FORM 10-Q

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 July 31, 2009


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		33-0199426
(State or other jurisdiction of incorporation or organization)		(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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):


Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company 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
September 4, 2009 was 128,599,163

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

QUIKSILVER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)


	Three months ended July 31,
In thousands, except per share amounts	2009			2008
Revenues, net	$	501,394		$	564,876
Cost of goods sold		267,030			280,047

Gross profit		234,364			284,829

Selling, general and administrative expense		211,771			232,094

Operating income		22,593			52,735

Interest expense		15,347			11,801
Foreign currency loss (gain)		3,473			(1,231	)
Minority interest and other (income) expense		(36	)		415

Income before provision for income taxes		3,809			41,750

Provision for income taxes		396			8,677

Income from continuing operations		3,413			33,073
Loss from discontinued operations, net of tax		(2,067	)		(30,219	)

Net income	$	1,346		$	2,854


Income per share from continuing operations	$	0.03		$	0.26

Loss per share from discontinued operations	$	(0.02	)	$	(0.24	)

Net income per share	$	0.01		$	0.02


Income per share from continuing operations, assuming dilution	$	0.03		$	0.25

Loss per share from discontinued operations, assuming dilution	$	(0.02	)	$	(0.23	)

Net income per share, assuming dilution	$	0.01		$	0.02


Weighted average common shares outstanding		127,467			126,220

Weighted average common shares outstanding, assuming dilution		128,238			130,021

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)


	Three months ended July 31,
In thousands	2009			2008
Net income	$	1,346		$	2,854
Other comprehensive income (loss):
Foreign currency translation adjustment		39,678			(2,669	)
Net unrealized (loss) gain on derivative instruments, net of tax of $(7,152) (2009) and $1,640 (2008)		(14,198	)		3,281

Comprehensive income	$	26,826		$	3,466

See notes to condensed consolidated financial statements.

QUIKSILVER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)


	Nine months ended July 31,
In thousands, except per share amounts	2009			2008
Revenues, net	$	1,438,845		$	1,657,737
Cost of goods sold		764,200			829,042

Gross profit		674,645			828,695

Selling, general and administrative expense		621,178			684,304
Asset impairment		—			350

Operating income		53,467			144,041

Interest expense		43,053			35,845
Foreign currency loss (gain)		6,829			(463	)
Minority interest and other expense		584			18

Income before provision for income taxes		3,001			108,641

Provision for income taxes		60,505			29,273

(Loss) income from continuing operations		(57,504	)		79,368
Loss from discontinued operations, net of tax		(132,763	)		(304,678	)

Net loss	$	(190,267	)	$	(225,310	)


(Loss) income per share from continuing operations	$	(0.45	)	$	0.63

Loss per share from discontinued operations	$	(1.04	)	$	(2.43	)

Net loss per share	$	(1.49	)	$	(1.80	)


(Loss) income per share from continuing operations, assuming dilution	$	(0.45	)	$	0.61

Loss per share from discontinued operations, assuming dilution	$	(1.04	)	$	(2.35	)

Net loss per share, assuming dilution	$	(1.49	)	$	(1.74	)


Weighted average common shares outstanding		127,286			125,511

Weighted average common shares outstanding, assuming dilution		127,286			129,765

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)


	Nine months ended July 31,
In thousands	2009			2008
Net loss	$	(190,267	)	$	(225,310	)
Other comprehensive income (loss):
Foreign currency translation adjustment		72,242			34,811
Reclassification adjustment for foreign currency translation included in current period loss from discontinued operations		(47,850	)		—
Net unrealized (loss) gain on derivative instruments, net of tax of $(14,481) (2009) and $667 (2008)		(25,837	)		246

Comprehensive loss	$	(191,712	)	$	(190,253	)

See notes to condensed consolidated financial statements.

QUIKSILVER, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)


	July 31,			October 31,
In thousands, except share amounts	2009			2008
ASSETS
Current assets:
Cash and cash equivalents	$	116,830		$	53,042
Restricted cash		50,054			—
Trade accounts receivable, less allowances of $43,386 (2009) and $31,331 (2008)		424,191			470,059
Other receivables		19,459			70,376
Income taxes receivable		—			10,738
Inventories		334,233			312,138
Deferred income taxes short-term		101,807			12,220
Prepaid expenses and other current assets		39,874			25,869
Current assets held for sale		2,282			411,442

Total current assets		1,088,730			1,365,884

Restricted cash		—			46,475
Fixed assets, less accumulated depreciation and amortization of $261,246 (2009) and $223,572 (2008)		237,069			235,528
Intangible assets, net		142,954			144,434
Goodwill		321,451			299,350
Other assets		62,271			39,594
Deferred income taxes long-term		23,659			39,000

Total assets	$	1,876,134		$	2,170,265


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Lines of credit	$	221,024		$	238,317
Accounts payable		219,536			235,729
Accrued liabilities		107,025			93,548
Current portion of long-term debt		82,363			31,904
Income taxes payable		28,313			—
Current liabilities related to assets held for sale		579			135,071

Total current liabilities		658,840			734,569

Long-term debt, net of current portion		733,622			790,097
Other long-term liabilities		43,069			39,607
Non-current liabilities related to assets held for sale		—			6,026

Total liabilities		1,435,531			1,570,299


Stockholders’ equity:
Preferred stock, $.01 par value, authorized shares - 5,000,000; issued and outstanding shares - none		—			—
Common stock, $.01 par value, authorized shares - 185,000,000; issued shares – 131,164,363 (2009) and 130,622,566 (2008)		1,312			1,306
Additional paid-in capital		366,852			334,509
Treasury stock, 2,885,200 shares		(6,778	)		(6,778	)
Retained earnings		152			190,419
Accumulated other comprehensive income		79,065			80,510

Total stockholders’ equity		440,603			599,966

Total liabilities and stockholders’ equity	$	1,876,134		$	2,170,265

See notes to condensed consolidated financial statements.

QUIKSILVER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)


	Nine months ended July 31,
In thousands	2009			2008
Cash flows from operating activities:
Net loss	$	(190,267	)	$	(225,310	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Loss from discontinued operations		132,763			304,678
Depreciation and amortization		40,388			42,935
Stock-based compensation and tax benefit on option exercises		7,419			6,457
Provision for doubtful accounts		13,180			8,023
Loss on disposal of fixed assets		3,006			251
Foreign currency (gain) loss		(236	)		738
Asset impairments		—			350
Minority interest and equity in earnings		873			1,172
Deferred income taxes		44,126			—
Changes in operating assets and liabilities, net of the effect from business acquisitions:
Trade accounts receivable		57,313			2,499
Other receivables		21,909			20,289
Inventories		(1,786	)		(46,326	)
Prepaid expenses and other current assets		(5,378	)		(5,694	)
Other assets		3,105			(861	)
Accounts payable		(18,374	)		41,084
Accrued liabilities and other long-term liabilities		2,370			(4,771	)
Income taxes		28,126			4,410

Cash provided by operating activities of continuing operations		138,537			149,924
Cash provided by (used in) operating activities of discontinued operations		11,943			(20,166	)

Net cash provided by operating activities		150,480			129,758

Cash flows from investing activities:
Capital expenditures		(32,505	)		(63,584	)
Business acquisitions, net of cash acquired		—			(31,127	)

Cash used in investing activities of continuing operations		(32,505	)		(94,711	)
Cash provided by investing activities of discontinued operations		21,848			107,942

Net cash (used in) provided by investing activities		(10,657	)		13,231

Cash flows from financing activities:
Borrowings on lines of credit		8,613			161,752
Payments on lines of credit		(38,316	)		(22,159	)
Borrowings on long-term debt		560,920			217,559
Payments on long-term debt		(563,509	)		(189,337	)
Payments of debt issuance costs		(24,881	)		—
Stock option exercises, employee stock purchases and tax benefit on option exercises		862			11,331

Cash (used in) provided by financing activities of continuing operations		(56,311	)		179,146
Cash used in financing activities of discontinued operations		(11,136	)		(293,456	)

Net cash used in financing activities		(67,447	)		(114,310	)

Effect of exchange rate changes on cash		(8,588	)		(3,536	)

Net increase in cash and cash equivalents		63,788			25,143
Cash and cash equivalents, beginning of period		53,042			74,348

Cash and cash equivalents, end of period	$	116,830		$	99,491

Supplementary cash flow information:
Cash paid (received) during the period for:
Interest	$	32,647		$	28,936

Income taxes	$	(4,224	)	$	23,867

Non-cash investing and financing activities:
Stock warrants issued	$	23,601		$	—

See notes to condensed consolidated financial statements.

QUIKSILVER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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.

Quiksilver, Inc. (the “Company”), in its opinion, has included all adjustments, consisting only of normal and recurring adjustments, necessary for a fair presentation of the results of operations for the three and nine months ended July 31, 2009 and 2008. 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, 2008 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. The Company evaluated all subsequent events through the time that it filed its consolidated condensed financial statements in this Form 10-Q with the Securities and Exchange Commission on September 9, 2009.

In November 2008, the Company sold its Rossignol business, including the related brands of Rossignol, Dynastar, Look and Lange, and in December 2007, the Company sold its golf equipment business. As a result, the Company has classified its Rossignol wintersports and golf equipment businesses as discontinued operations for all periods presented.

The Company is highly leveraged. However, management believes that its cash flow from operations, together with its existing credit facilities, term loans and committed European refinancings will be adequate to fund the Company’s capital requirements for at least the next twelve months. In July 2009, the Company and certain of its European subsidiaries entered into a commitment with a group of lenders in Europe to refinance its European indebtedness. This refinancing will consist of two term loans totaling approximately $239.0 million (€170 million), an $81.5 million (€58 million) credit facility and a line of credit of $56.2 million (€40 million) for issuances of letters of credit, referred to collectively as its “European Facilities.” The maturity of these European Facilities will be July 31, 2013. The term loans will have principal repayments due on January 31 and July 31 of each year, with €14.0 million due for each semi-annual payment in 2010, €17.0 million due for each semi-annual payment in 2011 and €27.0 million due for each semi-annual payment in 2012 and 2013. The closing of the European Facilities is subject to certain conditions and is expected to occur prior to September 30, 2009. In connection with the closing of the European Facilities, the Company expects to refinance an additional European term loan of $70.3 million (€50 million) such that its maturity date will align with the European Facilities. This term loan will have principal repayments due on January 31 and July 31 of each year, with €8.9 million due in the aggregate in 2011, €12.6 million due in the aggregate in 2012 and €28.5 million due in the aggregate in 2013. The Company believes that its short-term uncommitted lines of credit will continue to be made available until refinanced on a longer term basis.

If the Company is unsuccessful in closing these European refinancings or if its other short-term uncommitted lines of credit in Asia/Pacific are no longer made available, the Company could be adversely affected by having current maturities with limited means of repayment. The continuing turmoil in the financial markets and economic conditions worldwide could make it more difficult for the Company to close and fund these planned refinancings.

QUIKSILVER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

2. New Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements.” This standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company adopted this standard at the beginning of its fiscal year ending October 31, 2009. The adoption of this accounting pronouncement did not have a material effect on the Company’s consolidated financial position, results of operations or cash flows. See note 8 for certain required disclosures related to this standard.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” (“SFAS No. 159”), which permits companies to choose to measure certain financial instruments and other items at fair value that are not currently required to be measured at fair value. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company adopted this standard at the beginning of its fiscal year ending October 31, 2009. The adoption of this accounting pronouncement did not have a material effect on the Company’s consolidated financial position, results of operations or cash flows, since the Company did not elect the fair value option for any assets or liabilities.

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations,” (“SFAS No. 141(R)”), which requires the Company to record fair value estimates of contingent consideration and certain other potential liabilities during the original purchase price allocation, expense acquisition costs as incurred and does not permit certain restructuring activities previously allowed under Emerging Issues Task Force Issue No. 95-3 to be recorded as a component of purchase accounting. In April 2009, the FASB issued FASB Staff Position FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies” (“FSP FAS 141(R)-1”). FSP FAS 141(R)-1 amends the guidance in SFAS No. 141(R) to (i) require that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value only if fair value can be reasonably estimated. If fair value of an acquired asset or liability cannot be reasonably estimated, the asset or liability would generally be recognized in accordance with SFAS No. 5, “Accounting for Contingencies,” (“SFAS No. 5”) and FASB Interpretation No. 14, “Reasonable Estimation of the Amount of a Loss;” (ii) eliminate the requirement to disclose an estimate of the range of outcomes of recognized contingencies at the acquisition date, and for unrecognized contingencies, the Company is required to include disclosures required by SFAS No. 5 in the business combination footnote; and (iii) require that contingent consideration arrangements of an acquiree assumed by the acquiror in a business combination be treated as contingent consideration of the acquiror and should be initially and subsequently measured at fair value in accordance with SFAS No. 141(R). This statement (as amended) is effective for financial statements issued for fiscal years beginning on or after December 15, 2008. The Company will adopt this standard at the beginning of its fiscal year ending October 31, 2010 for all prospective business acquisitions. The Company has not determined the effect that the adoption of SFAS No. 141(R) will have on its consolidated financial statements, but the impact will be limited to any future acquisitions beginning in fiscal 2010, except for certain tax treatment of previous acquisitions.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51,” (“SFAS No. 160”), which requires noncontrolling interests in subsidiaries to be included in the equity section of the balance sheet. This statement is effective for financial statements issued for fiscal years beginning after December 15, 2008. The Company will adopt this standard at the beginning of its fiscal year ending October 31, 2010. The Company has not determined the effect that the adoption of SFAS No. 160 will have on its consolidated financial statements.

QUIKSILVER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an Amendment of FASB Statement No. 133” (“SFAS No. 161”). The objective of SFAS No. 161 is to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance and cash flows. This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company adopted this standard at the beginning of its fiscal quarter ending April 30, 2009. The adoption of this accounting pronouncement did not have a material effect on the Company’s consolidated financial position, results of operations or cash flows. See note 8 for certain required disclosures related to this standard.

In April 2009, the FASB issued FSP 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” which enhances consistency in financial reporting by increasing the frequency of fair value disclosures. FSP 107-1 and APB 28-1 is effective for interim periods ending after June 15, 2009 and the Company adopted this standard during the three months ending July 31, 2009. The adoption of this accounting standard did not have a material effect on the Company’s consolidated financial position, results of operations or cash flows. See note 14 for certain required disclosures related to this standard.

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS No. 165”). SFAS No. 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Specifically, SFAS No. 165 provides (i) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and (iii) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. SFAS No. 165 is effective for interim or annual financial periods ending after June 15, 2009, and is to be applied prospectively. The Company adopted SFAS No. 165 as of July 31, 2009. The adoption of this accounting standard did not have a material effect on the Company’s consolidated financial position, results of operations or cash flows. See note 1 for certain required disclosures related to this standard.

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and Hierarchy of GAAP” (“SFAS No. 168”). SFAS No. 168 replaces SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” and establishes the “FASB Accounting Standards Codification^TM” as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. Rules and interpretive releases of the Securities and Exchange Commission under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. This statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company plans to adopt this standard effective at the beginning of its fiscal quarter ending October 31, 2009. The adoption of this accounting standard is not expected to have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

3. Earnings Per Share and Stock-Based Compensation

The Company reports basic and diluted earnings per share (“EPS”). Basic EPS is based on the weighted average number of shares outstanding during the period, while diluted EPS additionally includes the dilutive effect of the Company’s outstanding stock options computed using the treasury stock method. For the three months ended July 31, 2009 and 2008, the weighted average common shares outstanding, assuming dilution, includes 771,000 and 3,801,000, respectively, of dilutive stock options and restricted stock. For the nine months ended July 31,

QUIKSILVER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

2009, the weighted average common shares outstanding, assuming dilution, does not include 722,000 of dilutive stock options and restricted stock as the effect is anti-dilutive. For the nine months ended July 31, 2008, the weighted average common shares outstanding, assuming dilution, includes 4,254,000 of dilutive stock options and restricted stock. For the three months ended July 31, 2009 and 2008, additional option shares outstanding of 13,658,000 and 12,928,000, respectively, and warrant shares outstanding of 25,654,000 and zero, respectively, were excluded from the calculation of diluted EPS, as their effect would have been anti-dilutive. For the nine months ended July 31, 2009 and 2008, additional option shares outstanding of 13,707,000 and 12,475,000, respectively, and warrant shares outstanding of 25,654,000 and zero, respectively, were excluded from the calculation of diluted EPS, as their effect would have been anti-dilutive.

The Company accounts for stock-based compensation under the fair value recognition provisions of SFAS No. 123(R) “Share-Based Payment.” The Company uses 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 nine months ended July 31, 2009 and 2008, options were valued assuming a risk-free interest rate of 2.46% and 3.0%, respectively, volatility of 54.8% and 40.7%, respectively, zero dividend yield, and an expected life of 5.9 and 5.7 years, respectively. The weighted average fair value of options granted was $0.93 and $3.85 for the nine months ended July 31, 2009 and 2008, respectively. The Company records stock-based compensation expense using the graded vested method over the vesting period, which is generally three years. As of July 31, 2009, the Company had approximately $4.2 million of unrecognized stock-based compensation expense expected to be recognized over a weighted average period of approximately 1.8 years. Stock-based compensation expense was included as selling, general and administrative expense for the period.

Changes in shares under option for the nine months ended July 31, 2009 are as follows:


				Weighted		Weighted		Aggregate
Dollar amounts in thousands,				Average		Average		Intrinsic
except per share amounts	Shares			Price		Life		Value
Outstanding, October 31, 2008		15,902,575		$	9.97
Granted		2,644,000			1.77
Exercised		—						$	—
Canceled		(4,117,810	)		11.25


Outstanding, July 31, 2009		14,428,765		$	8.10		5.6	$	995


Options exercisable, July 31, 2009		10,452,257		$	9.23		4.2	$	26

Changes in non-vested shares under option for the nine months ended July 31, 2009 are as follows:

QUIKSILVER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


				Weighted-
				Average Grant
	Shares			Date Fair Value
Non-vested, October 31, 2008		3,650,779		$	5.88
Granted		2,644,000			0.93
Vested		(1,840,592	)		6.28
Canceled		(477,679	)		6.08


Non-vested, July 31, 2009		3,976,508		$	2.38

In March 2006, the Company’s shareholders approved the 2006 Restricted Stock Plan and in March 2007, the Company’s shareholders approved an amendment to the 2000 Stock Incentive Plan whereby restricted stock and restricted stock units can be issued from such plans. Shares issued under these plans generally vest from three to five years and may have certain performance based acceleration features which allow for earlier vesting.

Changes in restricted stock for the nine months ended July 31, 2009 are as follows:


	Shares
Outstanding, October 31, 2008		721,003
Granted		270,000
Vested		(9,999	)
Forfeited		(279,001	)

Outstanding, July 31, 2009		702,003

Compensation expense is determined using the intrinsic value method and forfeitures are estimated at the date of grant based on historical rates and reduce the compensation expense recognized. The Company monitors the probability of meeting the restricted stock performance criteria and will adjust the amortization period as appropriate. As of July 31, 2009, there had been no acceleration of the amortization period. As of July 31, 2009, the Company had approximately $4.3 million of unrecognized compensation expense expected to be recognized over a weighted average period of approximately 2.0 years.

4. Inventories

Inventories consist of the following:


	July 31,		October 31,
In thousands	2009		2008
Raw materials	$	6,996	$	9,156
Work in-process		5,375		7,743
Finished goods		321,862		295,239

	$	334,233	$	312,138

QUIKSILVER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

5. Intangible Assets and Goodwill

A summary of intangible assets is as follows:


	July 31, 2009							October 31, 2008
						Net							Net
	Gross		Amorti-			Book		Gross		Amorti-			Book
In thousands	Amount		zation			Value		Amount		zation			Value
Amortizable trademarks	$	19,217	$	(6,272	)	$	12,945	$	18,976	$	(5,559	)	$	13,417
Amortizable licenses		11,046		(7,364	)		3,682		9,103		(5,386	)		3,717
Other amortizable intangibles		8,237		(4,465	)		3,772		8,103		(3,942	)		4,161
Non-amortizable trademarks		122,555		—			122,555		123,139		—			123,139

	$	161,055	$	(18,101	)	$	142,954	$	159,321	$	(14,887	)	$	144,434

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 nine months ended July 31, 2009 and 2008 was $2.4 million and $2.1 million, respectively. Annual amortization expense is estimated to be approximately $3.2 million in the fiscal year ending October 31, 2009, approximately $3.1 million in the fiscal years ending October 31, 2010 through 2012, and approximately $2.0 million in the fiscal year ending October 31, 2013.

Goodwill related to the Company’s operating segments is as follows:


	July 31,		October 31,
In thousands	2009		2008
Americas	$	77,789	$	76,124
Europe		178,581		167,814
Asia/Pacific		65,081		55,412

	$	321,451	$	299,350

Goodwill increased $22.1 million during the nine months ended July 31, 2009. This increase was primarily related to the effect of changes in foreign currency exchange rates.

The Company accounts for goodwill and intangible assets in accordance with SFAS No. 142, “Goodwill and Intangible Assets.” Under SFAS No. 142, goodwill and intangible assets with indefinite lives are not amortized but are tested for impairment annually and also in the event of an impairment indicator. The Company’s stock price has declined since our last annual impairment test. The Company considered the stock price decline from October 31, 2008 to July 31, 2009 but determined that it was not an indicator of impairment that would cause an interim test of impairment. The Company continues to operate in a very volatile market and continues to be impacted by the global economic conditions. In addition, the Company’s volatility has also been impacted by public uncertainty surrounding the completion of certain refinancings which are expected to be completed in fiscal 2009. The Company will perform its annual test for goodwill impairment as of October 31, 2009 and, based on the results of this test, may be required to record goodwill impairment.

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 income taxes, are as follows:

QUIKSILVER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


	July 31,			October 31,
In thousands	2009			2008
Foreign currency translation adjustment	$	84,395		$	60,003
(Loss) gain on cash flow hedges and interest rate swaps		(5,330	)		20,507

	$	79,065		$	80,510

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 in the outdoor market of the sporting goods industry in which the Company designs, markets and distributes clothing, footwear, accessories and related products. The Company currently operates in three 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. Costs that support all three 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 from continuing operations for the nine months ended July 31, 2009 and 2008.

QUIKSILVER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


	Nine Months Ended July 31,
In thousands	2009			2008
Revenues, net:
Americas	$	690,181		$	754,491
Europe		581,223			716,770
Asia/Pacific		164,979			182,494
Corporate operations		2,462			3,982

	$	1,438,845		$	1,657,737

Gross profit (loss):
Americas	$	257,296		$	320,087
Europe		328,933			409,866
Asia/Pacific		89,142			96,519
Corporate operations		(726	)		2,223

	$	674,645		$	828,695

SG&A expense:
Americas	$	273,300		$	273,668
Europe		241,557			283,639
Asia/Pacific		80,504			88,661
Corporate operations		25,817			38,336

	$	621,178		$	684,304

Asset impairment:
Americas	$	—		$	350
Europe		—			—
Asia/Pacific		—			—
Corporate operations		—			—

	$	—		$	350

Operating (loss) income:
Americas	$	(16,004	)	$	46,069
Europe		87,376			126,227
Asia/Pacific		8,638			7,858
Corporate operations		(26,543	)		(36,113	)

	$	53,467		$	144,041

Identifiable assets:
Americas	$	604,514		$	785,878
Europe		914,058			1,116,851
Asia/Pacific		257,592			365,954
Corporate operations		99,970			70,713

	$	1,876,134		$	2,339,396

QUIKSILVER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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.

The Company accounts for all of its cash flow hedges under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” which requires companies to recognize all derivative instruments as either assets or liabilities at fair value in the consolidated balance sheet. In accordance with SFAS No. 133, the Company designates forward contracts as cash flow hedges of forecasted purchases of commodities.

Effective February 1, 2009, the Company adopted SFAS No. 161, an amendment to SFAS No. 133, which provides an enhanced disclosure framework for derivative instruments. SFAS No. 161 requires that the fair values of derivative instruments and their gains and losses be disclosed in a manner that provides adequate information about the impact these instruments can have on an entity’s financial position, results of operations and cash flows.

For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income (“OCI”) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. As of July 31, 2009, the Company was hedging forecasted transactions expected to occur through October 2011. Assuming July 31, 2009 exchange rates remain constant, $5.3 million of losses, net of tax, related to hedges of these transactions are expected to be reclassified to earnings over the next 27 months.

For the nine months ended July 31, 2009, the effective portions of gains (losses) of foreign exchange derivative instruments in the consolidated statement of operations were as follows:


	Nine Months Ended July 31, 2009
In thousands	Amount			Location
Gain (loss) recognized in OCI on derivatives	$	(25,139	)	Other comprehensive income
Gain (loss) reclassified from accumulated OCI into income	$	(15,195	)	Cost of goods sold
Gain (loss) reclassified from accumulated OCI into income	$	29		Foreign currency gain (loss)
Gain (loss) recognized in income on derivative	$	(196	)	Foreign currency gain (loss)

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

QUIKSILVER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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.

The Company enters into forward exchange contracts with major banks and is exposed to exchange rate 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.

As of July 31, 2009, the Company had the following outstanding forward contracts that were entered into to hedge forecasted purchases:


		Notional
In thousands	Hedged Item	Amount		Maturity	Fair Value
United States dollar	Inventory	$	363,517	Aug 2009 – Oct 2011	$	(5,532	)
Swiss franc	Accounts receivable		1,471	Aug 2009 – Oct 2009		31
British pounds	Accounts receivable		8,225	Aug 2009 – Oct 2009		13

		$	373,213		$	(5,488	)

Effective November 1, 2008, the Company adopted SFAS No. 157, which provides a framework for measuring fair value under generally accepted accounting principles. SFAS No. 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS No. 157 requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. SFAS No. 157 also establishes a fair value hierarchy which prioritizes the valuation inputs into three broad levels. Based on the underlying inputs, each fair value measurement in its entirety is reported in one of the three levels. These levels are:

	•		Level 1 – Valuation is based upon quoted prices for identical instruments traded in active markets. Level 1 assets and liabilities include debt and equity securities traded in an active exchange market, as well as U.S. Treasury securities.

	•		Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

	•		Level 3 – Valuation is determined using model-based techniques with significant assumptions not observable in the market. These unobservable assumptions reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of third party pricing services, option pricing models, discounted cash flow models and similar techniques.

QUIKSILVER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The following table reflects the fair values of the foreign exchange contract assets and liabilities measured and recognized at fair value on a recurring basis on the consolidated balance sheet as of July 31, 2009:


	July 31, 2009
								Assets (Liabilities)
	Fair Value Measurements Using							at Fair Value
In thousands	Level 1		Level 2			Level 3
Derivative assets:
Other receivables	$	—	$	4,181		$	—	$	4,181
Other assets		—		371			—		371
Derivative liabilities:
Accrued liabilities		—		(8,697	)		—		(8,697	)
Other long-term liabilities		—		(1,343	)		—		(1,343	)

Total fair value	$	—	$	(5,488	)	$	—	$	(5,488	)

9. Litigation, Indemnities and Guarantees

The Company is involved from time to time in legal claims involving trademark and intellectual property, licensing, employee relations and other matters incidental to its business. The Company believes the resolution of any such matter currently pending will not have a material adverse effect on its financial condition or results of operations.

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. As of July 31, 2009, the Company had not recorded any liability for these indemnities, commitments and guarantees in the accompanying consolidated balance sheets because any liability for these indemnities would not be material.

10. 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 domestic subsidiaries. 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 July 31, 2009 and October 31, 2008 and for the three and nine months ended July 31, 2009 and 2008. The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions. The Company has adjusted certain prior year amounts in the current year’s presentation for prior periods to properly reflect the Company’s investment in its subsidiaries under the equity method

QUIKSILVER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended July 31, 2009


							Non-
	Quiksilver,			Guarantor			Guarantor
In thousands	Inc.			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Revenues, net	$	76		$	220,841		$	289,975		$	(9,498	)	$	501,394
Cost of goods sold		—			138,642			131,365			(2,977	)		267,030

Gross profit		76			82,199			158,610			(6,521	)		234,364

Selling, general and administrative expense		10,529			84,447			122,894			(6,099	)		211,771

Operating (loss) income		(10,453	)		(2,248	)		35,716			(422	)		22,593

Interest expense		10,896			615			3,836			—			15,347
Foreign currency (gain) loss		(112	)		(31	)		3,616			—			3,473
Minority interest, equity in earnings and other (income) expense		(22,783	)		(36	)		—			22,783			(36	)

Income (loss) before provision (benefit) for income taxes		1,546			(2,796	)		28,264			(23,205	)		3,809

Provision (benefit) for income taxes		1			(7,576	)		7,971			—			396

Income from continuing operations		1,545			4,780			20,293			(23,205	)		3,413

(Loss) income from discontinued operations		(199	)		398			(2,421	)		155			(2,067	)

Net income	$	1,346		$	5,178		$	17,872		$	(23,050	)	$	1,346

QUIKSILVER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended July 31, 2008


							Non-
	Quiksilver,			Guarantor			Guarantor
In thousands	Inc.			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Revenues, net	$	(26	)	$	240,332		$	338,377		$	(13,807	)	$	564,876
Cost of goods sold		—			142,887			142,892			(5,732	)		280,047

Gross profit		(26	)		97,445			195,485			(8,075	)		284,829

Selling, general and administrative expense		18,461			82,523			140,689			(9,579	)		232,094

Operating (loss) income		(18,487	)		14,922			54,796			1,504			52,735

Interest expense (income)		12,127			(123	)		(203	)		—			11,801
Foreign currency gain		(34	)		(162	)		(1,035	)		—			(1,231	)
Minority interest, equity in earnings and other (income) expense		(26,209	)		(33	)		448			26,209			415

(Loss) income before (benefit) provision for income taxes		(4,371	)		15,240			55,586			(24,705	)		41,750

(Benefit) provision for income taxes		(7,232	)		15,593			316			—			8,677

Income (loss) from continuing operations		2,861			(353	)		55,270			(24,705	)		33,073

Loss from discontinued operations		(7	)		(1,111	)		(26,603	)		(2,498	)		(30,219	)

Net income (loss)	$	2,854		$	(1,464	)	$	28,667		$	(27,203	)	$	2,854

QUIKSILVER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Nine Months Ended July 31, 2009


							Non-
	Quiksilver,			Guarantor			Guarantor
In thousands	Inc.			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Revenues, net	$	225		$	606,982		$	859,593		$	(27,955	)	$	1,438,845
Cost of goods sold		—			381,967			391,976			(9,743	)		764,200

Gross profit		225			225,015			467,617			(18,212	)		674,645

Selling, general and administrative expense		26,516			255,622			357,557			(18,517	)		621,178

Operating (loss) income		(26,291	)		(30,607	)		110,060			305			53,467

Interest expense		31,814			1,570			9,669			—			43,053
Foreign currency (gain) loss		(111	)		19			6,921			—			6,829
Minority interest, equity in earnings and other expense		152,467			584			—			(152,467	)		584

(Loss) income before (benefit) provision for income taxes		(210,461	)		(32,780	)		93,470			152,772			3,001

(Benefit) provision for income taxes		(2,822	)		38,463			24,864			—			60,505

(Loss) income from continuing operations		(207,639	)		(71,243	)		68,606			152,772			(57,504	)

Income (loss) from discontinued operations		17,372			(2,389	)		(148,410	)		664			(132,763	)

Net loss	$	(190,267	)	$	(73,632	)	$	(79,804	)	$	153,436		$	(190,267	)

QUIKSILVER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Nine Months Ended July 31, 2008


							Non-
	Quiksilver,			Guarantor			Guarantor
In thousands	Inc.			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Revenues, net	$	(8	)	$	668,933		$	1,024,234		$	(35,422	)	$	1,657,737
Cost of goods sold		—			389,280			451,846			(12,084	)		829,042

Gross profit		(8	)		279,653			572,388			(23,338	)		828,695

Selling, general and administrative expense		43,410			256,474			410,620			(26,200	)		684,304
Asset impairment		—			350			—			—			350

Operating (loss) income		(43,418	)		22,829			161,768			2,862			144,041

Interest expense		35,736			2			107			—			35,845
Foreign currency loss (gain)		554			(170	)		(847	)		—			(463	)
Minority interest, equity in earnings and other expense (income)		166,409			(257	)		275			(166,409	)		18

(Loss) income before (benefit) provision for income taxes		(246,117	)		23,254			162,233			169,271			108,641

(Benefit) provision for income taxes		(21,626	)		17,936			32,963			—			29,273

(Loss) income from continuing operations		(224,491	)		5,318			129,270			169,271			79,368

Loss from discontinued operations		(819	)		(28,507	)		(271,333	)		(4,019	)		(304,678	)

Net loss	$	(225,310	)	$	(23,189	)	$	(142,063	)	$	165,252		$	(225,310	)

QUIKSILVER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

CONDENSED CONSOLIDATING BALANCE SHEET
At July 31, 2009


						Non-
	Quiksilver,		Guarantor			Guarantor
In thousands	Inc.		Subsidiaries			Subsidiaries			Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	18	$	15,898		$	100,914		$	—		$	116,830
Restricted cash		—		—			50,054			—			50,054
Trade accounts receivable, net		—		165,974			258,217			—			424,191
Other receivables		562		5,362			13,535			—			19,459
Inventories		—		112,434			222,872			(1,073	)		334,233
Deferred income taxes short-term		—		980			100,827			—			101,807
Prepaid expenses and other current assets		13,775		12,588			13,511			—			39,874
Current assets held for sale		—		7			2,275			—			2,282

Total current assets		14,355		313,243			762,205			(1,073	)		1,088,730

Fixed assets, net		4,808		83,607			148,654			—			237,069
Intangible assets, net		2,885		50,635			89,434			—			142,954
Goodwill		—		118,111			203,340			—			321,451
Other assets		12,206		17,693			32,372			—			62,271
Deferred income taxes long-term		—		(20,443	)		44,102			—			23,659
Investment in subsidiaries		1,015,273		—			—			(1,015,273	)		—

Total assets	$	1,049,527	$	562,846		$	1,280,107		$	(1,016,346	)	$	1,876,134


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Lines of credit	$	—	$	—		$	221,024		$	—		$	221,024
Accounts payable		4,256		94,598			120,682			—			219,536
Accrued liabilities		22,781		25,255			58,989			—			107,025
Current portion of long-term debt		—		842			81,521			—			82,363
Income taxes payable		—		(8,026	)		36,339			—			28,313
Intercompany balances		181,887		(113,356	)		(68,531	)		—			—
Current liabilities of assets held for sale		—		18			561			—			579

Total current liabilities		208,924		(669	)		450,585			—			658,840

Long-term debt, net of current portion		400,000		129,030			204,592			—			733,622
Other long-term liabilities		—		36,882			6,187			—			43,069

Total liabilities		608,924		165,243			661,364			—			1,435,531

Stockholders’/invested equity		440,603		397,603			618,743			(1,016,346	)		440,603

Total liabilities and stockholders’ equity	$	1,049,527	$	562,846		$	1,280,107		$	(1,016,346	)	$	1,876,134

QUIKSILVER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

CONDENSED CONSOLIDATING BALANCE SHEET
At October 31, 2008


						Non-
	Quiksilver,		Guarantor			Guarantor
In thousands	Inc.		Subsidiaries			Subsidiaries			Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	18	$	2,666		$	50,358		$	—		$	53,042
Trade accounts receivable, net		—		214,033			256,026			—			470,059
Other receivables		866		9,824			59,686			—			70,376
Income taxes receivable		—		2,859			7,879			—			10,738
Inventories		—		134,812			178,738			(1,412	)		312,138
Deferred income taxes short-term		—		21,560			(9,340	)		—			12,220
Prepaid expenses and other current assets		6,019		8,773			11,077			—			25,869
Current assets held for sale		—		70,367			341,075			—			411,442

Total current assets		6,903		464,894			895,499			(1,412	)		1,365,884

Restricted cash		—		—			46,475			—			46,475
Fixed assets, net		5,775		96,686			133,067			—			235,528
Intangible assets, net		2,754		51,113			90,567			—			144,434
Goodwill		—		117,235			182,115			—			299,350
Investment in subsidiaries		1,185,761		—			—			(1,185,761	)		—
Other assets		9,300		3,387			26,907			—			39,594
Deferred income taxes long-term		—		3,992			35,008			—			39,000

Total assets	$	1,210,493	$	737,307		$	1,409,638		$	(1,187,173	)	$	2,170,265


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Lines of credit	$	—	$	—		$	238,317		$	—		$	238,317
Accounts payable		5,121		102,987			127,621			—			235,729
Accrued liabilities		18,436		17,455			57,657			—			93,548
Current portion of long-term debt		—		2,061			29,843			—			31,904
Intercompany balances		186,970		(122,584	)		(64,386	)		—			—
Current liabilities related to assets held for sale		—		35,398			99,673			—			135,071

Total current liabilities		210,527		35,317			488,725			—			734,569

Long-term debt, net of current portion		400,000		143,501			246,596			—			790,097
Other long-term liabilities		—		29,882			9,725			—			39,607
Non-current liabilities related to assets held for sale		—		—			6,026			—			6,026

Total liabilities		610,527		208,700			751,072			—			1,570,299

Stockholders’/invested equity		599,966		528,607			658,566			(1,187,173	)		599,966

Total liabilities and stockholders’ equity	$	1,210,493	$	737,307		$	1,409,638		$	(1,187,173	)	$	2,170,265

QUIKSILVER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Nine Months Ended July 31, 2009


							Non-
	Quiksilver,			Guarantor			Guarantor
In thousands	Inc.			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Cash flows from operating activities:
Net loss	$	(190,267	)	$	(73,632	)	$	(79,804	)	$	153,436		$	(190,267	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
(Income) loss from discontinued operations		(17,372	)		2,389			148,410			(664	)		132,763
Depreciation and amortization		1,145			18,377			20,866			—			40,388
Stock-based compensation		7,419			—			—			—			7,419
Provision for doubtful accounts		—			8,535			4,645			—			13,180
Equity in earnings		152,467			—			—			(152,467	)		—
Deferred income taxes		—			47,413			(3,287	)		—			44,126
Other adjustments to reconcile net loss		(136	)		1,938			1,841			—			3,643
Changes in operating assets and liabilities:
Trade accounts receivables		—			41,032			16,281			—			57,313
Inventories		—			22,371			(23,188	)		(969	)		(1,786	)
Other operating assets and liabilities		3,113			1,332			27,313			—			31,758

Cash (used in) provided by operating activities of continuing operations		(43,631	)		69,755			113,077			(664	)		138,537
Cash (used in) provided by operating activities of discontinued operations		(19,423	)		42,920			(12,218	)		664			11,943

Net cash (used in) provided by operating activities		(63,054	)		112,675			100,859			—			150,480
Cash flows from investing activities:
Capital expenditures		(3,734	)		(6,072	)		(22,699	)		—			(32,505	)

Cash used in investing activities of continuing operations		(3,734	)		(6,072	)		(22,699	)		—			(32,505	)
Cash provided by investing activities of discontinued operations		—			—			21,848			—			21,848

Net cash used in investing activities		(3,734	)		(6,072	)		(851	)		—			(10,657	)
Cash flows from financing activities:
Borrowings on lines of credit		—			—			8,613			—			8,613
Payments on lines of credit		—			—			(38,316	)		—			(38,316	)
Borrowings on long-term debt		—			497,316			63,604			—			560,920
Payments on long-term debt		—			(492,753	)		(70,756	)		—			(563,509	)
Payments of debt issuance costs		(5,130	)		(16,782	)		(2,969	)		—			(24,881	)
Stock option exercises, employee stock purchases and tax benefit on option exercises		862			—			—			—			862
Intercompany		71,056			(81,152	)		10,096			—			—

Cash provided by (used in) financing activities of continuing operations		66,788			(93,371	)		(29,728	)		—			(56,311	)
Cash used in financing activities of discontinued operations		—			—			(11,136	)		—			(11,136	)

Net cash provided by (used in) financing activities		66,788			(93,371	)		(40,864	)		—			(67,447	)
Effect of exchange rate changes on cash		—			—			(8,588	)		—			(8,588	)

Net increase in cash and cash equivalents		—			13,232			50,556			—			63,788
Cash and cash equivalents, beginning of period		18			2,666			50,358			—			53,042

Cash and cash equivalents, end of period	$	18		$	15,898		$	100,914		$	—		$	116,830

QUIKSILVER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Nine Months Ended July 31, 2008


							Non-
	Quiksilver,			Guarantor			Guarantor
In thousands	Inc.			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Cash flows from operating activities:
Net loss	$	(225,310	)	$	(23,189	)	$	(142,063	)	$	165,252		$	(225,310	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Loss from discontinued operations		819			28,507			271,333			4,019			304,678
Depreciation and amortization		1,689			19,123			22,123			—			42,935
Stock-based compensation		6,457			—			—			—			6,457
Provision for doubtful accounts		—			3,243			4,780			—			8,023
Equity in earnings		166,409			—			—			(166,409	)		—
Asset impairments		—			350			—			—			350
Other adjustments to reconcile net loss		188			370			1,603			—			2,161
Changes in operating assets and liabilities:
Trade accounts receivables		—			(473	)		2,972			—			2,499
Inventories		—			(6,375	)		(41,108	)		1,157			(46,326	)
Other operating assets and liabilities		7,959			1,773			44,725			—			54,457

Cash (used in) provided by operating activities of continuing operations		(41,789	)		23,329			164,365			4,019			149,924
Cash provided by (used in) operating activities of discontinued operations		4,395			(16,068	)		(4,474	)		(4,019	)		(20,166	)

Net cash (used in) provided by operating activities		(37,394	)		7,261			159,891			—			129,758
Cash flows from investing activities:
Capital expenditures		1,106			(25,019	)		(39,671	)		—			(63,584	)
Business acquisitions, net of cash acquired		—			(24,174	)		(6,953	)		—			(31,127	)

Cash provided by (used in) investing activities of continuing operations		1,106			(49,193	)		(46,624	)		—			(94,711	)
Cash provided by investing activities of discontinued operations		—			94,968			12,974			—			107,942

Net cash provided by (used in) investing activities		1,106			45,775			(33,650	)		—			13,231
Cash flows from financing activities:
Borrowings on lines of credit		—			—			161,752			—			161,752
Payments on lines of credit		—			—			(22,159	)		—			(22,159	)
Borrowings on long-term debt		—			131,199			86,360			—			217,559
Payments on long-term debt		—			(154,924	)		(34,413	)		—			(189,337	)
Stock option exercises, employee stock purchases and tax benefit on option exercises		11,331			—			—			—			11,331
Intercompany		24,422			(5,913	)		(18,509	)		—			—

Cash provided by (used in) financing activities of continuing operations		35,753			(29,638	)		173,031			—			179,146
Cash used in financing activities of discontinued operations		—			(35,000	)		(258,456	)		—			(293,456	)

Net cash provided by (used in) financing activities		35,753			(64,638	)		(85,425	)		—			(114,310	)
Effect of exchange rate changes on cash		—			—			(3,536	)		—			(3,536	)

Net (decrease) increase in cash and cash equivalents		(535	)		(11,602	)		37,280			—			25,143
Cash and cash equivalents, beginning of period		12			13,254			61,082			—			74,348

Cash and cash equivalents, end of period	$	(523	)	$	1,652		$	98,362		$	—		$	99,491

QUIKSILVER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

11. Discontinued Operations

The Company completed the sale of its Rossignol business in November 2008 for a purchase price of approximately $50.8 million, comprised of $38.1 million in cash and a $12.7 million note. The business sold includes the related brands of Rossignol, Dynastar, Look and Lange. The Company used the cash proceeds from the sale to pay for related transaction costs and reduce its indebtedness. In accordance with the purchase agreement, the purchase price may be adjusted for certain items including a working capital adjustment. The Company is currently evaluating the working capital and certain other contractual adjustments with the buyer of Rossignol, but the Company does not expect any materially adverse purchase price adjustments.

The operating results of discontinued operations, which include both the Rossignol wintersports and golf equipment businesses, included in the accompanying consolidated statements of operations were as follows:


	Nine Months Ended
	July 31,
In thousands	2009			2008
Revenues, net	$	16,528		$	185,797

Loss before income taxes		(222,614	)		(368,667	)
Benefit for income taxes		(89,851	)		(63,989	)

Loss from discontinued operations	$	(132,763	)	$	(304,678	)

The loss from discontinued operations for the nine months ended July 31, 2009 includes the loss on sale of Rossignol of approximately $124.4 million, net of expected tax benefits.

The remaining assets and liabilities of the Company’s discontinued businesses primarily relate to its discontinued Rossignol apparel business. The components of assets and liabilities held for sale are as follows:


	July 31,
In thousands	2009
Current assets:
Receivables, net	$	927
Inventories		—
Other current assets		1,355

	$	2,282


Current liabilities:
Accounts payable	$	320
Other current liabilities		259

	$	579


12. Income Taxes

During the nine months ended July 31, 2009, the Company evaluated the realizability of its U.S. federal and state deferred tax assets. The Company has evaluated the need for a valuation allowance with respect to the U.S. consolidated tax group, which includes the U.S. portion of the Americas operating segment and the U.S. portion of the Corporate operations segment. The Company has concluded that based on all available information and proper weighting of objective and subjective evidence as of July 31, 2009, including a cumulative loss that had been sustained over a three-year period by the U.S. consolidated tax group, it is more likely than not that its U.S. federal and state deferred tax assets will not be realized and a full valuation allowance was established against $45.9 million of deferred tax assets that existed as of October 31, 2008. No

QUIKSILVER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

benefit has been recognized on U.S. losses during the three months ended July 31, 2009; however, income tax expense has been recognized against non U.S. earnings in the current period.

On July 31, 2009, the Company’s liability for uncertain tax positions was approximately $38.3 million resulting from unrecognized tax benefits, excluding interest and penalties. During the nine months ended July 31, 2009, the Company increased its liability for uncertain tax positions, exclusive of interest and penalties, by $12.9 million. Of this increase, approximately $6.7 million is related to positions taken in prior periods, and approximately $6.2 million is related to tax positions taken in the current period and certain other items. The nature of the increase relates to intercompany transactions between foreign affiliates and certain foreign withholding tax exposures.

If the Company’s positions are favorably sustained by the relevant taxing authority, approximately $28.6 million (excluding interest and penalties) of uncertain tax position liabilities would favorably impact the Company’s effective tax rate in future periods.

The Company includes interest and penalties related to unrecognized tax benefits in its provision for income taxes in the accompanying consolidated statements of operations. During the nine months ended July 31, 2009, the Company recorded an expense of approximately $2.9 million relating to interest and penalties, and as of July 31, 2009, the Company had a liability for interest and penalties of $11.8 million.

During the next 12 months, it is reasonably possible that the Company’s liability for uncertain tax positions may change by a significant amount as a result of the resolution or payment of uncertain tax positions related to intercompany transactions between foreign affiliates and certain foreign withholding tax exposures. Conclusion of these matters could result in settlement for different amounts than the Company has accrued as uncertain tax benefits. If a position for which the Company concluded was more likely than not is subsequently not upheld, then the Company would need to accrue and ultimately pay an additional amount. Conversely, the Company could settle positions with the tax authorities for amounts lower than have been accrued or extinguish a position through payment. The Company believes the outcomes which are reasonably possible within the next 12 months range from no significant change to a reduction of the liability for unrecognized tax benefits of up to $17.0 million, excluding penalties and interest.

The Company has completed a federal tax audit in the United States for fiscal years ending in 2004 and 2005 and remains subject to examination for years thereafter. The Company’s significant foreign tax jurisdictions, including France, Australia, and Canada, are subject to normal and regular examination for various tax years generally beginning in fiscal year 2000. The Company is currently under examination in France, Australia, and Canada for certain fiscal years ending through 2007.

13. Restructuring Charges

In connection with its cost reduction efforts, the Company has formulated the Fiscal 2009 Cost Reduction Plan (the “Plan”). During the nine months ended July 31, 2009, the Company recorded $12.6 million in severance charges in SG&A, which includes $8.8 million in the Americas segment, $2.5 million in the European segment and $1.3 million in corporate operations. The Plan covers the global operations of the Company but is primarily concentrated in the United States. In addition to severance charges, the Company completed the closure of its Huntington Beach, California distribution center during the three months ended July 31, 2009. As a result, the Company recorded a charge of approximately $2.3 million in SG&A for the fair value of its lease commitments on this facility which extends through fiscal 2014. This charge is net of estimated future sublease income. The Company could be required to take future charges if it is

QUIKSILVER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

not able to sub-lease this facility as planned. The Company continues to evaluate its cost structure and expects to incur future charges under the Plan.

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


				Facility
In thousands	Workforce			& Other		Total
Balance, November 1, 2008	$	—		$	—	$	—
Charged to expense		12,644			2,307		14,951
Cash payments		(6,557	)		—		(6,557	)
Adjustments to accrual		(178	)		—		(178	)
Foreign currency translation		89			—		89

Balance, July 31, 2009	$	5,998		$	2,307	$	8,305

14. Debt

The Company’s current credit facilities allow for total maximum cash borrowings and letters of credit of $550.5 million. The Company’s total maximum borrowings and actual availability fluctuate depending on the extent of assets comprising the Company’s borrowing base under certain credit facilities. The Company had $280.3 million of borrowings drawn on these credit facilities as of July 31, 2009, and letters of credit issued at that time totaled $57.1 million. The amount of availability for borrowings under these facilities as of July 31, 2009 was $146.7 million of which $95.6 million was committed. Of this $95.6 million in committed capacity, the entire amount can also be used for letters of credit. In addition to the $146.7 million of availability for borrowings, the Company also had $66.4 million in additional capacity for letters of credit in Europe and Asia/Pacific as of July 31, 2009.

On July 31, 2009, the Company entered into a $153.1 million five year senior secured term loan with the Rhone Group, a strategic partner. In connection with the term loan, the Company issued warrants to purchase approximately 25.7 million shares of its common stock, representing 19.99% of the outstanding equity of the Company, at an exercise price of $1.86 per share. The warrants are fully vested and have a seven year term. The estimated fair value of these warrants was $23.6 million. This amount was recorded as a debt discount and will be amortized into interest expense over the term of the loan. In addition to this, the Company incurred approximately $17.0 million in debt issuance costs which are included in prepaid expenses (short-term) and other assets (long-term) and will be amortized into interest expense over the five year term of the loan. The term loan is primarily secured by certain of the Company’s trademarks in the Americas and a first or second priority interest in substantially all property related to the Company’s Americas business. The term loan bears an interest rate of 15% on a $125 million tranche, with 6% of that interest payable in kind or in cash, at the Company’s option. The remaining $28.1 million tranche is denominated in euros (€20.0 million) and also bears an interest rate of 15%, with the full 15% payable in kind or cash at the Company’s option. The term loan contains customary default provisions for loans of its type. Net proceeds from the new term loan were used to reduce other borrowings. However, approximately $28.1 million is included in the Company’s cash balance as of July 31, 2009.

On July 31, 2009, the Company entered into a new $200 million three year asset-based credit facility for its Americas segment (with the option to expand the facility to $250.0 million on certain conditions) which replaced its existing credit facility which was to expire in April 2010. The new credit facility expires in July 2012, includes a $100 million sublimit for letters of credit and bears interest at a rate of LIBOR plus a margin of 4.0% to 4.5%, depending upon availability. The weighted average interest rate at July 31, 2009 was 8.5%. The credit facility is secured by the Company’s U.S. and Canadian accounts receivable, inventory, certain intangibles, a second priority interest in substantially all other personal property and a second priority pledge of shares of certain of the Company’s domestic subsidiaries. The borrowing base is limited to certain

QUIKSILVER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

percentages of eligible accounts receivable and inventory from participating subsidiaries. In connection with obtaining the credit facility, the Company incurred approximately $9.5 million in debt issuance costs which are included in prepaid expenses (short-term) and other assets (long-term) and will be amortized into interest expense over the term of the credit facility. The credit facility contains customary default provisions for facilities of its type. As of July 31, 2009, approximately $21.2 million was outstanding under the credit facility, in addition to outstanding letters of credit of $33.8 million.

In July 2009, the Company and certain of its European subsidiaries entered into a commitment with a group of lenders in Europe to refinance its European indebtedness. This refinancing will consist of two term loans totaling approximately $239.0 million (€170 million), an $81.5 million (€58 million) credit facility and a line of credit of $56.2 million (€40 million) for issuances of letters of credit, referred to collectively as its “European Facilities.” The maturity of these European Facilities will be July 31, 2013. The term loans will have principal repayments due on January 31 and July 31 of each year, with €14.0 million due for each semi-annual payment in 2010, €17.0 million due for each semi-annual payment in 2011 and €27.0 million due for each semi-annual payment in 2012 and 2013. Amounts outstanding under the European Facilities will bear interest at a rate of Euribor plus a margin of between 4.25% and 4.75%. The European Facilities will be guaranteed by Quiksilver, Inc. and will be secured by pledges of certain assets of its European subsidiaries, including certain trademarks of its European business and shares of certain European subsidiaries. The European Facilities will contain customary default provisions and covenants usual for transactions of this type. Certain fees paid in connection with the closing of the European Facilities will be amortized into interest expense over the four year term. The closing of the European Facilities is subject to certain conditions and is expected to occur prior to September 30, 2009.

In connection with the closing of the European Facilities, the Company expects to refinance an additional European term loan of $70.3 million (€50 million) such that its maturity date will align with the European Facilities. This term loan will have principal repayments due on January 31 and July 31 of each year, with €8.9 million due in the aggregate in 2011, €12.6 million due in the aggregate in 2012 and €28.5 million due in the aggregate in 2013. This extended term loan will bear an interest rate of Euribor plus a margin of 5.0% and will have the same security as the European Facilities.

In July 2009, the Company extended the maturity date of a $77.3 million (€55 million) European credit facility, which was previously due on June 30, 2009 to September 29, 2009 for the sole purpose of enabling the Company to refinance this credit facility into a term loan that will be part of the European Facilities described above. This credit facility was classified as a current liability, in the lines of credit balance, on the Company’s condensed consolidated balance sheets as of July 31, 2009 and October 31, 2008.

The carrying value of the Company’s trade accounts receivable and accounts payable approximates its fair value due to their short-term nature.

The estimated fair values of the Company’s lines of credit and long-term debt are as follows (in thousands):


	July 31, 2009
	Carrying
	Amount		Fair Value
Lines of credit	$	221,024	$	221,024
Long-term debt		815,985		593,009

	$	1,037,009	$	814,033


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, 2008 and subsequent reports on Form 10-Q and 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 disclosures 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.

Over the past 39 years, Quiksilver has been established as a leading global brand representing the casual, youth lifestyle associated with boardriding sports.

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 1991, 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 2004, we acquired DC Shoes, Inc. to expand our presence in action sports-inspired footwear. In 2005, we acquired Skis Rossignol, S.A., a wintersports and golf equipment manufacturer. Today our products are sold throughout the world, primarily in surf shops, skate shops, snow shops and specialty stores.

In November 2008, we completed the sale of our Rossignol business, which included the brands Rossignol, Dynastar, Look and Lange. Our Rossignol business, including both wintersports equipment and related apparel, is classified as discontinued operations. The assets and related liabilities of our Rossignol business are classified as held for sale, and the operations are classified as discontinued in our condensed consolidated financial statements. Also, as part of our acquisition of Rossignol in 2005, we acquired a majority interest in Roger Cleveland Golf Company, Inc. Our golf equipment operations were subsequently sold in December 2007 and are also classified as discontinued operations in our condensed consolidated financial statements. As a result of these dispositions, the information herein has been adjusted to exclude both our Rossignol and golf equipment businesses.

We operate in the outdoor market of the sporting goods industry in which we design, produce and distribute branded apparel, footwear, accessories and related products. We currently operate in three segments: the Americas, Europe and Asia/Pacific. Our former wintersports equipment segment has been classified as discontinued operations. 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. Royalties earned from various licensees in other international territories are categorized in corporate operations along with revenues from sourcing services to our licensees.

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, 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, in part, 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 certain components in our statements of operations and other data as a percentage of revenues:


	Three Months Ended July 31,						Nine Months Ended July 31,
Statements of Operations data	2009			2008			2009			2008
Revenues, net		100.0	%		100.0	%		100.0	%		100.0	%
Gross profit		46.7			50.4			46.9			50.0
Selling, general and administrative expense		42.2			41.1			43.2			41.3

Operating income		4.5			9.3			3.7			8.7

Interest expense		3.1			2.1			3.0			2.2
Foreign currency, minority interest and other expense (income)		0.6			(0.2	)		0.5			(0.1	)

Income before provision for income taxes		0.8			7.4			0.2			6.6

Other data

Adjusted EBITDA⁽¹⁾		7.2	%		12.7	%		6.5	%		11.9	%


⁽¹⁾		Adjusted EBITDA is defined as income from continuing operations before (i) interest expense, (ii) income tax expense, (iii) depreciation and amortization, (iv) non-cash stock-based compensation expense and (v) asset impairments. Adjusted 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 Adjusted EBITDA, along with other GAAP measures, as a measure of profitability because Adjusted 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, the accounting methods used to compute depreciation and amortization, the existence or timing of asset impairments and the effect of non-cash stock-based compensation expense. We believe EBITDA is useful to investors as it is a widely used measure of performance and the adjustments we make to EBITDA provide further clarity on our profitability. We remove the effect of non-cash stock-based compensation from our earnings which can vary based on share price, share price volatility and expected life of the equity instruments we grant. In addition, this stock-based compensation expense does not result in cash payments by us. We remove the effect of asset impairments from Adjusted EBITDA for the same reason that we remove depreciation and amortization as it is part of the impact of our asset base. Adjusted 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, the effect of non-cash stock-based compensation expense and the effect of asset impairments. The following is a reconciliation of income (loss) from continuing operations to Adjusted EBITDA:


	Three Months Ended				Nine Months Ended
	July 31,				July 31,
	2009		2008		2009			2008
Income (loss) from continuing operations	$	3,413	$	33,073	$	(57,504	)	$	79,368
Provision for income taxes		396		8,677		60,505			29,273
Interest expense		15,347		11,801		43,053			35,845
Depreciation and amortization		13,650		14,842		40,388			42,935
Non-cash stock-based compensation expense		3,047		3,320		7,419			9,871
Non-cash asset impairments		—		—		—			350

Adjusted EBITDA	$	35,853	$	71,713	$	93,861		$	197,642

Three Months Ended July 31, 2009 Compared to Three Months Ended July 31, 2008

Our total net revenues for the three months ended July 31, 2009 decreased 11% to $501.4 million from $564.9 million in the comparable period of the prior year. In constant currency, net revenues decreased 5% compared to the prior year. Our net revenues in each of the Americas, Europe and Asia/Pacific segments include apparel, footwear and accessories product lines for our Quiksilver, Roxy and DC brands, and other brands which include Hawk, Raisins, Leilani, Radio Fiji, Lib Technologies, Gnu and Bent Metal.

In order to better understand growth rates in our foreign operating segments, we make reference to constant currency. Constant currency improves visibility into actual growth rates as it adjusts for the effect of changing foreign currency exchange rates from period to period. For income statement items, constant currency is calculated by taking the average foreign currency exchange rate used in translation for the current period and applying that same rate to the prior period. Our European segment is translated into constant currency using euros and our Asia/Pacific segment is translated into constant currency using Australian dollars as these are the primary functional currencies of each reporting segment. A constant currency translation based upon each individual currency could yield a different result compared to using only euros and Australian dollars. The following table presents revenues by segment in both historical currency and constant currency for the three months ended July 31, 2009 and 2008:


Historical currency (as reported)	Americas			Europe			Asia/Pacific			Corporate		Total
July 31, 2008	$	271,941		$	231,987		$	59,634		$	1,314	$	564,876
July 31, 2009		256,778			189,027			55,090			499		501,394
Percentage decrease		(6%	)		(19%	)		(8%	)				(11%	)

Constant currency (current year exchange rates)

July 31, 2008		271,941			206,250			49,249			1,314		528,754
July 31, 2009		256,778			189,027			55,090			499		501,394
Percentage (decrease) increase		(6%	)		(8%	)		12%					(5%	)

Revenues in the Americas decreased 6% to $256.8 million for the three months ended July 31, 2009 from $271.9 million in the comparable period of the prior year, while European revenues decreased 19% to $189.0 million from $232.0 million and Asia/Pacific revenues decreased 8% to $55.1 million from $59.6 million for those same periods. The decrease in the Americas came primarily from Roxy brand revenues and, to a lesser extent, Quiksilver brand revenues across all product lines. These decreases were partially offset by our DC brand revenues, with growth in apparel and accessories partially offset by a decrease in our footwear product line. Europe’s net revenues decreased 8% in constant currency. The constant currency decrease in Europe was driven by our Roxy brand and, to a lesser extent, our Quiksilver brand, offset by a slight increase in our DC brand. Decreases in Roxy and Quiksilver brand revenues came primarily from apparel and, to a lesser extent, our accessories product lines. DC brand revenue growth came primarily from footwear, partially offset by other DC product lines. Asia/Pacific’s net revenues increased 12% in constant currency. This constant currency increase in Asia/Pacific’s net revenues came across all product lines, primarily from our Roxy and Quiksilver brands and, to a lesser extent, growth in our DC brand.

Our consolidated gross profit margin for the three months ended July 31, 2009 decreased to 46.7% from 50.4% in the comparable period of the prior year. The gross profit in the Americas segment decreased to 37.7% from 41.4%, while our European segment gross profit margin decreased to 57.5% from 59.7%, and our Asia/Pacific segment gross profit margin decreased to 53.7% from 55.5% for those same periods. The decrease in the Americas segment gross profit margin was due primarily to market related price compression in both our company-owned retail stores and our wholesale business. Our European segment gross profit margin decreased primarily as a result of negative foreign currency translation effects of certain European subsidiaries that do not use euros as their functional currency and market related price compression in our wholesale business, partially offset by improvements to our margin due to the foreign currency exchange effect of sourcing goods in U.S. dollars. In our Asia/Pacific segment, our gross profit margin decrease was primarily due to our business in Japan, which also experienced market related price compression in the current quarter.

Our selling, general and administrative expense (“SG&A”) for the three months ended July 31, 2009 decreased 9% to $211.8 million from $232.1 million in the comparable period of the prior year. Consolidated SG&A decreased 2% in constant currency. In the Americas segment, these expenses increased 3% to $92.3 million from $89.4 million in the comparable period of the prior year, while our European segment SG&A decreased 14% to $83.7 million from $97.5 million, and our Asia/Pacific segment SG&A decreased 5% to $27.3 million from $28.6 million for those same periods. As a percentage of revenues, our consolidated SG&A increased to 42.2% for the three months ended July 31, 2009 from 41.1% for the three months ended July 31, 2008. In the Americas, SG&A as a percentage of revenues increased to 35.9% compared to 32.9% the year before. In Europe, SG&A as a percentage of revenues increased to 44.3% from 42.0% and in Asia/Pacific, SG&A as a percentage of revenues increased to 49.5% from 47.9% for those same periods. The increase in SG&A as a percentage of revenue in our Americas segment was primarily caused by lower revenues. Expense reductions were more than offset by restructuring related charges of $7.1 million and incremental bad debt charges of $1.5 million. The increase in SG&A as a percentage of revenue in our European segment was primarily caused by lower revenues and, to a lesser extent, the cost of operating additional retail stores and severance costs of approximately $0.8 million, partially offset by decreased marketing and variable selling costs. In our Asia/Pacific segment, the increase in SG&A as a percentage of revenue primarily related to the cost of opening and operating additional retail stores.

Interest expense for the three months ended July 31, 2009 increased to $15.3 million from $11.8 million in the comparable period of the prior year. This increase was primarily the result of additional interest expense in 2009, which was allocated to the discontinued operations of Rossignol in 2008 and, to a lesser extent, higher interest rates on variable rate debt in Europe and the United States, partially offset by favorable foreign currency translation rates of European interest expense in the current year. Including both continuing and discontinued operations for the three months ending July 31, 2009 and 2008, interest expense was $15.3 million and $14.7 million, respectively. In the prior year, the discontinued Rossignol business was allocated interest based on intercompany borrowings. After giving effect to the new term loan and the new Americas credit facility, and after the anticipated closing of the European Facilities during our fourth fiscal quarter, we expect our quarterly interest expense to be approximately $25 million at current debt levels.

Our foreign currency loss amounted to $3.5 million for the three months ended July 31, 2009 compared to a gain of $1.2 million in the same period of the prior year. This loss primarily resulted from the foreign currency exchange effect of certain non-U.S. dollar denominated liabilities and the settlement of certain foreign currency exchange contracts.

Our effective income tax rate for the three months ended July 31, 2009 was 10.4% compared to 20.8% for the three months ended July 31, 2008. The income tax rate for the three months ended July 31, 2009 was positively impacted by favorable adjustments, primarily related to the finalization of certain tax deductions more favorably than originally anticipated.

Our income from continuing operations for the three months ended July 31, 2009 was $3.4 million, or $0.03 per share on a diluted basis, compared to income from continuing operations of $33.1 million, or $0.25 per share on a diluted basis, in the same period of the prior year. Adjusted EBITDA decreased to $35.9 million from $71.7 million for those same periods.

Nine Months Ended July 31, 2009 Compared to Nine Months Ended July 31, 2008

Our total net revenues for the nine months ended July 31, 2009 decreased 13% to $1,438.8 million from $1,657.7 million in the comparable period of the prior year. Net revenues decreased 6% in constant currency.

The following table presents revenues by segment in both historical currency and constant currency for the nine months ended July 31, 2009 and 2008:


Historical currency (as reported)	Americas		Europe		Asia/Pacific		Corporate		Total
July 31, 2008	$	754,491	$	716,770	$	182,494	$	3,982	$	1,657,737
July 31, 2009		690,181		581,223		164,979		2,462		1,438,845
Percentage decrease		(9%)		(19%)		(10%)				(13%)

Constant currency (current year exchange rates)

July 31, 2008		754,491		628,201		140,708		3,982		1,527,382
July 31, 2009		690,181		581,223		164,979		2,462		1,438,845
Percentage (decrease) increase		(9%)		(7%)		17%				(6%)

Revenues in the Americas decreased 9% to $690.2 million for the nine months ended July 31, 2009 from $754.5 million in the comparable period of the prior year, while European revenues decreased 19% to $581.2 million from $716.8 million and Asia/Pacific revenues decreased 10% to $165.0 million from $182.5 million for those same periods. In the Americas, the decrease in revenues came primarily from Roxy and Quiksilver brand revenues, partially offset by a modest increase in our DC brand revenues. Decreases in Roxy and Quiksilver brand revenues came primarily from apparel and accessories product lines and, to a lesser extent, footwear product lines. The increase in DC brand revenues came primarily from increases in our apparel product line, partially offset by a decrease in our footwear product line. European net revenues decreased approximately 7% in constant currency. The currency adjusted decrease in Europe came primarily from decreases in our Roxy and Quiksilver brand revenues, partially offset by increases in our DC brand revenues. Decreases in our Roxy and Quiksilver brand revenues came primarily from our apparel product lines, our Roxy accessories product line and, to a lesser extent, our Roxy footwear product line. Increases in DC brand revenues came primarily from growth in apparel and footwear product lines. Asia/Pacific’s net revenues increased 17% in constant currency. The currency adjusted increase in Asia/Pacific revenues came primarily from our Roxy and Quiksilver brands and, to a lesser extent, our DC brand across all product lines.

Our consolidated gross profit margin for the nine months ended July 31, 2009 decreased to 46.9% from 50.0% in the comparable period of the prior year. The gross profit margin in the Americas segment decreased to 37.3% from 42.4%, while our European segment gross profit margin decreased to 56.6% from 57.2%, and our Asia/Pacific segment gross profit margin increased to 54.0% from 52.9% for those same periods. The decrease in the Americas segment gross profit margin was due primarily to market related price compression in both our company-owned retail stores and our wholesale business. Our European segment gross profit margin decreased primarily as a result of negative foreign currency translation effects of certain European subsidiaries that do not use euros as their functional currency and market related price compression in our wholesale business, partially offset by improvements to our margin due to the foreign currency exchange effect of sourcing goods in U.S. dollars. In our Asia/Pacific segment, our gross profit margin increase was primarily due to improved margins in Japan compared to the prior year and, to a lesser extent, improved wholesale margins in Australia.

Our SG&A for the nine months ended July 31, 2009 decreased 9% to $621.2 million from $684.3 million in the comparable period of the prior year. Consolidated SG&A decreased 1% in constant currency. In the Americas segment, SG&A decreased slightly to $273.3 million from $273.7 million in the comparable period of the prior year, while our European segment SG&A decreased 15% to $241.6 million from $283.6 million, and our Asia/Pacific segment SG&A decreased 9% to $80.5 million from $88.7 million for those same periods. As a percentage of revenues, SG&A increased to 43.2% for the nine months ended July 31, 2009 from 41.3% for the nine months ended July 31, 2008. In the Americas, SG&A as a percentage of revenues increased to 39.6% compared to 36.3% during the same period the year before. In Europe, SG&A as a percentage of revenues increased to 41.6% from 39.6% and in Asia/Pacific, SG&A as a percentage of revenues increased to 48.8% from 48.6% for those same periods. The increase in SG&A as a percentage of revenue in our Americas segment was primarily due to lower revenues. Expense reductions were partially offset by $16.9 million in charges primarily related to restructuring activities, a legal settlement and severance costs, and incremental bad debt charges of $3.8 million. The increase in SG&A as a percentage of revenue in our European segment was primarily caused by lower revenues and, to a lesser extent, the cost of operating additional retail stores and severance costs of approximately $2.5 million. In our Asia/Pacific segment, the slight increase in SG&A as a percentage of revenue primarily related to the cost of operating additional retail stores.

Interest expense for the nine months ended July 31, 2009 increased to $43.1 million from $35.8 million in the comparable period of the prior year. This increase was primarily due to additional interest expense previously allocated to the discontinued operations of Rossignol in the prior year, partially offset by lower interest rates on variable rate debt in Europe and the United States and favorable foreign currency translation rates of European interest expense in the current period. Including both continuing and discontinued operations for the nine months ended July 31, 2009 and 2008, interest expense was $43.4 million and $46.5 million, respectively. In the prior year, the discontinued Rossignol business was allocated interest based on intercompany borrowings.

Our foreign currency loss amounted to $6.8 million for the nine months ended July 31, 2009 compared to a gain of $0.5 million in the comparable period of the prior year. This current year loss resulted primarily from the foreign currency exchange effect of certain non-U.S. dollar denominated liabilities and the settlement of certain foreign currency exchange contracts.

Our income tax expense for the nine months ended July 31, 2009 was $60.5 million compared to $29.3 million for the nine months ended July 31, 2008. Income tax expense for the nine months ended July 31, 2009 was unfavorably impacted by a valuation allowance of $45.9 million recorded against our deferred tax assets in the United States.

Our loss from continuing operations for the nine months ended July 31, 2009 was $57.5 million, or $0.45 per share on a diluted basis, compared to income from continuing operations of $79.4 million, or $0.61 per share on a diluted basis, in the same period of the prior year. Adjusted EBITDA decreased to $93.9 million from $197.6 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 purchase price for our acquisition of Rossignol and to refinance certain existing indebtedness.

The net increase in cash and cash equivalents for the nine months ended July 31, 2009 was $63.8 million compared to $25.1 million in the comparable period of the prior year. Cash and cash equivalents totaled $116.8 million at July 31, 2009 compared to $53.0 million at October 31, 2008, while working capital was $429.9 million at July 31, 2009 compared to $631.3 million at October 31, 2008.

We are highly leveraged. However, we believe that our cash flow from operations, together with our existing credit facilities, term loans and committed European refinancings will be adequate to fund our capital requirements for at least the next twelve months. In July 2009, we entered into a commitment with a group of lenders in Europe to refinance our European indebtedness. This refinancing will consist of two term loans totaling approximately $239.0 million (€170 million), an $81.5 million (€58 million) credit facility and a line of credit of $56.2 million (€40 million) for issuances of letters of credit, referred to collectively as our “European Facilities.” The maturity of these European Facilities will be July 31, 2013. The term loans will have principal repayments due on January 31 and July 31 of each year, with €14.0 million due for each semi-annual payment in 2010, €17.0 million due for each semi-annual payment in 2011 and €27.0 million due for each semi-annual payment in 2012 and 2013. Amounts outstanding under the European Facilities will bear interest at a rate of Euribor plus a margin of between 4.25% and 4.75%. The European Facilities will be guaranteed by Quiksilver, Inc. and will be secured by pledges of certain assets of our European subsidiaries, including certain trademarks of our European business and shares of certain European subsidiaries. The European Facilities will contain customary default provisions and covenants usual for transactions of this type. Certain fees paid in connection with the closing of the European Facilities will be amortized into interest expense over the four year term. The closing of the European Facilities is subject to certain conditions and is expected to occur during the three months ending October 31, 2009.

In connection with the closing of the European Facilities, we expect to refinance an additional European term loan of $70.3 million (€50 million) such that its maturity date will align with the European Facilities. This term loan will have principal repayments due on January 31 and July 31 of each year, with €8.9M due in the aggregate in 2011, €12.6M due in the aggregate in 2012 and €28.5M due in the aggregate in 2013. This extended term loan will bear an interest rate of Euribor plus a margin of 5.0% and will have the same security as the European Facilities.

In July 2009, we extended the maturity date of a $77.3 million (€55 million) European credit facility, which was previously due on June 30, 2009 to September 29, 2009, for the sole purpose of enabling us to refinance this credit facility into a term loan that will be part of the European Facilities described above.

We believe that our short-term uncommitted lines of credit will continue to be made available until refinanced on a longer term basis. If we are unsuccessful in closing the European Facilities or if our other short-term uncommitted lines of credit in Asia/Pacific are no longer made available, we could be adversely affected by having current maturities with limited means of repayment.

On July 31, 2009, we entered into a $153.1 million five year senior secured term loan with the Rhone Group, a strategic partner. In connection with the term loan, we issued warrants to purchase approximately 25.7 million shares of our common stock, representing 19.99% of our outstanding equity, at an exercise price of $1.86 per share. The warrants are fully vested and have a seven year term. The estimated fair value of these warrants was $23.6 million. This amount was recorded as a debt discount and will be amortized into interest expense over the term of the loan. In addition to this, we incurred approximately $17.0 million in debt issuance costs which are included in prepaid expenses (short-term) and other assets (long-term) and will be amortized into interest expense over the five year term of the loan. The term loan is primarily secured by certain of our trademarks in the Americas and a first or second priority interest in substantially all property related to our Americas business. The term loan bears an interest rate of 15% on a $125 million tranche, with 6% of that interest payable in kind or in cash, at our option. The remaining $28.1 million tranche is denominated in euros (€20.0 million) and also bears an interest rate of 15%, with the full 15% payable in kind or cash at our option. The term loan contains customary default provisions for loans of its type. Net proceeds from the new term loan were used to reduce other borrowings. However, approximately $28.1 million is included in our cash balance as of July 31, 2009.

On July 31, 2009, we entered into a new $200 million three year asset-based credit facility for our Americas segment (with the option to expand the facility to $250.0 million on certain conditions) which replaced our existing credit facility which was to expire in April 2010. The new credit facility expires in July 2012, includes a $100 million sublimit for letters of credit and bears interest at a rate of LIBOR plus a

margin of 4.0% to 4.5%, depending upon availability. The weighted average interest rate at July 31, 2009 was 8.5%. The credit facility is secured by our U.S. and Canadian accounts receivable, inventory, certain intangibles, a second priority interest in substantially all other personal property and a second priority pledge of shares of certain of our domestic subsidiaries. The borrowing base is limited to certain percentages of eligible accounts receivable and inventory from participating subsidiaries. In connection with obtaining the credit facility, we incurred approximately $9.5 million in debt issuance costs which are included in prepaid expenses (short-term) and other assets (long-term) and will be amortized into interest expense over the term of the credit facility. The credit facility contains customary default provisions for facilities of its type. As of July 31, 2009, approximately $21.2 million was outstanding under the credit facility, in addition to outstanding letters of credit of $33.8 million.

Cash Flows

We generated $138.5 million of cash from operating activities of continuing operations in the nine months ended July 31, 2009 compared to $149.9 million for the same period of the prior year. This $11.4 million decrease in cash provided was primarily due to increases in our net loss adjusted for other non-cash charges of $88.0 million, partially offset by improvements in working capital of $76.6 million.

Capital expenditures of continuing operations totaled $32.5 million for the nine months ended July 31, 2009, compared to $63.6 million in the comparable period of the prior year. These investments included company owned retail stores and ongoing investments in computer and warehouse equipment. We had no acquisitions during the nine months ended July 31, 2009. During that same period, we generated $21.8 million in cash from investing activities of discontinued operations, which is primarily related to the net proceeds from the sale of our Rossignol wintersports business.

During the nine months ended July 31, 2009, net cash used in financing activities of continuing operations totaled $56.3 million, compared to $179.1 million provided by financing activities of continuing operations in the comparable period of the prior year.

Trade Accounts Receivable and Inventories

Our trade accounts receivable decreased 10% to $424.2 million at July 31, 2009 from $470.1 million at October 31, 2008. Accounts receivable in our Americas segment decreased 19% to $205.6 million at July 31, 2009 from $254.2 million at October 31, 2008, European segment accounts receivable increased 15% to $183.4 million from $160.0 million and Asia/Pacific segment accounts receivable decreased 37% to $35.2 million from $55.8 million for those same periods. Compared to July 31, 2008, accounts receivable decreased 11% in the Americas segment, 16% in our European segment, 17% in our Asia/Pacific segment and 14% in total. Consolidated accounts receivable decreased 9% in constant currency compared to the same period of the prior year. Included in accounts receivable at July 31, 2009 are approximately $26.1 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 more accurately compute days sales outstanding. Overall days sales outstanding decreased by approximately two days at July 31, 2009 compared to July 31, 2008.

Consolidated inventories increased 7% to $334.2 million at July 31, 2009 from $312.1 million at October 31, 2008. Inventories in the Americas segment decreased 10% to $145.4 million from $162.2 million at October 31, 2008, European segment inventories increased 25% to $128.1 million from $102.6 million, and Asia/Pacific segment inventories increased 28% to $60.7 million from $47.4 million for those same periods. Compared to July 31, 2008, inventories decreased 9% in the Americas segment, 10% in our European segment, increased 9% in our Asia/Pacific segment and decreased 7% in total. Inventories decreased 1% in constant currency compared to July 31, 2008. Consolidated average annual inventory turnover was approximately 3.0 at July 31, 2009 compared to 3.2 in the comparable period of the prior year.

Restructuring

In connection with our cost reduction efforts, we have formulated the Fiscal 2009 Cost Reduction Plan (the “Plan”). During the nine months ended July 31, 2009, we recorded $12.6 million in severance

charges and $2.3 million in facility lease charges. Additionally, we paid $1.7 million in consulting fees to a restructuring firm. The Plan covers our global operations but is primarily concentrated in the United States. We continue to evaluate our cost structure and additional cost reductions may be necessary. As of July 31, 2009, we have obligations to pay approximately $8.3 million under the Plan with a majority of these payments occurring in fiscal 2009 and early fiscal 2010.

Commitments

As discussed above, we successfully closed the refinancing of the Americas credit facility and the funding of the five year senior secured term loan on July 31, 2009. Additionally, the European Facilities are expected to close during the three months ending October 31, 2009. These transactions enabled us to extend a significant portion of our short-term maturities to a long-term basis. There have been no other material changes in our contractual obligations since October 31, 2008.

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.

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 is recognized when the carrying value exceeds the undiscounted future cash flows estimated to result from the use and eventual disposition of the asset. Impairments are 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.

Stock-Based Compensation Expense

We recognize compensation expense for all stock-based payments 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. For option valuation, we determine the fair value using the Black-Scholes option-pricing model which requires the input of certain assumptions, including the expected life of the stock-based payment awards, stock price volatility and interest rates.

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.

On November 1, 2007, we adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). This interpretation clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with SFAS No. 109. FIN 48 provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits of the tax position. We recognize accrued interest and penalties related to unrecognized tax benefits as a component of our provision for income taxes. The application of FIN 48 can create significant variability in our tax rate from period to period upon changes in or adjustments to our uncertain tax positions.

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 substantial portions of our

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 currency 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 changes in the fair value of the derivatives in other comprehensive income.

New Accounting Pronouncements

See Note 2 to Condensed Consolidated Financial Statements – New Accounting Pronouncements for a discussion of pronouncements that may affect our future 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, liquidity, 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,” “likely,” “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:

•		continuing deterioration of global economic conditions and credit and capital markets;

•		our ability to close our refinancing transactions in a timely manner;

•		our ability to remain compliant with our debt covenants;

•		our ability to achieve the financial results that we anticipate;

•		payments due on contractual commitments and other debt obligations;

•		future expenditures for capital projects;

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

•		foreign currency 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 operations of our foreign subsidiaries into U.S. dollars using the average exchange rate during the reporting period. Changes in foreign currency 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 operations 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 the Australian dollar or Japanese yen.

European revenues decreased 7% in euros during the nine months ended July 31, 2009 compared to the nine months ended July 31, 2008. As measured in U.S. dollars and reported in our consolidated statements of operations, European revenues decreased 19% during the nine months ended July 31, 2009 as a result of a stronger U.S. dollar versus the euro in comparison to the same period in the prior year.

Asia/Pacific revenues increased 17% in Australian dollars during the nine months ended July 31, 2009 compared to the nine months ended July 31, 2008. As measured in U.S. dollars and reported in our consolidated statements of operations, Asia/Pacific revenues decreased 10% during the nine months ended July 31, 2009 as a result of a stronger U.S. dollar versus the Australian dollar in comparison to the same period in 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, 2008 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 July 31, 2009, 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 July 31, 2009.

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 July 31, 2009 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION


Item 6.		Exhibits


Exhibits
	2.1	Stock Purchase Agreement between the Roger Cleveland Golf Company, Inc., Rossignol Ski Company, Incorporated, the Company and SRI Sports Limited dated October 30, 2007 (incorporated by reference to Exhibit 2.3 of the Company’s Annual Report on Form 10-K for the year ended October 31, 2007).

	2.2	Amendment No. 1 to the Stock Purchase Agreement between the Roger Cleveland Golf Company, Inc., Rossignol Ski Company, Incorporated, the Company and SRI Sports Limited dated December 7, 2007 (incorporated by reference to Exhibit 2.4 of the Company’s Annual Report on Form 10-K for the year ended October 31, 2007).

	2.3	Offer Letter dated August 25, 2008, by and among Quiksilver, Inc., Pilot S.A.S., Meribel S.A.S., Quiksilver Americas, Inc. and Chartreuse et Mont Blanc LLC (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on August 27, 2008).

	2.4	Amended and Restated Offer Letter dated October 31, 2008, by and among Quiksilver, Inc., Pilot S.A.S., Meribel S.A.S., Quiksilver Americas, Inc. and Chartreuse et Mont Blanc LLC (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on October 31, 2008).

	2.5	Stock Purchase Agreement dated November 12, 2008, by and among Quiksilver, Inc., Pilot S.A.S., Meribel S.A.S., Quiksilver Americas, Inc., Chartreuse et Mont Blanc LLC, Chartreuse et Mont Blanc SAS, Chartreuse et Mont Blanc Global Holdings S.C.A., Macquarie Asset Finance Limited and Mavilia SAS (incorporated by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K filed on November 18, 2008).

	3.1	Restated Certificate of Incorporation of Quiksilver, Inc., as amended (incorporated by reference to Exhibit 3.1 of the Company’s Annual Report on Form 10-K for the year ended October 31, 2004).

	3.2	Certificate of Amendment of Restated Certificate of Incorporation of Quiksilver, Inc. (incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended April 30, 2005).

	3.3	Amended and Restated Bylaws of Quiksilver, Inc. (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed on December 7, 2007).

	3.4	Certificate of Designation of the Series A Convertible Preferred Stock of Quiksilver, Inc. (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed on August 4, 2009).

	4.1	Indenture for the 6 7/8% Senior Notes due 2015 dated July 22, 2005, among Quiksilver, Inc., the subsidiary guarantors set forth therein and Wilmington Trust Company, as trustee, including the form of Global Note attached thereto (incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed July 25, 2005).

	10.1	Commitment Letter by and among Quiksilver, Inc., Quiksilver Americas, Inc., Bank of America, N.A., Banc of America Securities LLC, General Electric Capital Corporation and GE Capital Markets, Inc. dated June 8, 2009 (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed on June 9, 2009).


	10.2			Commitment Letter by and among Quiksilver, Inc., Quiksilver Americas, Inc. and Rhone Capital III L.P dated June 8, 2009 (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on June 9, 2009).

	10.3			First Amendment to Commitment Letter by and among Quiksilver, Inc., Quiksilver Americas, Inc., Bank of America, N.A., Banc of America Securities LLC, General Electric Capital Corporation and GE Capital Markets, Inc. dated June 24, 2009 (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on June 25, 2009).

	10.4			English Translation of Amendment No. 4 to Line of Credit Agreement dated March 14, 2008 between Pilot S.A.S. and Societe Generale, BNP Paribas and Le Credit Lyonnais dated June 30, 2009.

	10.5			English Translation of Amendment No. 5 to Line of Credit Agreement dated March 14, 2008 between Pilot S.A.S. and Societe Generale, BNP Paribas and Le Credit Lyonnais dated June 30, 2009 (incorporated by reference to Exhibit 10.6 of the Company’s Current Report on Form 8-K filed on August 4, 2009).

	10.6			Credit Agreement by and among Quiksilver, Inc., Quiksilver Americas, Inc., as borrower, Rhone Group L.L.C., as administrative agent, and Romolo Holdings C.V., Triton SPV L.P., Triton Onshore SPV L.P., Triton Offshore SPV L.P. and Triton Coinvestment SPV L.P., as the lenders party thereto, dated July 31, 2009 (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on August 4, 2009).

	10.7			Credit Agreement by and among Quiksilver, Inc., Mountain & Wave S.a.r.l., as borrower, Rhone Group L.L.C., as administrative agent and Romolo Holdings C.V., Triton SPV L.P., Triton Onshore SPV L.P., Triton Offshore SPV L.P. and Triton Coinvestment SPV L.P., as the lenders party thereto, dated July 31, 2009 (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed on August 4, 2009).

	10.8			Warrant and Registration Rights Agreement by and among Quiksilver, Inc., Rhone Capital III L.P. and Romolo Holdings C.V., Triton SPV L.P., Triton Onshore SPV L.P., Triton Offshore SPV L.P. and Triton Coinvestment SPV L.P., as the initial warrant holders, dated July 31, 2009 (incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed on August 4, 2009).

	10.9			Credit Agreement by and among Quiksilver Americas, Inc., Bank of America, N.A., Banc of America Securities LLC, General Electric Capital Corporation and GE Capital Markets, Inc. dated July 31, 2009 (incorporated by reference to Exhibit 10.4 of the Company’s Current Report on Form 8-K filed on August 4, 2009).

	10.10			English Translation of Facilities Agreement by and among Pilot S.A.S. and Na Pali S.A.S. as borrowers, Quiksilver, Inc., as guarantor, BNP Paribas, Crédit Lyonnais and Société Générale Corporate & Investment Banking as mandated lead arrangers, BNP Paribas as agent, Société Générale as security agent, Caisse Régionale de Crédit Agricole Mutuel Pyrénées Gascogne as issuing bank, and BNP Paribas, Crédit Lyonnais, Société Générale, Natixis, Caisse Régionale de Crédit Agricole Mutuel Pyrénées-Gascogne, Banque Populaire du Sud Ouest, CIC — Société Bordelaise, and HSBC France as original lenders dated July 31, 2009 (incorporated by reference to Exhibit 10.5 of the Company’s Current Report on Form 8-K filed on August 4, 2009).

	10.11			Stock Option Cancellation Agreement by and between Quiksilver, Inc. and Robert B. McKnight, Jr. dated June 23, 2009. (1)


	10.12	Stock Option Cancellation Agreement by and between Quiksilver, Inc. and Joseph Scirocco dated June 23, 2009. (1)

	10.13	Stock Option Cancellation Agreement by and between Quiksilver, Inc. and Charles S. Exon dated June 23, 2009. (1)

	10.14	Stock Option Cancellation Agreement by and between Quiksilver, Inc. and Pierre Agnes dated June 23, 2009. (1)

	10.15	Stock Option Cancellation Agreement by and between Quiksilver, Inc. and Craig Stevenson dated June 23, 2009. (1)

	10.16	Indemnity Agreement by and between Quiksilver, Inc. and Andrew Sweet dated July 31, 2009.

10.17		Indemnity Agreement by and between Quiksilver, Inc. and M. Steven Langman dated July 31, 2009.

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


⁽¹⁾		Management contract or compensatory plan


	Page No.
PART I - FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited):

Quiksilver, Inc. Condensed Consolidated Statements of Operations Three Months Ended July 31, 2009 and 2008		2

Quiksilver, Inc. Condensed Consolidated Statements of Comprehensive Income Three Months Ended July 31, 2009 and 2008		2

Quiksilver, Inc. Condensed Consolidated Statements of Operations Nine Months Ended July 31, 2009 and 2008		3

Quiksilver, Inc. Condensed Consolidated Statements of Comprehensive Loss Nine Months Ended July 31, 2009 and 2008		3

Quiksilver, Inc. Condensed Consolidated Balance Sheets July 31, 2009 and October 31, 2008		4

Quiksilver, Inc. Condensed Consolidated Statements of Cash Flows Nine Months Ended July 31, 2009 and 2008		5

Quiksilver, Inc. Notes to Condensed Consolidated Financial Statements		6

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

Results of Operations		32

Three Months Ended July 31, 2009 Compared to Three Months Ended July 31, 2008		33

Nine Months Ended July 31, 2009 Compared to Nine Months Ended July 31, 2008		35

Financial Position, Capital Resources and Liquidity		36

Critical Accounting Policies		39

New Accounting Pronouncements		41

Forward-Looking Statements		41

Item 3. Quantitative and Qualitative Disclosures About Market Risk		42

Item 4. Controls and Procedures		42

Part II - OTHER INFORMATION		43

Item 6. Exhibits		43

SIGNATURES		46
EX-10.4
EX-10.11
EX-10.12
EX-10.13
EX-10.14
EX-10.15
EX-10.16
EX-10.17
EX-31.1
EX-31.2
EX-32.1
EX-32.2


	QUIKSILVER, INC., a Delaware corporation
September 9, 2009	/s/ Brad L. Holman
	Brad L. Holman
	Senior Vice President & Corporate Controller (Principal Accounting Officer and Authorized Signatory)