##### 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 September 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)
 þ o
  o o þ
 o þ




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##### 



VOLCOM, INC.
 FORM 10-Q
INDEX
 PagePART I. FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    3Condensed Consolidated Balance Sheets (unaudited) as of September 30, 2006 and December
31, 2005
    
    
    3Condensed Consolidated Statements of Operations (unaudited) for the three and nine months
ended September 30, 2006 and 2005
    
    
    4Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended
September 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
    
    
    30Item 4. Controls and Procedures
    
    
    30  31PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    32Item 1A. Risk Factors
    
    
    32  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
    
    
    33Item 5. Other Information
    
    
    33Item 6. Exhibits
    
    
    34SIGNATURES
    
    
    35EXHIBIT 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)
 September 30, 2006
    
    
    December 31, 2005AssetsCurrent assets:Cash and cash equivalents
    
    $
    84,561
    
    
    $
    71,712Accounts receivable  net of allowances of $1,311 (2006)
and $730 (2005)
    
    
    35,978
    
    
    
    21,408Inventories
    
    
    12,706
    
    
    
    10,833Prepaid expenses and other current assets
    
    
    1,574
    
    
    
    1,366Income taxes receivable
    
    
    
    
    
    
    479Deferred income taxes
    
    
    1,302
    
    
    
    1,110Total current assets
    
    
    136,121
    
    
    
    106,908Property and equipment  net
    
    
    8,874
    
    
    
    3,467Investments in unconsolidated investees
    
    
    298
    
    
    
    298Intangible assets  net
    
    
    398
    
    
    
    451Goodwill
    
    
    158
    
    
    
    158Other assets
    
    
    229
    
    
    
    99Total assets
    
    $
    146,078
    
    
    $
    111,381Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
    
    $
    11,042
    
    
    $
    5,779Accrued expenses and other current liabilities
    
    
    7,095
    
    
    
    2,587Income taxes payable
    
    
    2,582
    
    
    
    Current portion of capital lease obligations
    
    
    76
    
    
    
    72Total current liabilities
    
    
    20,795
    
    
    
    8,438Long-term capital lease obligations
    
    
    125
    
    
    
    183Deferred income taxes
    
    
    80
    
    
    
    80Commitments and contingencies (Note 9)Stockholders equity:Common stock, $.001 par value  60,000,000 shares authorized;
24,257,720 (2006) and 24,214,120 (2005) shares issued and
outstanding
    
    
    24
    
    
    
    24Additional paid-in capital
    
    
    85,684
    
    
    
    84,418Retained earnings
    
    
    39,387
    
    
    
    18,266Accumulated other comprehensive income
    
    
    (17
    )
    
    
    (28
    )Total stockholders equity
    
    
    125,078
    
    
    
    102,680Total liabilities and stockholders equity
    
    $
    146,078
    
    
    $
    111,381
  3




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##### Table of Contents



VOLCOM, INC. AND SUBSIDIARIES
 
 CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
 (unaudited)
(in thousands, except share and per share data)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues:Product revenues
    
    $
    59,704
    
    
    $
    50,096
    
    
    $
    145,709
    
    
    $
    116,259Licensing revenues
    
    
    1,345
    
    
    
    1,096
    
    
    
    2,987
    
    
    
    2,477Total revenues
    
    
    61,049
    
    
    
    51,192
    
    
    
    148,696
    
    
    
    118,736Cost of goods sold
    
    
    30,141
    
    
    
    25,082
    
    
    
    73,352
    
    
    
    57,522Gross profit
    
    
    30,908
    
    
    
    26,110
    
    
    
    75,344
    
    
    
    61,214Selling, general and administrative expenses
    
    
    15,348
    
    
    
    10,669
    
    
    
    43,408
    
    
    
    32,090Operating income
    
    
    15,560
    
    
    
    15,441
    
    
    
    31,936
    
    
    
    29,124Other income:Interest income, net
    
    
    1,048
    
    
    
    463
    
    
    
    2,762
    
    
    
    461Dividend income from cost method investee
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    11Foreign currency gain
    
    
    122
    
    
    
    171
    
    
    
    384
    
    
    
    54Total other income
    
    
    1,170
    
    
    
    634
    
    
    
    3,149
    
    
    
    526Income before provision for income taxes
    
    
    16,730
    
    
    
    16,075
    
    
    
    35,085
    
    
    
    29,650Provision for income taxes
    
    
    6,567
    
    
    
    4,783
    
    
    
    13,964
    
    
    
    7,797Income before equity in earnings of investee
    
    
    10,163
    
    
    
    11,292
    
    
    
    21,121
    
    
    
    21,853Equity in earnings of investee
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    331Net income
    
    $
    10,163
    
    
    $
    11,292
    
    
    $
    21,121
    
    
    $
    22,184Net income per share:Basic
    
    $
    0.42
    
    
    $
    0.47
    
    
    $
    0.87
    
    
    $
    1.07Diluted
    
    $
    0.42
    
    
    $
    0.47
    
    
    $
    0.87
    
    
    $
    1.06Weighted average shares outstanding:Basic
    
    
    24,217,204
    
    
    
    23,939,141
    
    
    
    24,210,801
    
    
    
    20,762,988Diluted
    
    
    24,235,173
    
    
    
    24,065,665
    
    
    
    24,286,406
    
    
    
    20,998,798Pro forma net income data:Income before provision for income taxes,
as reported
    
    
    
    
    
    $
    16,075
    
    
    
    
    
    
    $
    29,650Pro forma provision for income taxes
    
    
    
    
    
    
    6,551
    
    
    
    
    
    
    
    12,217Pro forma income before equity in earnings
of investee
    
    
    
    
    
    
    9,524
    
    
    
    
    
    
    
    17,433Equity in earnings of investee
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    331Pro forma net income
    
    
    
    
    
    $
    9,524
    
    
    
    
    
    
    $
    17,764Pro forma net income per share:Basic
    
    
    
    
    
    $
    0.40
    
    
    
    
    
    
    $
    0.86Diluted
    
    
    
    
    
    $
    0.40
    
    
    
    
    
    
    $
    0.85Pro forma weighted average shares outstanding:Basic
    
    
    
    
    
    
    23,939,141
    
    
    
    
    
    
    
    20,762,988Diluted
    
    
    
    
    
    
    24,065,665
    
    
    
    
    
    
    
    20,998,798
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VOLCOM, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (unaudited)
 (in thousands)
 Nine Months EndedSeptember 30,2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    21,121
    
    
    $
    22,184Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    1,000
    
    
    
    406Equity in earnings of investee, net of dividends received
    
    
    
    
    
    
    (331
    )Provision for doubtful accounts
    
    
    464
    
    
    
    89Excess tax benefits related to exercise of stock options
    
    
    (116
    )
    
    
    2,833Loss on disposal of property and equipment
    
    
    8
    
    
    
    30Stock-based compensation
    
    
    607
    
    
    
    145Deferred income taxes
    
    
    (193
    )
    
    
    (428
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    (15,021
    )
    
    
    (11,190
    )Inventories
    
    
    (1,864
    )
    
    
    (5,946
    )Prepaid expenses and other current assets
    
    
    (194
    )
    
    
    (459
    )Other assets
    
    
    (118
    )
    
    
    (53
    )Accounts payable
    
    
    5,252
    
    
    
    2,013Accrued expenses and other current liabilities
    
    
    3,982
    
    
    
    1,894Income taxes receivable/payable
    
    
    3,176
    
    
    
    4,466Net cash provided by operating activities
    
    
    18,104
    
    
    
    15,653Cash flows from investing activities:Purchase of property and equipment
    
    
    (5,693
    )
    
    
    (2,775
    )Acquisition, net of cash acquired
    
    
    (168
    )
    
    
    Proceeds from sale of equity method investee
    
    
    
    
    
    
    1,391Net cash used in investing activities
    
    
    (5,861
    )
    
    
    (1,384
    )Cash flows from financing activities:Principal payments on capital lease obligations
    
    
    (53
    )
    
    
    (68
    )Proceeds from initial public offering costs, net of offering costs
    
    
    
    
    
    
    80,131Proceeds from exercise of stock options
    
    
    543
    
    
    
    200Excess tax benefits related to exercise of stock options
    
    
    116
    
    
    
    Distributions to stockholders
    
    
    
    
    
    
    (39,204
    )Net cash provided by financing activities
    
    
    606
    
    
    
    41,059Effect of exchange rate changes on cash
    
    
    
    
    
    
    Net increase in cash and cash equivalents
    
    
    12,849
    
    
    
    55,328Cash and cash equivalents Beginning of period
    
    
    71,712
    
    
    
    10,359Cash and cash equivalents End of period
    
    $
    84,561
    
    
    $
    65,687Supplemental disclosures of cash flow information:Cash paid during the period for:Interest
    
    $
    11
    
    
    $
    15Income taxes
    
    
    10,901
    
    
    
    925
 Supplemental disclosures of non-cash investing and financing activities:
    5




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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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Three months ended
    
    
    Nine months endedSeptember 30, 2005
    
    
    September 30, 2005(in thousands, except per share data)Net income:As reported
    
    $
    11,292
    
    
    $
    22,184Add: Stock-based employee
compensation expense
included in reported net
income, net of related
tax effects
    
    
    13
    
    
    
    13Deduct: Total stock-based
employee compensation
expense determined under
fair value based method
for all awards, net of
related tax effects
    
    
    (481
    )
    
    
    (487
    )Pro forma
    
    $
    10,824
    
    
    $
    21,710Basic net income per share:As reported
    
    $
    0.47
    
    
    $
    1.07Pro forma
    
    $
    0.45
    
    
    $
    1.05Diluted net income per share:As reported
    
    $
    0.47
    
    
    $
    1.06Pro forma
    
    $
    0.45
    
    
    $
    1.03
  7




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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
    
    
    (28,600
    )
    
    $
    19.00Canceled or forfeited
    
    
    (22,000
    )
    
    $
    19.00Outstanding at September 30, 2006
    
    
    525,400
    
    
    $
    19.00
    
    
    8.8 yearsExercisable at September 30, 2006
    
    
    252,600
    
    
    $
    19.00
    
    
    8.8 years
   Weighted-AverageNumber of
    
    
    Grant-DateOptions
    
    
    Fair ValueUnvested at January 1, 2006
    
    
    366,000
    
    
    $
    9.14Granted
    
    
    
    
    
    
    Vested
    
    
    (71,200
    )
    
    
    Canceled or forfeited
    
    
    (22,000
    )
    
    $
    9.14Unvested at September 30, 2006
    
    
    272,800
    
    
    $
    9.14
 8




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##### Table of Contents



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
    
    
    525,400
    
    
    
    8.8
    
    
    $
    19.00
    
    
    
    252,600
    
    
    $
    19.00
 Restricted Stock Awards
     Weighted-AverageShares of
    
    
    Grant-DateRestricted Stock
    
    
    Fair ValueOutstanding restricted stock at January 1, 2006
    
    
    20,000
    
    
    $
    33.01Granted
    
    
    15,000
    
    
    
    26.99Vested
    
    
    
    
    
    
    Canceled or forfeited
    
    
    
    
    
    
    Outstanding restricted stock at September 30, 2006
    
    
    35,000
    
    
    $
    30.43
  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
 9




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Accounting for Uncertainty in
Income Taxesan interpretation of FASB Statement No. 109
 Fair Value Measurements
 Considering the
Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial
Statements
 Note 4  Inventories
  September 30, 2006
    
    
    December 31, 2005(in thousands)Finished goods
    
    $
    12,158
    
    
    $
    10,188Work-in-process
    
    
    147
    
    
    
    312Raw materials
    
    
    401
    
    
    
    333$
    12,706
    
    
    $
    10,833
 Note 5  Property and Equipment
  September 30, 2006
    
    
    December 31, 2005(in thousands)Furniture and fixtures
    
    $
    1,784
    
    
    $
    600Office equipment
    
    
    1,185
    
    
    
    1,062Computer equipment
    
    
    2,077
    
    
    
    1,141Leasehold improvements
    
    
    534
    
    
    
    128Land and building
    
    
    2,004
    
    
    
    2,004Construction in progress
    
    
    3,612
    
    
    
    11,196
    
    
    
    4,935Less accumulated depreciation
    
    
    (2,322
    )
    
    
    (1,468
    )Property and equipment  net
    
    $
    8,874
    
    
    $
    3,467
  10




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Note 6  Investments in Unconsolidated Investees
   Note 7 Intangible Assets
  As of September 30, 2006
    
    
    As of December 31, 2005Gross Carrying
    
    
    Accumulated
    
    
    Gross Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Amount
    
    
    Amortization(in thousands)Customer relationships
    
    $
    310
    
    
    $
    28
    
    
    $
    310
    
    
    $
    5Backlog
    
    
    160
    
    
    
    160
    
    
    
    160
    
    
    
    53Non-compete agreements
    
    
    40
    
    
    
    4
    
    
    
    40
    
    
    
    1Reacquired license rights
    
    
    84
    
    
    
    4
    
    
    
    
    
    
    
    $
    594
    
    
    $
    196
    
    
    $
    510
    
    
    $
    59
  11




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Note 8  Accrued Expenses and Other Current Liabilities
  September 30, 2006
    
    
    December 31, 2005(in thousands)Payroll and related accruals
    
    $
    3,885
    
    
    $
    1,079Other
    
    
    3,210
    
    
    
    1,508$
    7,095
    
    
    $
    2,587
 Note 9  Commitments and Contingencies
 Litigation
 Indemnities and Guarantees
 Note 10  Earnings Per Share
 Earnings Per
Share
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands, except share data)Numerator  Net income
    
    $
    10,163
    
    
    $
    11,292
    
    
    $
    21,121
    
    
    $
    22,184Denominator:Weighted average common stock
outstanding for basic earnings per
share
    
    
    24,217,204
    
    
    
    23,939,141
    
    
    
    24,210,801
    
    
    
    20,762,988Effect of dilutive securities:Stock options and restricted stock
    
    
    17,969
    
    
    
    126,524
    
    
    
    75,605
    
    
    
    235,810Adjusted weighted average common
stock and assumed conversions for
diluted earnings per share
    
    
    24,235,173
    
    
    
    24,065,665
    
    
    
    24,286,406
    
    
    
    20,998,798
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Note 11  Income Taxes
 Interim Financial Reporting
  Note 12  Segment Information
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands)Mens
    
    $
    24,075
    
    
    $
    24,348
    
    
    $
    74,226
    
    
    $
    63,294Girls
    
    
    18,454
    
    
    
    14,691
    
    
    
    47,958
    
    
    
    38,456Snow
    
    
    13,133
    
    
    
    8,377
    
    
    
    13,134
    
    
    
    8,377Boys
    
    
    3,097
    
    
    
    2,316
    
    
    
    8,484
    
    
    
    5,031Other
    
    
    945
    
    
    
    364
    
    
    
    1,907
    
    
    
    1,101Subtotal product categories
    
    
    59,704
    
    
    
    50,096
    
    
    
    145,709
    
    
    
    116,259Licensing revenues
    
    
    1,345
    
    
    
    1,096
    
    
    
    2,987
    
    
    
    2,477Total revenues
    
    $
    61,049
    
    
    $
    51,192
    
    
    $
    148,696
    
    
    $
    118,736
  13




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands)United States
    
    $
    47,075
    
    
    $
    41,763
    
    
    $
    114,383
    
    
    $
    94,539Canada
    
    
    7,393
    
    
    
    4,848
    
    
    
    18,685
    
    
    
    12,605Asia Pacific
    
    
    2,821
    
    
    
    2,462
    
    
    
    5,325
    
    
    
    5,312Other
    
    
    2,415
    
    
    
    1,023
    
    
    
    7,316
    
    
    
    3,803$
    59,704
    
    
    $
    50,096
    
    
    $
    145,709
    
    
    $
    116,259
  September 30, 2006
    
    
    December 31, 2005(in thousands)United States
    
    $
    140,371
    
    
    $
    110,137Europe
    
    
    5,707
    
    
    
    1,244$
    146,078
    
    
    $
    111,381
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##### Table of Contents



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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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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##### Table of Contents



Athlete Sponsorships
  Income Taxes
   Stock-Based Compensation
 Share-Based Payment
 19




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##### Table of Contents



Foreign Currency Translation
   General
    20




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##### Table of Contents



Results of Operations
  Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of goods sold
    
    
    49.4
    
    
    
    49.0
    
    
    
    49.3
    
    
    
    48.4Gross profit
    
    
    50.6
    
    
    
    51.0
    
    
    
    50.7
    
    
    
    51.6Selling, general and administrative expenses
    
    
    25.1
    
    
    
    20.8
    
    
    
    29.2
    
    
    
    27.0Operating income
    
    
    25.5
    
    
    
    30.2
    
    
    
    21.5
    
    
    
    24.6Other income
    
    
    1.9
    
    
    
    1.2
    
    
    
    2.1
    
    
    
    0.4Income before provision for income taxes
    
    
    27.4
    
    
    
    31.4
    
    
    
    23.6
    
    
    
    25.0Provision for income taxes
    
    
    10.8
    
    
    
    9.3
    
    
    
    9.4
    
    
    
    6.6Income before equity in earnings of investee
    
    
    16.6
    
    
    
    22.1
    
    
    
    14.2
    
    
    
    18.4Equity in earnings of investee
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.3Net income
    
    
    16.6
    %
    
    
    22.1
    %
    
    
    14.2
    %
    
    
    18.7
    %
 Three Months Ended September 30, 2006 Compared to Three Months Ended September 30, 2005
 Revenues
    21




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##### Table of Contents



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
 Selling, General and Administrative Expenses
  Operating Income
  Other Income
  22




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Provision for Income Taxes
    Net Income
  Nine Months Ended September 30, 2006 Compared to Nine Months Ended September 30, 2005
 Revenues
   23




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##### Table of Contents



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
 Selling, General and Administrative Expenses
  Operating Income
  24




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##### Table of Contents



Other Income
  Provision for Income Taxes
    Net Income
  Liquidity and Capital Resources
   Nine MonthsEnded September 30,2006
    
    
    2005(in thousands)Cash and cash equivalents at beginning of period
    
    $
    71,712
    
    
    $
    10,359Cash flow from operating activities
    
    
    18,104
    
    
    
    15,653Cash flow from investing activities
    
    
    (5,861
    )
    
    
    (1,384
    )Cash flow from financing activities
    
    
    606
    
    
    
    41,059Effect of exchange rate changes on cash
    
    
    
    
    
    
    Cash and cash equivalents at end of period
    
    $
    84,561
    
    
    $
    65,687
  25




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##### Table of Contents



(in thousands)
    
    
    Attributable to$
    5,327
    
    
    Increase in cash flows from accounts payable and accrued expenses and other liabilities due to timing of payments and increased payroll accruals and other liabilities.4,082
    
    
    Increase in cash flows due to a slower growth rate in inventories1,431
    
    
    Increase in non-cash depreciation, provision for doubtful accounts, and stock-based compensation.331
    
    
    Increase in cash flows due to a decrease in equity in earnings of investee, net of dividends received(3,831
    )
    
    Decrease in cash flows from accounts receivable due to increased sales and timing of collections.(2,949
    )
    
    Decrease in cash flows from excess tax benefits related to exercise of stock options(1,290
    )
    
    Decrease in cash flows from income tax receivable/payable due to timing of payments made for income taxes.(1,063
    )
    
    Decrease in net income413
    
    
    Net increase in cash flows from all other operating activities$
    2,451
    
    
    Total
    Credit Facilities
  26




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##### Table of Contents



Contractual Obligations and Commitments
  Payments Due by Period(in thousands)Oct. 1 -Total
    
    
    Dec. 31, 2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    ThereafterOperating lease obligations
    
    $
    5,443
    
    
    $
    296
    
    
    $
    1,226
    
    
    $
    1,317
    
    
    $
    906
    
    
    $
    465
    
    
    $
    1,233Facility construction obligations (1)
    
    
    3,006
    
    
    
    1,937
    
    
    
    1,069
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Capital lease obligations
    
    
    218
    
    
    
    22
    
    
    
    87
    
    
    
    75
    
    
    
    34
    
    
    
    
    
    
    
    Professional athlete sponsorships
    
    
    4,641
    
    
    
    862
    
    
    
    3,013
    
    
    
    766
    
    
    
    
    
    
    
    
    
    
    
    Contractual letters of credit
    
    
    2,961
    
    
    
    2,961
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    16,269
    
    
    $
    6,078
    
    
    $
    5,395
    
    
    $
    2,158
    
    
    $
    940
    
    
    $
    465
    
    
    $
    1,233
 
 (1)
    
    Based on a 1 Euro to $1.2688 (US) exchange rate at September 30, 2006.      27




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##### Table of Contents



Seasonality
   Backlog
  Inflation
  Vulnerability Due to Concentrations
   28




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##### Table of Contents



Recent Accounting Pronouncements
 Inventory-Costs, an Amendment of ARB No. 43, Chapter 4.
 Share-Based Payment
 Reporting Accounting Changes in
Interim Financial Statements
 Accounting for Uncertainty in
Income Taxesan interpretation of FASB Statement No. 109
 Fair Value Measurements
 Considering the Effects
of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements
 29




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures about Market Risk.
 Foreign Currency Risk
     Interest Rate Risk
  
 Item 4. Controls and Procedures.
  30




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##### Table of Contents



31




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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 Reports on
Form 10-Q for the quarters ended March 31, 2006 and June 30, 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
reports on Form 10-Q for the quarters ended March 31, 2006 and June 30, 2006.
 Our earnings may be adversely affected by the discontinuance of our licensing relationship in
Europe and the additional expenses incurred while taking direct control of the Volcom brand in
Europe.
  32




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##### Table of Contents



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.
  If our new product initiatives are not accepted by our customers or if we are unable to maintain
our margins, it could materially affect our financial performance.
  
 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.
  
 Item 5. Other Information.
  33




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##### Table of Contents



Item 6. Exhibits.
 10.1
    
    Credit Agreement dated as of July 20, 2006 between Volcom, Inc. and
Bank of the West (incorporated by reference to Volcom, Inc.s Current
Report on Form 8-K filed with the SEC on July 24, 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: November 10, 2006
    
    /s/ Douglas P. CollierDouglas P. CollierChief Financial Officer, Secretary and Treasurer(Principal Financial Officer and AuthorizedSignatory)
 35




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##### Table of Contents



INDEX TO EXHIBITS
 Exhibit No.
    
    Description10.1
    
    Credit Agreement dated as of July 20, 2006 between Volcom,
Inc. and Bank of the West (incorporated by reference to
Volcom, Inc.s Current Report on Form 8-K filed with the
SEC on July 24, 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