UNITED STATES

Washington D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended January 31, 2005

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 þ No o

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

The number of shares outstanding of Registrant’s Common Stock,
par value $0.01 per share, at
March 7, 2005 was
58,999,146

QUIKSILVER, INC.

FORM 10-Q
INDEX

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PART I — FINANCIAL INFORMATION

QUIKSILVER, INC.

See notes to condensed consolidated financial statements.

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QUIKSILVER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

See notes to condensed consolidated financial statements.

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QUIKSILVER, INC.

See notes to condensed consolidated financial statements.

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QUIKSILVER, INC.

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 months ended January 31, 2005 and 2004. 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, 2004 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 March 2004, the Emerging Issues Task Force (“EITF”) ratified EITF Issue No. 03-1 (“EITF 03-1”), “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”. EITF 03-1 provides a three-step process for determining whether investments, including debt securities, are other than temporarily impaired and requires additional disclosures in annual financial statements. The adoption of EITF 03-1 did not have a material impact on the Company’s financial position or results of operations because the Company does not hold any applicable investments.
	In November 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 151, “Inventory Costs an amendment of ARB No. 43, Chapter 4”. SFAS No. 151 clarifies that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges and requires the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. SFAS No. 151 is effective for fiscal years beginning after June 15, 2005. The Company does not expect the adoption of SFAS No. 151 to have a significant impact on its consolidated financial position, results of operations or cash flows.
	In December 2004, the FASB issued SFAS No. 123 (R) “Share-Based Payment”. SFAS No. 123 (R) requires that companies recognize compensation expense equal to the fair value of stock options or other share based payments. The standard is effective for the Company beginning the fourth quarter of fiscal 2005. The impact on the Company’s net income will include the remaining amortization of the fair value of existing options currently disclosed as pro-forma expense in Note 3 and is contingent upon the number of future options granted, the selected transition method and the selection of either the Black-Scholes or the binominal lattice model for valuing options. The adoption of this standard will have no impact on the Company’s cash flows.

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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 our stock option plans have 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,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure.”

4.	Inventories
	Inventories consist of the following:

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

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Certain trademarks and licenses 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 three months ended January 31, 2005 and 2004 was $0.6 million and $0.3 million, respectively. Annual amortization expense is estimated to be approximately $2.2 million in each of the fiscal years ending October 31, 2005 through 2007 and approximately $1.5 million in the fiscal years ending October 31, 2008 and 2009. Goodwill related to the Company’s geographic segments is as follows:

	Goodwill arose primarily from the acquisitions for Quiksilver Europe, The Raisin Company, Inc., Mervin, Freestyle SA, Beach Street, Quiksilver Asia/Pacific and DC Shoes, Inc. Goodwill increased during the three months ended January 31, 2005 primarily as a result of foreign exchange fluctuations of $2.3 million.
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:

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 operates in the Americas (primarily the U.S.), Europe and Asia/Pacific. Costs that support all three geographic segments, including trademark protection, trademark maintenance and licensing functions are part of corporate operations. Corporate operations also includes sourcing income and gross profit earned from the Company’s licensees. 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:

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 $0.2 million was recognized related to these types of contracts during the three months ended January 31, 2005. For all qualifying cash flow hedges, the changes in the fair value of the derivatives are recorded in other comprehensive income. As of January 31, 2005, the Company was hedging forecasted transactions expected to occur in the following seventeen months. Assuming exchange rates at January 31, 2005 remain constant, $4.7 million of losses, net of tax, related to hedges of these transactions are expected to be reclassified into earnings over the next seventeen months. Also included in accumulated other comprehensive income at January 31, 2005 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

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	the fair value of interest rate swaps, totaling a loss of $0.2 million, net of tax, which is related to the Company’s U.S. dollar denominated long-term debt and 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 three months ended January 31, 2005, the Company reclassified into earnings a net loss of $1.8 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 January 31, 2005 is as follows:

9.	Business Acquisitions
	Effective May 1, 2004, the Company acquired DC Shoes, Inc. (“DC”), a premier designer, producer and distributor of action sports inspired footwear, apparel and related accessories in the U.S. and internationally. The operations of DC have been included in the Company’s results since May 1, 2004. The initial purchase price, excluding transaction costs, includes cash of approximately $52.8 million, 1.6 million restricted shares of the Company’s common stock valued at $27.3 million and the repayment of approximately $15.3 million in funded indebtedness. Transaction costs totaled $2.9 million. The valuation of the common stock issued in connection with the acquisition was based on its quoted market price for 5 days before and after the announcement date, discounted to reflect the estimated effect of its trading restrictions. Of the initial purchase price, $63.4 million was paid in fiscal 2004, $3.3 million was paid in the three months ended January 31, 2005, $0.5 million was paid in the three months ending April 30, 2005, and $0.9 million is expected to be paid based on the resolution of certain remaining contingencies. The sellers are entitled to additional payments ranging from zero to $57.0 million if certain performance targets are achieved during the four years ending October 31, 2007. The amount of goodwill initially recorded for the transaction would increase if such contingent payments were made. As of January 31, 2005, $8.0 million was accrued based on achieving certain sales and earnings targets, which was paid during the three months ending April 30, 2005. Goodwill arises from synergies the Company believes can be achieved integrating DC’s product lines and

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	operations with the Company’s, and is not expected to be deductible for income tax purposes. Amortizing intangibles consist of non-compete agreements, customer relationships and patents with estimated useful lives ranging from four to eighteen years.
	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.
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 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.

The information contained in this Quarterly Report on Form 10-Q is not a complete description of our business or the risks associated with our business. We urge you to carefully review and consider the various disclosures made by us in this Report and in our other reports filed with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended October 31, 2004, which discusses our business in greater detail.

We began our domestic operations in 1976 as a designer and manufacturer of Quiksilver branded boardshorts designed for the sport of surfing. We grew our business through the late 1980’s by expanding our Quiksilver products into a full range of sportswear, and we bought our U.S. trademark from the Quiksilver brand’s Australian founders in 1986. The distribution of our products was primarily through surf shops. Since the early 1990’s, we have diversified and grown our business by increased sales of our Quiksilver product line, the creation of new brands such as Roxy, the introduction of new products, the development of our retail operations, and acquisitions. We acquired the European Quiksilver licensee in 1991 to expand geographically, we purchased Quiksilver International in 2000 to gain global ownership of the Quiksilver brand, and we acquired Quiksilver Asia/Pacific in December 2002 to unify our global operating platform and take advantage of available synergies in product development and sourcing, among other things. In May 2004, we acquired DC, a premier designer, producer and distributor of action sports inspired footwear, apparel and related accessories in the U.S. and internationally. We also acquired various other smaller businesses and brands. Brand building has been a key to our growth, and we have always maintained our roots in the boardriding lifestyle. Today our products are sold throughout the world, primarily in surf shops and specialty stores that provide an outstanding retail experience for our customers.

Over the last five years, our revenues have grown from $519 million in fiscal 2000 to $1.3 billion in fiscal 2004. We design, produce and distribute clothing, accessories and related products exclusively in the consumer products industry. We operate in three geographic segments, the Americas, Europe and Asia/Pacific. The Americas segment includes revenues primarily from the U.S. and Canada. The European segment includes revenues primarily from Western Europe. The Asia/Pacific segment includes revenues primarily from Australia, Japan, New Zealand, and Indonesia.

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, our 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.

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Results of Operations

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

Three Months Ended January 31, 2005 Compared to Three Months Ended January 31, 2004

Our total net revenues for the three months ended January 31, 2005 increased 34% to $342.9 million from $256.1 million in the comparable period of the prior year. The DC division, which was acquired on May 1, 2004, accounted for approximately 11% of our consolidated revenue growth for the three months ended January 31, 2005. Revenues in the Americas increased 29% to $159.3 million for the three months ended January 31, 2005 from $123.2 million in the comparable period of the prior year, and European revenues increased 25% to $132.6 million from $106.2 million for those same periods. As measured in euros, Quiksilver Europe’s primary functional currency, revenues in the current year’s quarter increased 16% compared to the prior year. Asia/Pacific revenues increased 92% to $50.5 million for the three months ended January 31, 2005 from $26.3 million for the three months ended January 31, 2004. As measured in Australian dollars, Quiksilver Asia/Pacific’s primary functional currency, revenues increased 85% for the three months ended January 31, 2005 compared to the three months ended January 31, 2004.

In the Americas, revenues in our men’s category, which includes the Quiksilver Young Men’s, Boys, Toddlers, Wintersports, Quiksilveredition, DC, Hawk Clothing and Fidra divisions, increased 31% to $73.3 million from $55.9 million in the comparable period of the prior year, while revenues in our women’s category, which includes the Roxy, Roxy Girl, Teenie Wahine, DC, Raisins, Leilani and Radio Fiji

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divisions, increased 28% to $84.7 million from $66.1 million. Revenues from snowboards, boots and bindings amounted to $1.3 million for the current year’s quarter compared to $1.2 million in the comparable period of the prior year. The increase in the Americas men’s revenues came primarily from the newly acquired DC division and to a lesser extent the Quiksilver Young Men’s division. The increase in the Americas women’s revenues came primarily from the Roxy division, and to a lesser extent the DC division. In Europe and as reported in dollars, men’s revenues increased 22% to $96.9 million from $79.6 million, while women’s revenues increased 34% to $35.7 million from $26.6 million. The European men’s revenues increase came primarily from the Quiksilver Young Men’s division, and to a lesser extent the DC division, and the women’s revenue increase reflects growth in the Roxy division. The increases in European revenues were impacted by the strong euro in comparison to the prior year. In euros, men’s revenues increased 13% and women’s revenues increased 24%. In Asia/Pacific, the increase in revenues came primarily from the Quiksilver Young Men’s, DC and Roxy divisions.

Our consolidated gross profit margin for the three months ended January 31, 2005 increased to 44.6% from 44.4% in the comparable period of the prior year. The Americas’ gross profit margin decreased to 39.2% from 40.5%, while the European gross profit margin increased to 49.5% from 48.3%, and the Asia/Pacific gross profit margin increased to 48.1% from 47.5% for those same periods. The decrease in the Americas’ gross profit margin was primarily from a shift in product mix to lower margin products and the inclusion of DC, which produced a lower gross profit margin than our other product categories during the three months ended January 31, 2005. Our European gross profit margin increased due to a higher percentage of sales through company-owned retail stores where we earn both the wholesale and retail margins. In Asia/Pacific, the gross profit margin increased primarily due to lower production costs resulting from a stronger Australian dollar in comparison to the prior year.

Our selling, general and administrative expense (“SG&A”) for the three months ended January 31, 2005 increased 37% to $129.5 million from $94.7 million in the comparable period of the prior year. Americas’ SG&A increased 35% to $53.7 million from $39.7 million in the comparable period of the prior year, while European SG&A increased 32% to $50.7 million from $38.4 million, and Asia/Pacific SG&A increased 50% to $16.9 million from $11.3 million for those same periods. The increase across all three segments was primarily due to the addition of DC, additional retail stores, additional expenses related to increased sales volume and additional marketing expenses. The stronger euro and Australian dollar in relation to the previous year also contributed to higher SG&A in Europe and Asia/Pacific. As a percentage of revenues, SG&A increased to 37.8% for the three months ended January 31, 2005 from 37.0% for the three months ended January 31, 2004. This increase was primarily due to the effect of DC, which operates with a higher percentage of SG&A during the first quarter of the fiscal year in comparision to our other divisions. The increase in company-owned retail stores also increased our SG&A as a percentage of revenues, but this effect was substantially offset by general leverage on our growth.

Interest expense for the three months ended January 31, 2005 increased 13% to $1.8 million from $1.6 million in the comparable period of the prior year. This increase was primarily due to higher average debt balances in the Americas and Europe.

Foreign currency loss decreased to $0.5 million for the three months ended January 31, 2005 from $3.3 million in the comparable period of the prior year. This loss resulted primarily from the foreign currency contracts we used to hedge the risk of translating the results of our international subsidiaries into U.S. dollars.

The effective income tax rate for the three months ended January 31, 2005, which is based on current estimates of the annual effective income tax rate, decreased to 32.2% from 33.5% in the comparable period of the prior year. This improvement resulted primarily because a higher percentage of our 2005 profits are expected to be generated in countries with lower tax rates.

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Net income for the three months ended January 31, 2005 increased 55% to $14.2 million or $0.23 per share on a diluted basis from $9.2 million or $0.16 per share on a diluted basis in the comparable period of the prior year. Basic net income per share increased to $0.24 per share for the three months ended January 31, 2005 from $0.16 per share in the comparable period of the prior year. EBITDA increased 42% to $30.6 million from $21.5 million for those same periods.

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 $14.0 million of cash from operating activities in the three months ended January 31, 2005 compared to $35.4 million in the three months ended January 31, 2004. This $21.4 million decrease in cash provided was primarily due to changes in accounts receivable and inventories net of changes in accounts payable. During the three months ended January 31, 2005, decreases in trade accounts receivable generated cash of $30.5 million compared to $33.4 million in the comparable period of the prior year, a decrease in cash provided of $2.9 million. The increase in inventories net of the increase in accounts payable used cash of $21.3 million in the three months ended January 31, 2005 compared to $10.0 million used in the comparable period of the prior year, a net increase in cash used of $11.3 million. The increase in cash provided by higher net income adjusted for non-cash expenses was more than offset by changes in other operating assets and liabilities.

Capital expenditures totaled $10.2 million for the three months ended January 31, 2005, compared to $9.1 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 three months ended January 31, 2005, net cash provided by financing activities totaled $32.0 million, compared to cash used of $21.4 million in the comparable period of the prior year. Borrowings increased as did our cash and cash equivalents balance at January 31, 2005 primarily due to the timing of payments for inventory purchased.

The net increase in cash and cash equivalents for the three months ended January 31, 2005 was $27.4 million compared to $5.5 million in the comparable period of the prior year. Cash and cash equivalents totaled $82.6 million at January 31, 2005 compared to $55.2 million at October 31, 2004, while working capital was $378.5 million at January 31, 2005 compared to $343.1 million at October 31, 2004. We believe our current cash balance and current lines of credit are adequate to cover our seasonal working capital and other operating requirements for the foreseeable future and that increases in our lines of credit or other financing can be obtained as needed to fund future growth.

Trade Accounts Receivable and Inventories

Accounts receivable decreased 10% to $252.1 million at January 31, 2005 from $281.3 million at October 31, 2004. Accounts receivable in the Americas decreased 11% to $112.3 million at January 31, 2005 from $125.8 million at October 31, 2004, while European accounts receivable decreased 7% to $111.8 million from $120.7 million, and Asia/Pacific accounts receivable decreased 20% to $28.0 million from $34.8 million for the same period. As compared to January 31, 2004, accounts receivable in the Americas increased 51%, European accounts receivable increased 3%, and Asia/Pacific accounts receivable increased 55%. The growth in Americas’ accounts receivable was primarily due to the addition of accounts receivable from DC. The growth in European and Asia/Pacific accounts receivable were less than the related increases in revenues. Included in accounts receivable are approximately $15.4 million of Value Added Tax and Goods and Services Tax related to foreign accounts receivable. Such taxes are not reported as net revenues and as such, must be accounted for to accurately compute days sales outstanding. Overall average days sales outstanding decreased by approximately four days at January 31, 2005 compared to January 31, 2004.

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Consolidated inventories increased 32% to $236.8 million at January 31, 2005 from $179.6 million at October 31, 2004. Inventories in the Americas increased 15% to $120.6 million from $104.6 million at October 31, 2004, while European inventories increased 62% to $86.9 million from $53.7 million, and Asia/Pacific inventories increased 38% to $29.3 million from $21.3 million for those same periods. Inventories in the Americas increased 38% compared to January 31, 2004, while inventories in Europe increased 19%, and inventories in Asia/Pacific increased 58% for that same period. The stronger euro and Australian dollar in relation to the U.S. dollar increased the U.S. dollar value of inventories by approximately $3.9 million. The remaining increase is due to the addition of the DC division and to support our overall growth. Consolidated average inventory turnover improved to approximately 3.8 at January 31, 2005 compared to approximately 3.5 at January 31, 2004.

Commitments

During the quarter ended January 31, 2005 we paid $5.3 million to the previous shareholders of the Asia/Pacific division based on the acheivement of certain sales and earnings targets and $3.3 million to the previous shareholders of DC Shoes, Inc. related to the resolution of certain acquisition contingencies. In the quarter ending April 30, 2005, we have paid approximately $8.5 million to the previous shareholders of DC Shoes, Inc. based on the acheivement of certain sales and earnings targets and the resolution of certain other acquisition contingencies. This amount is reflected in our balance sheet as of January 31, 2005, as a component of accrued liabilities.

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 accounting policies that are necessary to understand and evaluate our reported financial results.

Revenue Recognition

We recognize revenues 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.

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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 inventory 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:

•	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, trademarks, licenses and other amortizable intangibles) whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss would be recognized when the carrying value exceeds the undiscounted future cash flows estimated to result from the use and eventual disposition of the asset. Impairments equal to the difference between the carrying value of the asset and its fair value, 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 impairment 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 determine 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 in Europe, where we operate with the euro as our primary functional currency, and a smaller portion of our revenues are generated in Asia/Pacific, where we operate with the 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

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fluctuations in foreign exchange rates. We also have other foreign currency obligations related to our acquisition of Quiksilver International and Asia/Pacific. 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.

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. 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.

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

Forward-Looking Statements

Certain words in this report like “believes”, “anticipates”, “expects”, “estimates” and similar expressions are intended to identify, in certain cases, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially from the predicted results. Such factors include, among others, the following:

•	general economic and business conditions,
•	the acceptance in the marketplace of new products,
•	the availability of outside contractors at prices favorable to us,
•	the ability to source raw materials at prices favorable to us,
•	currency fluctuations,
•	changes in business strategy or development plans,
•	availability of qualified personnel,
•	changes in political, social and economic conditions and local regulations, particularly in Europe and Asia and
•	other factors outlined in our previously filed public documents, copies of which may be obtained without cost from us.

Given these uncertainties, investors are cautioned not to place too much weight on such statements. We are not obligated to update these forward-looking statements.

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PART I — FINANCIAL INFORMATION

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Foreign Currency

Our foreign currency and interest rate risks are discussed in our Annual Report on Form 10-K for the year ended October 31, 2004 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 our 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 16% in euros during the three months ended January 31, 2005 compared to the three months ended January 31, 2004. As measured in U.S. dollars and reported in our Consolidated Statements of Income, European revenues increased 25% as a result of a stronger euro versus the U.S. dollar in comparison to the prior year. Thus far in our second quarter, the euro continues to be stronger relative to the U.S. dollar in comparison to the prior year.

Asia/Pacific revenues increased 85% in Australian dollars during the three months ended January 31, 2005 compared to the three months ended January 31, 2004. As measured in U.S. dollars and reported in our Consolidated Statements of Income, Asia/Pacific revenues increased 92% as a result of a stronger Australian dollar versus the U.S. dollar in comparison to the prior year. Thus far in our second quarter, the Australian dollar continues to be stronger relative to the U.S. dollar in comparison to the prior year.

PART I — FINANCIAL INFORMATION

Item 4. Controls and Procedures.

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 January 31, 2005, 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 January 31, 2005.

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 January 31, 2005 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 6. Exhibits

(a)     Exhibits

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SIGNATURES

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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EXHIBIT INDEX