Quiksilver, Inc. entered into an agreement with Rhône, an international private equity firm, for a 5-year senior secured term loan of approximately $150 million to ease its liquidity pressures. The surf giant also reported second-quarter sales fell 17.1% and earnings from continuing operations tumbled 82.9%

 

Regarding the new funding, Quiksilver said the new capital from Rhône “will significantly improve the company’s liquidity position and is expected to provide the cornerstone to solidify Quiksilver’s regional banking relationships around the world.” It also said the financing will enable the company to further refocus its attention on its boardsport and outdoor lifestyle brands, Quiksilver, Roxy and DC, “and on improving the operating profitability of its business worldwide.”

 

Quiksilver intends to use the proceeds from the term loan to pay down existing indebtedness. Concurrent with the extension of the term loan, Quiksilver will appoint two new directors designated by Rhône to its board of directors.

 

In addition, Quiksilver entered into a written commitment with Bank of America and GE Capital, as joint lead arrangers, to refinance its existing Americas facility in the form of a new 3-year $200 million asset-based credit facility. The company is also in discussions with its French banking partners to consolidate its European debts into a new committed multi-year facility and expects a positive resolution in the near term.

 

“Rhône is a strong strategic partner with an international presence and extensive experience investing in globally diversified businesses across a number of sectors,” said Robert B. McKnight, Jr., Chairman of the Board, Chief Executive Officer and President of Quiksilver, Inc. “Our agreement with Rhône not only provides the financial stability necessary to complete our new Americas and European financing efforts, but it also allows us to improve our global business and increase the efficiency of our worldwide operations. We are pleased to have addressed our liquidity concerns so that we can now sharpen our focus on streamlining the business and making great product within our three great brands – Quiksilver, Roxy and DC.”

In its second quarter ended April 30, sales fell 17.1% to $494.2 million from $596.3 million a year ago. Adjusting for changes in foreign currency as compared to the U.S. dollar, this represented a decline of 8% in constant currency. Consolidated pro-forma income from continuing operations was $6.6 million, or 5 cents per share, compared to $38.7 million, or 30 cents a share, for the second quarter of fiscal 2008.

 

Quiksilver said the pro-forma income from continuing operations for the latest three months excludes a severance charge of $1.7 million, net of tax. Including these charges, income from continuing operations was $4.9 million, or 4 cents per share. Net revenues and income from continuing operations for all periods exclude the results of our Rossignol wintersports business, which was sold in the first quarter of fiscal 2009 and is reported as discontinued operations.

 

Net revenues in the Americas segment decreased 7% during the second quarter of fiscal 2009 to $230.0 million from $247.6 million a year ago. In constant currency, European segment net revenues decreased 13% compared to the prior year. As reported in our financial statements, European segment net revenues decreased 26% during the second quarter of fiscal 2009 to $210.5 million from $284.5 million in the second quarter of fiscal 2008. In constant currency, Asia/Pacific segment net revenues increased 14% compared to the prior year. As reported in our financial statements, Asia/Pacific segment net revenues decreased 16% to $52.3 million in the second quarter of fiscal 2009 from $62.5 million in the second quarter of fiscal 2008. Please refer to the accompanying tables in order to better understand the impact of foreign currency on revenue trends in our Europe and Asia/Pacific segments.

 

Consolidated inventories increased 1% to $307.7 million at April 30, 2009 from $304.1 million at April 30, 2008. Consolidated trade accounts receivable decreased 13% to $411.0 million at April 30, 2009 from $473.0 million at April 30, 2008.

 

Regarding earnings, McKnight said, “We are pleased to report second quarter earnings that are essentially in-line with our expectations, but the environment remains extremely challenging and we have yet to see any improvement in overall business trends. With customers proceeding cautiously in this uncertain market, orders for the second half are building more slowly than in past periods and we continue to look for opportunities to streamline the business and improve profitability. As such, we are targeting substantial cost reductions by the end of this fiscal year and are planning our business conservatively.”

 

Addressing its outlook for continuing operations, the company stated that based on current trends, third quarter revenues are expected to be down in the mid-teens on a percentage basis compared to the same quarter a year ago and that diluted earnings per share are expected to be in the low-single-digit range. The company indicated that longer term visibility into revenues and earnings remains limited at the present time due to global economic conditions.

 

McKnight reiterated that the new term loan is expected to stabilize the company’s liquidity position and enable the company to refinance its existing Americas line of credit and consolidate its European debts into a new committed multi-year facility, and is expected to be funded by the end of July.

 

McKnight said “Clearly our most important message is captured in our financing press release, also issued today, in which we announced the $150 million infusion by Rhône and the update on our Americas and European refinancing efforts. We do not think of the Rhône investment as merely a loan, but as the cornerstone of Quiksilver’s financial restructuring plan. Rhône is a strong strategic partner with an international presence and extensive experience investing in globally diversified businesses across a number of sectors. Our agreement with Rhône not only provides the financial stability necessary to complete our new Americas and European financing efforts, but it also allows us to improve our global business and increase the efficiency of our worldwide operations. We are pleased to have addressed our liquidity concerns so that we can now sharpen our focus on streamlining the business and making great product within our three great brands – Quiksilver, Roxy and DC.”

Steven Langman, Managing Director and Co-Founder of Rhône, stated, “Rhône is enthusiastic about this opportunity to partner with Quiksilver in the continued development of its leading brands. Bob has assembled a first-rate management team, and we are confident that the liquidity and support provided by Rhône will allow the company to implement its dynamic strategy.”

 

The senior secured term loan will bear a coupon rate of interest of 15% of which up to 7.5% is payable in-kind (PIK) with the remainder payable in cash. Rhône will also receive detachable warrants providing the right to acquire approximately 20% of the then-outstanding shares of Quiksilver’s common stock at a strike price of $1.86, which is the volume weighted average closing price over the 60-day period ended June 2, 2009. The warrants expire seven years from issue.

 

Quiksilver said Rhône’s commitment to fund the term loan is subject to the satisfaction of certain terms and conditions, including completion of the refinancing of Quiksilver’s multi-year facility in Europe and other customary closing conditions and is expected to close before the end of July.

Peter J. Solomon company served as financial advisor and Skadden, Arps, Slate, Meagher & Flom LLP served as legal advisor to Quiksilver in this transaction. Lazard Frères & Co. LLC served as financial advisor and Sullivan & Cromwell LLP served as legal advisor to Rhône.