K-Swiss Inc. increased its net loss for the first quarter to $4.7 million, or 13 cents a share, from $1.1 million, or 3 cents, a year ago. Total worldwide revenues decreased 11.0% to $65.9 million from $74 million.

Domestic revenues decreased 21.2%
to $23,940,000 in the first quarter, and international revenues
decreased 4.0% to $41,930,000 for the same period.

The sale of Royal Elastics on April 30, 2009, is accounted for as a discontinued operation in the company’s financial results and is excluded from futures orders data for the current and prior-year periods.

Worldwide futures orders with start ship dates from April through September 2010 decreased 1.6% to $72.5 million at March 31, 2010. Domestic futures orders increased 2.7% to $29.1 million at March 31, 2010. International futures orders decreased 4.3% to $43.4 million at March 31, 2010. The reported futures orders as of March 31, 2010 do not include any adjustment for potential loss of customer orders associated with the temporary loss of some manufacturing capacity in Thailand.

Thailand Contract Sourcing

In April 2010, the company’s contract manufacturer in Thailand, one of only three manufacturers utilized by the company in its global supply chain, ceased operations. As a result, it will not be able to fulfill orders for approximately 700,000 pairs scheduled to be produced during the second and third quarters of 2010. A majority of the pairs were being produced to fulfill orders primarily for Latin America and to a lesser extent Europe. The company is attempting to secure production capacity in other facilities and secure permanent capacity for the primarily canvas product sourced from the Thailand manufacturer. The company anticipates delays in replacing capacity and is not certain when and how much capacity will be replaced. Assuming the Company cannot fulfill any customer orders from previously scheduled Thailand production, the company estimates a total impact of approximately $5,000,000 in lost revenues during the second and third quarters of 2010.

Amended Palladium Purchase Agreement

On May 1, 2010, the company amended the Share Purchase and Shareholders Rights Agreement, dated as of May 16, 2008, as amended by Amendment No. 1 dated June 2, 2009, by and among the seller, Palladium SAS and K-Swiss Inc. to revise the terms of the remaining future purchase price payable in 2013. The future purchase price will be equal to €3,000,000 plus up to €500,000 based on an amount calculated in accordance with a formula driven by Palladium’s EBITDA for the twelve months ended December 31, 2012. In the second quarter of 2010, the Company will recognize the net present value of €3,000,000 in its Consolidated Statement of Earnings/Loss which will accrete to €3,000,000 at December 31, 2012. The €500,000 contingent purchase price will be determined each quarter based on the current quarter’s projection of Palladium’s EBITDA for the twelve months ended December 31 of the current year.

Steven Nichols, Chairman of the Board and President, stated, “We are confident in the direction of the K-Swiss and Palladium brands. While the unexpected short-term loss of capacity in Thailand is disappointing and has cost us some important business, we are continuing to make inroads in Running and Tennis with product innovations and marketing efforts. This is a pivotal year for us as we continue to invest for success in 2011 and beyond, and Im pleased with how we have begun the year in positioning K-Swiss as the California Sports Company.”

Guidance

For 2010, the company expects full year consolidated revenues to be 5% to 10% less than 2009. On a year-over-year basis, the company expects to report decreased revenue in the second and third quarters and an increase in the fourth quarter.

Consolidated gross margin is expected to increase to approximately 43% compared with 35.8% in 2009 due to expected lower closeout sales during 2010 compared to 2009.

Selling, general & administrative expenses are expected to rise to $143 million to $148 million due to increased marketing expenditures. These expenditures will be continually evaluated and could change over time, including the possibility of even greater marketing expenditures depending on available branding opportunities.

Other expense will be charged approximately $3,700,000 in the second quarter due to the Amendment to the Palladium Purchase Agreement.

The tax benefit rate is projected to be approximately 25%. Should the company be unable to substantiate evidence for realizing the benefit of its deferred tax assets in the second half of the year, the Company might be required to establish a reserve of $10.9 million, plus any deferred tax assets established during the remainder of 2010, if any.

K-Swiss Inc. Consolidated
Statements of Earnings/Loss

(In thousands, except earnings per share data)

 


 

Three Months Ended



March 31,



 

2010

 

 

 

 

2009

 



(Unaudited)

Revenues


$

65,870




$

74,044


Cost of goods sold


 

37,224

 



 

45,752

 

Gross profit



28,646





28,292


Selling, general and administrative expenses


 

35,282

 



 

29,976

 

Operating loss



(6,636

)




(1,684

)

Other expense, net



(41

)







Interest income (expense), net


 

139

 



 

(124

)

Loss before income tax benefit and discontinued operations



(6,538

)




(1,808

)

Income tax benefit


 

(1,840

)



 

(203

)

Loss before discontinued operations



(4,698

)




(1,605

)

Earnings from discontinued operations, less applicable income
tax
benefit


 


 



 

512

 

Net loss


$

(4,698

)



$

(1,093

)

Basic loss per share


$

(0.13

)



$

(0.03

)

Diluted loss per share


$

(0.13

)



$

(0.03

)

Weighted average number of shares outstanding






Basic



35,142





34,859


Diluted



35,142





34,859