UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

For the quarterly period ended April 30, 2004

OR

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 o

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

The number of shares outstanding of Registrant’s Common Stock,
par value $0.01 per share, at
June 9, 2004 was
58,346,345

QUIKSILVER, INC.

FORM 10-Q
INDEX

1

QUIKSILVER, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

See notes to condensed consolidated financial statements.

2

QUIKSILVER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

See notes to condensed consolidated financial statements.

3

QUIKSILVER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

See notes to condensed consolidated financial statements.

4

QUIKSILVER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

See notes to condensed consolidated financial statements.

5

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 six months ended April 30, 2004 and 2003. 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, 2003 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
		In January 2003, the FASB issued FIN 46, “Consolidation of Variable Interest Entities” and issued FIN 46 (R) in December 2003, which amended FIN 46. FIN 46 requires certain variable interest entities to be consolidated in certain circumstances by the primary beneficiary even if it lacks a controlling financial interest. Adopting FIN 46 and FIN 46 (R) will not have a material impact on the Company’s operational results or financial position since it does not have any variable interest entities.
3.		Stock Based Compensation
		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”.

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4.		Inventories
		Inventories consist of the following:

5.		Intangible Assets and Goodwill
		A summary of intangible assets is as follows:

Certain trademarks and licenses are amortized by the Company using estimated useful lives of 10 to 25 years with no residual values. Intangible amortization expense for the six months ended April 30, 2004 was $0.6 million. Annual amortization expense is estimated to be approximately $1.3 million in each of the fiscal years ending October 31, 2005 through 2007 and approximately $1.2 million in each of the fiscal years ending October 31, 2008 through 2009. Goodwill related to the Company’s geographic segments is as follows:

		Goodwill arose primarily from the acquisitions of Quiksilver Europe, The Raisin Company, Inc., Mervin, Freestyle SA, Beach Street and Quiksilver Asia/Pacific. Goodwill increased during the six months ended April 30, 2004 as a result of the Company’s acquisition of its Swiss distributor, Sunshine Diffusion SA, as well as from the contingent purchase price payment recorded related to the acquisition of Quiksilver Asia/Pacific, as described in Note 9 to the financial statements.
6.		Accumulated Other Comprehensive Income
		The components of accumulated other comprehensive income include net income, changes in fair value of derivative instruments qualifying as cash flow hedges, the fair value of interest rate swaps and foreign currency translation adjustments. The components of accumulated other comprehensive income, net of tax, are as follows:

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7.		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, the Hong Kong sourcing office, licensing functions and related royalty income are part of corporate operations. No single customer accounts for more than 10% of the Company’s revenues.
		Information related to the Company’s geographical segments is as follows:

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8.		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.
		Derivatives that 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. A loss of $1.6 million was recognized related to these types of derivatives during the six months ended April 30, 2004. For all qualifying cash flow hedges, the changes in the fair value of the derivatives are recorded in other comprehensive income. As of April 30, 2004, the Company was hedging forecasted transactions expected to occur in the following 13 months. Assuming exchange rates at April 30, 2004 remain constant, $0.1 million of gains, net of tax, related to hedges of these transactions are expected to be reclassified into earnings over the next 13 months. Also included in accumulated other comprehensive income at April 30, 2004 is a $2.3 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 $0.1 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.

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		During the six months ended April 30, 2004, the Company reclassified into earnings a net loss of $3.8 million resulting from the expiration, sale, termination, or exercise of derivative contracts.
		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.
		A summary of derivative contracts at April 30, 2004 is as follows:

9.		Business Acquisitions
		Effective December 1, 2003, the Company acquired the operations of its Swiss distributor, Sunshine Diffusion SA. The initial purchase price was $1.6 million. The acquisition has been recorded using the purchase method of accounting and resulted in goodwill of $0.7 million at the acquisition date, which is not expected to be deductible for tax purposes. The sellers are entitled to future payments denominated in Euros ranging from zero to $1.4 million if certain sales targets are achieved.
		Effective December 1, 2002, the Company acquired its licenses 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 Holding Pty Ltd., and one Japanese company, Quiksilver Japan KK. The initial purchases price, excluding transaction costs, included cash of $25.3 million and 5.6 million shares of the Company’s common stock valued at $71.3 million. The sellers are entitled to future payments denominated in Australian dollars ranging from zero to $23.1 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. Goodwill was increased by $4.0 million in the six months ended April 30, 2004, as a result of contingent consideration related to the transaction that was paid during the three months ended April 30, 2004.
		Effective May 1, 2004, the Company acquired DC Shoes, Inc., the premier designer, producer and distributor of action sports inspired footwear, apparel and related accessories in the U.S. and internationally. The purchase price is subject to adjustment based on DC Shoes, Inc.’s closing balance sheet, which is expected to be finalized during the three months ending July 31, 2004. Before adjustment, the purchase price consists of an initial payment of $55.6 million in cash, 1.6 million restricted shares of the Company’s common stock, the assumption of approximately $16.5 million in funded indebtedness, and contingent consideration of up to $57.0 payable over four years through 2007 if DC Shoes, Inc. reaches certain performance targets. Due to the recent closing of the acquisition, the Company has not completed the allocation of its purchase price to the fair value of the individual assets and liabilities acquired.
10.		Indemnities and Guarantees
		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

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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.

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PART I - FINANCIAL INFORMATION

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:

Three Months Ended April 30, 2004 Compared to Three Months Ended April 30, 2003

Revenues for the three months ended April 30, 2004 increased 23% to $322.6 million from $262.2 million in the comparable period of the prior year. Revenues in the Americas increased 16% to $148.5 million for the three months ended April 30, 2004 from $127.5 million in the comparable period of the prior year, and European revenues increased 29% to $140.3 million from $108.5 million for those same periods. As measured in euros, Quiksilver Europe’s functional currency, revenues in the current year’s quarter increased 14% compared to the prior year. Asia/Pacific revenues increased 30% to $33.2 million for the three months ended April 30, 2004 from $25.6 million for the three months ended April 30, 2003. In Australian dollars, Asia/Pacific revenues increased 3% compared to the prior year. In the Americas, men’s revenues increased 5% to $66.0 million from $62.7 million in the comparable period of the prior year, while women’s revenues increased 28% to $81.9 million from $64.1 million. Revenues from snowboards, boots and bindings amounted to $0.6 million for the current year’s quarter compared to $0.7 million in the prior year. The increase in Americas’ men’s revenues came from the Quiksilver Young Men’s and Quiksilveredition divisions. The increase in Americas’ women’s revenues came from both women’s divisions, Roxy and Raisins. In Europe and as reported in dollars, men’s revenues increased 22% to $101.3 million from $83.0 million, while women’s revenues increased 53% to $39.0 million from $25.5 million. The European men’s revenues increase came from the Quiksilver Young Men’s and Boys 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, men’s revenues increased 7% and women’s revenues increased 35%.

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Our consolidated gross profit margin for the three months ended April 30, 2004 increased to 45.6% from 45.2% in the comparable period of the prior year. The Americas’ gross profit margin decreased to 41.1% from 43.1%, while the European gross profit margin increased to 49.2% from 47.6% for those same periods. The Asia/Pacific gross profit margin for the three months ended April 30, 2004 increased to 48.9% from 44.7% for three months ended April 30, 2003. The decrease in the Americas’ gross profit margin was primarily due to increased sales of end-of-season inventories compared to the prior year. The profit margins on such sales are lower than goods sold during the season. In Europe and Asia/Pacific, the gross profit margin increased primarily due to lower production costs resulting from a stronger euro and Australian dollar in comparison to the prior year and from a higher percentage of sales through company-owned retail stores. While we earn higher gross margins on sales in company-owned stores, these higher gross margins are generally offset by store operating costs.

Selling, general and administrative expense (“SG&A”) for the three months ended April 30, 2004 increased 29% to $104.6 million from $81.4 million in the comparable period of the prior year. Americas’ SG&A increased 13% to $42.1 million from $37.3 million in the comparable period of the prior year, and European SG&A increased 41% to $42.8 million from $30.4 million for those same periods. Asia/Pacific SG&A totaled $12.4 million for the three months ended April 30, 2004 versus $7.6 million in the comparable period of the prior year. The increase in the Americas’, European and Asia/Pacific SG&A was primarily due to additional retail stores, higher personnel and other costs related to increased sales volume and additional marketing. The stronger euro and Australian dollar in relation to the previous year also contributed to higher SG&A. In the Americas, SG&A decreased to 28.4% of revenues from 29.2% of revenues as the costs of additional company-owned retail stores was more than offset by general expense leverage as revenues grew. In Europe, SG&A increased to 30.5% of revenues from 28.0% of revenues due primarily to additional company-owned retail stores and increased marketing. Corporate operations SG&A increased to $7.3 million in the three months ended April 30, 2004 from $6.1 million in the prior year primarily due to higher expenses to support our trademarks and brands around the world.

Interest expense for the three months ended April 30, 2004 decreased 30% to $1.5 million from $2.1 million in the comparable period of the prior year. This decrease was primarily due to lower average debt balances in the Americas and Europe compared to the prior year.

Derivative contracts that we use to mitigate our exposure to the effect of foreign exchange rate fluctuations on our European profits as reported in U.S. dollars resulted in a foreign currency gain of $1.2 million for the three months ended April 30, 2004 as the euro weakened versus the U.S. dollar in comparison to January 31, 2004. This gain compares to a loss of $0.3 million in the comparable period of the prior year as the euro was strengthening versus the U.S. dollar.

The effective income tax rate for the three months ended April 30, 2004, which is based on current estimates of the annual effective income tax rate, decreased to 33.6% from 34.9% in the comparable period of the prior year as the effect of foreign income taxes continues to reduce our effective income tax rate.

As a result of the above factors, net income for the three months ended April 30, 2004 increased 23% to $27.8 million or $0.47 per share on a diluted basis from $22.6 million or $0.40 per share on a diluted basis in the comparable period of the prior year. Basic net income per share increased to $0.49 per share for the three months ended April 30, 2004 from $0.42 in the comparable period of the prior year.

Six Months Ended April 30, 2004 Compared to Six Months Ended April 30, 2003

Revenues for the six months ended April 30, 2004 increased 27% to $578.7 million from $454.3 million in the comparable period of the prior year. Revenues in the Americas increased 18% to $271.7 million for the six months ended April 30, 2004 from $229.5 million in the comparable period of the prior year, and European revenues increased 33% to $246.5 million from $185.7 million for those same periods. As measured in euros, Quiksilver Europe’s revenues in the first six months of the current year increased 15% as compared to the prior year. Asia/Pacific revenues totaled $59.5 million in the six months ended April 30, 2003 compared to $37.7 million in the comparable period of the prior year, which includes five months of results since the effective date of the acquisition on December 1, 2002. In the Americas, men’s revenues increased 9% to $121.9 million from $111.5 million in the comparable period of the prior year, while women’s revenues increased 27% to $148.0 million from $116.2 million. Revenues of snowboards, boots and bindings amounted to $1.8 million in the current year’s six-month period, equaling revenues of $1.8 million in the comparable period of the prior year. The increase in Americas’ men’s revenues came

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primarily from the Quiksilver Young Men’s, Boys and Quiksilveredition divisions. The increase in Americas’ women’s revenues came from both the Roxy and Raisins divisions. In Europe and as reported in dollars, men’s revenues increased 30% to $180.8 million from $138.8 million, while women’s revenues increased 40% to $65.7 million from $46.9 million. The European men’s revenue increase came primarily from the Quiksilver Young Men’s, Boys and Hawk divisions, and the women’s revenue increase reflects growth in the Roxy division. The revenues in Europe were impacted by the strong euro in comparison to the prior year. In euros, men’s revenues increased 14% and women’s revenues increased 22%.

Our consolidated gross profit margin for the six months ended April 30, 2004 increased to 45.0% from 44.0% in the comparable period of the prior year. The Americas’ gross profit margin decreased somewhat to 40.8% from 41.0%, while the European gross profit margin increased to 48.8% from 46.8% and the Asia/Pacific gross profit margin increased to 48.3% from 46.8% for those same periods. The decrease in the Americas’ gross profit margin resulted primarily from increased sales of end-of-season inventories during the three months ended April 30, 2004 compared to the prior year. The profit margins on such sales are lower than goods sold during the season. In Europe and Asia/Pacific, the gross profit margin increased primarily due to lower production costs resulting from a stronger euro and Australian dollar in comparison to the prior year and a higher level of sales through company-owned retail stores in comparison to the prior year.

SG&A for the six months ended April 30, 2004 increased 33% to $199.4 million from $149.8 million in the comparable period of the prior year. America’s SG&A increased 16% to $81.8 million from $70.7 million in the comparable period of the prior year, and European SG&A increased 43% to $81.2 from $56.7 for those same periods. Asia/Pacific SG&A totaled $23.7 million in the six months ended April 30, 2004 compared to $12.1 million in the comparable period of the prior year, which includes five months of results since the effective date of the acquisition on December 1, 2002. The increase in the Americas’, European and Asia/Pacific SG&A was primarily due to additional retail stores, expenses related to increased sales volume and additional marketing. The stronger euro and Australian dollar also contributed to higher SG&A in Europe and Asia/Pacific. In each segment, SG&A increased as a percentage of revenues primarily as a result of additional company-owned retail stores and from increased marketing activities in the six months ended April 30, 2004. Corporate operations SG&A increased to $12.7 million in the six months ended April 30, 2004 from $10.4 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 six months ended April 30, 2004 decreased 27% to $3.1 million from $4.2 million in the comparable period of the prior year. This decrease was due primarily to lower average debt balances in the Americas and Europe compared to the prior year.

The effective income tax rate for the six months ended April 30, 2004, which is based on current estimates of the annual effective income tax rate, decreased to 33.6% from 35.1% in the comparable period of the prior year as the effect of foreign income taxes continues to reduce our effective income tax rate.

As a result of the above factors, net income for the six months ended April 30, 2004 increased 27% to $37.0 million or $0.63 per share on a diluted basis from $29.2 million or $0.53 per share on a diluted basis in the comparable period of the prior year. Basic net income per share increased to $0.66 for the six months ended April 30, 2004 from $0.55 in the comparable period of the prior year.

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Financial Position, Capital Resources and Liquidity

We finance our working capital needs and capital investments with operating cash flows and bank revolving lines of credit. Multiple banks in the U.S., Europe and Australia make these lines of credit available. Term loans are also used to supplement these lines of credit and are typically used to finance long-term assets.

Cash Flows

We generated $41.4 million of cash from operating activities in the six months ended April 30, 2004 compared to using $11.5 million for the comparable period of the prior year. This $52.9 million increase in cash provided was primarily due to changes in inventories and accounts payable and the increase in earnings. During the six months ended April 30, 2004 inventories decreased and generated cash of $19.2 million net of the change in accounts payable. This is a $38.6 million improvement compared to using cash of $19.4 million in the comparable period of the prior year. The increase in net income adjusted for non-cash expenses provided cash of $53.9 million in the six months ended April 30, 2004 compared to $41.9 million in the comparable period of prior year, an increase of $12.0 million.

Capital expenditures totaled $19.4 million for the six months ended April 30, 2004, compared to $15.3 million in the comparable period of the prior year. These investments include company-owned Boardriders Clubs and ongoing investments in computer and warehouse equipment. During the six months ended April 30, 2004, we used $5.6 million of cash, net of cash acquired, to purchase our Swiss distributor in Europe and make a contingent purchase price payment to the former shareholders of our Asia/Pacific division. See Note 9 - Business Acquisitions.

During the six months ended April 30, 2004, net cash used in financing activities totaled $3.1 million, compared to cash provided of $73.0 million in the comparable period of the prior year. Borrowings were reduced with the increase in cash provided by operating activities during the period.

The net increase in cash and cash equivalents for the six months ended April 30, 2004 was $14.5 million compared to $18.8 million in the comparable period of the prior year. Cash and cash equivalents totaled $42.3 million at April 30, 2004 compared to $27.9 million at October 31, 2003, while working capital was $325.2 million at April 30, 2004 compared to $286.6 million at October 31, 2003. We believe our current cash balance and current lines of credit are adequate to cover our seasonal working capital and other requirements for the foreseeable future and that increases in our lines of credit can be obtained as needed to fund future growth.

Trade Accounts Receivable and Inventories

Accounts receivable increased 15% to $257.1 million at April 30, 2004 from $224.4 million at October 31, 2003. Accounts receivable in the Americas increased 24% to $101.3 million at April 30, 2004 from $81.9 million at October 31, 2003, and European accounts receivable increased 25% to $137.0 million from $109.9 million for that same period. Asia/Pacific accounts receivable decreased 42% to $18.8 million at April 30, 2004 from $32.6 million at October 31, 2003. As compared to April 30, 2003, accounts receivable in the Americas increased 13%, European accounts receivable increased 16% and Asia/Pacific accounts receivable did not change. The growth in accounts receivable across the regions was less than the related increases in revenues.

Consolidated inventories decreased 13% to $127.3 million at April 30, 2004 from $146.4 million at October 31, 2003. Inventories in the Americas decreased 12% to $76.3 million from $86.4 million at October 31, 2003. European inventories decreased 15% to $37.4 million at April 30, 2004 from $43.8 million at October 31, 2003, while the Asia/Pacific inventories decreased 16% to $13.6 million from $16.2 million for those same periods.

Consolidated inventories increased 5% compared to April 30, 2003. Inventories in the Americas decreased 8% compared to the year earlier as we shipped our end-of-season inventories sooner than we did in the prior year. Inventories in Europe and Asia/Pacific increased 35% and 29%, respectively, from the year earlier, which is generally in line with the growth in sales. The stronger euro and Australian dollar in relation to the U.S dollar increased the value of the inventories by approximately $4.0 million. Adjusting for these foreign exchange effects, consolidated inventories increased 2%.

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Contractual Obligations and Commitments

On March 8, 2004, we signed a definitive stock purchase agreement to acquire DC Shoes, Inc., the premier designer, producer and distributor of action sports inspired footwear, apparel and related accessories in the U.S. and internationally. The transaction closed effective May 1, 2004 with an initial payment of $55.6 million in cash and the issuance of 1.6 million restricted shares of our common stock. At the time of the purchase, DC Shoes had approximately $16.5 million in funded indebtedness. The purchase price is subject to adjustment based on DC Shoes, Inc.’s closing balance sheet, which is expected to be finalized during the three months ending July 31, 2004, and contingent consideration of up to $57.0 is potentially payable over four years through 2007 if DC Shoes, Inc. reaches certain performance targets. In connection with the purchase, the size of our existing line of credit was increased from $170 million to $200 million and we funded the cash portion of the purchase price with borrowings under the expanded line of credit.

Critical Accounting Policies

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. To prepare these financial statements, we must make estimates and assumptions that affect the reported amounts of assets and liabilities. These estimates also affect our reported revenues and expenses. Judgments must also be made about the disclosure of contingent liabilities. Actual results could be significantly different from these estimates. We believe that the following discussion addresses the significant accounting policies that are the most critical to help fully understand and evaluate our reported financial results.

Revenue Recognition

Revenues are recognized when the risk of ownership and title passes to our customers. Generally, we extend credit to our customers and do not require collateral. Our payment terms range from net-30 to net-90, depending on the country or whether we sell directly to retailers in the country or to a distributor. None of our sales agreements with any of our customers provide for any rights of return. However, we do approve returns on a case-by-case basis at our sole discretion to protect our brands and our image. We provide allowances for estimated returns when revenues are recorded, and related losses have historically been within our expectations. If returns are higher than our estimates, our earnings would be adversely affected.

Accounts Receivable

It is not uncommon for some of our customers to have financial difficulties from time to time. This is normal given the wide variety of our account base, which includes small surf shops, medium-sized retail chains, and some large department store chains. Throughout the year, we perform credit evaluations of our customers, and we adjust credit limits based on payment history and the customer’s current creditworthiness. We continuously monitor our collections and maintain a reserve for estimated credit losses based on our historical experience and any specific customer collection issues that have been identified. Historically, our losses have been consistent with our estimates, but there can be no assurance that we will continue to experience the same credit loss rates that we have experienced in the past. Unforeseen, material financial difficulties of our customers could have an adverse impact on our profits.

Inventories

We value inventories at the cost to purchase and/or manufacture the product or the current estimated market value of the inventory, whichever is lower. We regularly review our inventory quantities on hand and adjust values for excess and obsolete inventory based primarily on estimated forecasts of product demand and market value. Demand for our products could fluctuate significantly. The demand for our products could be negatively affected by many factors, including the following:

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•		weakening economic conditions,
•		terrorist acts or threats,
•		unanticipated changes in consumer preferences,
•		reduced customer confidence in the retail market, and
•		unseasonable weather.

Some of these factors could also interrupt the production and/or importation of our products or otherwise increase the cost of our products. As a result, our operations and financial performance could be negatively affected. Additionally, our estimates of product demand and/or market value could be inaccurate, which could result in an understated or overstated provision required for excess and obsolete inventory.

Long-Lived Assets

We acquire tangible and intangible assets in the normal course of our business. We evaluate the recoverability of the carrying amount of these long-lived assets (including fixed assets and trademarks) at least annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. An impairment is assessed when the undiscounted expected future cash flows derived from an asset are less than its carrying amount. Impairments, if any, would be recognized in operating earnings. We continually use judgment when applying these impairment rules to determine the timing of the impairment tests, the undiscounted cash flows used to assess impairments, and the fair value of a potentially impaired asset. The reasonableness of our judgment could significantly affect the carrying value of our long-lived assets.

Goodwill

We evaluate the recoverability of goodwill at least annually based on a two-step impairment test. The first step compares the fair value of each reporting unit with its carrying amount including goodwill. If the carrying amount exceeds fair value, then the second step of the impairment test is performed to measure the amount of any impairment loss. Fair value is computed based on estimated future cash flows discounted at a rate that approximates our cost of capital. Such estimates are subject to change, and we may be required to recognize impairments losses in the future.

Income Taxes

Current income tax expense is the amount of income taxes expected to be payable for the current year. A deferred income tax asset or liability is established for the expected future consequences of temporary differences in the financial reporting and tax bases of assets and liabilities. We consider future taxable income and ongoing prudent and feasible tax planning strategies in assessing the value of our deferred tax assets. If we determine that it is more likely than not that these assets will not be realized, we would reduce the value of these assets to their expected realizable value, thereby decreasing net income. Evaluating the value of these assets is necessarily based on our judgment. If we subsequently determined that the deferred tax assets, which had been written down would, in our judgment, be realized in the future, the value of the deferred tax assets would be increased, thereby increasing net income in the period when that determination was made.

Foreign Currency Translation

A significant portion of our revenues are generated by our European and Asia/Pacific divisions, where we operate with the euro, Australian dollar and Japanese yen as our functional currencies. Our European revenues in the United Kingdom are denominated in British pounds, and some European and Asia/Pacific product is sourced in U.S. dollars, both of which result in exposure to gains and losses that could occur from fluctuations in foreign exchange rates. We also have other foreign currency obligations related to our acquisition of Quiksilver International. Our assets and liabilities that are denominated in foreign currencies are translated at the rate of exchange on the balance sheet date. Revenues and expenses are translated using the average exchange rate for the period. Gains and losses from translation of foreign subsidiary financial statements are included in accumulated other comprehensive income or loss.

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As part of our overall strategy to manage our level of exposure to the risk of fluctuations in foreign currency exchange rates, we enter into various foreign exchange contracts generally in the form of forward contracts. For all contracts that qualify as cash flow hedges, we record the changes in the fair value of the derivatives in other comprehensive income. We also use other derivatives that do not qualify for hedge accounting to mitigate our exposure to currency risks related to the translation of the foreign currency financial statements of certain of our international subsidiaries from their functional currencies into U.S. dollars.. These derivatives are marked to fair value with corresponding gains or losses recorded in earnings.

New Accounting Pronouncements

See Note 2 – New Accounting Pronouncements for a discussion of future pronouncements that may affect our financial reporting.

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PART I – FINANCIAL INFORMATION

Foreign Currency

Our foreign currency and interest rate risks are discussed in the our Annual Report on Form 10-K for the year ended October 31, 2003 in Item 7a.

Quiksilver Europe’s statements of income are translated from euros into U.S. dollars at average exchange rates in effect during the reporting period. When the euro strengthens compared to the U.S. dollar there is a positive effect on Quiksilver Europe’s results as reported in the Company’s Consolidated Financial Statements. Conversely, when the U.S. dollar strengthens, there is a negative effect. Likewise, the statements of income of Quiksilver Asia/Pacific are translated from Australian dollars and Japanese yen into U.S. dollars, and there is a positive effect on our results from a stronger Australian dollar or Japanese yen in comparison to the U.S. dollar.

European revenues increased 15% in euros during the six months ended April 30, 2004 compared to the six months ended April 30, 2003. As measured in U.S. dollars and reported in the Company’s Consolidated Statements of Income, European revenue growth increased to 33% as a result of a stronger euro versus the U.S. dollar in comparison to the prior year. Thus far in the Company’s third quarter, the euro continues to be stronger relative to the U.S. dollar in comparison to the prior year.

Asia/Pacific revenues increased 24% in Australian dollars during the six months ended April 30, 2004 compared to the six months ended April 30, 2003. As measured in U.S. dollars and reported in the Company’s Consolidated Statements of Income, Asia/Pacific revenue growth increased to 58% as a result of a stronger Australian dollar versus the U.S. dollar in comparison to the prior year. Thus far in the Company’s third quarter, the Australian dollar continues to be stronger relative to the U.S. dollar in comparison to the prior year.

PART I – FINANCIAL INFORMATION

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

We carried out an evaluation under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of April 30, 2004, the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of April 30, 2004.

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended April 30, 2004 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

On May 3, 2004 we purchased all of the outstanding shares of DC Shoes, Inc., pursuant to a stock purchase agreement dated March 8, 2004, as amended May 3, 2004, among us, DC Shoes, the shareholders of DC Shoes at closing, the DC Shoes, Inc. Employee Share Trust and Damon Way.

In connection with our purchase from the shareholders, from the shareholders, we paid the shareholders and the beneficiaries of the Trust approximately $56 million in cash (subject to a working capital adjustment and an indemnity holdback) and 1,584,575 unregistered shares of our Common Stock. In addition, if DC Shoes reaches certain performance targets, the shareholders and the beneficiaries may receive up to an additional $57 million paid over four years through 2007.

The issuance of our shares was exempt from registration pursuant to Rule 506 of Regulation D promulgated under the Securities Act of 1933, as amended. The shareholders represented to us their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof. Appropriate legends were affixed to the stock certificates that were issued. There were no commissions or underwriting discounts paid in connection with the issuance of the shares.

Item 4. Submission of Matters to a Vote of Security-Holders

The Company’s Annual Meeting of Stockholders was held on March 26, 2004. At the Annual Meeting, the following directors were elected to serve on the Company’s Board of Directors until the next Annual Meeting and until their respective successors are elected and qualified:

In addition, the amendment of the Company’s 2000 Stock Incentive Plan was approved by the stockholders with 32,509,075 votes for, 7,108,922 votes against, and 59,783 votes abstained, and the approval of the material terms of performance goals for the Company’s Long-Term Incentive Plan was approved by the stockholders with 37,683,052 votes for, 978,544 votes against, and 60,692 votes abstained.

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PART II – OTHER INFORMATION

(a)

Exhibits

31.1		Rule 13a-14(a)/15d-14(a) Certifications – Principal Executive Officer
31.2		Rule 13a-14(a)/15d-14(a) Certifications – Principal Financial Officer
32.1		Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2003 – Chief Executive Officer
32.2		Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2003 – Chief Financial Officer

(b)

Reports on Form 8-K

The Company filed a report on Form 8-K on March 10, 2004, to make a Regulation FD disclosure regarding press releases dated March 10, 2004 and March 8, 2004.

The Company filed a report on Form 8-K on May 18, 2004 to report the acquisition of DC Shoes, Inc.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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