K-Swiss brand revenues decreased to $121.4 million for the three months ended June 30, 2006 from $124.1 million for the three months ended June 30, 2005, a decrease of 2.2%. Net earnings increased 21.3% to $20,334,000, or 58 cents per diluted share, for the three months ended June 30, 2006 from $16,765,000, or 47 cents per diluted share, for the three months ended June 30, 2005.

Steven Nichols, Chairman of the Board and President, stated, “The results for the quarter demonstrate the benefit of past investments in building international sales and the continued need for new investment and concepts in our domestic business. The better-than-expected earnings and increased guidance also point to strong expense control and improved product margins. International revenues and backlog were once again decidedly positive with increases of 37% and 59%, respectively, for the second quarter. We are encouraged by the trends we see in the international backlog for the second half of the year and initial international bookings for the first quarter of 2007. However, the domestic business continues to be soft and, based on recent booking trends, indicate that a more realistic timeframe for stemming the domestic downturn is now at least the second half of 2007.”

Results of Operations


                                                    Six Months           Three Months
                                                  Ended June 30,        Ended June 30,
                                                  2006       2005       2006       2005
  Revenues                                        100.0 %    100.0 %    100.0 %    100.0 %
  Cost of goods sold                               52.1       53.2       50.4       53.5
  Gross profit                                     47.9       46.8       49.6       46.5
  Selling, general and administrative expenses     25.1       24.1       27.7       27.6
  Interest income, net                              1.1        0.4        1.5        0.5
  Earnings before income taxes                     23.9       23.1       23.4       19.4
  Income tax expense                                7.4        7.9        7.0        6.1
  Net earnings                                     16.5       15.2       16.4       13.3


 

K-Swiss brand revenues decreased to $121.4 million for the three months ended June 30, 2006 from $124.1 million for the three months ended June 30, 2005, a decrease of 2.2%. K-Swiss brand revenues decreased to $268,549,000 for the six months ended June 30, 2006 from $275,185,000 for the six months ended June 30, 2005, a decrease of $6,636,000 or 2.4%. The decrease for the three and six months ended June 30, 2006 was the result of a decrease in the volume of footwear sold offset by higher average wholesale prices per pair.

The volume of footwear sold decreased to 4,685,000 and 10,128,000 pair for the three and six months ended June 30, 2006, respectively, from 4,896,000 and 10,797,000 pair for the three and six months ended June 30, 2005, respectively. The decrease in the volume of footwear sold for the three months ended June 30, 2006 was primarily the result of decreased sales of the tennis and Classic categories of 15.7% and 7.8%, respectively, offset by increased sales of training product of 41.5%.

This decrease in the volume for the three and six months ended June 30, 2006 was offset by a higher average wholesale price per pair of $25.37 for the three months ended June 30, 2006 from $24.93 for the three months ended June 30, 2005, an increase of 1.8%, and $25.96 for the six months ended June 30, 2006 from $25.04 for the six months ended June 30, 2005, an increase of 3.7%. These higher average wholesale prices per pair resulted from an increase in the average price of the Classic category, partially due to the price increase of the Classic during the third quarter of 2005, offset by lower average prices in other categories.

The breakdown of revenues (dollar amounts in thousands) is as follows:


                          Six Months Ended June 30,             Three Months Ended June 30,
                         2006        2005      % Change         2006        2005      % Change
Domestic
K•Swiss brand          $ 182,794   $ 211,281      (13.5 %)   $   80,152   $  94,404      (15.1 %)
Royal Elastics brand       1,704       1,410       20.9 %           962         695       38.4 %

Total domestic         $ 184,498   $ 212,691      (13.3 %)   $   81,114   $  95,099      (14.7 %)

International
K•Swiss brand          $  85,755   $  63,904       34.2 %    $   41,286   $  29,705       39.0 %
Royal Elastics brand       3,927       3,022       29.9 %         1,796       1,670        7.5 %

Total international    $  89,682   $  66,926       34.0 %    $   43,082   $  31,375       37.3 %

Total Revenues         $ 274,180   $ 279,617       (1.9 %)   $  124,196   $ 126,474       (1.8 %)

Overall gross profit margins, as a percentage of revenues, increased to 49.6% for the three months ended June 30, 2006, from 46.5% for the three months ended June 30, 2005.

Overall gross profit margins, as a percentage of revenues, increased to 47.9% for the six months ended June 30, 2006, from 46.8% for the six months ended June 30, 2005. Gross profit margin for the three and six months ended June 30, 2006 was affected by product mix changes and international sales becoming a larger portion of revenues.

Overall selling, general and administrative expenses decreased to $34,450,000 (27.7% of revenues) for the three months ended June 30, 2006, from $34,946,000 (27.6% of revenues) for the three months ended June 30, 2005, a decrease of $496,000 or 1.4%. The decrease in selling, general and administrative expenses during the three months ended June 30, 2006 compared to the three months ended June 30, 2005 was the result of a decrease in compensation and compensation related expenses, offset by increases in legal and warehousing expenses for the three months ended June 30, 2006.

Overall selling, general and administrative expenses increased to $68,876,000 (25.1% of revenues) for the six months ended June 30, 2006, from $67,285,000 (24.1% of revenues) for the six months ended June 30, 2005, an increase of $1,591,000 or 2.4%. The increase in selling, general and administrative expenses during the six months ended June 30, 2006 compared to the six months ended June 30, 2005 was a result of an increase in advertising, legal and warehousing expenses, offset by a decrease in compensation and compensation related expenses for the six months ended June 30, 2006.

Compensation expenses, which includes commissions and bonus/incentive related expenses, decreased 14.7% and 14.4% for the three and six months ended June 30, 2006, respectively, due to a decrease in bonus/incentive related expenses that were calculated in accordance with our bonus formula under our Economic Value Added Bonus Plan offset by increased salaries as a result of recognizing compensation expenses related to stock options as required by SFAS No. 123 (Revised 2004) and an increase in headcount.

Advertising expenses increased 10.0% for the six months ended June 30, 2006 due primarily to an increase in advertising expenses incurred by our international locations as part of a strategic effort to drive higher revenues. Legal expenses increased 106.7% and 59.2% for the three and six months ended June 30, 2006, respectively, in connection with pursuing a lawsuit to protect our trademarks. Warehousing expenses, other than compensation and compensation related expenses, increased 7.8% and 16.2% for the three and six months ended June 30, 2006, respectively, primarily as a result of higher freight costs. Corporate expenses were comparable for the three months ended June 30, 2006 and 2005. The decrease in corporate expenses during the six months ended June 30, 2006 was due to decreases in compensation expenses offset by an increase in legal expenses as explained above.

Overall net interest income was $1,863,000 (1.5% of revenues) and $3,164,000 (1.1% of revenues) for the three and six months ended June 30, 2006, respectively, compared to $665,000 (0.5% of revenues) and $1,183,000 (0.4% of revenues) for the three and six months ended June 30, 2005, representing an increase of $1,198,000 and $1,981,000 for the three and six months ended June 30, 2006, respectively, compared to the same prior year period. This increase in net interest income was the result of higher average interest rates and higher average balances and no borrowings on The company’s bank lines of credit during the three and six months ended June 30, 2006.

The company’s effective tax rate was 30.0% and 31.0% for the three and six months ended June 30, 2006 compared to 31.7% and 34.1% for the three and six months ended June 30, 2005, respectively. Starting January 1, 2005, future provision will not be made for appropriate United States income taxes on future earnings of selected subsidiary companies as these are intended to be permanently invested. The decrease in tax rate was mainly due to the company’s geographic mix of sales, as international sales have become a larger portion of revenues, with these international subsidiaries being profitable.

Net earnings increased 21.3% to $20,334,000, or 58 cents per diluted share, for the three months ended June 30, 2006 from $16,765,000, or 47 cents per diluted share, for the three months ended June 30, 2005. Net earnings increased 6.1% to $45,244,000, or $1.28 per share for the six months ended June 30, 2006 from $42,629,000, or $1.19 per share, for the six months ended June 30, 2005.

At June 30, 2006 and 2005 total futures orders with start ship dates from July 2006 and 2005 through December 2006 and 2005 were approximately $181.2 million and $185.2 million respectively, a decrease of 2.2%. The 2.2% decrease in total futures orders is comprised of a 1.5% decrease in the third quarter 2006 futures orders and a 3.1% decrease in the fourth quarter 2006 futures orders.

At June 30, 2006 and 2005, domestic futures orders with start ship dates from July 2006 and 2005 through December 2006 and 2005 were approximately $105.2 million and $137.5 million respectively, a decrease of 23.4%.

At June 30, 2006 and 2005, international futures orders with start ship dates from July 2006 and 2005 through December 2006 and 2005 were approximately $75.9 million and $47.7 million respectively, an increase of 59.2%.

The company experienced net cash inflows of approximately $1.7 million from operating activities during the six months ended June 30, 2006 compared to net cash inflows of approximately $20.6 million from operating activities during the six months ended June 30, 2005. The decrease in operating cash inflows from the prior year is due primarily to changes in accounts receivables and inventories.

No other material capital commitments existed at June 30, 2006. Depending on the company’s future growth rate, funds may be required by operating activities. With continued use of our revolving credit facility and internally generated funds, we believe our present and currently anticipated sources of capital are sufficient to sustain the company’s anticipated capital needs for the remainder of 2006. At June 30, 2006 and December 31, 2005 there was no funded debt. At June 30, 2006 K-Swiss was in compliance with all relevant covenants under the credit facilities.

K-Swiss working capital increased $40,451,000 to $306,274,000 at June 30, 2006 from $265,823,000 at December 31, 2005. Working capital increased during the six months ended June 30, 2006 mainly due to increases in accounts receivable and inventory and a decrease in accrued liabilities offset by increases in accounts and income taxes payable.