e10vq

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-Q

( Mark One)


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

For the quarterly period ended January 31, 2006


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

Commission file number 1-14229

QUIKSILVER, INC.

(Exact name of registrant as specified in its charter)


Delaware ( State or other jurisdiction of incorporation or organization)		33-0199426 (I.R.S. Employer Identification Number)

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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer þ Accelerated Filer o Non-Accelerated Filer o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The number of shares outstanding of Registrant’s Common Stock,
par value $0.01 per share, at
March 6, 2006 was
122,036,050

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

QUIKSILVER, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)


	January 31,			October 31,
In thousands, except share amounts	2006			2005
ASSETS
Current assets:
Cash and cash equivalents	$	109,365		$	75,598
Trade accounts receivable, less allowances of $16,543 (2006) and $10,727 (2005)		533,468			599,486
Other receivables		18,314			27,414
Inventories		406,542			386,396
Deferred income taxes		41,768			41,646
Prepaid expenses and other current assets		28,362			21,819

Total current assets		1,137,819			1,152,359

Fixed assets, less accumulated depreciation and amortization of $139,981 (2006) and $121,453 (2005)		239,632			241,979
Intangible assets, net		248,308			247,702
Goodwill		456,200			449,377
Other assets		45,009			43,955
Assets held for sale		23,280			23,229

Total assets	$	2,150,248		$	2,158,601


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Lines of credit	$	247,459		$	220,113
Accounts payable		222,697			212,407
Accrued liabilities		164,346			182,973
Current portion of long-term debt		16,299			50,833
Income taxes payable		17,632			27,176

Total current liabilities		668,433			693,502

Long-term debt, net of current portion		635,289			640,348
Deferred income taxes		77,331			81,628


Total liabilities		1,381,053			1,415,478


Minority interest		9,015			10,241

Stockholders’ equity:
Preferred stock, $.01 par value, authorized shares — 5,000,000; issued and outstanding shares — none		¾			¾
Common stock, $.01 par value, authorized shares — 185,000,000; issued shares — 124,581,250 (2006) and 124,093,392 (2005)		1,245			1,241
Additional paid-in capital		251,590			242,284
Treasury stock, 2,885,200 shares		(6,778	)		(6,778	)
Retained earnings		484,646			466,043
Accumulated other comprehensive income		29,477			30,092

Total stockholders’ equity		760,180			732,882

Total liabilities and stockholders’ equity	$	2,150,248		$	2,158,601

See notes to condensed consolidated financial statements.

QUIKSILVER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)


	Three months ended January 31,
In thousands, except per share amounts	2006			2005
Revenues, net	$	541,142		$	342,860
Cost of goods sold		292,581			189,954

Gross profit		248,561			152,906

Selling, general and administrative expense		211,305			129,483

Operating income		37,256			23,423

Interest expense		12,591			1,789
Foreign currency (gain) loss		(497	)		463
Minority interest and other (income) expense		(1,226	)		206

Income before provision for income taxes		26,388			20,965

Provision for income taxes		7,785			6,751

Net income	$	18,603		$	14,214


Net income per share	$	0.15		$	0.12

Net income per share, assuming dilution	$	0.15		$	0.12


Weighted average common shares outstanding		121,434			117,592

Weighted average common shares outstanding, assuming dilution		127,240			123,154

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)


	Three months ended January 31,
In thousands	2006			2005
Net income	$	18,603		$	14,214
Other comprehensive income (loss):
Foreign currency translation adjustment		71			10,032
Net unrealized (loss) income on derivative instruments, net of tax of ($360) (2006), $389 (2005)		(686	)		473

Comprehensive income	$	17,988		$	24,719

See notes to condensed consolidated financial statements.

QUIKSILVER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)


	Three months ended January 31,
In thousands	2006			2005
Cash flows from operating activities:
Net income	$	18,603		$	14,214
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		15,503			7,802
Stock based compensation		5,760			¾
Provision for doubtful accounts		1,134			1,970
Loss on sale of fixed assets		100			43
Foreign currency loss		¾			232
Interest accretion		¾			496
Minority interest		(1,226	)		¾
Changes in operating assets and liabilities, net of the effects from business acquisitions:
Trade accounts receivable		60,583			30,529
Other receivables		9,323			5,808
Inventories		(20,330	)		(55,760	)
Prepaid expenses and other current assets		(6,831	)		(6,387	)
Other assets		(3,184	)		(3,306	)
Accounts payable		9,574			34,441
Accrued liabilities		(13,407	)		(15,209	)
Income taxes payable		(3,142	)		(900	)

Net cash provided by operating activities		72,460			13,973


Cash flows from investing activities:
Capital expenditures		(13,038	)		(10,208	)
Business acquisitions, net of cash acquired		(13,133	)		(9,115	)

Net cash used in investing activities		(26,171	)		(19,323	)


Cash flows from financing activities:
Borrowings on lines of credit		119,953			19,217
Payments on lines of credit		(96,746	)		(4,428	)
Borrowings on long-term debt		49,302			18,091
Payments on long-term debt		(87,281	)		(3,102	)
Proceeds from stock option exercises		2,156			2,198

Net cash (used in) provided by financing activities		(12,616	)		31,976

Effect of exchange rate changes on cash		94			756

Net increase in cash and cash equivalents		33,767			27,382
Cash and cash equivalents, beginning of period		75,598			55,197

Cash and cash equivalents, end of period	$	109,365		$	82,579


Supplementary cash flow information:
Cash paid during the period for:
Interest	$	4,352		$	1,438

Income taxes	$	14,079		$	6,190

See notes to condensed consolidated financial statements.

QUIKSILVER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

Quiksilver, Inc. (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, 2006 and 2005. 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, 2005 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.

New Accounting Pronouncements

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 adoption of SFAS No. 151 did not have a significant impact on the Company’s consolidated financial position, results of operation or cash flows.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,” which replaces APB Opinion No. 20, “Accounting Changes,” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements.” SFAS No. 154 applies to all voluntary changes in accounting principles and requires retrospective application (a term defined by the statement) to prior periods’ financial statements, unless it is impracticable to determine the effect of a change. It also applies to changes required by an accounting pronouncement that does not include specific transition provisions. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company will adopt SFAS No. 154 in the first quarter of fiscal 2007, but does not expect the adoption of SFAS No. 154 to have a material impact on its financial condition, 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 Company adopted this standard during the three months ended January 31, 2006 using the modified prospective method. See Note 3 for a description of the impact of this standard on the Company’s financial statements.

Stock Based Compensation

On November 1, 2005, the Company adopted the fair value recognition provisions of SFAS No. 123(R). Prior to November 1, 2005, the Company had accounted for stock-based payments under the recognition and measurement provisions of Accounting Principles Board (“APB”) Opinion 25 and related interpretations, as permitted by SFAS No. 123, “Accounting for Stock-Based Compensation.” In accordance with APB 25, no compensation expense was required to be recognized for options granted that had an exercise price equal to the market value of the underlying common stock on the date of grant.

Under the modified prospective method of SFAS No. 123(R), compensation expense was recognized during the three months ended January 31, 2006 and includes compensation expense for all stock-based payments granted prior to, but not yet vested as of November 1, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123 and compensation expense for all stock based payments granted after November 1, 2005, based

QUIKSILVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R). The Company’s financial results for the prior periods have not been restated.

As a result of adopting SFAS No. 123(R), during the three months ended January 31, 2006, the Company’s net income is $4.1 million lower than if it had continued to account for stock based compensation under APB 25 as it did for the three months ended January 31, 2005. Basic and diluted earnings per share for the three months ended January 31, 2006 would have been $0.19 and $0.18, respectively, if the Company had not adopted SFAS No. 123(R), compared to basic and diluted earnings per share of $0.15 and $0.15, respectively. Compensation expense was included as selling, general and administrative expense for the period. The impact on cost of goods sold was not significant. The adoption of SFAS No. 123(R) had no impact on the Company’s cash flows.

Consistent with the valuation method used for the disclosure only provisions of SFAS No. 123, the Company is using the Black-Scholes option-pricing model to value compensation expense. Forfeitures are estimated at the date of grant based on historical rates and reduce the compensation expense recognized. The expected term of options granted is derived from historical data on employee exercises. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the date of grant. Expected volatility is based on the historical volatility of the Company’s stock. For the three months ended January 31, 2006 and 2005 options were valued assuming risk-free interest rates of 4.5% and 4.1%, respectively, volatility of 44.9% and 54.2%, respectively, zero dividend yield, and expected lives of 5.2 years. The weighted average fair value of options granted was $6.32 and $7.47 for the three months ended January 31, 2006 and 2005, respectively. The Company records stock compensation expense using the graded vested method over the vesting period, which is generally three years. As of January 31, 2006, the Company had approximately $29.6 million of unrecognized compensation expense expected to be recognized over a weighted average period of approximately 1.2 years.

The reported net income and net income per share for the three months ended January 31, 2005 have been presented below to reflect the impact of the adoption of SFAS No. 123(R) had the Company been required to adopt this standard for the three months ended January 31, 2005.


	Three months ended
In thousands	January 31, 2005
Actual net income	$	14,214
Less stock-based employee compensation expense determined under the fair value based method		1,814

Pro forma net income	$	12,400

Actual net income per share	$	0.12

Pro forma net income per share	$	0.11

Actual net income per share, assuming dilution	$	0.12

Pro forma net income per share, assuming dilution	$	0.10

QUIKSILVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Inventories

Inventories consist of the following:


	January 31,		October 31,
In thousands	2006		2005
Raw materials	$	50,385	$	46,659
Work in-process		10,571		10,416
Finished goods		345,586		329,321

	$	406,542	$	386,396

Intangible Assets and Goodwill

A summary of intangible assets is as follows:


	January 31, 2006							October 31, 2005
						Net							Net
	Gross		Amorti-			Book		Gross		Amorti-			Book
In thousands	Amount		zation			Value		Amount		zation			Value
Amortizable trademarks	$	5,238	$	(1,454	)	$	3,784	$	5,135	$	(1,349	)	$	3,786
Amortizable licenses		10,074		(3,190	)		6,884		10,081		(2,940	)		7,141
Other amortizable intangibles		28,719		(3,102	)		25,617		28,757		(2,022	)		26,735
Non-amortizable trademarks		212,023		¾			212,023		210,040		¾			210,040

	$	256,054	$	(7,746	)	$	248,308	$	254,013	$	(6,311	)	$	247,702

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, 2006 and 2005 was $1.4 million and $0.6 million, respectively. Annual amortization expense is estimated to be approximately $5.3 million in the fiscal year ending October 31, 2006, approximately $5.0 million in the fiscal year ending October 31, 2007 and approximately $3.8 million in the fiscal years ending October 31, 2009 and 2010. Goodwill related to the Company’s geographic segments is as follows:


	January 31,		October 31,
In thousands	2006		2005
Americas	$	145,078	$	144,948
Europe		180,259		175,392
Asia/Pacific		130,863		129,037

	$	456,200	$	449,377

Goodwill increased $6.0 million during the three months ended January 31, 2006, primarily as a result of the Rossignol and other acquisitions and increased $0.8 million due to the effect of foreign currency exchange rates.

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:


	January 31,		October 31,
In thousands	2006		2005
Foreign currency translation adjustment	$	27,801	$	27,730
Gain on cash flow hedges and interest rate swaps		1,676		2,362

	$	29,477	$	30,092

QUIKSILVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 in the outdoor market of the sporting goods industry in which the Company designs, produces and distributes clothing, winter sports and golf equipment, footwear, accessories and related products. The Company operates in three geographic segments, the Americas, 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. The Company’s largest customer accounted for approximately 4% of the Company’s net revenues.

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


	Three months ended January 31,
In thousands	2006			2005
Revenues, net:
Americas	$	220,718		$	159,274
Europe		261,152			132,590
Asia/Pacific		58,342			50,450
Corporate operations		930			546

	$	541,142		$	342,860


Gross profit:
Americas	$	87,782		$	62,424
Europe		134,708			65,628
Asia/Pacific		25,812			24,282
Corporate operations		259			572

	$	248,561		$	152,906


Operating income:
Americas	$	3,963		$	8,691
Europe		43,253			14,977
Asia/Pacific		2,968			7,355
Corporate operations		(12,928	)		(7,600	)

	$	37,256		$	23,423


Identifiable assets:
Americas	$	732,802		$	425,543
Europe		1,056,223			480,001
Asia/Pacific		303,862			136,603
Corporate operations		57,361			30,704

	$	2,150,248		$	1,072,851

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.

QUIKSILVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 gain of $0.1 million was recognized related to these types of contracts during the three months ended January 31, 2006. 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, 2006, the Company was hedging forecasted transactions expected to occur through November 2007. Assuming exchange rates at January 31, 2006 remain constant, $1.8 million of gains, net of tax, related to hedges of these transactions are expected to be reclassified into earnings over the next 22 months. Also included in accumulated other comprehensive income at January 31, 2006 is 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, which 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 management determines 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, 2006, the Company reclassified into earnings a net gain of $0.7 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, 2006 is as follows:


	Notional			Fair
In thousands	Amount		Maturity	Value
U.S. dollars	$	187,217	Feb 2006 – Nov 2007	$	3,344
British pound		9,723	Feb 2006 – Nov 2006		(107	)
Interest rate swap		36,971	April 2006 – Sept 2009		(128	)

	$	233,911		$	3,109

Business Acquisitions

Effective July 31, 2005, the Company acquired Skis Rossignol SA (“Rossignol”), a wintersports and golf equipment manufacturer. Rossignol offers a full range of wintersports equipment under the Rossignol, Dynastar, Lange, Look and Kerma brands, and also sells golf products under the Cleveland Golf and Never Compromise brands. The Company has included the operations of Rossignol in its results since August 1, 2005. The purchase price, excluding transaction costs, included cash of approximately $208.3 million, approximately 2.2 million restricted shares of the Company’s common stock, valued at $28.9 million, a deferred purchase price obligation of approximately $32.5 million, a liability of approximately $16.9 million for the mandatory purchase of approximately 0.7 million outstanding public shares of Rossignol representing less than 5% of the share capital of Rossignol, and a liability of approximately $2.0 million for the estimated fair value of 0.1 million fully vested Rossignol stock options. Estimated transaction costs totaled

QUIKSILVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

approximately $16.0 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. The deferred purchase price obligation is expected to be paid in 2010 and will accrue interest equal to the 3-month euro interbank offered rate (“Euribor”) plus 2.35% (currently 4.65%). The mandatory purchase of the remaining Rossignol shares was required under French law as the Company had obtained over 95% of the outstanding shares of Rossignol through a combination of share purchases, including a public tender offer. The purchase of these shares was completed in the quarter ended October 31, 2005 and the Company now owns 100% of the shares in Rossignol. Upon the future exercise of the Rossignol stock options, the Company will purchase the newly issued shares from the Rossignol stock option holders, retaining 100% ownership in Rossignol. These Rossignol stock options are treated as variable for accounting purposes and subsequent changes in the value of these stock options are recorded as compensation expense in the Company’s consolidated statement of income. The Company acquired a majority interest in Cleveland Golf when it acquired Rossignol, but certain former owners of Cleveland Golf retained a minority interest of 36.37%. The Company and the minority owners have entered into a put/call arrangement whereby the minority owners of Cleveland Golf can require the Company to buy all of their interest in Cleveland Golf after 4.5 years and the Company can buy their interest at its option after 7 years, each at a purchase price generally determined by reference to a multiple of Cleveland Golf’s annual profits and the Company’s price-earnings ratio. As a result of the minority interest and put/call arrangement, the Company will account for Cleveland Golf as a step acquisition. In a step acquisition, where less than 100% of an entity is acquired, only a portion of the fair value adjustments are recorded in the acquiring company’s balance sheet equal to the percentage ownership in the acquired company. Based on this step acquisition accounting, the Company has recorded 63.63% of the fair value adjustments for Cleveland Golf in its balance sheet. Goodwill arises from synergies the Company believes can be achieved integrating Rossignol’s brands, products and operations with the Company’s, and is not expected to be deductible for income tax purposes. Amortizing intangibles consist of customer relationships, patents and athlete contracts with estimated useful lives of twenty, seven and two years, respectively. The acquired trademarks are non-amortizing as they have been determined to have indefinite lives.

The allocation of purchase price is based on preliminary estimates and is subject to change (see Note 11). The following table summarizes the fair values of the assets acquired and the liabilities assumed at the date of the Rossignol acquisition in accordance with the purchase method of accounting:


	July 31,
In thousands	2005
Cash acquired	$	64,396
Accounts receivable		96,763
Inventory		233,909
Other current assets		21,548
Fixed assets		115,321
Deferred income taxes		3,572
Other assets		3,296
Amortizing intangible assets		20,400
Trademarks		94,700
Goodwill		250,242

Total assets acquired		904,147

Other liabilities		183,641
Long term debt and lines of credit		365,126
Deferred income taxes		40,657
Minority interest		10,109

Net assets acquired	$	304,614

QUIKSILVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In connection with the acquisition of Rossignol, the Company has formulated the Rossignol Integration plan (“the Plan”). As of January 31, 2006 the Company has recognized approximately $29.6 million of liabilities related to the plan. See Note 11 for further description of the Plan.

Effective August 1, 2005, the Company acquired 11 retail stores in Australia from Surfection Pty Ltd, Manly Boardriders Pty Ltd. and Sydney Boardriders Pty Ltd. (“Surfection”). The operations of Surfection have been included in the Company’s results since August 1, 2005. The initial purchase price, excluding transaction costs, included cash of approximately $21.4 million. Transaction costs totaled approximately $1.0 million. The sellers are entitled to additional payments ranging from zero to approximately $17.1 million if certain sales and margin targets are achieved through September 30, 2008. The amount of goodwill initially recorded for the transaction would increase if such contingent payments are made. Goodwill arises from synergies the Company believes can be achieved through Surfection’s retail expertise and store presence in key locations in Australia, and is not expected to be deductible for income tax purposes. Amortizing intangibles consist of non-compete agreements with estimated useful lives of five years.

The allocation of purchase price is based on preliminary estimates and is subject to change based on the finalization of the purchase price allocation. The following table summarizes the fair values of the assets acquired and the liabilities assumed at the date of the Surfection acquisition in accordance with the purchase method of accounting:


	August 1,
In thousands	2005
Inventory and other current assets	$	3,239
Fixed assets		4,839
Amortizing intangible assets		2,400
Goodwill		19,335

Total assets acquired		29,813

Other liabilities		7,419

Net assets acquired	$	22,394

The Company paid cash of approximately $13.1 million during the three months ended January 31, 2006, of which $5.8 million relates to a payment to the former owners of the Asia/Pacific business and the remaining $7.3 million relates primarily to acquisitions of certain other distributors and retail store locations.

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.

11.

Rossignol Integration Plan and Pre-acquisition Restructuring Plan

In connection with the acquisition of Rossignol, the Company has formulated the Rossignol Integration Plan (the “Plan”). The Plan covers the global operations of newly acquired Rossignol and the Company’s existing businesses, and it includes the evaluation of facility relocations, nonstrategic business activities, redundant functions and other related items. The Company has not finalized the Plan, but as of January 31, 2006 has recognized approximately $29.6 million of liabilities related to the Plan, including employee relocation and severance costs, moving costs, and other costs related primarily to the consolidation of Rossignol’s administrative headquarters in Europe and the relocation of the Company’s wintersports equipment sales and distribution

QUIKSILVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

operations in the United States. These liabilities were included in the allocation of the purchase price for Rossignol in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations” and EITF Issue No. 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination”. Costs that are not associated with the acquired company but relate to activities or employees of the Company’s existing operations are charged to earnings as incurred. Certain facilities owned by the acquired company are expected to be sold in connection with the Plan, while others are anticipated to be refinanced through sale-leaseback arrangements. Assets currently held for sale, primarily in the United States and France, total approximately $23.3 million at January 31, 2006. The Plan has not been finalized as it relates primarily to manufacturing and distribution facilities outside of the United States, and the Company’s estimates of expected costs related to the U.S. aspects of the Plan may change. Accordingly, as uncertainties related to the Plan are resolved, additional liabilities related to facility relocations, the elimination of nonstrategic business activities and redundant functions, and other related costs could be recognized. These uncertainties are expected to be resolved within one year of the consummation date of the acquisition, and when determined, additional liabilities could be significant and would be recorded as adjustments to goodwill. If the Company has overestimated these costs, the excess will reduce goodwill in future periods. Conversely, if the Company has underestimated these costs, additional liabilities recognized more than one year after the consummation date of the acquisition will be recorded in earnings.

Activity and liability balances recorded as part of the Plan are as follows:


				Facility
In thousands	Workforce			and Other			Total
Recorded in purchase price allocation	$	3,673		$	1,574		$	5,247
Adjustment to purchase price allocation		17,463			752			18,215
Cash payments		(17	)		(44	)		(61	)
Foreign currency translation		(83	)		(6	)		(89	)

Balance, October 31, 2005		21,036			2,276			23,312

Adjustment to purchase price allocation		4,328			1,799			6,127
Cash payments		(558	)		(29	)		(587	)
Foreign currency translation		34			¾			34

Balance, January 31, 2006	$	24,840		$	4,046		$	28,886

Prior to the acquisition of Rossignol, a restructuring plan was announced related to Rossignol’s French manufacturing facilities (“Pre-acquisition Restructuring Plan”). The costs associated with the Pre-acquisition Restructuring Plan consist of termination benefits achieved through voluntary early retirement and voluntary termination of certain employees.

Activity and liability balances recorded as part of the Pre-acquisition Restructuring Plan are as follows:


In thousands	Workforce
Balance, October 31, 2005	$	4,054
Cash payments		(187	)
Foreign currency translation		8

Balance, January 31, 2006	$	3,875

QUIKSILVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

12.

Condensed Consolidating Financial Information

The Company has $400 million in publicly registered senior notes. Obligations under the Company’s senior notes are fully and unconditionally guaranteed by certain of its existing domestic subsidiaries. Cleveland Golf is expected to be added as a guarantor subsidiary during the three months ended April 30, 2006. The Company is required to present condensed consolidating financial information for Quiksilver, Inc. and its domestic subsidiaries within the notes to the consolidated financial statements in accordance with the criteria established for parent companies in the SEC’s Regulation S-X, Rule 3-10(f). The following condensed consolidating financial information presents the results of operations, financial position and cash flows of Quiksilver Inc., its guarantor subsidiaries, its non-guarantor subsidiaries and the eliminations necessary to arrive at the information for the Company on a consolidated basis as of January 31, 2006 and October 31, 2005 and for the three months ended January 31, 2006 and 2005. The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions. Prior to November 1, 2004, certain of the Company’s guarantor subsidiaries did not exist and were created as part of an internal restructuring on that date. As a result, information presented prior to November 1, 2004 contains certain allocations between Quiksilver, Inc. and its guarantor subsidiaries to conform to the current subsidiary structure under which the guarantees exist. Due to the seasonality of the Company’s quarterly operations, management has applied the estimated consolidated annual effective income tax rate to both the guarantor and non-guarantor subsidiaries for interim reporting purposes. In our consolidated financial statements for the fiscal year ending October 31, 2006, management will apply the actual income tax rate to both the guarantor and non-guarantor subsidiaries. These interim tax rates may differ from the actual annual effective income tax rates for both the guarantor and non-guarantor subsidiaries.

QUIKSILVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATING BALANCE SHEET
At January 31, 2006


			Wholly-owned		Non-
			Guarantor		Guarantor
In thousands	Quiksilver, Inc.		Subsidiaries		Subsidiaries			Elimination			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	426	$	11,370	$	97,569		$	¾		$	109,365
Trade accounts receivable, net		¾		175,170		358,298			¾			533,468
Other receivables		719		1,113		16,482			¾			18,314
Inventories		¾		118,113		289,422			(993	)		406,542
Deferred income taxes		¾		22,543		19,225			¾			41,768
Prepaid expenses and other current assets		2,237		8,968		17,157			¾			28,362

Total current assets		3,382		337,277		798,153			(993	)		1,137,819

Fixed assets, net		3,430		65,960		170,242			¾			239,632
Intangible assets, net		2,450		47,936		197,922			¾			248,308
Goodwill		¾		124,161		332,039			¾			456,200
Investment in subsidiaries		579,979		¾		¾			(579,979	)		¾
Other assets		12,721		5,022		27,266			¾			45,009
Assets held for sale		¾		4,225		19,055			¾			23,280

Total assets	$	601,962	$	584,581	$	1,544,677		$	(580,972	)	$	2,150,248


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Lines of credit	$	¾	$	5,234	$	242,225		$	¾		$	247,459
Accounts payable		1,371		51,877		169,449			¾			222,697
Accrued liabilities		19,145		28,501		116,569			131			164,346
Current portion of long-term debt		¾		1,230		15,069			¾			16,299
Income taxes payable		¾		12,092		5,540			¾			17,632
Intercompany balances		31,720		15,002		(46,722	)		¾			¾

Total current liabilities		52,236		113,936		502,130			131			668,433

Long-term debt, net of current portion		432,031		98,747		104,511			¾			635,289
Deferred income taxes		¾		37,689		39,642			¾			77,331

Total liabilities		484,267		250,372		646,283			131			1,381,053

Minority interest		9,015		¾		¾			¾			9,015
Stockholders’/invested equity		108,680		334,209		898,394			(581,103	)		760,180

Total liabilities and stockholders’ equity	$	601,962	$	584,581	$	1,544,677		$	(580,972	)	$	2,150,248

QUIKSILVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATING BALANCE SHEET
At October 31, 2005


				Wholly-owned		Non-
				Guarantor		Guarantor
In thousands	Quiksilver, Inc.			Subsidiaries		Subsidiaries		Elimination			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	1,177		$	20,816	$	53,605	$	¾		$	75,598
Trade accounts receivable, net		¾			207,120		392,366		¾			599,486
Other receivables		920			4,918		21,576		¾			27,414
Inventories		¾			118,548		268,888		(1,040	)		386,396
Deferred income taxes		¾			22,531		19,115		¾			41,646
Prepaid expenses and other current assets		1,788			6,588		13,443		¾			21,819

Total current assets		3,885			380,521		768,993		(1,040	)		1,152,359

Fixed assets, net		2,679			66,604		172,696		¾			241,979
Intangible assets, net		2,310			47,960		197,432		¾			247,702
Goodwill		¾			177,841		271,536		¾			449,377
Investment in subsidiaries		578,719			¾		¾		(578,719	)		¾
Other assets		11,735			4,933		27,287		¾			43,955
Assets held for sale		¾			4,225		19,004		¾			23,229

Total assets	$	599,328		$	682,084	$	1,456,948	$	(579,759	)	$	2,158,601


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Lines of credit	$	¾		$	6,138	$	213,975	$	¾		$	220,113
Accounts payable		1,486			78,859		132,062		¾			212,407
Accrued liabilities		18,237			29,777		134,665		294			182,973
Current portion of long-term debt		¾			1,230		49,603		¾			50,833
Income taxes payable		¾			14,872		12,304		¾			27,176
Intercompany balances		(63,906	)		59,579		4,327		¾			¾

Total current liabilities		(44,183	)		190,455		546,936		294			693,502

Long-term debt, net of current portion		431,944			76,456		131,948		¾			640,348
Deferred income taxes		¾			21,441		60,187		¾			81,628

Total liabilities		387,761			288,352		739,071		294			1,415,478

Minority interest		¾			¾		10,241		¾			10,241

Stockholders’/invested equity		211,567			393,732		707,636		(580,053	)		732,882

Total liabilities and stockholders’ equity	$	599,328		$	682,084	$	1,456,948	$	(579,759	)	$	2,158,601

QUIKSILVER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATING STATEMENT OF INCOME
Three Months Ended January 31, 2006


				Wholly-owned		Non-
	Quiksilver,			Guarantor		Guarantor
In thousands	Inc.			Subsidiaries		Subsidiaries			Elimination			Consolidated
Revenues, net	$	13		$	189,490	$	361,122		$	(9,483	)	$	541,142
Cost of goods sold		¾			115,346		184,999			(7,764	)		292,581

Gross profit		13			74,144		176,123			(1,719	)		248,561

Selling, general and administrative expense		11,990			66,727		134,231			(1,643	)		211,305

Operating (loss) income		(11,977	)		7,417		41,892			(76	)		37,256
Interest expense		9,135			1,115		2,341			¾			12,591
Foreign currency (gain) loss		89			96		(682	)		¾			(497	)
Minority interest and other expense		(1,226	)		¾		¾			¾			(1,226	)

(Loss) income before provision for income taxes		(19,975	)		6,206		40,233			(76	)		26,388
Provision for income taxes		(5,893	)		1,831		11,847			¾			7,785

Net (loss) income	$	(14,082	)	$	4,375	$	28,386		$	(76	)	$	18,603

QUIKSILVER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING STATEMENT OF CASH FLOW
Three Months Ended January 31, 2006


							Non-
				Guarantor			Guarantor
In thousands	Quiksilver, Inc.			Subsidiaries			Subsidiaries			Consolidated
Cash flows from operating activities:
Net income	$	(14,082	)	$	4,375		$	28,310		$	18,603
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		120			4,633			10,750			15,503
Stock based compensation		5,760			¾			¾			5,760
Provision for doubtful accounts		¾			(679	)		1,813			1,134
Loss on sale of fixed assets		¾			4			96			100
Minority interest		(1,226	)		¾			¾			(1,226	)
Changes in operating assets and liabilities:
Trade accounts receivable		¾			30,839			29,744			60,583
Other receivables		201			3,495			5,627			9,323
Inventories		¾			(574	)		(19,756	)		(20,330	)
Prepaid expenses and other current assets		85			(2,450	)		(4,466	)		(6,831	)
Other assets		(253	)		(192	)		(2,739	)		(3,184	)
Accounts payable		(115	)		(25,776	)		35,465			9,574
Accrued liabilities		923			(1,627	)		(12,703	)		(13,407	)
Income taxes payable		¾			(922	)		(2,220	)		(3,142	)

Net cash (used in) provided by operating activities		(8,587	)		11,126			69,921			72,460

Cash flows from investing activities:
Capital expenditures		(1,011	)		(4,163	)		(7,864	)		(13,038	)
Business acquisitions, net of cash acquired		(1,972	)		¾			(11,161	)		(13,133	)

Net cash used in investing activities		(2,983	)		(4,163	)		(19,025	)		(26,171	)

Cash flows from financing activities:
Borrowings on lines of credit		¾			5,154			114,799			119,953
Payments on lines of credit		¾			(6,062	)		(90,684	)		(96,746	)
Borrowings on long-term debt		(1,267	)		22,600			27,969			49,302
Payments on long-term debt		¾			(309	)		(86,972	)		(87,281	)
Proceeds from stock option exercises		2,156			¾			¾			2,156
Intercompany		9,843			(37,081	)		27,238			¾

Net cash provided by (used in) financing activities		10,732			(15,698	)		(7,650	)		(12,616	)

Effect of exchange rate changes on cash		87			(711	)		718			94

Net increase (decrease) in cash and cash equivalents		(751	)		(9,446	)		43,964			33,767
Cash and cash equivalents, beginning of period		1,177			20,816			53,605			75,598

Cash and cash equivalents, end of period	$	426		$	11,370		$	97,569		$	109,365

QUIKSILVER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATING STATEMENT OF CASH FLOW
Three Months Ended January 31, 2005


							Non-
				Guarantor			Guarantor
In thousands	Quiksilver, Inc.			Subsidiaries			Subsidiaries			Consolidated
Cash flows from operating activities:
Net income	$	(4,578	)	$	4,210		$	14,582		$	14,214
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		214			3,473			4,115			7,802
Provision for doubtful accounts		¾			497			1,473			1,970
Loss on sale of fixed assets		¾			¾			43			43
Foreign currency gain		232			¾			¾			232
Interest accretion		¾			¾			496			496
Changes in operating assets and liabilities:
Trade accounts receivable		¾			13,450			17,079			30,529
Other receivables		¾			(147	)		5,955			5,808
Inventories		¾			(16,037	)		(39,723	)		(55,760	)
Prepaid expenses and other current assets		(1,231	)		(50	)		(5,106	)		(6,387	)
Other assets		(94	)		(311	)		(2,901	)		(3,306	)
Accounts payable		3,500			4,082			26,859			34,441
Accrued liabilities		4,065			(18,860	)		(414	)		(15,209	)
Income taxes payable		¾			(1,517	)		617			(900	)

Net cash (used in) provided by operating activities		2,108			(11,210	)		23,075			13,973

Cash flows from investing activities:
Capital expenditures		(1,600	)		(4,721	)		(3,887	)		(10,208	)
Business acquisitions, net of cash acquired		¾			(3,331	)		(5,784	)		(9,115	)

Net cash used in investing activities		(1,600	)		(8,052	)		(9,671	)		(19,323	)

Cash flows from financing activities:
Borrowings on lines of credit		¾			¾			19,217			19,217
Payments on lines of credit		¾			¾			(4,428	)		(4,428	)
Borrowings on long-term debt		¾			17,300			791			18,091
Payments on long-term debt		¾			¾			(3,102	)		(3,102	)
Proceeds from stock option exercises		2,198			¾			¾			2,198
Intercompany		(328	)		(7,481	)		7,809			¾

Net cash provided by (used in) financing activities		1,870			9,819			20,287			31,976

Effect of exchange rate changes on cash		¾			¾			756			756

Net increase (decrease) in cash and cash equivalents		2,378			(9,443	)		34,447			27,382
Cash and cash equivalents, beginning of period		(1,070	)		9,489			46,778			55,197

Cash and cash equivalents, end of period	$	1,308		$	46		$	81,225		$	82,579

PART I — FINANCIAL INFORMATION

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

Unless the context indicates otherwise, when we refer to “Quiksilver”, “we”, “us”, “our”, or the “Company” in this Form 10-Q, we are referring to Quiksilver, Inc. and its subsidiaries on a consolidated basis. You should read the following discussion and analysis in conjunction with our unaudited condensed consolidated financial statements and related notes thereto contained elsewhere in this report. The information contained in this quarterly report on Form 10-Q is not a complete description of our business or the risks associated with an investment in our securities. 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, 2005 and subsequent reports on Form 8-K, which discuss our business in greater detail. The section entitled “Risk Factors” set forth in Item 1A of our Annual Report on Form 10-K, and similar discussions in our other SEC filings, discuss some of the important risk factors that may affect our business, results of operations and financial condition. You should carefully consider those risks, in addition to the information in this report and in our other filings with the SEC, before deciding to purchase, hold or sell our securities.

We began operations in 1976 as a California company making boardshorts for surfers in the United States under a license agreement with the Quiksilver brand founders in Australia. Our product offering expanded in the 1980s as we grew our distribution channels. After going public in 1986 and purchasing the rights to the Quiksilver brand in the United States from our Australian licensor, we further expanded our product offerings and began to diversify. In the early 1990s, we acquired the European licensee of Quiksilver and introduced Roxy, our surf brand for teenage girls. We also expanded demographically in the 1990s by adding products for boys, girls, toddlers and men, and we introduced our proprietary retail store concept, Boardriders Clubs, which displays the heritage and products of Quiksilver and Roxy. In 2000, we acquired the international Quiksilver and Roxy trademarks, and in 2002, we acquired our licensees in Australia and Japan. In May 2004, we acquired DC Shoes to expand our presence in action sports-inspired footwear.

In July 2005, we acquired Skis Rossignol, S.A., a wintersports and golf equipment manufacturer. Rossignol offers a full range of wintersports equipment under the Rossignol, Dynastar, Lange, Look and Kerma brands, and also sells golf products under the Cleveland Golf and Never Compromise brands. The acquisition was effective July 31, 2005 and we have included the operations of Rossignol in our results since August 1, 2005. In July 2005, we issued $400 million in senior notes that bear a coupon interest rate of 6.875% and are due April 15, 2015. These senior notes were used to fund a portion of the Rossignol purchase price and to refinance certain existing indebtedness.

Over the past 35 years, Quiksilver has been established as a leading global brand representing the casual, youth lifestyle associated with boardriding sports. With our acquisition of Rossignol, we have added a collection of leading ski equipment brands to our company that we believe will be the foundation for a full range of technical ski apparel, sportswear and accessories. Also, as part of our acquisition of Rossignol, we acquired a majority interest in Roger Cleveland Golf Company, Inc., a leading producer of wedges and golf clubs in the United States.

We believe that our acquisition of Rossignol provides us with multiple authentic brands in both snow and golf. Rossignol’s technical knowledge, combined with our current lifestyle brands, will enable us to produce and market apparel, equipment, footwear, accessories and related products for consumers in a broad cross section of the outdoor market. Furthermore, we believe the combination of our existing global expertise in branded apparel and footwear, along with Rossignol’s expertise in branded wintersports equipment, provide us with a diversified platform for continued growth and enhanced operating efficiencies. Our products are sold throughout the world, primarily in surf shops, ski shops snow shops, skate shops and specialty stores.

Our acquisition of Rossignol has had, and is expected to continue to have a significant impact on our financial results. Our revenues and expenses have increased substantially. However, our overall profit margins have been negatively impacted because Rossignol has historically generated lower profit margins than we have, and this trend is expected to continue in the foreseeable future. In addition, Rossignol’s business has historically been seasonal, with revenues and operating profits generally higher in August

through December, which will affect our consolidated quarterly results. We are substantially more leveraged as a result of the debt incurred in connection with the acquisition, and we have an increased amount of capital committed to manufacturing functions.

We operate in the outdoor market of the sporting goods industry in which we design, produce and distribute branded apparel, wintersports and golf equipment, footwear, accessories and related products. 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. If we are unable to remain competitive and maintain our consumer loyalty, our business will be negatively affected. We believe that our historical success is due to the development of an experienced team of designers, artists, sponsored athletes, engineers, technicians, researchers, merchandisers, pattern makers, and contractors. Our team and the heritage and current strength of our brands has helped us remain competitive in our markets. Our success in the future will depend on our ability to continue to design products that are acceptable to the marketplace and competitive in the areas of quality, brand image, technical specifications, distribution methods, price, customer service, and intellectual property protection.

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,
	2006			2005
Statement of Income data

Revenues		100.0	%		100.0	%
Gross profit		45.9			44.6
Selling, general and administrative expense		39.0			37.8

Operating income		6.9			6.8
Interest expense		2.3			0.5

Foreign currency, minority interest and other expense		(0.3	)		0.2

Income before provision for income taxes		4.9	%		6.1	%


Other data

EBITDA ⁽¹⁾		11.1	%		8.9	%


⁽¹⁾		EBITDA is defined as net income before (i) interest expense, (ii) income tax expense, (iii) depreciation and amortization, and (iv) non-cash stock based compensation expense. EBITDA is not defined under generally accepted accounting principles (“GAAP”), and it may not be comparable to similarly titled measures reported by other companies. We use EBITDA, along with other GAAP measures, as a measure of profitability because EBITDA helps us to compare our performance on a consistent basis by removing from our operating results the impact of our capital structure, the effect of operating in different tax jurisdictions, the impact of our asset base, which can differ depending on the book value of assets and the accounting methods used to compute depreciation and amortization, and the effect of non-cash stock based compensation expense. We believe it is useful to investors for the same reasons. EBITDA has limitations as a profitability measure in that it does not include the interest expense on our debts, our provisions for income taxes, the effect of our expenditures for capital assets and certain intangible assets and the effect of non-cash compensation expense. Following is a reconciliation of net income to EBITDA:


	Three Months Ended January 31,
	2006		2005
Net income	$	18,603	$	14,214
Provision for income taxes		7,785		6,751
Interest expense		12,591		1,789
Depreciation and amortization		15,503		7,802
Non-cash stock compensation expense		5,760		—

EBITDA	$	60,242	$	30,556

Three Months Ended January 31, 2006 Compared to Three Months Ended January 31, 2005

Our total net revenues for the three months ended January 31, 2006 increased 58% to $541.1 million from $342.9 million in the comparable period of the prior year. The Rossignol and Cleveland businesses, which were acquired on July 31, 2005, accounted for $191.7 million of our consolidated revenue growth for the three months ended January 31, 2006. Revenues in the Americas increased 39% to $220.7 million for the three months ended January 31, 2006 from $159.3 million in the comparable period of the prior year, and European revenues increased 97% to $261.2 million from $132.6 million for those same periods. As measured in euros, Quiksilver Europe’s primary functional currency, revenues in the current year’s quarter increased 118% compared to the prior year. Asia/Pacific revenues increased 16% to $58.3 million for the three months ended January 31, 2006 from $50.5 million for the three months ended January 31, 2005. As measured in Australian dollars, Quiksilver Asia/Pacific’s primary functional currency, revenues increased 20% for the three months ended January 31, 2006 compared to the three months ended January 31, 2005.

In the Americas, revenues in our men’s category, which includes the Quiksilver Young Men’s, Boys, Toddlers, Quiksilveredition, and DC brands, increased 14% to $83.8 million from $73.3 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 brands, decreased 1% to $83.6 million from $84.7 million. Revenues from our wintersports and golf equipment brands which include Rossignol, Dynastar, Look, Lange, Kerma, Cleveland Golf, Never Compromise, Lib Technologies, Gnu, Bent Metal and Roxy equipment, totaled $193.3 million for the current year’s quarter compared to $1.3 million in the comparable period of the prior year. The increase in the Americas men’s revenues came primarily from an increase in DC and to a lesser extent from the Quiksilver brand. The decrease in the Americas women’s revenues came primarily from growth in Roxy which was more than offset by a decrease in revenue due to our discontinuation of our private label swimwear product line. The increase in wintersports and golf equipment revenue came primarily from the newly acquired Rossignol and Cleveland Golf businesses. In Europe, and as reported in dollars, men’s revenues decreased 9% to $88.2 million from $96.9 million, while women’s revenues increased 27% to $45.4 million from $35.7 million. Our wintersports and golf equipment revenue totaled $127.5 million. The European men’s revenues decrease was primarily due to foreign exchange rate fluctuations. As measured in euros, European men’s revenues increased 1%. The women’s revenue increase reflects growth in Roxy partially offset by the negative effect of foreign exchange rate fluctuations. As measured in euros, European women’s revenue increased 41%. Our European wintersports and golf equipment revenue was due to the newly acquired Rossignol and Cleveland Golf businesses. In Asia/Pacific, the increase in revenues came primarily from the newly acquired Rossignol and Cleveland Golf business partially offset by decreases in our other brand revenues due primarliy to general economic weakness in Australia.

Our consolidated gross profit margin for the three months ended January 31, 2006 increased to 45.9% from 44.6% in the comparable period of the prior year. The Americas’ gross profit margin increased to 39.8% from 39.2%, while the European gross profit margin increased to 51.6% from 49.5%, and the Asia/Pacific gross profit margin decreased to 44.2% from 48.1% for those same periods. The increase in the Americas’ gross profit margin was due primarily to a higher percentage of sales through company owned retail stores where we earn both the wholesale and retail margins and improved margins on our DC products, partially offest by higher sales from our wintersports and golf equipment businesses, which operate at lower gross margins than our other businesses. Our European gross profit margin increased primarily from the impact of foreign currency exchange rate fluctuations and a higher percentage of sales through company-owned retail stores, which was partially offset by sales of our lower margin wintersports and golf equipment businesses. In Asia/Pacific, the gross profit margin decrease was primarily due to sales of our lower margin wintersports and golf equipment businesses slightly offset by a higher percentage of sales through company-owned retail stores.

Our selling, general and administrative expense (“SG&A”) for the three months ended January 31, 2006 increased 63% to $211.3 million from $129.5 million in the comparable period of the prior year. Americas’ SG&A increased 56% to $83.8 million from $53.7 million in the comparable period of the prior year, while European SG&A increased 81% to $91.5 million from $50.7 million, and Asia/Pacific SG&A increased 35% to $22.8 million from $16.9 million for those same periods. As a percentage of revenues, SG&A

increased to 39.0% for the three months ended January 31, 2006 from 37.8% for the three months ended January 31, 2005.

This consolidated increase in SG&A as a percentage of revenues was primarily due to stock based compensation recorded in the current period as a result of adopting SFAS No. 123(R). In addition, increased marketing expense and the cost of additional retail stores as a percentage of revenues were largely offset by our newly acquired wintersports and golf equipment businesses, which operated with lower SG&A as a percentage of revenues than our other businesses during the three months ended January 31, 2006, which is a seasonally high shipping period.

Interest expense for the three months ended January 31, 2006 increased to $12.6 million from $1.8 million in the comparable period of the prior year. This increase was primarily due to debt incurred and assumed in connection with the acquisition of Rossignol.

Our foreign currency gain amounted to $0.5 million for the three months ended January 31, 2006 compared to a loss of $0.5 million in the comparable period of the prior year. This gain 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, 2006, which is based on current estimates of the annual effective income tax rate, decreased to 29.5% from 32.2% in the comparable period of the prior year. This improvement resulted primarily because a higher percentage of our 2006 profits are expected to be generated in countries with lower tax rates and from foreign tax credits.

Net income for the three months ended January 31, 2006 increased 31% to $18.6 million or $0.15 per share on a diluted basis from $14.2 million or $0.12 per share on a diluted basis in the comparable period of the prior year and as adjusted for the two-for-one stock split effected in May 2005. Basic net income per share also increased to $0.15 per share for the three months ended January 31, 2006 from $0.12 per share in the comparable period of the prior year. EBITDA increased 97% to $60.2 million from $30.6 million for those same periods.

Financial Position, Capital Resources and Liquidity

We generally finance our working capital needs and capital investments with operating cash flows and bank revolving lines of credit. Multiple banks in the United States, Europe and Australia make these lines of credit available to us. Term loans are also used to supplement these lines of credit and are typically used to finance long-term assets. In fiscal 2005, we issued $400 million of senior notes to fund a portion of the Rossignol purchase price and to refinance certain existing indebtedness.

Cash Flows

We generated $72.5 million of cash from operating activities in the three months ended January 31, 2006 compared to $14.0 million in the three months ended January 31, 2005. This $58.5 million increase 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, 2006, the decrease in trade accounts receivable generated cash of $60.6 million compared to $30.5 million in the comparable period of the prior year, an increase in cash provided of $30.1 million. The increase in inventories net of the increase in accounts payable used cash of $10.8 million in the three months ended January 31, 2006 compared to $21.3 million used in the comparable period of the prior year, a net decrease in cash used of $10.5 million. The increase in cash provided by net income adjusted for non-cash expenses and other working capital changes was $17.9 million.

Capital expenditures totaled $13.0 million for the three months ended January 31, 2006, compared to $10.2 million in the comparable period of the prior year. These investments include company-owned stores and ongoing investments in computer and warehouse equipment. We used $13.1 million in cash for acquisitions, of which $5.8 million relates to a payment to the former owners of our Asia/Pacific business and the remaining $7.3 million relates primarily to acquisitions of certain other distributors and retail store locations.

During the three months ended January 31, 2006, net cash used in financing activities totaled $12.6 million, compared to cash provided of $32.0 million in the comparable period of the prior year. Borrowings decreased as we generated increased cash from our operating activities.

The net increase in cash and cash equivalents for the three months ended January 31, 2006 was $33.8 million compared to $27.4 million in the comparable period of the prior year. Cash and cash equivalents totaled $109.4 million at January 31, 2006 compared to $75.6 million at October 31, 2005, while working capital was $469.4 million at January 31, 2005 compared to $458.9 million at October 31, 2005. 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

Our trade accounts receivable decreased 11% to $533.5 million at January 31, 2006 from $599.5 million at October 31, 2005. Accounts receivable in the Americas decreased 15% to $231.2 million at January 31, 2006 from $273.0 million at October 31, 2005, while European accounts receivable decreased 4% to $253.7 million from $263.8 million, and Asia/Pacific accounts receivable decreased 22% to $48.6 million from $62.7 million for those same periods. Our January 31, 2006 balance includes $241.8 million of accounts receivable from our newly acquired Rossignol and Cleveland Golf businesses. Accounts receivable related to our other businesses compared to January 31, 2005, increased 24% in the Americas, 8% in Europe and 17% in Asia/Pacific. The increase in accounts receivable related to all three segments primarily relates to higher revenues and the timing of shipments. Included in accounts receivable are approximately $37.1 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 deducted from accounts receivable to accurately compute days sales outstanding. Overall average days sales outstanding increased by approximately 21 days at January 31, 2006 compared to January 31, 2005. Of this increase, 12 days related to our newly acquired wintersports and golf equipment businesses and the remaining 9 days related to higher revenues and the timing of shipments in our other businesses.

Consolidated inventories increased 5% to $406.5 million at January 31, 2006 from $386.4 million at October 31, 2005. Inventories in the Americas increased 3% to $169.8 million from $164.4 million at October 31, 2005, while European inventories increased 7% to $188.7 million from $176.9 million, and Asia/Pacific inventories increased 7% to $ 48.1 million from $45.1 million for those same periods. Our January 31, 2006 inventory balance includes $159.1 million in inventories from our newly acquired Rossignol and Cleveland Golf businesses. Inventories related to our other businesses compared to January 31, 2006, decreased 10% in the Americas, while inventories in Europe increased 12%, and inventories in Asia/Pacific increased 43% for that same period. The increase in our European and Asia/Pacific inventories primarily relates to the increase in inventories due to additional retail locations. Consolidated average annual inventory turnover was approximately 3.4 at January 31, 2006 compared to approximately 3.8 at January 31, 2005. Excluding the effect of the Rossignol and Cleveland Golf inventories, average inventory turnover remained consistent at 3.8.

Commitments

We paid $5.8 million related to the achievement of certain sales and earnings targets to the former owners of our Asia/Pacific business during the three months ended January 31, 2006. This amount represents the final payment related to this acquisition.

In connection with the acquisition of Rossignol, we have formulated the Rossignol Integration Plan (the “Plan”). The Plan covers the global operations of Rossignol and our existing businesses, and it includes the evaluation of facility relocations, nonstrategic business activities, redundant functions and other related items. We have not finalized the Plan, but as of January 31, 2006 we had recognized $29.6 million of liabilities related to the Plan, including employee relocation and severance costs, moving costs, and other costs related primarily to the consolidation of Rossignol’s administrative headquarters in Europe and the relocation of our wintersports equipment sales and distribution operations in the United States. Costs that are not associated with Rossignol but relate to activities or employees of our existing operations will be charged to earnings as incurred. Certain facilities owned by Rossignol are expected to be sold in connection with the Plan, while others are anticipated to be refinanced through sale-leaseback arrangements. Assets currently held for sale, primarily in the United States and France, totaled

approximately $23.3 million at January 31, 2006. The Plan has not been finalized as it relates to facilities outside of the United States, and our estimates of expected costs related to the U.S. aspects of the Plan may change. Accordingly, as uncertainties related to the Plan are resolved, additional liabilities related to facility relocations, the elimination of nonstrategic business activities and redundant functions, and other related costs could be recognized. These uncertainties are expected to be resolved within one year of the consummation date of the acquisition, and when determined, additional liabilities could be significant and would be recorded as adjustments to goodwill. If we have overestimated these costs, the excess will reduce goodwill in future periods. Conversely, if we have underestimated these costs, additional liabilities recognized more than one year after the consummation date of the acquisition will be recorded in earnings.

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

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. 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.

Stock-Based Compensation Expense

Effective November 1, 2005, we adopted the fair value recognition provisions of SFAS 123(R), using the modified prospective transition method, and therefore have not restated prior periods’ results. Under this method we recognize compensation expense for all stock-based payments granted after November 1, 2005 and prior to but not yet vested as of November 1, 2005, in accordance with SFAS 123(R). Under the fair value recognition provisions of SFAS 123(R), we recognize stock-based compensation net of an estimated forfeiture rate and only recognize compensation cost for those shares expected to vest using the graded vested method over the requisite service period of the award. Prior to SFAS 123(R) adoption, we accounted for stock-based payments under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and accordingly, we were not required to recognize compensation expense for options granted that had an exercise price equal to the market value of the underlying common stock on the date of grant.

Determining the appropriate fair value model and calculating the fair value of stock-based payment awards require the input of highly subjective assumptions, including the expected life of the stock-based payment awards and stock price volatility. We use the Black-Scholes option-pricing model to value compensation expense. The assumptions used in calculating the fair value of stock-based payment awards represent management’s best estimates, but the estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future. See Note 3 to the Consolidated Condensed Financial Statements for a further discussion on stock-based compensation.

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 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, 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 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 in Europe, where we operate with the euro as our 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 fluctuations in foreign exchange rates. 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.

Forward-Looking Statements

All statements included in this report, other than statements or characterizations of historical fact, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Examples of forward-looking statements include, but are not limited to, statements regarding the trends and uncertainties in our financial condition and results of operations. These forward-looking statements are based on our current expectations, estimates and projections about our industry, management’s beliefs, and certain assumptions made by us and speak only as of the date of this report. Forward-looking statements can often be identified by words such as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “believes,” “seeks,” “estimates,” “may,” “will,” “should,” “would,” “could,” “potential,” “continue,” “ongoing,” and similar expressions, and variations or negatives of these words. In addition, any statements that refer to expectations, projections, guidance, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. These statements are not guarantees of future results and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statement as a result of various factors, including, but not limited to, the following:

•

our ability to achieve the financial results that we anticipate, or have experienced in the past;

•

our ability to fully realize the benefits we anticipate from our acquisition of Rossignol;

•

the impact of our substantial leverage on our ability to generate cash flows or obtain financing to fund our anticipated growth strategies and the cost of such financing;

•

our plans to expand internationally;

•

our intention to introduce new products and enter into new joint ventures;

•

our plans to open new retail stores;

•

payments due on contractual commitments;

•

future expenditures for capital projects;

•

our ability to continue to maintain our brand image and reputation;

•

our ability to remain compliant with our debt covenants;

•

integration of acquired businesses and future acquisitions;

•

general economic and business conditions;

•

foreign exchange rate fluctuations; and

•

changes in political, social and economic conditions and local regulations, particularly in Europe and Asia.

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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Foreign Currency

We are exposed to financial statement gains and losses as a result of translating the operating results and financial position of our international subsidiaries. We translate the local currency statements of income of our foreign subsidiaries into U.S. dollars using the average exchange rate during the reporting period. Changes in foreign exchange rates affect our reported profits and distort comparisons from period to period. By way of example, when the U.S. dollar strengthens compared to the euro, there is a negative effect on our reported results for Quiksilver Europe because it takes more profits in euros to generate the same amount of profits in stronger U.S. dollars. In addition, the statements of income of Quiksilver Asia/Pacific are translated from Australian dollars and Japanese yen into U.S. dollars, and there is a negative effect on our reported results for Quiksilver Asia/Pacific when the U.S. dollar is stronger in comparison to Australian dollar or Japanese yen.

European revenues increased 118% in euros during the three months ended January 31, 2006 compared to the three months ended January 31, 2005. As measured in U.S. dollars and reported in our consolidated statements of income, European revenues increased 97% as a result of a stronger U.S. dollar versus the euro in comparison to the prior year.

Asia/Pacific revenues increased 20% in Australian dollars during the three months ended January 31, 2006 compared to the three months ended January 31, 2005. As measured in U.S. dollars and reported in our consolidated statements of income, Asia/Pacific revenues increased 16% as a result of a stronger U.S. dollar versus the Australian dollar in comparison to the prior year.

Our other foreign currency and interest rate risks are discussed in our Annual Report on Form 10-K for the year ended October 31, 2005 in Item 7A.

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, 2006, 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, 2006.

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, 2006 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

	10.1		Amendment to the Long-Term Incentive Plan dated January 25, 2006

	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


		QUIKSILVER, INC., a Delaware corporation

March 13, 2006		/s/ Steven L. Brink

		Steven L. Brink
		Chief Financial Officer and Treasurer
		(Principal Accounting Officer)


Exhibit No.		Description

10.1		Amendment to the Long-Term Incentive Plan dated January 25, 2006

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


Date: March 13, 2006		/s/ Robert B. McKnight, Jr.

		Robert B. McKnight, Jr.
		Chief Executive Officer (Principal Executive Officer)


Date: March 13, 2006		/s/ Steven L. Brink

		Steven L. Brink
		Chief Financial Officer (Principal Financial Officer)

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		Page No.
PART I — FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited):

Condensed Consolidated Balance Sheets January 31, 2006 and October 31, 2005		2

Condensed Consolidated Statements of Income Three Months Ended January 31, 2006 and 2005		3

Condensed Consolidated Statements of Comprehensive Income Three Months Ended January 31, 2006 and 2005		3

Condensed Consolidated Statements of Cash Flows Three Months Ended January 31, 2006 and 2005		4

Notes to Condensed Consolidated Financial Statements		5

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations		20

Three Months Ended January 31, 2006 Compared to Three Months Ended January 31, 2005		22

Financial Position, Capital Resources and Liquidity		23

Critical Accounting Policies		25

New Accounting Pronouncements		27

Forward-Looking Statements		27

Item 3. Quantitative and Qualitative Disclosures About Market Risk		28

Item 4. Controls and Procedures		28

Part II — OTHER INFORMATION

Item 6. Exhibits		29

SIGNATURES		30
EXHIBIT 10.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.1


/s/ Robert B. McKnight, Jr.
Robert B. McKnight, Jr.
Chief Executive Officer
March 13, 2006


/s/ Steven L. Brink
Steven L. Brink
Chief Financial Officer
March 13, 2006