes Electric product revenues generated from customers
worldwide, primarily in United States, Canada, Europe and Asia Pacific. All intercompany revenues,
expenses, payables and receivables are eliminated in consolidation and are not reviewed when
evaluating segment performance. Each segments performance is evaluated based on revenues, gross
profit and operating income. The accounting policies of the segments are the same as those
described in the summary of significant accounting policies in the Companys Annual Report on Form
10-K for the year ended December 31, 2007.
12
Information related to the Companys operating segments is as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
Total revenues:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
49,225
|
|
|
$
|
49,214
|
|
Europe
|
|
|
25,154
|
|
|
|
1,604
|
|
Electric
|
|
|
6,175
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
80,554
|
|
|
$
|
50,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
23,907
|
|
|
$
|
25,678
|
|
Europe
|
|
|
14,669
|
|
|
|
729
|
|
Electric
|
|
|
3,599
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
42,175
|
|
|
$
|
26,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
4,979
|
|
|
$
|
9,839
|
|
Europe
|
|
|
9,038
|
|
|
|
(1,777
|
)
|
Electric
|
|
|
381
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
14,398
|
|
|
$
|
8,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
120,898
|
|
|
$
|
145,154
|
|
Europe
|
|
|
57,129
|
|
|
|
12,523
|
|
Electric
|
|
|
39,055
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
217,082
|
|
|
$
|
157,677
|
|
|
|
|
|
|
|
|
Although the Company operates within three reportable segments, it has several different
product categories within each segment, for which the revenues attributable to each product
category are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
Mens
|
|
$
|
40,817
|
|
|
$
|
24,672
|
|
Girls
|
|
|
19,867
|
|
|
|
17,078
|
|
Snow
|
|
|
308
|
|
|
|
|
|
Boys
|
|
|
4,739
|
|
|
|
3,334
|
|
Footwear
|
|
|
3,358
|
|
|
|
2,114
|
|
Girls swim
|
|
|
4,058
|
|
|
|
1,720
|
|
Electric
|
|
|
6,175
|
|
|
|
|
|
Other
|
|
|
665
|
|
|
|
507
|
|
|
|
|
|
|
|
|
Subtotal product categories
|
|
|
79,987
|
|
|
|
49,425
|
|
Licensing revenues
|
|
|
567
|
|
|
|
1,393
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
80,554
|
|
|
$
|
50,818
|
|
|
|
|
|
|
|
|
The Electric product category includes revenues from all Electric branded products including
sunglasses, goggles and related clothing and accessories generated from the Companys newly
acquired Electric subsidiary. Other includes revenues primarily related to the Companys Volcom
Entertainment division, films and related accessories.
13
The table below summarizes product revenues by geographic regions, which includes revenues
generated worldwide by our Electric operating segment and are allocated based on customer location.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
United States
|
|
$
|
39,323
|
|
|
$
|
35,638
|
|
Canada
|
|
|
8,492
|
|
|
|
8,109
|
|
Asia Pacific
|
|
|
2,270
|
|
|
|
1,546
|
|
Europe
|
|
|
26,871
|
|
|
|
1,604
|
|
Other
|
|
|
3,031
|
|
|
|
2,528
|
|
|
|
|
|
|
|
|
|
|
$
|
79,987
|
|
|
$
|
49,425
|
|
|
|
|
|
|
|
|
14
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion of our financial condition and results of operations should be read in
conjunction with our condensed consolidated financial statements and related notes included
elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking
statements that involve risks and uncertainties. Our actual results may differ materially from
those anticipated in these forward-looking statements due to known and unknown risks, uncertainties
and other factors. The section entitled Risk Factors set forth in Item 1A of our Annual Report on
Form 10-K for the year ended December 31, 2007, and similar discussions in our other Securities and
Exchange Commission, or SEC, filings, discuss some of the important risk factors that may affect
our business, results of operations and financial condition. You should carefully consider those
risks, in addition to the information in this report and in our other filings with the SEC, before
deciding to purchase, hold or sell our securities. We do not have any intention or obligation to
update forward-looking statements included in this Quarterly Report on Form 10-Q after the date of
this Quarterly Report on Form 10-Q, except as required by law. In addition, the following
discussion should be read in conjunction with the information presented in our audited consolidated
financial statements and related notes contained in our Annual Report on Form 10-K for our fiscal
year ended December 31, 2007.
Overview
We are an innovative designer, marketer and distributor of premium quality young mens and
young womens clothing, footwear, accessories and related products under the Volcom brand name. We
seek to offer products that appeal to participants in skateboarding, snowboarding and surfing, and
those who affiliate themselves with the broader action sports youth lifestyle. Our products, which
include t-shirts, fleece, bottoms, tops, jackets, boardshorts, denim, outerwear, sandals, girls
swimwear and a complete collection of kids and boys clothing, combine fashion, functionality and
athletic performance. Our designs are infused with an artistic and creative element that we believe
differentiates our products from those of many of our competitors. We develop and introduce
products that we believe set the industry standard for style and quality in each of our product
categories.
On January 17, 2008, we acquired all of the outstanding membership interests of Electric
Visual Evolution LLC, or Electric, for $27.3 million. Known for its volt logo, Electric is a core
action sports lifestyle brand. Electrics growing product line includes sunglasses, goggles,
t-shirts, bags, hats, belts and other accessories. Electric was founded in 2000 by industry
veterans Kip Arnette and Bruce Beach and is headquartered in Orange County, California.
Volcom branded products are currently sold throughout the United States and in over 40
countries internationally by either us or international licensees. We serve the United States,
Europe, Canada, Latin America, Asia Pacific and Puerto Rico through our in-house sales personnel,
independent sales representatives and distributors. In these areas, Volcom branded products are
sold to retailers that we believe merchandise our products in an environment that supports and
reinforces our brand image and provide a superior in-store experience. Our retail customers are
primarily specialty boardsports retailers and several retail chains. Except for Volcom and Electric
sales made in Europe and Canada and Electric sales made in Australia and New Zealand, all of our
sales are denominated in U.S. dollars.
In Australia, Indonesia, South Africa and Brazil, we license the Volcom brand to entities that
we believe have local market insight and strong relationships with retailers in their respective
territories. We receive royalties on the sales of Volcom branded products sold by our licensees.
Our license agreements specify design and quality standards for the Volcom branded products
distributed by our licensees. Our licensees are not controlled and operated by us, and the amount
of our licensing revenues could decrease in the future. As these license agreements expire, we may
assume direct responsibility for serving these licensed territories. In anticipation of the
expiration of the European licensing agreement on December 31, 2006, we established our own
operations in Europe. Pursuant to an agreement between us and Volcom Europe (our former European
licensee), Volcom Europe produced and distributed the Spring 2007 Volcom line in Europe and paid us
our same royalty rate as required under the license agreement. As a result, we will continue to
experience a decrease in our licensing revenues and an increase in our selling, general and
administrative expense while we continue to build the necessary infrastructure and hire
employees to further establish and support our own operations in Europe. However, our product
revenues have increased in Europe as we now recognize revenue from the direct sale of our products
in this territory.
15
As part of our strategy to take direct control of our European operations, we constructed a
new European headquarters in Anglet, France, which was completed in February 2007 and delivered our
first full season product line during the third quarter of 2007. We continue to build the necessary
infrastructure to support these European operations.
Our revenues increased from $76.3 million in 2003 to $268.6 million in 2007. Our revenues were
$80.6 million for the three months ended March 31, 2008, an increase of $29.8 million, or 58.5%,
compared to $50.8 million for the three months ended March 31, 2007. In June 2007, we began direct
distribution of our product in Europe, which contributed to our increase in sales for the three
months ended March 31, 2008 compared to the three months ended March 31, 2007. The operations of
our newly acquired subsidiary, Electric, are included our operating results since January 17, 2008,
which also contributed to our increase in revenues for the three months ended March 31, 2008
compared to the three months ended March 31, 2007. Additionally, based upon our experience and
consumer reaction to our products and brand image, we believe that the increase in our revenues
during these periods resulted primarily from increased brand recognition and growing acceptance of
our products at existing retail accounts. We believe that our marketing programs, product designs
and product quality, and our relationships with our retailers contributed to this increased demand
and market penetration. In addition, several of our largest retailers have opened additional stores
and those store openings likely have contributed to an increase in our product revenues; however,
period-over-period increases in our product revenues as judged solely by additional store openings
by our largest retailers may not be a useful or accurate measure of revenue increases because our
products may not be carried in every new store. Growth of our revenues will depend in part on the
demand for our products by consumers, our ability to effectively distribute our products and our
ability to design products consistent with the changing fashion interests of boardsports
participant and those who affiliate themselves with the broader action sports youth lifestyle.
Sales to Pacific Sunwear decreased 33.9%, or $3.5 million, for the three months ended March
31, 2008 compared to the three months ended March 31, 2007. We may continue to see sales to Pacific
Sunwear decline, and we currently project an approximate 10% decrease in sales to Pacific Sunwear
for 2008 compared to 2007. It is unclear where our sales to Pacific Sunwear will trend in the
longer term. Pacific Sunwear remains an important customer for us and we are working both
internally and with Pacific Sunwear to maximize our business with them. We believe our brand
continues to be an important part of the Pacific Sunwear business. We also recognize that any
customer concentration creates risks and we are, therefore, assessing strategies to lessen our
concentration with Pacific Sunwear.
Our gross margins are affected by our ability to accurately forecast demand and avoid excess
inventory by matching purchases of finished goods to pre-season orders, which decreases our
percentage of sales at discount or close-out prices. Gross margins are also impacted by our ability
to control our sourcing costs and, to a lesser extent, by changes in our product mix and geographic
distribution channel. Our gross margins have also historically been seasonal, with the first
quarter having the highest margin. However, with the introduction of our direct European business
and our Electric subsidiary, the seasonality of our gross margin may change. If we misjudge
forecasting inventory levels or our sourcing costs increase and we are unable to raise our prices,
our gross margins may decline.
We currently source the substantial majority of our products from third-party manufacturers
located primarily in China and Mexico. As a result, we may be adversely affected by the disruption
of trade with these countries, the imposition of new regulations related to imports, duties, taxes
and other charges on imports, and decreases in the value of the U.S. dollar against foreign
currencies. We seek to mitigate the possible disruption in product flow by diversifying our
manufacturing across numerous manufacturers and by using manufacturers in countries that we believe
to be politically stable. We do not enter into long-term contracts with our third-party
manufacturers. Rather, we typically enter into contracts with each manufacturer to produce one or
more product lines for a particular selling season. This strategy has enabled us to maintain
flexibility in our sourcing.
Our products manufactured abroad are subject to U.S. customs laws, which impose tariffs as
well as import quota restrictions for textiles and apparel. Quota represents the right, pursuant to
bilateral or other international trade arrangements, to export amounts of certain categories of
merchandise into a country or territory pursuant to a visa or
16
license. Pursuant to the Agreement on Textiles and Clothing, the quota on textile and apparel
products was eliminated for World Trade Organization, or WTO, member countries, including the
United States, Canada and European countries, on January 1, 2005. During 2005, the United States
and China agreed to a new quota arrangement, which will impose quotas on certain textile products
that will impact our business through 2008. Additionally, China offers a rebate tax on exports.
China has reduced this rebate due to pressures from the United States and other countries to
control the amount of exports from China. This reduction in the rebate has increased our sourcing
costs. These cost increases, along with the Yuan strengthening against the U.S. dollar, labor
shortages and inflations in China, will have a negative impact on our sourcing costs. We intend to
closely monitor our sourcing in China to avoid disruptions.
Over the past five years, our selling, general and administrative expenses have increased on
an absolute dollar basis as we have increased our spending on marketing, advertising and
promotions, strengthened our management team and hired additional personnel. As a percentage of
revenues, however, our selling, general and administrative expenses have decreased from 30.1% in
2003 to 29.6% in 2007. This decrease was largely because some of our expenses were fixed and did
not increase at the same rate as that of our revenues. Our selling, general and administrative
expenses as a percentage of revenues have decreased from 36.1% for the three months ended March 31,
2007 to 34.5% for the three months ended March 31, 2008. Our selling, general and administrative
expenses as a percentage of revenues were higher during the three months ended March 31, 2007 due
to the hiring of additional personnel as we developed our infrastructure domestically and abroad
and costs related to the transition of our European operations from a licensee model to a direct
control model without obtaining any significant revenue to offset or leverage the additional
expenses in Europe.
Critical Accounting Policies
Our condensed consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America. To prepare these
financial statements, we must make estimates and assumptions that affect the reported amounts of
assets and liabilities. These estimates also affect our reported revenues and expenses. Judgments
must also be made about the disclosure of contingent liabilities. Actual results could be
significantly different from these estimates. We believe that the following discussion addresses
the accounting policies that are necessary to understand and evaluate our reported financial
results.
Revenue Recognition
Revenues are recognized upon shipment, at which time transfer of title occurs and risk of
ownership passes to the customer. Generally, we extend credit to our customers and do not require
collateral. Our payment terms are typically net-30 with terms up to net-120 for certain products.
None of our sales agreements with any of our customers provides for any rights of return. However,
we do approve returns on a case-by-case basis at our sole discretion to protect our brand and our
image. Allowances for estimated returns are provided when product revenues are recorded based on
historical experience and are reported as reductions in product revenues. Allowances for doubtful
accounts are reported as a component of selling, general and administrative expenses when they
arise.
Licensing revenues are recorded when earned based on a stated percentage of the licensees
sales of Volcom branded products.
Accounts Receivable
Throughout the year, we perform credit evaluations of our customers, and we adjust credit
limits based on payment history and the customers current creditworthiness. We continuously
monitor our collections and maintain an allowance for doubtful accounts based on our historical
experience and any specific customer collection issues that have been identified. Historically, our
losses associated with uncollectible accounts have been consistent with our estimates, but there
can be no assurance that we will continue to experience the same credit loss rates that we have
experienced in the past. Unforeseen, material financial difficulties of our customers could have an
adverse impact on our profits.
17
Inventories
We value inventories at the lower of the cost or the current estimated market value of the
inventory. We regularly review our inventory quantities on hand and adjust inventory values for
excess and obsolete inventory based primarily on estimated forecasts of product demand and market
value. Demand for our products could fluctuate significantly. The demand for our products could be
negatively affected by many factors, including the following:
|
|
|
changes in consumer preferences;
|
|
|
|
|
buying patterns of our retailers;
|
|
|
|
|
unseasonable weather; and
|
|
|
|
|
weakened economic conditions.
|
Some events, including terrorist acts or threats and trade restrictions and safeguards, could
also interrupt the production and importation of our products or otherwise increase the cost of our
products. As a result, our operations and financial performance could be negatively affected.
Additionally, our estimates of product demand and market value could be inaccurate, which could
result in excess or obsolete inventory.
Goodwill and Intangible Assets
We account for goodwill and intangible assets in accordance with SFAS No. 142,
Goodwill and
Intangible Assets,
or SFAS No. 142. Under SFAS No. 142, goodwill and intangible assets with
indefinite lives are not amortized but are tested for impairment annually and also in the event of
an impairment indicator. As required by SFAS No. 142, we evaluate the recoverability of goodwill
based on a two-step impairment test. The first step compares the fair value of each reporting unit
with its carrying amount, including goodwill. If the carrying amount exceeds the fair value, then
the second step of the impairment test is performed to measure the amount of any impairment loss.
Fair value is determined based on estimated future cash flows, discounted at a rate that
approximates our cost of capital. Such estimates are subject to change and we may be required to
recognize an impairment loss in the future. Any impairment losses will be reflected in operating
income.
Long-Lived Assets
We acquire assets in the normal course of our business. We evaluate the recoverability of the
carrying amount of these long-lived assets (including fixed assets) whenever events or changes in
circumstances indicate that the carrying value of an asset may not be recoverable. An impairment
loss would be recognized when the carrying value exceeds the undiscounted future cash flows
estimated to result from the use and eventual disposition of the asset. Impairments, if any, would
be recognized in operating earnings. We continually use judgment when applying these impairment
rules to determine the timing of the impairment tests, the undiscounted cash flows used to assess
impairments and the fair value of a potentially impaired asset. The reasonableness of our judgment
could significantly affect the carrying value of our long-lived assets.
Investments in Unconsolidated Investees
We account for our investments in unconsolidated investees using the cost method if we do not
have the ability to exercise significant influence over the operating and financial policies of the
investee. We assess such investments for impairment when there are events or changes in
circumstances that may have a significant adverse effect on the fair value of the investment. If,
and when, an event or change in circumstances that may have a significant adverse effect on the
fair value of the investment is identified, we estimate the fair value of the investment and, if
the reduction in value is determined to be other than temporary, we record an impairment loss on
the investment.
18
We account for our investments in unconsolidated investees using the equity method of
accounting if we have the ability to exercise significant influence over the operating and
financial policies of the investee. We evaluate such investments for impairment if an event or
change in circumstances occurs that may have a significant adverse effect on the fair value of the
investment. If, and when, an event is identified, we estimate the fair value of the investment and,
if the reduction in value is determined to be other than temporary, we record an impairment loss on
the investment.
Athlete Sponsorships
We establish relationships with professional athletes in order to promote our products and
brand. We have entered into endorsement agreements with professional skateboarding, snowboarding
and surfing athletes. Many of these contracts provide incentives for magazine exposure and
competitive victories while wearing or using our products. It is not possible to determine the
precise amounts we will be required to pay under these agreements, as they are subject to many
variables. The actual amounts paid under these agreements may be higher or lower than expected due
to the variable nature of these obligations. We expense these amounts as they are incurred.
Income Taxes
Financial Accounting Standards Board Interpretation No. 48,
Accounting for Uncertainty in
Income Taxes
, or FIN No. 48, prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or expected to be taken in
a tax return. Under FIN No. 48, we must recognize the tax benefit from an uncertain tax position
only if it is more likely than not that the tax position will be sustained on examination by the
taxing authorities, based on the technical merits of the position. The tax benefits recognized in
the financial statements from such a position are measured based on the largest benefit that has a
greater than fifty percent likelihood of being realized upon ultimate resolution.
We record a provision and liability for Federal and state income taxes using an annual
effective tax rate. Deferred income taxes are recorded at our effective tax rate. Managements
judgment is required in assessing the realizability of our deferred tax assets. We consider future
taxable income and ongoing prudent and feasible tax planning strategies in assessing the value of
our deferred tax assets. If we determine that it is more likely than not that these assets will not
be realized, we would reduce the value of these assets to their expected realizable value, thereby
decreasing net income. Evaluating the value of these assets is necessarily based on our judgment.
If we subsequently determined that the deferred tax assets that had been written down would, in our
judgment, be realized in the future, the value of the deferred tax assets would be increased,
thereby increasing net income in the period when that determination was made.
Stock-Based Compensation
We account for stock-based compensation in accordance with SFAS No. 123 (revised 2004),
Share-Based Payment,
or SFAS No. 123(R). SFAS No. 123(R) requires that we account for all
stock-based compensation transactions using a fair-value method and recognize the fair value of
each award as an expense over the service period. The fair value of restricted stock awards is
based upon the market price of our common stock at the grant date. We estimate the fair value of
stock option awards, as of the grant date, using the Black-Scholes option-pricing model. The use of
the Black-Scholes model requires that we make a number of estimates, including the expected option
term, the expected volatility in the price of our common stock, the risk-free rate of interest and
the dividend yield on our common stock. If our expected option term and stock-price volatility
assumptions were different, the resulting determination of the fair value of stock option awards
could be materially different. In addition, judgment is also required in estimating the number of
share-based awards that we expect will ultimately vest upon the fulfillment of service conditions
(such as time-based vesting). If the actual number of awards that ultimately vest differs
significantly from these estimates, stock-based compensation expense and our results of operations
could be materially impacted.
19
Foreign Currency Translation
We own international subsidiaries that operate with the local currency as their functional
currency. Our international subsidiaries generate revenues and collect receivables at future dates
in the customers local currencies, and purchase inventory primarily in U.S. dollars. Accordingly,
we are exposed to gains and losses that result from the effect of changes in foreign currency
exchange rates on foreign currency denominated transactions. Our assets and liabilities that are
denominated in foreign currencies are translated at the rate of exchange on the balance sheet date.
Revenues and expenses are translated using the average exchange rate for the period. Gains and
losses from translation of foreign subsidiary financial statements are included in accumulated
other comprehensive income or loss.
A portion of our sales are made in Canadian dollars. In addition, our recently acquired
Electric subsidiary purchases sunglass inventory in Euros. As a result, we are exposed to
transaction gains and losses that result from movements in foreign currency exchange rates. Changes
in our assets and liabilities that are denominated in these foreign currencies are translated into
U.S. dollars at the rate of exchange on the balance sheet date, and are reflected in our statement
of operations. As our foreign currency denominated revenues, accounts receivable, inventories,
accounts payable and cash balances have historically been a small portion of our revenues, assets
and liabilities, we do not generally hedge our exposure to foreign currency rate fluctuations, and
therefore we are exposed to currency risk.
General
Our revenues consist of both our product revenues and our licensing revenues. Our product
revenues are derived primarily from the sale of young mens and young womens clothing, accessories
and related products under the Volcom brand name. We offer apparel and accessory products in six
main categories: mens, girls, boys, footwear, girls swim and snow. Product revenues also include
revenues from music and film sales. Beginning in January 2008, we added the full product line from
Electric, which includes sunglasses, goggles, soft goods and other accessories sold under the
Electric brand name. Amounts billed to customers for shipping and handling are included in product
revenues. Licensing revenues consist of royalties on Volcom product sales by our international
licensees in Europe (through delivery of our Spring 2007 line), Australia, Indonesia, South Africa
and Brazil.
Our cost of goods sold consists primarily of product costs, retail packaging, freight costs
associated with shipping goods to customers, quality control and inventory shrinkage. There are no
cost of goods sold associated with our licensing revenues.
Our selling, general and administrative expenses consist primarily of wages and related
payroll and employee benefit costs, handling costs, sales and marketing expenses, advertising
costs, legal and accounting professional fees, insurance, utilities and other facility related
costs, such as rent and depreciation.
Results of Operations
The following table sets forth selected items in our consolidated statements of operations for
the periods presented, expressed as a percentage of revenues:
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Ended March 31,
|
|
|
2008
|
|
2007
|
Revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of goods sold
|
|
|
47.6
|
|
|
|
48.0
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
52.4
|
|
|
|
52.0
|
|
Selling, general and administrative expenses
|
|
|
34.5
|
|
|
|
36.1
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
17.9
|
|
|
|
15.9
|
|
Other income
|
|
|
0.4
|
|
|
|
2.2
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
18.3
|
|
|
|
18.1
|
|
Provision for income taxes
|
|
|
6.7
|
|
|
|
7.3
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
11.6
|
%
|
|
|
10.8
|
%
|
|
|
|
|
|
|
|
|
|
20
Three Months Ended March 31, 2008 Compared to Three Months Ended March 31, 2007
Revenues
Consolidated revenues were $80.6 million for the three months ended March 31, 2008, an
increase of $29.8 million, or 58.5%, compared to $50.8 million for the three months ended March 31,
2007. Revenues from our European operations were $25.2 million for the three months ended March 31,
2008, an increase of $23.6 million, compared to $1.6 million for the three months ended March 31,
2007. The increase in revenues from our European operations was a result of the transition of our
European operations from a licensee model to a direct control model. The operations of Electric are
included in our operating results since January 17, 2008, and contributed $6.2 million in revenues
for the three months ended March 31, 2008. Revenues from our five largest customers were $15.8
million for the three months ended March 31, 2008, a decrease of $3.1 million, or 16.4%, compared
to $18.9 million for the three months ended March 31, 2007. Excluding revenues from Pacific
Sunwear, which decreased $3.5 million, or 33.9%, to $6.9 million, total revenues from our remaining
five largest customers increased $0.4 million, or 5.2%, to $8.9 million for the three months ended
March 31, 2008 from $8.5 million for the three months ended March 31, 2007. We believe the decrease
in revenues from Pacific Sunwear was generally due to a change in Pacific Sunwears product mix and
Pacific Sunwears effort to reduce their overall inventory levels, which caused Pacific Sunwears
purchases of our product to slow. It is unclear where our sales to Pacific Sunwear will trend in
the longer term. We believe our overall domestic revenue growth was driven primarily by the
increasing popularity of our brand across our target market and increasing acceptance of our
products at retail as a result of marketing and advertising programs that effectively promoted our
brand, a compelling product offering, high quality standards and strong relationships with our
retailers. In addition, the increase in our revenues can be attributed to sales of our recently
introduced Creedlers and girls swim product, as well as additional distribution. Further, several
of our largest retailers have opened additional stores over the last year and those store openings
likely have contributed to an increase in our product revenues; however, period-over-period
increases in our product revenues as judged solely by additional store openings by our largest
retailers may not be a useful or accurate measure of revenue increases because our products may not
be carried in every new store.
Consolidated product revenues were $80.0 million for the three months ended March 31, 2008, an
increase of $30.6 million, or 61.8%, compared to $49.4 million for the three months ended March 31,
2007. Of the $30.6 million increase in product revenues, increases in mens products and girls
products accounted for $18.9 million of that increase. Revenues from mens products increased $16.1
million, or 65.4%, to $40.8 million for the three months ended March 31, 2008 compared to $24.7
million for the three months ended March 31, 2007 and girls products increased $2.8 million, or
16.3%, to $19.9 million for the three months ended March 31, 2008 compared to $17.1 million for the
three months ended March 31, 2007. Revenues from girls swim increased $2.4 million, or 135.9%, to
$4.1 million for the three months ended March 31, 2008 compared to $1.7 million for the three
months ended March 31, 2007. Revenues from boys products, which includes our line of kids clothing
for young boys ages 4 to 7, increased $1.4 million, or 42.1%, to $4.7 million for the three months
ended March 31, 2008 compared to $3.3 million for the three months ended March 31, 2007. Revenues
from our Creedler footwear line increased $1.3 million, or 58.9%, to $3.4 million for the three
months ended March 31, 2008 compared to $2.1 million for the three months ended March 31, 2007.
Revenues from our new Electric subsidiary were $6.2 million for the three months ended March 31,
2008.
Licensing revenues decreased 59.3% to $0.6 million for the three months ended March 31, 2008
from $1.4 million for the three months ended March 31, 2007. The decrease in licensing revenues was
a result of the transition of our European operations from a licensee model to a direct control
model.
Product revenues by geographic region include revenues from our Electric operating segment,
and are allocated based on customer location. Such product revenues in the United States were $39.3
million, or 49.2% of our product revenues, for the three months ended March 31, 2008, compared to
$35.6 million, or 72.1% of our product revenues, for the three months ended March 31, 2007. Product
revenues in Europe were $26.9 million, or 33.6% of our product revenues, for the three months ended
March 31, 2008, compared to $1.6 million, or 3.2% of our product revenues, for the three months
ended March 31, 2007. Product revenues in the rest of the world consist primarily of product
revenues from sales in Canada, Japan, Australia and New Zealand, and do not include sales by our
international licensees. Such product revenues in the rest of the world were $13.8 million, or
17.2% of our product
revenues, for the three months ended March 31, 2008 compared to $12.2 million, or 24.7% of our
product revenues, for the three months ended March 31, 2007.
21
Gross Profit
Consolidated gross profit increased $15.8 million, or 59.7%, to $42.2 million for the three
months ended March 31, 2008 compared to $26.4 million for the three months ended March 31, 2007.
Gross profit as a percentage of revenues, or gross margin, increased 40 basis points to 52.4% for
the three months ended March 31, 2008 compared to 52.0% for the three months ended March 31, 2007.
Consolidated gross margin related specifically to product revenues increased 140 basis points to
52.0% for the three months ended March 31, 2008 compared to 50.6% for the three months ended March
31, 2007. Gross margin from the U.S. segment decreased 280 basis points to 48.0% for the three
months ended March 31, 2008 compared to 50.8% for the three months ended March 31, 2007, primarily
due to additional discounts and an increase in inventory liquidations that we believe were the
result of the soft domestic retail environment. These U.S. segment gross margin pressures were more
than offset by our European segment delivering gross margin on product of 58.3% due to strong
full-price sell through and foreign currency gains during the three months ended March 31, 2008.
Selling, General and Administrative Expenses
Consolidated selling, general and administrative expenses increased $9.5 million, or 51.4%, to
$27.8 million for the three months ended March 31, 2008 compared to $18.3 million for the three
months ended March 31, 2007. The increase in absolute dollars was due primarily to expenses of $3.2
million from our newly acquired subsidiary, Electric, of which $0.6 million was non-cash
amortization related to the acquisition. We also had increased expenses of $3.1 million related to
the transition of our European operations from a licensee model to a direct control model.
Additionally, we had increased payroll and payroll-related expenses of $1.1 million due to
expenditures on infrastructure and personnel, increased rent expense of $0.7 million, increased
advertising and marketing expenses of $0.6 million, and a net increase in various other expense
categories of $0.8 million. As a percentage of revenues, selling, general and administrative
decreased to 34.5% for the three months ended March 31, 2008 from 36.1% for the three months ended
March 31, 2007. Our selling, general and administrative expenses as a percentage of revenues were
higher during the three months ended March 31, 2007 due to the hiring of additional personnel as we
developed our infrastructure domestically and abroad and costs related to the transition of our
European operations from a licensee model to a direct control model without obtaining any
significant revenue to offset or leverage the additional expenses in Europe. We believe our
selling, general and administrative expenses will continue to increase in absolute dollars as we
grow our infrastructure domestically and abroad.
Operating Income
As a result of the factors above, operating income for the three months ended March 31, 2008
increased $6.3 million to $14.4 million compared to $8.1 million for the three months ended March
31, 2007. Operating income as a percentage of revenue increased to 17.9% for the three months ended
March 31, 2008 from 15.9% for the three months ended March 31, 2007.
Other Income
Other income primarily includes net interest income and foreign currency gains and losses.
Interest income for the three months ended March 31, 2008 and 2007 was $0.5 million and $1.1
million, respectively. Foreign currency gain (loss) decreased to a $0.2 million loss for the three
months ended March 31, 2008 compared to a $39,000 gain for the three months ended March 31, 2007
due primarily to fluctuations in the Euro and Canadian dollar exchange rates against the U.S.
dollar.
Provision for Income Taxes
We have computed our provision for income taxes for the three months ended March 31, 2008
using an estimated effective annual tax rate of 36.5%. The provision for income taxes increased
$1.7 million to $5.4 million for the three months ended March 31, 2008 compared to $3.7 million for
the three months ended March 31, 2007.
22
Net Income
As a result of the factors above, net income increased $3.8 million, or 70.4%, to $9.3 million
for the three months ended March 31, 2008 from $5.5 million for the three months ended March 31,
2007.
Liquidity and Capital Resources
Our primary cash needs are working capital and capital expenditures. These sources of
liquidity may be impacted by fluctuations in demand for our products, ongoing investments in our
infrastructure and expenditures on marketing and advertising.
The following table sets forth, for the periods indicated, our beginning balance of cash and
cash equivalents, net cash flows from operating, investing and financing activities and our ending
balance of cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
Cash and cash equivalents at beginning of period
|
|
$
|
92,962
|
|
|
$
|
85,414
|
|
Cash flow from operating activities
|
|
|
5,628
|
|
|
|
9,315
|
|
Cash flow from investing activities
|
|
|
(28,495
|
)
|
|
|
(6,443
|
)
|
Cash flow from financing activities
|
|
|
417
|
|
|
|
618
|
|
Effect of exchange rate on cash
|
|
|
1,519
|
|
|
|
64
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
72,031
|
|
|
$
|
88,968
|
|
|
|
|
|
|
|
|
Cash from operating activities consists primarily of net income adjusted for certain non-cash
items including depreciation, deferred income taxes, provision for doubtful accounts, excess tax
benefits related to the exercise of stock options, loss on disposal of property and equipment,
stock-based compensation and the effect of changes in working capital and other activities. For the
three months ended March 31, 2008 and 2007, cash from operating activities was $5.6 million and
$9.3 million, respectively. The $3.7 million decrease in cash from operating activities between the
periods was attributable to the following:
|
|
|
|
|
(In thousands)
|
|
|
Attributable to
|
$
|
(11,101
|
)
|
|
Decrease in cash flows from accounts payable and accrued expenses due to
timing of payments, increased payroll accruals and other liabilities
|
|
(3,822
|
)
|
|
Decrease in cash flows from accounts receivable due to the timing of sales
and collections and increased sales volumes and corresponding accounts
receivable balances as a result of the direct distribution of product in
Europe
|
|
3,858
|
|
|
Increase in net income
|
|
3,769
|
|
|
Increase in cash flows from inventory due to a quicker inventory turnover
thereby reducing our inventory levels
|
|
1,812
|
|
|
Increase in cash flows due to fluctuations in the income tax
receivable/payable balance and tax benefits related to stock option
exercises between periods
|
|
1,264
|
|
|
Increase in non-cash depreciation and amortization, provision for doubtful
accounts and stock-based compensation
|
|
533
|
|
|
Net increase in cash flows from all other operating activities
|
|
|
|
|
$
|
(3,687
|
)
|
|
Total
|
|
|
|
|
Cash used in investing activities was $28.5 million and $6.4 million for the three months
ended March 31, 2008 and 2007, respectively. The increase in cash used in investing activities was
primarily due to the $26.9 million spent on the acquisition of Electric, net of cash acquired,
during the three months ended March 31, 2008. This increase was offset by a $5.4 million decrease
in purchases of property and equipment due to significant capital expenditures during the three
months ended March 31, 2007, including payments for the construction of our European headquarters
in Anglet, France, and the purchase of real property on the North Shore of Oahu, or the Pipe House,
for $4.2 million. Capital expenditures during the three months ended March 31, 2008 included the
ongoing purchase of investments in computer equipment, warehouse equipment, marketing initiatives
and in-store buildouts at customer retail locations.
23
Cash provided by financing activities was $0.4 million and $0.6 million for the three months
ended March 31, 2008 and 2007, respectively, and is primarily due to cash received from government
grants and the proceeds and excess tax benefits related to the exercise of stock options.
We currently have no material cash commitments, except our normal recurring trade payables,
expense accruals, operating leases, capital leases and athlete endorsement agreements. We believe
that our cash and cash equivalents, cash received from our initial public offering, cash flow from
operating activities and available borrowings under our credit facility will be sufficient to meet
our capital requirements for at least the next twelve months.
Credit Facilities
In July 2006, we entered into a $20.0 million unsecured credit agreement with Bank of the West
(which includes a line of credit, foreign exchange facility and letter of credit sub-facilities).
The credit agreement, which expires on August 31, 2008, may be used to fund our working capital
requirements. Borrowings under this agreement bear interest, at our option, either at the banks
prime rate (5.25% at March 31, 2008) or LIBOR plus 1.50%. Under this credit facility, we had $0.8
million outstanding in letters of credit at March 31, 2008. At March 31, 2008 there were no
outstanding borrowings under this credit facility, and $19.2 million was available under the credit
facility. The credit agreement requires compliance with conditions precedent that must be satisfied
prior to any borrowing, as well as ongoing compliance with specified affirmative and negative
covenants, including covenants related to our financial condition, including requirements that we
maintain a minimum net profit after tax and a minimum effective tangible net worth. At March 31,
2008, we were in compliance with all restrictive covenants.
Contractual Obligations and Commitments
We did not have any off-balance sheet arrangements or outstanding balances on our credit
facility as of March 31, 2008. The following table summarizes, as of March 31, 2008, the total
amount of future payments due in various future periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
Apr. 1 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Dec. 31, 2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
Thereafter
|
|
Operating lease obligations
|
|
$
|
26,791
|
|
|
$
|
3,042
|
|
|
$
|
3,388
|
|
|
$
|
3,128
|
|
|
$
|
2,958
|
|
|
$
|
2,256
|
|
|
$
|
12,019
|
|
Capital lease obligations
|
|
|
197
|
|
|
|
87
|
|
|
|
83
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional athlete sponsorships
|
|
|
17,432
|
|
|
|
4,498
|
|
|
|
4,433
|
|
|
|
3,044
|
|
|
|
1,345
|
|
|
|
1,340
|
|
|
|
2,772
|
|
Contractual letters of credit
|
|
|
750
|
|
|
|
750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
45,170
|
|
|
$
|
8,377
|
|
|
$
|
7,904
|
|
|
$
|
6,199
|
|
|
$
|
4,303
|
|
|
$
|
3,596
|
|
|
$
|
14,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We lease certain land and buildings under non-cancelable operating leases. The leases expire
at various dates through 2018, excluding extensions at our option, and contain provisions for
rental adjustments, including in certain cases, adjustments based on increases in the Consumer
Price Index. The leases generally contain renewal provisions for varying periods of time.
We lease computer and office equipment pursuant to capital lease obligations. These leases
bear interest at rates ranging from 2.9% to 13.7% per year and expire at various dates through July
2010.
We establish relationships with professional athletes in order to promote our products and
brand. We have entered into endorsement agreements with professional skateboarding, snowboarding
and surfing athletes. Many of these contracts provide incentives for magazine exposure and
competitive victories while wearing or using our products. It is not possible to determine the
precise amounts that we will be required to pay under these agreements as they are subject to many
variables. The amounts listed above are the approximate amounts of the minimum obligations required
to be paid under these contracts. The additional estimated maximum amount that could be paid under
our existing contracts, assuming that all bonuses, victories and similar incentives are achieved
during a five-
year period ending March 31, 2013, is approximately $3.9 million. The actual amounts paid under
these agreements may be higher or lower than the amounts discussed above as a result of the
variable nature of these obligations.
24
Our contractual letters of credit have maturity dates of less than one year. We use these
letters of credit to purchase finished goods.
Seasonality
Historically, we have experienced greater revenues in the second half of the year than those
in the first half due to a concentration of shopping around the fall and holiday seasons and
pricing differences between our products sold during the first and second half of the year, as
products we sell in the fall and holiday seasons generally have higher prices per unit than
products we sell in the spring and summer seasons. We typically sell more of our summer products
(boardshorts and t-shirts) in the first half of the year and a majority of our winter products
(pants, long sleeve shirts, sweaters, fleece, jackets and outerwear) in the second half of the
year. We anticipate that this seasonal impact on our revenues is likely to continue. In addition,
our direct European operations began shipping product during the second half of 2007, which caused
a slightly higher concentration of revenues in the second half of 2007 over historical levels. Our
business in Europe is extremely seasonal with revenues concentrated primarily in the first and
third quarters, shipment of low margin samples concentrated in the second and fourth quarters, and
a relatively steady pace of selling, general and administrative expenses throughout the year. As
2008 is the first year that our European business will be fully operational throughout the entire
year, we may experience a shift in our historical revenue, gross profit and operating income
trends. During the two-year period ended December 31, 2007, approximately 59% of our revenues, 57%
of our gross profit and 65% of our operating income were generated in the second half of the year,
with the third quarter generally generating most of our operating income due to fall, holiday and
snow shipments. Accordingly, our results of operations for the first and second quarters of any
year are not indicative of the results we expect for the full year.
As a result of the effects of seasonality, particularly in preparation for the fall and
holiday shopping seasons, our inventory levels and other working capital requirements generally
begin to increase during the second quarter and into the third quarter of each year. Based on our
current cash position we do not anticipate borrowing under our credit facility in the near term.
Inflation
We do not believe inflation has had a material impact on our results of operations in the
past. There can be no assurance that our business will not be affected by inflation in the future.
Vulnerability Due to Concentrations
One customer, Pacific Sunwear, accounted for approximately 18% of our product revenues in 2007
and approximately 9% of our product revenues for the three months ended March 31, 2008. No other
customer accounted for more than 10% of our product revenues in 2008 or 2007.
Sales to Pacific Sunwear decreased 33.9%, or $3.5 million, for the three months ended March
31, 2008 compared to the three months ended March 31, 2007. We may continue to see sales to Pacific
Sunwear decline, and we currently expect an approximate 10% decrease in sales to Pacific Sunwear
for 2008 compared to 2007. It is unclear where our sales to Pacific Sunwear will trend in the
longer term. Pacific Sunwear remains an important customer for us and we are working both
internally and with Pacific Sunwear to maximize our business with them. We believe our brand
continues to be an important part of the Pacific Sunwear business. We also recognize that any
customer concentration creates risks and we are, therefore, assessing strategies to lessen our
concentration with Pacific Sunwear.
We do not own or operate any manufacturing facilities and source our products from
independently-owned manufacturers. During 2007, we contracted for the manufacture of our products
with approximately 45 foreign manufacturers and four domestic screen printers. Purchases from
Dragon Crowd and Ningbo Jehson Textiles totaled
approximately 19% and 14%, respectively, of our product costs in 2007, and approximately 12%
and 20%, respectively, of our product costs for the three months ended March 31, 2008.
25
Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board, or FASB, issued SFAS No. 157,
Fair Value Measurements
(SFAS No. 157), which defines fair value, establishes a framework for
measuring fair value and expands disclosures about fair value measurements. SFAS No.157 applies to
other accounting pronouncements that require or permit fair value measurements. The new guidance is
effective for financial statements issued for fiscal years beginning after November 15, 2007, and
for interim periods within those fiscal years. We adopted the provisions of SFAS No.157 as of
January 1, 2008. The adoption of SFAS No. 157 did not have a material impact on our financial
position.
In February 2008, the FASB issued FASB Staff Position No. 157-2, which deferred the effective
date for certain portions of SFAS No. 157 related to nonrecurring measurements of nonfinancial
assets and liabilities. That provision of SFAS No. 157 will be effective for our fiscal year 2009.
We are currently evaluating the effect, if any, that the adoption of SFAS No. 157-2 will have on
our consolidated results of operations, financial position and cash flows.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and
Financial Liabilities Including an Amendment of SFAS No. 115,
or SFAS No. 159. SFAS No. 159
provides reporting entities an option to measure certain financial assets and liabilities and other
eligible items at fair value on an instrument-by-instrument basis. Unrealized gains and losses on
items for which the fair value option has been elected are reported in earnings at each subsequent
reporting date. SFAS No. 159 was adopted on January 1, 2008. The adoption of SFAS No. 159 did not
have a significant impact on our consolidated financial position or results of operations.
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations,
or SFAS No. 141(R).
SFAS No. 141(R) requires reporting entities to record fair value estimates of contingent
consideration and certain other potential liabilities during the original purchase price
allocation, expense acquisition costs as incurred and does not permit certain restructuring
activities previously allowed under EITF 95-3 to be recorded as a component of purchase accounting.
SFAS No. 141(R) is effective for fiscal periods beginning after December 15, 2008 and should be
applied prospectively for all business acquisitions entered into after the date of adoption. We are
currently evaluating the impact the adoption of SFAS No. 141(R) will have on our consolidated
financial position or results of operations.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interest in Consolidated
Financial Statements
an amendment of ARB No. 51
, or SFAS No. 160. SFAS No. 160 requires (i) that
noncontrolling (minority) interests be reported as a component of shareholders equity, (ii) that
net income attributable to the parent and to the noncontrolling interest be separately identified
in the consolidated statement of operations, (iii) that changes in a parents ownership interest
while the parent retains its controlling interest be accounted for as equity transactions, (iv)
that any retained noncontrolling equity investment upon the deconsolidation of a subsidiary be
initially measured at fair value, and (v) that sufficient disclosures are provided that clearly
identify and distinguish between the interests of the parent and the interests of the
noncontrolling owners. SFAS No. 160 is effective for fiscal periods beginning after December 15,
2008. We are currently evaluating the impact the adoption of SFAS No. 160 will have on our
consolidated financial position or results of operations.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and
Hedging Activities an amendment of FASB Statement No. 133
, or SFAS No. 161. SFAS No. 161 requires
expanded disclosures about an entitys derivative instruments and hedging activities. It is
effective for fiscal years beginning after November 15, 2008, including interim periods within
those fiscal periods. We do not expect the adoption of SFAS No. 161 to have a material effect on
our consolidated financial position or results of operations.
In April 2008, the FASB issued FASB Staff Position 142-3,
Determination of the Useful Lives of
Intangible Assets
(FSP 142-3), which amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful life of a recognized intangible asset
under FASB No. 142,
Goodwill and Other Intangible Assets
. The intent of FSP 142-3 is to improve the
consistency between the useful life of a
recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to
measure the fair value of the asset under SFAS No. 141(R) and other U.S. generally accepted
accounting principles. We do not expect the adoption of FSP 142-3 to have a material effect on our
consolidated financial position or results of operations.
26
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Foreign Currency Risk
We own international subsidiaries that operate with the local currency as their functional
currency. Our international subsidiaries generate revenues and collect receivables at future dates
in the customers local currencies, and purchase inventory primarily in U.S. dollars. Accordingly,
we are exposed to gains and losses that result from the effect of changes in foreign currency
exchange rates on foreign currency denominated transactions. Our assets and liabilities that are
denominated in foreign currencies are translated at the rate of exchange on the balance sheet date.
Revenues and expenses are translated using the average exchange rate for the period. Gains and
losses from translation of foreign subsidiary financial statements are included in accumulated
other comprehensive income or loss.
A portion of our sales are made in Canadian dollars. For the three months ended March 31, 2008
and March 31, 2007, we derived 10.6% and 16.4%, respectively, of our product revenues from sales in
Canada. As a result, we are exposed to fluctuations in the value of Canadian dollar denominated
receivables and payables, foreign currency investments, primarily consisting of Canadian dollar
deposits, and cash flows related to repatriation of those investments. A weakening of the Canadian
dollar relative to the U.S. dollar could negatively impact the profitability of our products sold
in Canada and the value of our Canadian receivables, as well as the value of repatriated funds we
may bring back to the United States from Canada. Account balances denominated in Canadian dollars
are marked-to-market every period using current exchange rates and the resulting changes in the
account balance are included in our income statement as other (expense) income. We do not believe
that a 10% movement in the applicable foreign currency exchange rates would have a material effect
on our financial position.
Our recently acquired subsidiary, Electric, purchases sunglass inventory in Euros. As a
result, we are exposed to fluctuations in the value of the Euro denominated inventory and payables.
A strengthening in the Euro relative to the U. S. dollar could negatively impact the profitability
of our products. Accounts payable denominated in Euros are marked-to-market every period using
current exchange rates and the resulting changes in the account balance are included in our
statement of operations as other (expense) income. We do not believe that a 10% movement in the
applicable foreign currency exchange rates would have a material effect on our financial position.
Due to the fact that we recently established our European operations and completed the
acquisition of Electric, and because our Canadian accounts receivable, accounts payable and cash
balances represent a small portion of our total assets and liabilities, we do not generally hedge
our exposure to foreign currency rate fluctuations. We may enter into future transactions in order
to hedge our exposure to foreign currencies.
We generally purchase Volcom branded finished goods from our manufacturers in U.S. dollars.
However, we source substantially all of these finished goods abroad and their cost may be affected
by changes in the value of the relevant currencies. Price increases caused by currency exchange
rate fluctuations could increase our costs. If we are unable to increase our prices to a level
sufficient to cover the increased costs, it could adversely affect our margins and we may become
less price competitive with companies who manufacture their products in the United States.
Interest Rate Risk
We maintain a $20.0 million unsecured credit agreement (which includes a line of credit,
foreign exchange facility and letter of credit sub-facilities) with no balance outstanding at March
31, 2008. The credit agreement, which expires on August 31, 2008, may be used to fund our working
capital requirements. Borrowings under this agreement bear interest, at our option, either at the
banks prime rate (5.25% at March 31, 2008) or LIBOR plus 1.50%. Based on the average interest rate
on our credit facility during 2007, and to the extent that borrowings were
outstanding, we do not believe that a 10% change in interest rates would have a material
effect on our results of operations or financial condition.
27
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in our Exchange Act reports is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange Commissions rules and
forms, and that such information is accumulated and communicated to our management, including our
Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosures. Our management, including our Chief Executive Officer and our Chief
Financial Officer, does not expect that our disclosure controls or procedures will prevent all
error and all fraud. A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system are met. Further, the
benefits of controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within our company have been detected. These
inherent limitations include the realities that judgments in decision-making can be faulty, and
that breakdowns can occur because of simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or more people, or by
management override of the control. The design of any system of controls is also based in part upon
certain assumptions about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future conditions. Because of
the inherent limitations in a cost-effective control system, misstatements due to error or fraud
may occur and not be detected.
We carried out an evaluation, under the supervision and with the participation of our
management, including our Chief Executive Officer and our Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and procedures as of March 31,
2008, the end of the quarterly period covered by this report. The evaluation of our disclosure
controls and procedures included a review of the disclosure controls and procedures objectives,
design, implementation and the effect of the controls and procedures on the information generated
for use in this report. In the course of our evaluation, we sought to identify data errors, control
problems or acts of fraud and to confirm the appropriate corrective actions, including process
improvements, were being undertaken.
Based on the foregoing, our Chief Executive Officer and our Chief Financial Officer concluded
that, as of the end of the period covered by this report, our disclosure controls and procedures
were effective and were operating at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal controls over financial reporting during our most
recent fiscal quarter that has materially affected, or is reasonably likely to materially affect,
our internal controls over financial reporting.
Item 4T. Controls and Procedures.
Not applicable.
28
PART II.
OTHER INFORMATION
Item 1. Legal Proceedings.
We are subject to various claims, complaints and legal actions in the normal course of
business from time to time. We do not believe we have any currently pending litigation of which the
outcome will have a material adverse effect on our operations or financial position.
Item 1A. Risk Factors.
Before deciding to purchase, hold or sell our common stock, you should carefully consider the
risks described below in addition to the other cautionary statements and risks described elsewhere,
and the other information contained, in this Report and in our other filings with the SEC,
including our Annual Report on
Form 10-K
for the year ended December 31, 2007 and subsequent
reports on Forms 8-K. Risks that could affect our actual performance include, but are not limited
to those discussed in Part I, Item 1A in our Annual Report on
Form 10-K
for the year ended December
31, 2007. The following are the material changes and updates from the risk factors previously
disclosed in Part I, Item 1A of our Annual Report on
Form 10-K
.
One retail customer represents a material amount of our revenues, and the loss of this retail
customer or reduced purchases from this retail customer may have a material adverse effect on our
operating results.
Pacific Sunwear accounted for approximately 18% of our product revenues in 2007 and
approximately 9% of our product revenues for the three months ended March 31, 2008. We do not have
a long-term contract with Pacific Sunwear, and all of its purchases from us have historically been
on a purchase order basis. Sales to Pacific Sunwear decreased 9%, or $4.7 million, for 2007
compared to 2006, and 33.9%, or $3.5 million, for the three months ended March 31, 2008 compared to
the three months ended March 31, 2007. We currently project that Pacific Sunwear sales will be down
approximately 10% in 2008 compared to 2007. We may see sales to Pacific Sunwear decline even beyond
these projected amounts. It is unclear where our sales to Pacific Sunwear will trend in the longer
term, as Pacific Sunwear appears to be increasing its private label business and lessening overall
inventories. We recognize that any customer concentration creates risks and we are, therefore,
assessing strategies to lessen our concentration with Pacific Sunwear. We cannot predict whether
such strategies will reduce, in whole or in part, our sales concentration with Pacific Sunwear in
the near or long term. Because Pacific Sunwear has represented such a significant amount of our
product revenues, our results of operations are likely to be adversely affected by any Pacific
Sunwear decision to decrease its rate of purchases of our products. A continuing decrease in its
purchases of our products, a cancellation of orders of our products or a change in the timing of
its orders will have an additional adverse affect on our operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
We did not sell any unregistered equity securities or purchase any of our securities during
the period ended March 31, 2007.
We effected the initial public offering of our common stock pursuant to a Registration
Statement on Form S-1 (File No. 333-124498) that was declared effective by the Securities and
Exchange Commission on June 29, 2005. To date, we have used $20.0 million of the net proceeds from
the offering to distribute our estimated undistributed S corporation earnings to our S corporation
stockholders, $1.5 million to acquire all of the outstanding common stock of Welcom Distribution
SARL, the sole distributor of Volcom branded products in Switzerland, approximately $30.6 million
for developing our infrastructure and European headquarters in Europe, $27.3 million to acquire all
of the outstanding membership interests in Electric Visual Evolution, LLC, and $1.1 million in
transaction costs associated with the Electric acquisition. We intend to use the remaining net
proceeds for the continual development of our infrastructure in Europe, any earn-out payments to
the shareholders of Electric, facility upgrades, marketing and advertising, enhancing and deploying
our in-store marketing displays for our retailers, and working capital and
other general corporate purposes. In addition, we may use a portion of the remaining proceeds
to acquire products or businesses that are complementary to our own.
29
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits.
31.1
|
|
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
31.2
|
|
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
32
|
|
Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
30
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.
|
|
|
|
|
|
Volcom, Inc.
|
|
Date: May 12, 2008
|
/s/ Douglas P. Collier
|
|
|
Douglas P. Collier
|
|
|
Chief Financial Officer, Secretary and Treasurer
(Principal Financial Officer and Authorized Signatory)
|
|
|
31
INDEX TO EXHIBITS
|
|
|
Exhibit No.
|
|
Description
|
31.1
|
|
Certification of Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
31.2
|
|
Certification of Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
32
|
|
Certification of Principal Executive Officer and Principal Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
|
32
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