##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2006
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number: 000-51382
 
 Volcom, Inc.
 (Exact name of registrant as specified in its charter)
 Delaware
(State or other jurisdiction of
incorporation or organization)
    
    33-0466919
(I.R.S. Employer
Identification No.)
 Volcom, Inc.
1740 Monrovia Avenue
Costa Mesa, CA 92627
(Address of principal executive offices, including zip code)
 (949) 646-2175
(Registrants telephone number, including area code)
 
 R £
 
 £ £ R
 £ R




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##### 



VOLCOM, INC.
 FORM 10-Q
INDEX
 PagePART I. FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    3Condensed Consolidated Balance Sheets (unaudited) as of June 30, 2006 and
December 31, 2005
    
    
    3Condensed Consolidated Statements of Operations (unaudited) for the three
and six months ended June 30, 2006 and 2005
    
    
    4Condensed Consolidated Statements of Cash Flows (unaudited) for the six
months ended June 30, 2006 and 2005
    
    
    5Notes to Condensed Consolidated Financial Statements (unaudited)
    
    
    6  14Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
    
    
    15  29Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    29  30Item 4. Controls and Procedures
    
    
    30PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    31Item 1A. Risk Factors
    
    
    31  33Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    33Item 3. Defaults Upon Senior Securities
    
    
    33Item 4. Submission of Matters to a Vote of Security Holders
    
    
    33 - 34Item 5. Other Information
    
    
    34Item 6. Exhibits
    
    
    34SIGNATURES
    
    
    35EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 VOLCOM, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (unaudited)
 (in thousands, except share data)
 June 30, 2006
    
    
    December 31, 2005AssetsCurrent assets:Cash and cash equivalents
    
    $
    83,336
    
    
    $
    71,712Accounts receivable  net of allowances of $1,050 (2006) and $730
(2005)
    
    
    29,758
    
    
    
    21,408Inventories
    
    
    11,180
    
    
    
    10,833Prepaid expenses and other current assets
    
    
    1,117
    
    
    
    1,366Income taxes receivable
    
    
    
    
    
    
    479Deferred income taxes
    
    
    1,110
    
    
    
    1,110Total current assets
    
    
    126,501
    
    
    
    106,908Property and equipment  net
    
    
    5,917
    
    
    
    3,467Investments in unconsolidated investees
    
    
    298
    
    
    
    298Intangible assets  net
    
    
    409
    
    
    
    451Goodwill
    
    
    158
    
    
    
    158Other assets
    
    
    229
    
    
    
    99Total assets
    
    $
    133,512
    
    
    $
    111,381Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
    
    $
    11,205
    
    
    $
    5,779Accrued expenses and other current liabilities
    
    
    5,955
    
    
    
    2,587Income taxes payable
    
    
    1,446
    
    
    
    Current portion of capital lease obligations
    
    
    75
    
    
    
    72Total current liabilities
    
    
    18,681
    
    
    
    8,438Long-term capital lease obligations
    
    
    145
    
    
    
    183Deferred income taxes
    
    
    80
    
    
    
    80Commitments and contingencies (Note 9)Stockholders equity:Common stock, $.001 par value  60,000,000 shares authorized;
24,243,220 (2006) and 24,214,120 (2005) shares issued and
outstanding
    
    
    24
    
    
    
    24Additional paid-in capital
    
    
    85,351
    
    
    
    84,418Retained earnings
    
    
    29,224
    
    
    
    18,266Accumulated other comprehensive income
    
    
    7
    
    
    
    (28
    )Total stockholders equity
    
    
    114,606
    
    
    
    102,680Total liabilities and stockholders equity
    
    $
    133,512
    
    
    $
    111,381
  3




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VOLCOM, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (unaudited)
 (in thousands, except share and per share data)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues:Product revenues
    
    $
    45,492
    
    
    $
    35,478
    
    
    $
    86,005
    
    
    $
    66,163Licensing revenues
    
    
    559
    
    
    
    375
    
    
    
    1,642
    
    
    
    1,381Total revenues
    
    
    46,051
    
    
    
    35,853
    
    
    
    87,647
    
    
    
    67,544Cost of goods sold
    
    
    23,137
    
    
    
    17,156
    
    
    
    43,211
    
    
    
    32,440Gross profit
    
    
    22,914
    
    
    
    18,697
    
    
    
    44,436
    
    
    
    35,104Selling, general and administrative expenses
    
    
    13,224
    
    
    
    11,057
    
    
    
    28,060
    
    
    
    21,420Operating income
    
    
    9,690
    
    
    
    7,640
    
    
    
    16,376
    
    
    
    13,684Other income (expense):Interest income (expense), net
    
    
    977
    
    
    
    
    
    
    
    1,715
    
    
    
    (2
    )Dividend income from cost method investee
    
    
    3
    
    
    
    11
    
    
    
    3
    
    
    
    11Foreign currency gain (loss)
    
    
    259
    
    
    
    (93
    )
    
    
    262
    
    
    
    (117
    )Total other income (expense)
    
    
    1,239
    
    
    
    (82
    )
    
    
    1,980
    
    
    
    (108
    )Income before provision for income taxes
    
    
    10,929
    
    
    
    7,558
    
    
    
    18,356
    
    
    
    13,576Provision for income taxes
    
    
    4,397
    
    
    
    2,926
    
    
    
    7,398
    
    
    
    3,015Income before equity in earnings of investee
    
    
    6,532
    
    
    
    4,632
    
    
    
    10,958
    
    
    
    10,561Equity in earnings of investee
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    331Net income
    
    $
    6,532
    
    
    $
    4,632
    
    
    $
    10,958
    
    
    $
    10,892Net income per share:Basic
    
    $
    0.27
    
    
    $
    0.24
    
    
    $
    0.45
    
    
    $
    0.57Diluted
    
    $
    0.27
    
    
    $
    0.24
    
    
    $
    0.45
    
    
    $
    0.56Weighted average shares outstanding:Basic
    
    
    24,214,523
    
    
    
    19,174,912
    
    
    
    24,207,537
    
    
    
    19,172,809Diluted
    
    
    24,310,679
    
    
    
    19,390,558
    
    
    
    24,311,960
    
    
    
    19,463,261Pro forma net income data:Income before provision for income taxes, as
reported
    
    
    
    
    
    $
    7,558
    
    
    
    
    
    
    $
    13,576Pro forma provision for income taxes
    
    
    
    
    
    
    3,080
    
    
    
    
    
    
    
    5,667Pro forma income before equity in earnings of
investee
    
    
    
    
    
    
    4,478
    
    
    
    
    
    
    
    7,909Equity in earnings of investee
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    331Pro forma net income
    
    
    
    
    
    $
    4,478
    
    
    
    
    
    
    $
    8,240Pro forma net income per share:Basic
    
    
    
    
    
    $
    0.23
    
    
    
    
    
    
    $
    0.43Diluted
    
    
    
    
    
    $
    0.23
    
    
    
    
    
    
    $
    0.42Pro forma weighted average shares outstanding:Basic
    
    
    
    
    
    
    19,174,912
    
    
    
    
    
    
    
    19,172,809Diluted
    
    
    
    
    
    
    19,390,558
    
    
    
    
    
    
    
    19,463,261
  4




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VOLCOM, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (unaudited)
 (in thousands)
 Six Months EndedJune 30,2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    10,958
    
    
    $
    10,892Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    630
    
    
    
    257Equity in earnings of investee, net of dividends received
    
    
    
    
    
    
    (331
    )Provision for doubtful accounts
    
    
    76
    
    
    
    113Excess tax benefits related to exercise of stock options
    
    
    (124
    )
    
    
    2,833Loss on disposal of property and equipment
    
    
    8
    
    
    
    Stock-based compensation
    
    
    399
    
    
    
    123Deferred income taxes
    
    
    
    
    
    
    (428
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    (8,416
    )
    
    
    (5,077
    )Inventories
    
    
    (341
    )
    
    
    (6,143
    )Prepaid expenses and other current assets
    
    
    255
    
    
    
    (193
    )Other assets
    
    
    (117
    )
    
    
    (55
    )Accounts payable
    
    
    5,407
    
    
    
    4,644Accrued expenses and other current liabilities
    
    
    3,081
    
    
    
    3,989Income taxes receivable/payable
    
    
    2,049
    
    
    
    408Net cash provided by operating activities
    
    
    13,865
    
    
    
    11,032Cash flows from investing activities:Purchase of property and equipment
    
    
    (2,611
    )
    
    
    (2,620
    )Acquisition, net of cash acquired
    
    
    (168
    )
    
    
    Proceeds from sale of equity method investee
    
    
    
    
    
    
    1,391Net cash used in investing activities
    
    
    (2,779
    )
    
    
    (1,229
    )Cash flows from financing activities:Principal payments on capital lease obligations
    
    
    (35
    )
    
    
    (48
    )Prepaid initial public offering costs
    
    
    
    
    
    
    (1,110
    )Proceeds from exercise of stock options
    
    
    411
    
    
    
    200Excess tax benefits related to exercise of stock options
    
    
    124
    
    
    
    Distributions to stockholders
    
    
    
    
    
    
    (19,204
    )Net cash provided by (used in) financing activities
    
    
    500
    
    
    
    (20,162
    )Effect of exchange rate changes on cash
    
    
    38
    
    
    
    Net increase (decrease) in cash and cash equivalents
    
    
    11,624
    
    
    
    (10,359
    )Cash and cash equivalents Beginning of period
    
    
    71,712
    
    
    
    10,359Cash and cash equivalents End of period
    
    $
    83,336
    
    
    $
    Supplemental disclosures of cash flow information:Cash paid during the period for:Interest
    
    $
    8
    
    
    $
    11Income taxes
    
    
    5,304
    
    
    
    200
 Supplemental disclosures of non-cash investing and financing activities:
      5




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VOLCOM, INC. AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
 Note 1
 Basis of Presentation
   Stockholders Equity 
 Comprehensive Income 
 Note 2
 Stock-Based Compensation
 Share-Based Payment Accounting for Stock Issued to Employees Accounting for Stock-Based Compensation Accounting for Stock-Based
Compensation  Transition and Disclosure
  6




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VOLCOM, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
     Three months ended
    
    
    Six months endedJune 30, 2005
    
    
    June 30, 2005(in thousands, except per share data)Net income:As reported
    
    $
    4,632
    
    
    $
    10,892Deduct: Total stock-based
employee compensation
expense determined under
fair value based method for
all awards, net of related
tax effects
    
    
    (5
    )
    
    
    (5
    )Pro forma
    
    $
    4,627
    
    
    $
    10,887Basic net income per share:As reported
    
    $
    0.24
    
    
    $
    0.57Pro forma
    
    $
    0.24
    
    
    $
    0.57Diluted net income per share:As reported
    
    $
    0.24
    
    
    $
    0.56Pro forma
    
    $
    0.24
    
    
    $
    0.56
  7




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VOLCOM, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
 Stock
Compensation Plans
 Stock Option Awards
  Weighted-Average
    
    
    Weighted-AverageNumber of
    
    
    Exercise
    
    
    RemainingOptions
    
    
    Price
    
    
    Contractual TermOutstanding at January 1, 2006
    
    
    576,000
    
    
    $
    19.00Granted
    
    
    
    
    
    
    Exercised
    
    
    (21,600
    )
    
    $
    19.00Canceled or forfeited
    
    
    (10,000
    )
    
    $
    19.00Outstanding at June 30, 2006
    
    
    544,400
    
    
    $
    19.00
    
    
    9.0 yearsExercisable at June 30, 2006
    
    
    259,600
    
    
    $
    19.00
    
    
    9.0 years
  8




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VOLCOM, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
  Weighted-AverageNumber of
    
    
    Grant-DateOptions
    
    
    Fair ValueUnvested at January 1, 2006
    
    
    366,000
    
    
    $
    9.14Granted
    
    
    
    
    
    
    Vested
    
    
    (71,200
    )
    
    
    Canceled or forfeited
    
    
    (10,000
    )
    
    $
    9.14Unvested at June 30, 2006
    
    
    284,800
    
    
    $
    9.14
  Options Outstanding
    
    Options ExercisableWeighted-
    
    Weighted-
    
    
    
    
    
    Weighted-Average
    
    Average
    
    
    
    
    
    AverageNumber of
    
    Remaining
    
    Exercise
    
    Number of
    
    ExerciseRange of Exercise Price
    
    Options
    
    Life (yrs)
    
    Price
    
    Options
    
    Price$19.00
    
    
    544,400
    
    
    
    9.0
    
    
    $
    19.00
    
    
    
    259,600
    
    
    $
    19.00
 Restricted Stock Awards
    Weighted-AverageShares of
    
    
    Grant-DateRestricted Stock
    
    
    Fair ValueOutstanding restricted stock at January 1, 2006
    
    
    20,000
    
    
    $
    33.01Granted
    
    
    7,500
    
    
    
    34.65Vested
    
    
    
    
    
    
    Canceled or forfeited
    
    
    
    
    
    
    Outstanding restricted stock at June 30, 2006
    
    
    27,500
    
    
    $
    33.46
  9




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VOLCOM, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
 Note 3
 New Accounting Pronouncements
 Inventory-Costs, an Amendment of ARB No. 43, Chapter 4.
 Accounting Changes and Error Corrections Accounting Changes Reporting Accounting Changes in
Interim Financial Statements
 Accounting for Uncertainty in
Income Taxesan interpretation of FASB Statement No. 109
 Note 4
 Inventories
  June 30, 2006
    
    
    December 31, 2005(in thousands)Finished goods
    
    $
    10,723
    
    
    $
    10,188Work-in-process
    
    
    144
    
    
    
    312Raw materials
    
    
    313
    
    
    
    333$
    11,180
    
    
    $
    10,833
 Note 5
 Property and Equipment
  June 30, 2006
    
    
    December 31, 2005(in thousands)Furniture and fixtures
    
    $
    1,448
    
    
    $
    600Office equipment
    
    
    1,174
    
    
    
    1,062Computer equipment
    
    
    1,737
    
    
    
    1,141Leasehold improvements
    
    
    485
    
    
    
    128Land and building
    
    
    2,004
    
    
    
    2,004Construction in progress
    
    
    1,035
    
    
    
    7,883
    
    
    
    4,935Less accumulated depreciation
    
    
    (1,966
    )
    
    
    (1,468
    )Property and equipment  net
    
    $
    5,917
    
    
    $
    3,467
  10




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VOLCOM, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
  Note 6
 Investments in Unconsolidated Investees
   Note 7
Intangible Assets
  As of June 30, 2006
    
    
    As of December 31, 2005Gross Carrying
    
    
    Accumulated
    
    
    Gross Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Amount
    
    
    Amortization(in thousands)Customer relationships
    
    $
    310
    
    
    $
    21
    
    
    $
    310
    
    
    $
    5Backlog
    
    
    160
    
    
    
    160
    
    
    
    160
    
    
    
    53Non-compete agreements
    
    
    40
    
    
    
    3
    
    
    
    40
    
    
    
    1Reacquired license rights
    
    
    84
    
    
    
    1
    
    
    
    
    
    
    
    $
    594
    
    
    $
    185
    
    
    $
    510
    
    
    $
    59
  11




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VOLCOM, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
 Note 8
 Accrued Expenses and Other Current Liabilities
  June 30, 2006
    
    
    December 31, 2005(in thousands)Payroll and related accruals
    
    $
    2,959
    
    
    $
    1,079Other
    
    
    2,996
    
    
    
    1,508$
    5,955
    
    
    $
    2,587
 Note 9
 Commitments and Contingencies
 Litigation
 Indemnities and Guarantees
 Note
10  Earnings Per Share
 Earnings Per
Share
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands, except share data)Numerator  Net income
    
    $
    6,532
    
    
    $
    4,632
    
    
    $
    10,958
    
    
    $
    10,892Denominator:Weighted average common stock
outstanding for basic earnings per
share
    
    
    24,214,523
    
    
    
    19,174,912
    
    
    
    24,207,537
    
    
    
    19,172,809Effect of dilutive securities:Stock options and restricted stock
    
    
    96,156
    
    
    
    215,646
    
    
    
    104,423
    
    
    
    290,452Adjusted weighted average common
stock and assumed conversions for
diluted earnings per share
    
    
    24,310,679
    
    
    
    19,390,558
    
    
    
    24,311,960
    
    
    
    19,463,261
 Note
11  Income Taxes
  12




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VOLCOM, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
 Interim Financial Reporting
  Note
12  Segment Information
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands)Mens
    
    $
    25,380
    
    
    $
    21,115
    
    
    $
    50,151
    
    
    $
    38,947Girls
    
    
    16,447
    
    
    
    12,402
    
    
    
    29,504
    
    
    
    23,764Snow
    
    
    2
    
    
    
    
    
    
    
    2
    
    
    
    Boys
    
    
    3,111
    
    
    
    1,530
    
    
    
    5,387
    
    
    
    2,715Other
    
    
    552
    
    
    
    431
    
    
    
    961
    
    
    
    737Subtotal product categories
    
    
    45,492
    
    
    
    35,478
    
    
    
    86,005
    
    
    
    66,163Licensing revenues
    
    
    559
    
    
    
    375
    
    
    
    1,642
    
    
    
    1,381Total revenues
    
    $
    46,051
    
    
    $
    35,853
    
    
    $
    87,647
    
    
    $
    67,544
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands)United States
    
    $
    36,802
    
    
    $
    28,655
    
    
    $
    67,309
    
    
    $
    52,776Canada
    
    
    5,341
    
    
    
    3,743
    
    
    
    11,291
    
    
    
    7,757Asia Pacific
    
    
    1,087
    
    
    
    1,315
    
    
    
    2,504
    
    
    
    2,849Other
    
    
    2,262
    
    
    
    1,765
    
    
    
    4,901
    
    
    
    2,781$
    45,492
    
    
    $
    35,478
    
    
    $
    86,005
    
    
    $
    66,163
  June 30, 2006
    
    
    December 31, 2005(in thousands)United States
    
    $
    130,541
    
    
    $
    110,137Europe
    
    
    2,971
    
    
    
    1,244$
    133,512
    
    
    $
    111,381
 13




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VOLCOM, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
 Note
13  Subsequent Event
  14




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Item 2. Managements 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, 2005, 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, 2005.
 Overview
     15




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16




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Share-Based Payment
 Critical Accounting Policies
  Revenue Recognition
   Accounts Receivable
  17




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##### Table of Contents



Inventories
  
    
    unanticipated changes in consumer preferences;
    
    weakening economic conditions;
    
    terrorist acts or threats;
    
    reduced consumer confidence in the retail market; and
    
    unseasonable weather.
  Goodwill and Intangible Assets
 Goodwill and
Intangible Assets
 Long-Lived Assets
  Investments in Unconsolidated Investees
  18




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Athlete Sponsorships
  Income Taxes
   Stock-Based Compensation
  19




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Foreign Currency Translation
   General
    Results of Operations
  Three Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of goods sold
    
    
    50.2
    
    
    
    47.9
    
    
    
    49.3
    
    
    
    48.0Gross profit
    
    
    49.8
    
    
    
    52.1
    
    
    
    50.7
    
    
    
    52.0Selling, general and administrative expenses
    
    
    28.8
    
    
    
    30.8
    
    
    
    32.0
    
    
    
    31.7Operating income
    
    
    21.0
    
    
    
    21.3
    
    
    
    18.7
    
    
    
    20.3Other income (expense)
    
    
    2.7
    
    
    
    (0.2
    )
    
    
    2.2
    
    
    
    (    0.2
    )Income before provision for income taxes
    
    
    23.7
    
    
    
    21.1
    
    
    
    20.9
    
    
    
    20.1Provision for income taxes
    
    
    9.5
    
    
    
    8.2
    
    
    
    8.4
    
    
    
    4.5Income before equity in earnings of investee
    
    
    14.2
    
    
    
    12.9
    
    
    
    12.5
    
    
    
    15.6Equity in earnings of investee
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.5Net income
    
    
    14.2
    %
    
    
    12.9
    %
    
    
    12.5
    %
    
    
    16.1
    %
 20




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##### Table of Contents



Three Months Ended June 30, 2006 Compared to Three Months Ended June 30, 2005
 Revenues
      Gross Profit
 If the
United States continues to impose tariffs and import quota restrictions on products manufactured in
China it could materially affect our gross margin and financial performance
 21




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Selling, General and Administrative Expenses
  Operating Income
  Other Income (Expense)
  Provision for Income Taxes
    22




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##### Table of Contents



Net Income
  Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2005
 Revenues
      Gross Profit
 If the United States
continues to impose tariffs and import quota restrictions on products manufactured in China it
could materially affect our gross margin and financial performance
 23




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Selling, General and Administrative Expenses
  Operating Income
  Other Income (Expense)
  Provision for Income Taxes
    24




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##### Table of Contents



Net Income
  Liquidity and Capital Resources
   Six MonthsEnded June 30,2006
    
    
    2005(in thousands)Cash and cash equivalents at beginning of period
    
    $
    71,712
    
    
    $
    10,359Cash flow from operating activities
    
    
    13,865
    
    
    
    11,032Cash flow from investing activities
    
    
    (2,779
    )
    
    
    (1,229
    )Cash flow from financing activities
    
    
    500
    
    
    
    (20,162
    )Effect of exchange rate changes on cash
    
    
    38
    
    
    
    Cash and cash equivalents at end of period
    
    $
    83,336
    
    
    $
    
    25




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##### Table of Contents



Credit Facilities
   Contractual Obligations and Commitments
  Payments Due by Period(in thousands)Jul. 1 -Total
    
    
    Dec. 31, 2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    ThereafterOperating lease obligations
    
    $
    3,971
    
    
    $
    583
    
    
    $
    1,129
    
    
    $
    1,151
    
    
    $
    740
    
    
    $
    299
    
    
    $
    69Facility construction obligations (1)
    
    
    4,808
    
    
    
    3,750
    
    
    
    1,058
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Capital lease obligations
    
    
    239
    
    
    
    43
    
    
    
    87
    
    
    
    75
    
    
    
    34
    
    
    
    
    
    
    
    Professional athlete sponsorships
    
    
    5,303
    
    
    
    1,720
    
    
    
    2,874
    
    
    
    709
    
    
    
    
    
    
    
    
    
    
    
    Contractual letters of credit
    
    
    1,439
    
    
    
    1,439
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    15,760
    
    
    $
    7,535
    
    
    $
    5,148
    
    
    $
    1,935
    
    
    $
    774
    
    
    $
    299
    
    
    $
    69
 
 (1)
    
    Based on a 1 to 1.2551 exchange rate at June 30, 2006. 26




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Seasonality
   Backlog
  27




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##### Table of Contents



Inflation
  Vulnerability Due to Concentrations
    Recent Accounting Pronouncements
 Inventory-Costs, an Amendment of ARB No. 43, Chapter 4.
 Share-Based Payment
 Accounting Changes and Error Corrections Accounting Changes Reporting Accounting Changes in
Interim Financial Statements
 28




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##### Table of Contents



Accounting for Uncertainty in
Income Taxesan interpretation of FASB Statement No. 109
 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk.
 Foreign Currency Risk
     Interest Rate Risk
  29




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##### Table of Contents



Item 4. Controls and Procedures.
    30




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##### Table of Contents



PART II.
 OTHER INFORMATION
 
 Item 1. Legal Proceedings.
  
 Item 1A. Risk Factors.
 Certain statements contained in or incorporated by reference into this Quarterly Report on
Form 10-Q, or which are otherwise made by us or on our behalf, are forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements include statements that are predictive in nature, which depend upon or refer to future
events or conditions, which include words such as believes, plans, anticipates, estimates,
expects or similar expressions. In addition, any statements concerning future financial
performance, ongoing business strategies or prospects, and possible future actions are also
forward-looking statements. Forward-looking statements are based on current expectations and
projections about future events and are subject to risks, uncertainties, and assumptions about our
company, economic and market factors and the industry in which we do business, among other things.
These statements are not guaranties of future performance and we undertake no obligation to
publicly update any forward-looking statements, whether as a result of new information, future
events or otherwise. Actual events and results may differ materially from those expressed or
forecasted in forward-looking statements due to a number of factors. Factors that could cause our
actual performance and future events and actions to differ materially from such forward-looking
statements, 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, 2005 and Part II, Item 1A in our Quarterly Report on
Form 10-Q for the quarter ended March 31, 2006. The following are the material changes and updates
from the risk factors previously disclosed in Part I, Item 1A in our Annual Report on Form 10-K
for the year ended December 31, 2005 and Part II, Item 1A in our Quarterly report on Form 10-Q for
the quarter ended March 31, 2006.
 We may be adversely affected by the discontinuance of our licensing relationship in Europe.
  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.
  31




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##### Table of Contents



If the United States continues to impose tariffs and import quota restrictions on products
manufactured in China it could materially affect our gross margin and financial performance.
  If we are required to establish new manufacturing relationships due to the termination of current
key manufacturing relationships with large contractors such as Ningbo Jehson Textiles and China
Ningbo CIXI (Dragon Crowd), we would likely experience increased costs, disruptions in the
manufacture and shipment of our products and a loss of revenue.
  32




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##### Table of Contents



If the ownership of our common stock continues to be highly concentrated, it may prevent you and
other stockholders from influencing significant corporate decisions and may result in conflicts of
interest that could cause our stock price to decline.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
  
 Item 3. Defaults Upon Senior Securities.
  
 Item 4. Submission of Matters to a Vote of Security Holders.
  1. Re-election of Directors
  Director Name
    
    For
    
    WithheldDouglas S. Ingram
    
    
    20,978,900
    
    
    
    180,828Anthony M. Palma
    
    
    20,201,826
    
    
    
    957,902Joseph B. Tyson
    
    
    20,984,900
    
    
    
    174,828Carl W. Womack
    
    
    20,984,930
    
    
    
    174,798René R. Woolcott
    
    
    20,507,276
    
    
    
    652,452Richard R. Woolcott
    
    
    20,985,955
    
    
    
    173,773Kevin G. Wulff
    
    
    20,812,957
    
    
    
    346,771
 33




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##### Table of Contents



2. Ratification of Appointment of Deloitte & Touche LLP
  For
    
    Against
    
    Abstain21,155,355
    
    2,098
    
    2,275
 
 Item 5. Other Information.
  
 Item 6. Exhibits.
 10.1
    
    English Translation of Real Estate Development Contract dated May 5,
2006 between Volcom SAS and Societe dEquipement des Pays de lAdour
(incorporated by reference to Volcom, Inc.s Current Report on Form
8-K filed with the SEC on May 9, 2006)31.1
    
    Certification of Principal Executive Officer Required Under Rule
13a-14(a) of the Securities Exchange Act of 1934, as amended31.2
    
    Certification of Principal Financial Officer Required Under Rule
13a-14(a) of the Securities Exchange Act of 1934, as amended32
    
    Certification of Principal Executive Officer and Principal Financial
Officer Required Under Rule 13a-14(b) of the Securities Exchange Act
of 1934, as amended, and 18 U.S.C. Section 1350
 34




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##### Table of Contents



SIGNATURE
  Volcom, Inc.Date: August 9, 2006
    /s/ Douglas P. CollierDouglas P. CollierChief Financial Officer, Secretary and Treasurer
(Principal Financial Officer and Authorized
Signatory) 35




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##### Table of Contents



INDEX TO EXHIBITS
 Exhibit No.
    
    Description10.1
    
    English Translation of Real Estate Development Contract
dated May 5, 2006 between Volcom SAS and Societe
dEquipement des Pays de lAdour (incorporated by
reference to Volcom, Inc.s Current Report on Form 8-K
filed with the SEC on May 9, 2006)31.1
    
    Certification of Principal Executive Officer Required
Under Rule 13a-14(a) of the Securities Exchange Act of
1934, as amended31.2
    
    Certification of Principal Financial Officer Required
Under Rule 13a-14(a) of the Securities Exchange Act of
1934, as amended32
    
    Certification of Principal Executive Officer and Principal
Financial Officer Required Under Rule 13a-14(b) of the
Securities Exchange Act of 1934, as amended, and 18 U.S.C.
Section 1350
 36