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1. Quiksilver, Inc. Report on International Financial Operations
2. Overview Background
Foreign Exchange Exposure
Foreign Capital Investment
Analysis of risk
Cost of Capital and Capital Structure
Working Capital Management
Recommendations
3. Background Started in 1969 in Torquay, Australia
Alan Green, Carol McDonald, Tim Davis
Quick expansion
First export in 1974
Bought factory in 1976
Expanded to U.S. in 1976
License agreement with pro surfer/entrepreneur Jeff Hackman
Added Roxy in 1993, DC Shoes in 2004
IPO in 1986 on NASDAQ, moved to NYSE in1998
4. Background Today, premier surf, skate, and board apparel brand
Brand awareness through sponsorship of events and top athletes
Goal: Become the leading global youth apparel company
Sold in 90 countries
Surf shops, dept stores,
Quiksilver stores
5. Background Core brands
Quiksilver, Roxy, DC Shoes, Quicksilver Women’s
Increased focus for 2009
Non-core brands
LibTech, GNU (snowboard mfg)
Bent Metal (bindings mfg)
Divested brands
LOOK, Lange, Dynastar, Rossignol
6. Background Management’s goals and recent actions
Improved liquidity and capital structure
Adapted organizational structure
Refocused brand integrity and quality
Positioning for improved operating margins and cash flows upon economic rebound
Improved cost structure by $325 million annually
Expense savings of $40 million annually
7. Foreign Exchange Exposure
8. Foreign Exchange Exposure Operates in the North America, Europe, and Asia/Pacific regions
Exchange rates have significant effect on financials
Assets and liabilities translated at balance sheet date exchange rate
Revenues and expenses use the average exchange rate for the period
Translation gains/losses from foreign subsidiaries included in accumulated other comprehensive income or loss.
9. Foreign Exchange Exposure Hedging activities
Forward contracts
Inter-company loans
Currently hedging $20.5 million through 2010
Subsidiary translation hedging
Forward contracts
Inter-company loans
Not actual translation of terms
10. Foreign Capital Investment
11. Foreign Capital Investment Determine how much total budget for all global operations
Collect market forecasts from sales/marketing organizations
Combine these forecasts to create world analysis of the industry
Take into consideration current economic environment and specific demands in each region
12. Risk Analysis Quiksilver's Major Risks
Relative Growth and Contraction of Apparel Industry
Market Share gains and Losses
Real Estate Risk
Economic Fluctuations
The occurrence or consequences of any of these risks affects Quiksilver's ability to operate profitably and can harm its financial condition
13. Growth/Contraction of Apparel Industry Considerable variability in consumer demands and tastes for products
Operates in over 100 countries, all with different preferences
Have to fulfill different needs at production stage
Mitigate risk by expanding brand
reach
Creating line of Roxy headphones
partnership with JBL, Inc.
14. Market Share Gains and Losses Competition present in all of their regions
Quiksilver tries to maintain position as top performer in all of its regions
Only invest in projects with high degree of probability
In Latin America, surf/skate industry thriving
Bought out JV in Latin America and continuing to develop
Important to recognize growing markets and invest before competition
15. Real Estate Risk Always risky to operate international facilities
Track sales and performance at all stores
Target under performing stores for closure
Once expired, discontinue lease
Sometimes have to negotiate buy-out of lease or stay open until lease expires
16. Economic Fluctuations This risk factor is intertwined with all Quiksilver's other risks
Quiksilver realizes that it is not mandatory to invest when the economy is in peril
Because the U.S. and Western European markets are struggling, they weigh much more heavily the need to invest at all at this time
17. Cost of CapitalCapital Structure
18. Cost of Capital | Capital Structure Five key metrics:
Cost of equity
Before tax cost of debt
Average tax rate
Debt ratio
Equity ratio
19. Cost of Capital | Capital Structure Cost of equity -> CAPM
E(r)ZQK = rf +ß(rm - rf)
Risk Free Rate
30-year US bond yield (3.67%)
Long time period most appropriate
Beta = 2.03
Linear regression analysis of Quiksilver’s stock returns from past ten years vs. S&P over the same period
rm = 7.37%
S&P 500 from past 30 years
Cost of Equity = 11.33%
20. Cost of Capital | Capital Structure Before-tax cost of debt
Total interest expense
Total long term debt
$45,327,000 in interest expense
$790,097,000 of long-term debt
Before-tax cost of debt = 5.737%
Tax rate
Total income taxes paid ($33,027,000) over income before taxes ($98,571,000)
Tax rate = 33.5%
21. Cost of Capital | Capital Structure Debt/Equity Mix
Debt Ratio
Long-term debt ($790,097,000) over long-term debt and the market value of shareholders equity ($987,355,600
Debt ratio = 80.02%
Equity ratio = 19.98%
22. Cost of Capital | Capital Structure After-tax WACC
Use metrics mentioned
WACC = rd(1-Tax Rate)(D/V) + re(E/V)
Overall cost of capital = 5.31%
23. Cost of Capital | Capital Structure Cost of capital in foreign projects
Similar, with techniques to isolate foreign project cost
Slightly higher cost abroad than domestically
Highly Leveraged
Debt/Equity ratio = 4:1
Insufficient cash reserves and excessive short term debt
Stock price fell 90% since late 2007
Long-term sources of funds
Long-term debt
$790M in long-term debt
24. Working Capital Management
25. Working Capital Management Capital Expenditures
Quiksilver finances its working capital and capital expenditure needs with operating cash flows and bank revolving lines of credit
Working capital was $631.3 million in 2008, which is less than a one percent decrease from the prior year
Contracts with independent contractors have helped the company avoid high levels of capital expenditures
In 2008, the company spent $93.7 million on capital expenditures
Quicksilver estimates that capital expenditures with decrease in 2009 to approximately $60-$70 million
26. Working Capital Management Trade Accounts Receivables
A/R have decreased to $470.1 million in 2008 from $478 million in 2007
Part of the decrease ($36.6 million) is due to fluctuations in currency exchange rates
Receivables in the Americas increased 12%, while European and Asia/Pacific receivables decreased 10% and 22%
Quiksilver performs credit evaluations of their customers to adjust credit limits based on payment history and current creditworthiness
Products are sold to customers in the Americas on a net-30 to net-60 day basis, and net-30 to net-90 terms in Europe and Asia/Pacific depending on the country and whether the products are sold directly to a retailer or through a distributor
27. Working Capital Management Inventory
Value is based on the cost to purchase and/or manufacturer or estimated market value, whichever is lower
Demand for the products can vary significantly, especially due to weakening economic conditions when consumers tend to purchase less
If Quiksilver overestimates the need for certain products, it will distribute the additional products through outlet stores and secondary distribution channels
Consolidated inventories decreased approximately 5% in 2008 - totaling $312.1 million
Approximately $24 million decrease in inventories is due to fluctuations in currency exchange rates
28. Working Capital Management Short-term funds
Existing lines of credit with several banks throughout the United States, Europe and Asia/Pacific
Short-term lines of credit total over $248.9 million
Total maximum for cash borrowings and letters of credit is approximately $826.3 million
Senior notes
Covenants limit Quiksilver’s ability to incur additional debt, which keeps them from seeking additional short-term lines of credit
29. Working Capital Management Dividend Policy
Board of Directors determines the dividend policy
Policy is based on several factors: total earnings, financial requirements and condition, opportunities for reinvesting earnings, business conditions and other factors.
Quiksilver has never paid a cash dividend and all earnings are reinvested in the business
Senior notes and credit agreements
Covenants limit the ability to pay dividends on capital stock or repurchase capital stock
Also, limits dividends or other payments by the subsidiaries to the Company
30. Recommendations
31. Recommendations Invest in in emerging/thriving surf/skate areas
Latin America, Eastern Europe, domestic submarkets such as Washington D.C.)
Focus on successful core brands (Quiksilver, DC, Roxy)
Invest in these brands
Divest any remaining non-core business units and brands.
Invest only in projects with high probability of success
Debt structure and senior notes dictate the need for extreme risk aversion.
Debt reduction
Over $1 billion in short and long term debt
Coming due in the next five years
Too highly leveraged for its current size and revenue
Immediate action to reduce debt or renegotiate debt terms.
32. Thoughts?Questions?