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					Report on International Financial Operations



         MBAF 648 | April 28, 2009



                                                     Prepared by
                                               Hilary Fahlsing
                                                Laura Francis
                                               Brian Gooding
                                                   Trevor Zink
Overview
 Background
 Foreign Exchange Exposure
 Foreign Capital Investment
     Analysis of risk
 Cost of Capital and Capital Structure
 Working Capital Management
 Recommendations
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
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
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
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
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.
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
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
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
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.
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
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
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
Cost of Capital | Capital Structure
   Five key metrics:
     Cost of equity
     Before tax cost of debt
     Average tax rate
     Debt ratio
     Equity ratio
Cost of Capital | Capital Structure
   Cost of equity -> CAPM
     E(r)ZQK = rf +β(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%
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%
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%
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%
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
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
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
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
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
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
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.

				
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