K-Swiss Posts Flat Earnings Growth on Stronger International Business

K-Swiss Inc. reported that total worldwide revenues declined 2.6% to $133.1 million compared with $136.7 million in the prior-year period. Domestic revenues decreased 21.0% to $81.7 million in Q3, while international revenues increased 54.9% to $51.4 million.
Net earnings for the third quarter were $21.0 million, or 59 cents per diluted share, compared with $21.1 million, or 59 cents per diluted share, in the prior-year period.

Total worldwide revenues for the first nine months of 2006 decreased 2.2% to $407.3 million compared with $416.3 million in the first nine months of 2005. Domestic revenues decreased 15.8% to $266.2 million in the first nine months of 2006, while international revenues increased 40.9% to $141.1 million. Net earnings and net earnings per diluted share for the nine months ended September 30, 2006, increased 3.9% and 5.1%, respectively, to $66.2 million, or $1.87 per diluted share, compared with $63.7 million, or $1.78 per diluted share, at September 30, 2005.

Futures Orders

Worldwide futures orders with start ship dates from October through March decreased 10.9% to $171,923,000 at September 30, 2006, compared with $193.0 million at September 30, 2005. Domestic futures orders decreased 32.0% to $92.9 million at September 30, 2006, from $136.6 million at September 30, 2005. International futures orders increased 40.1% to $79.0 million at September 30, 2006, from $56.4 million the previous year.

Stock Repurchase Program

The company purchased 10,000 shares of Class A Common Stock during the third quarter of 2006 for a total expenditure of approximately $237,000 as part of its stock repurchase program. At September 30, 2006, there remains authorization to repurchase approximately 4,081,000 shares under the Company's existing stock repurchase program. Since August 1996, K-Swiss has purchased a total of 25.3 million shares of Class A Common Stock for a total expenditure of $164.1 million.

Guidance

K-Swiss also issued guidance for the fourth quarter of 2006 and full-year 2006. The company expects revenues for the fourth quarter of 2006 to be approximately $90 million to $95 million and earnings per diluted share to be in the range of 24 cents to 31 cents. KSWS expects full-year revenues to be approximately $497 million to $502 million and expects to report full-year earnings per diluted share of approximately $2.11 to $2.17.

The company's estimates for the fourth quarter of 2006 and full-year 2006 reflect the continued investments in marketing, sales and product development for the Royal Elastics brand as well as the expansion of European operations. They are based upon the following assumptions: gross margins will be approximately 47%; SG&A will not rise above $31 million for the quarter and $137 million for the year; cancellations will be moderate; and the Company's growth initiatives with respect to Royal Elastics will not exceed a net loss of $0.08 per share for the year.

Steven Nichols, chairman of the board and president, stated, “The underperformance of our domestic business and continued momentum in our international business during the quarter are consistent with our previous forecasts. We were able to supplement the strength in revenues and backlog in Europe and Asia with better-than-expected margins and at-once orders of our Classic product; however, the decline in the domestic backlog was much larger than we had anticipated. We have recently hired a new Vice President of Product to lead our product development efforts but, given the lag in the development cycle, it will take additional time for the full impact from this new team to reinvigorate the domestic business. In the interim, we expect to continue exploiting the untapped potential of the K-Swiss brand overseas with a new Vice President of International. We will remain disciplined in our distribution and make the right investments in K-Swiss for the long term.”

           K-Swiss Inc. Consolidated Statements of Earnings
            (In thousands, except earnings per share data)

                               Three Months Ended   Nine Months Ended
                                  September 30,       September 30,
                               ------------------- -------------------
                                   (Unaudited)         (Unaudited)
                                 2006      2005      2006      2005
                               --------- --------- --------- ---------
Revenues                       $133,135  $136,668  $407,315  $416,285
Cost of goods sold               69,782    73,100   212,689   221,908
                                --------  --------  --------  --------
     Gross profit                63,353    63,568   194,626   194,377
Selling, general and
 administrative expenses         36,549    34,093   105,425   101,378
                                --------  --------  --------  --------
     Operating profit            26,804    29,475    89,201    92,999
Interest income, net              1,768       908     4,932     2,091
                                --------  --------  --------  --------
Earnings before income taxes     28,572    30,383    94,133    95,090
Income tax expense                7,622     9,321    27,939    31,399
                                --------  --------  --------  --------
     Net earnings              $ 20,950  $ 21,062  $ 66,194  $ 63,691
                                ========  ========  ========  ========
Basic earnings per share       $   0.61  $   0.62  $   1.93  $   1.86
                                ========  ========  ========  ========
Diluted earnings per share     $   0.59  $   0.59  $   1.87  $   1.78