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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-Q

(Mark One)

[X]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 31, 2003

OR

[   ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 0-15131

QUIKSILVER, INC.

15202 Graham Street
Huntington Beach, California
92649
(Address of principal executive offices)
(Zip Code)

(714) 889-2200
(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  [X]  No  [   ]

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).  Yes  [X]  No  [   ]

The number of shares outstanding of issuer’s Common Stock,
par value $0.01 per share, at
September 10, 2003 was
55,383,716

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QUIKSILVER, INC.

FORM 10-Q
INDEX

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

QUIKSILVER, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

See notes to condensed consolidated financial statements.

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QUIKSILVER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

See notes to condensed consolidated financial statements.

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QUIKSILVER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

See notes to condensed consolidated financial statements.

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QUIKSILVER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

See notes to condensed consolidated financial statements.

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QUIKSILVER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.		Basis of Presentation
		The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statement presentation.
		The Company, in its opinion, has included all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the results of operations for the three and nine months ended July 31, 2003 and 2002. The condensed consolidated financial statements and notes thereto should be read in conjunction with the audited financial statements and notes for the year ended October 31, 2002 included in the Company’s Annual Report on Form 10-K. Interim results are not necessarily indicative of results for the full year due to seasonal and other factors.
2.		New Accounting Pronouncements
		Effective November 1, 2002, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, which superseded previous guidance on financial accounting and reporting for the impairment or disposal of long-lived assets and for segments of a business to be disposed of. The adoption of SFAS No. 144 had no impact on our financial position or results of operations. However, future impairment reviews may result in charges against earnings to write down the value of long-lived assets.
		In November 2002, the Financial Accounting Standards Board (“FASB”) issued FIN No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN No. 45 elaborates on the disclosures to be made by the guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, while the provisions of the disclosure requirements are effective beginning with our financial statements for the three months ended January 31, 2003. The adoption of FIN No. 45 has not had a material impact on our operational results or financial position.
		In August 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”, which requires that costs associated with exit or disposal activities be recognized when they are incurred rather than at the date of a commitment to an exit or disposal plan. We must apply SFAS No. 146 prospectively to exit or disposal activities initiated after December 31, 2002. If we initiate exit or disposal activities after that date, SFAS No.146 will affect the timing of the recognition of the related costs. We do not expect the adoption of this standard to have a significant impact on our financial position or results of operations.
		In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123.” SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. We are required to follow the prescribed format and provide the additional disclosures required by SFAS No. 148 in our financial statements for the year ending October 31, 2003 and have provided the disclosures required for interim periods below.

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The Company applies Accounting Principles Board Opinion 25 and related interpretations in accounting for its stock option plans. No stock-based employee compensation expense is reflected in net income, as all options granted under the Company’s stock option plans had exercise prices equal to the market value of the underlying common stock on the grant dates. The following table contains the pro forma disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation”.

3.		Inventories
		Inventories consist of the following:

4.		Intangibles and Goodwill
		A summary of intangibles is as follows:

The change in non-amortizable trademarks is due primarily to an increase in the deferred purchase price payment for the Quiksilver International aquisition. The change in amortizable intangibles is due primarily to the intangible assets acquired in the acquisition of Quiksilver Asia/Pacific. (See Note 8 - Business Acquisitions.) Certain intangible assets will continue to be amortized by the Company using estimated useful lives of 10 to 25 years with no residual values. Intangible amortization expense for the nine months ended July 31, 2003 was $0.8 million. Annual amortization expense, based on the Company’s amortizable intangible assets at July 31, 2003, is estimated to be approximately $1.2 million in each of the fiscal years ending October 31, 2004 through 2008.

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		Goodwill increased from October 31, 2002 primarily due to the acquisitions of Quiksilver Asia/Pacific, Omareef Europe, S.A. and Q.S. Optics, Inc. as described in Note 8 – Business Acquisitions, and due to foreign exchange fluctuations.
5.		Lines of Credit
		In June 2003, the Company replaced its syndicated bank facility with a new syndicated revolving line of credit (the “Line of Credit Agreement”). The Line of Credit Agreement expires June 2006 and provides for a revolving line of credit of up to $170.0 million. The Line of Credit Agreement bears interest based on the bank’s reference rate or based on LIBOR for borrowings committed to be outstanding for 30 days or longer. However, the interest rate on a portion of the borrowings under the facility is fixed through interest rate swaps, which were valued at a loss of $0.2 million at July 31, 2003. The weighted average interest rate at July 31, 2003 was 4.1%. The Line of Credit Agreement can be accessed by certain of the Company’s foreign subsidiaries and includes a $75 million sublimit for letters of credit and a $35 million sublimit for borrowings in certain foreign currencies.
		The Line of Credit Agreement contains restrictive covenants. The most significant covenants relate to maintaining certain leverage and fixed charge coverage ratios. The payment of dividends is restricted, among other things, and the Company’s U.S. assets, other than trademarks and other intellectual property, generally have been pledged as collateral. At July 31, 2003, the Company was in compliance with such covenants.
6.		Segment Information
		Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the Company’s management in deciding how to allocate resources and in assessing performance. The Company operates exclusively in the consumer products industry in which the Company designs, produces and distributes clothing, accessories and related products. Operating results of the Company’s various product lines have been aggregated because of their common characteristics and their reliance on shared operating functions. Within the consumer products industry, the Company has historically operated in the Americas (primarily the U.S.) and Europe. Effective with its acquisition of Quiksilver Asia/Pacific on December 1, 2002, the Company has added operations in Australia, Japan, New Zealand and other Southeast Asian countries and territories. Accordingly, the Company has revised its geographic segments to include Asia/Pacific and corporate operations. Costs that support all three geographic segments, including trademark protection and maintenance, licensing functions and related royalty income are part of corporate operations. Prior period segment disclosures have been revised to conform to this new segment presentation. No single customer accounts for more than 10% of the Company’s revenues.

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Information related to the Company’s geographical segments is as follows:

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7.		Derivative Financial Instruments
		The Company is exposed to gains and losses resulting from fluctuations in foreign currency exchange rates relating to certain sales, royalty income, and product purchases of its international subsidiaries that are denominated in currencies other than their functional currencies. The Company is also exposed to foreign currency gains and losses resulting from domestic transactions that are not denominated in U.S. dollars, and to fluctuations in interest rates related to its variable rate debt. Furthermore, the Company is exposed to gains and losses resulting from the effect that fluctuations in foreign currency exchange rates have on the reported results in the Company’s consolidated financial statements due to the translation of the operating results and financial position of the Company’s international subsidiaries. As part of its overall strategy to manage the level of exposure to the risk of fluctuations in foreign currency exchange rates, the Company uses various foreign currency exchange contracts and intercompany loans. In addition, interest rate swaps are used to manage the Company’s exposure to the risk of fluctuations in interest rates.
		For all qualifying cash flow hedges, the changes in the fair value of the derivatives are recorded in other comprehensive income. Other derivatives, which do not qualify for hedge accounting but are used by management to mitigate exposure to currency risks, are marked to fair value with corresponding gains or losses recorded in earnings. As of July 31, 2003, the Company was hedging forecasted transactions expected to occur in the following ten months. Assuming exchange rates at July 31, 2003 remain constant, $1.3 million of losses, net of tax, related to hedges of these transactions are expected to be reclassified into earnings over the next ten months. Also included in accumulated other comprehensive income at July 31, 2003 is a $0.3 million loss, net of tax, related to cash flow hedges of the Company’s long-term debt, which is denominated in Australian dollars and matures through fiscal 2005, and the fair value of interest rate swaps, totaling a loss of $0.8 million, net of tax, which is related to the Company’s U.S. dollar denominated long-term debt that matures through fiscal 2007.
		On the date the Company enters into a derivative contract, management designates the derivative as a hedge of the identified exposure. The Company formally documents all relationships between hedging instruments and hedged items, as well as the risk-management objective and strategy for entering into various hedge transactions. In this documentation, the Company identifies the asset, liability, firm commitment, or forecasted transaction that has been designated as a hedged item and indicates how the hedging instrument is expected to hedge the risks related to the hedged item. The Company formally measures effectiveness of its hedging relationships both at the hedge inception and on an ongoing basis in accordance with its risk management policy. The Company would discontinue hedge accounting prospectively (i) if it is determined that the derivative is no longer effective in offsetting changes in the cash flows of a hedged item, (ii) when the derivative expires or is sold, terminated, or exercised, (iii) if it becomes probable that the forecasted transaction being hedged by the derivative will not occur, (iv) because a hedged firm commitment no longer meets the definition of a firm commitment, or (v) if management determines that designation of the derivative as a hedge instrument is no longer appropriate. During the nine months ended July 31, 2003, the Company reclassified into earnings a net loss of $3.3 million resulting from the expiration, sale, termination, or exercise of derivative contracts. Additionally, a loss of $0.5 million was recognized during the nine months ended July 31, 2003 for changes in the value of derivatives that were marked to fair value.
		The Company enters into forward exchange and other derivative contracts with major banks and is exposed to credit losses in the event of nonperformance by these banks. The Company anticipates, however, that these banks will be able to fully satisfy their obligations under the contracts. Accordingly, the Company does not obtain collateral or other security to support the contracts.

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A summary of derivative contracts at July 31, 2003 is as follows:

8.		Business Acquisitions
		Effective December 1, 2002, the Company acquired its licensees in Australia and Japan to unify its global operating platform. This group of companies is referred to herein as “Quiksilver Asia/Pacific” and comprises two Australian companies, Ug Manufacturing Co. Pty Ltd. and QSJ Holdings Pty Ltd., and one Japanese company, Quiksilver Japan KK. Ug Manufacturing Co. Pty Ltd. was still owned by the founders of the Quiksilver brand and was the original Quiksilver operating company that has been producing Quiksilver products in Australia and surrounding countries and territories for over 30 years. Along with a Japanese partner, the founders also started Quiksilver Japan KK, which has been the Quiksilver licensee in Japan for approximately 20 years. In conjunction with its acquisition of Quiksilver Asia/Pacific, the Company also acquired a 25% interest in its Turkish licensee. The operations of Quiksilver Asia/Pacific have been included in the Company’s results since December 1, 2002.
		The initial purchase price, excluding transaction costs, includes cash of $25.3 million and 2.8 million shares of the Company’s common stock valued at $71.3 million. Transaction costs are estimated to total $2.8 million. The valuation of the common stock issued in connection with the acquisition was based on the quoted market price for 5 days before and after the announcement date. The initial purchase price was subject to adjustment based on the closing balance sheet, which was finalized in the third quarter of the Company’s fiscal year ending October 31, 2003. The sellers are entitled to future payments ranging from zero to $19.8 million if certain sales and earnings targets are achieved during the three years ending October 31, 2005. The amount of goodwill initially recorded for the transaction would increase if such contingent payments are made.
		The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition.

Intangible assets includes license agreements that will be amortized over their remaining lives through June 2012. Goodwill is not subject to amortization and is generally not expected to be deductible for tax purposes.

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		Effective November 1, 2002, the Company acquired the operations of its European licensee for eyewear and wetsuits, Omareef Europe, S.A. The initial purchase price was $5.2 million, which includes a cash payment of $4.9 million and assumed debt of $0.3 million. The acquisition has been recorded using the purchase method of accounting and resulted in goodwill of $3.5 million at the acquisition date. Goodwill is not subject to amortization and is generally not expected to be deductible for tax purposes.
		Effective February 1, 2003, the Company acquired its United States eyewear licensee, Q.S. Optics, Inc. The initial purchase price was $2.9 million, which includes a cash payment of $2.4 million and assumed debt of $0.5 million. The acquisition has been recorded using the purchase method of accounting and resulted in goodwill of $2.1 million at the acquisition date. Goodwill is not subject to amortization and is generally not expected to be deductible for tax purposes.
		The results of operations for each of the acquisitions are included in the Condensed Consolidated Statements of Income from their respective acquisition dates. Assuming these acquisitions had occurred as of November 1, 2001, consolidated net sales would have been $712.4 million and $547.0 million for the nine months ended July 31, 2003 and 2002, respectively. Net income would have been $41.1 million and $27.7 million, respectively, for those same periods, and diluted earnings per share would have been $0.72 and $0.51, respectively.
9.		Other Contingent Contractual Obligations
		During its normal course of business, the Company has made certain indemnities, commitments and guarantees under which it may be required to make payments in relation to certain transactions. These include (i) intellectual property indemnities to the Company’s customers and licensees in connection with the use, sale and/or license of Company products, (ii) indemnities to various lessors in connection with facility leases for certain claims arising from such facility or lease, (iii) indemnities to vendors and service providers pertaining to claims based on the negligence or willful misconduct of the Company, and (iv) indemnities involving the accuracy of representations and warranties in certain contracts. The duration of these indemnities, commitments and guarantees varies, and in certain cases, may be indefinite. The majority of these indemnities, commitments and guarantees do not provide for any limitation of the maximum potential for future payments the Company could be obligated to make. The Company has not recorded any liability for these indemnities, commitments and guarantees in the accompanying consolidated balance sheets.
10.		Stockholders’ Equity
		During the three months ended April 30, 2003, the Company’s Board of Directors approved a two-for-one split of the Company’s Common Stock. The split was effected in the form of a dividend on May 8, 2003 to shareholders of record on April 30, 2003. All share and per-share information has been restated to reflect the stock split.

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PART I - FINANCIAL INFORMATION

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Unless the context indicates otherwise, when we refer to “Quiksilver”, “we”, “us”, “our”, or the “Company” in this Form 10-Q, we are referring to Quiksilver, Inc. and its subsidiaries on a consolidated basis. Quiksilver, Inc. was incorporated in 1976 and was reincorporated in Delaware in 1986.

We operate in markets that are highly competitive, and our ability to evaluate and respond to changing consumer demands and tastes is critical to our success. Shifts in consumer preferences could have a negative effect on companies that misjudge these preferences. We believe that our historical success is due to the development of an experienced team of designers, artists, sponsored athletes, merchandisers, pattern makers, and cutting and sewing contractors. It’s this team and the heritage and current strength of our brands that has helped us remain in the forefront of design in our markets. Our success in the future will depend on our ability to continue to design products that are acceptable to the marketplace. There can be no assurance that we can do this. The consumer products industry is fragmented, and in order to retain and/or grow our market share, we must continue to be competitive in the areas of quality, brand image, distribution methods, price, customer service and intellectual property protection.

Results of Operations

The table below shows the components in our statements of income as a percentage of revenues:

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Three Months Ended July 31, 2003 Compared to Three Months Ended July 31, 2002

Revenues for the three months ended July 31, 2003 increased 44% to $251.5 million from $175.0 million in the comparable period of the prior year. Revenues in the Americas increased 28% to $137.4 million for the three months ended July 31, 2003 from $107.3 million in the comparable period of the prior year, and European revenues increased 41% to $93.9 million from $66.6 million for those same periods. As measured in euros, Quiksilver Europe’s functional currency, revenues in the current year’s quarter increased 16% compared to the prior year. Asia/Pacific revenues totaled $19.7 million in the three months ended July 31, 2003. In the Americas, mens revenues increased 18% to $72.2 million from $61.2 million in the comparable period of the prior year, while womens revenues increased 44% to $62.4 million from $43.4 million. Revenues from snowboards, boots and bindings amounted to $2.8 million for the current year’s quarter compared to $2.7 million in the prior year. The increase in Americas’ mens revenues came primarily from the Quiksilver Young Mens, Boys, Hawk and Quiksilveredition divisions. The increase in Americas’ womens revenues came from both the Roxy and Raisins divisions. In Europe and as reported in dollars, mens revenues increased 49% to $71.6 million from $48.0 million, while womens revenues increased 20% to $22.3 million from $18.6 million. The European mens revenues increase came primarily from the Quiksilver Young Mens, Boys and Hawk divisions, and the women’s revenue increase reflects growth in the Roxy division. These comparisons of revenues in Europe were impacted by the strong euro in comparison to the prior year. In euros, mens revenues increased 22% and womens revenues increased 1%. The Asia/Pacific revenues were added as we acquired Quiksilver Asia/Pacific effective December 1, 2002.

We believe that approximately $12.0 of the revenue increase in the three months ended July 31, 2003, was a result of accelerating our production schedule compared to fiscal 2002, primarily in the Americas. This enabled us to ship our fall season goods earlier than we did in fiscal 2002.

Royalty income for the three months ended July 31, 2003 totaled $0.5 million compared to $1.1 million in the comparable period of the prior year. Royalty income decreased because we acquired our domestic outlet store and eyewear licensees during the fourth quarter of fiscal 2002 and second quarter of fiscal 2003, respectively, terminated our domestic watch licensee in fiscal 2002, and acquired Quiksilver Asia/Pacific in the first quarter of fiscal 2003. Royalty income previously earned from these licensees is now eliminated.

Our consolidated gross profit margin for the three months ended July 31, 2003 increased to 42.6% from 40.2% in the comparable period of the prior year. The Americas’ gross profit margin increased to 37.9% from 37.0%, while the European gross profit margin increased to 48.6% from 44.4% for those same periods. The Asia/Pacific gross profit margin for the three months ended July 31, 2003 was 45.3%. The increase in the Americas’ gross profit margin resulted primarily from the acquisition of our outlet store chain in fiscal 2002, which has enabled us to capture the retail gross margin on U.S. sales through the outlet channel. In Europe, the gross profit margin increased primarily due to lower production costs resulting from a stronger euro in comparison to the prior year and from a higher percentage of sales through company-owned retail stores. We earn higher gross margins on sales in company-owned stores, but these higher gross margins are offset by store operating costs.

Selling, general and administrative expense (“SG&A”) for the three months ended July 31, 2003 increased 59% to $85.7 million from $53.8 million in the comparable period of the prior year. Americas’ SG&A increased 31% to $38.4 million from $29.4 million in the comparable period of the prior year, and European SG&A increased 54% to $33.9 million from $21.9 million for those same periods. The increase in both the Americas’ and European SG&A was primarily due to higher personnel and other costs related to increased sales volume. The stronger euro in relation to the previous year also contributed to higher SG&A in Europe. In the Americas and in Europe, SG&A increased as a percentage of revenues primarily as a result of additional company-owned retail stores, including the outlet store chain acquired in fiscal 2002, and from increased marketing activities. SG&A in our newly added Asia/Pacific segment totaled $8.3 million in the third quarter of fiscal 2003. Corporate operations SG&A increased to $5.1 million in the three months ended July 31, 2003 from $2.5 million in the comparable period of the prior year primarily due to higher expenses to support our trademarks and brands around the world.

Interest expense for the three months ended July 31, 2003 increased 9% to $2.2 million from $2.0 million in the comparable period of the prior year. This increase was due to additional interest from debt relating to the Asia/Pacific acquisition.

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