K2 Inc. posted net sales for the second quarter of $301.1 million versus $301.4 million in the prior year. Net sales for the six month period ended June 30, 2006 increased 4.8% over the prior year period. Adjusted net income for the second quarter of 2006 was $3.4 million, or 7 cents adjusted diluted earnings per share, compared to adjusted net income of $2.3 million, or 5 cents in the second quarter of 2005. Adjusted net income for the first six months of 2006 was $8.4 million, or 18 cents Adjusted diluted earnings per share, compared to Adjusted net income of $6.2 million, or 13 cents in the first half of 2005. Included in the second quarter 2006 results is a net after-tax gain of $568,000 or 1 cent earnings per share associated with the closing of the Worth bat manufacturing facility in Tennessee, consisting of a $1.5 million pre-tax gain on the sale of the facility, offset by $640,000 of pre-tax related closure and severance costs.
Richard Heckmann, Chairman and Chief Executive Officer, said, “This is seasonally our lowest quarter of the year. Our flat sales figure was largely due to the strength of the first quarter, which was up 9.4%, and our licensing of bikes in the third quarter of 2005, which resulted in a $4.2 million reduction in sales for the quarter. Adjusted diluted earnings per share increased 20% as compared to 2005 after excluding the net effect of the plant closure. The earnings growth in the second quarter was driven principally by continued sales growth and margin expansion in Team Sports, and by lower interest expense as we have continued to reduce debt through free cash flow.
“In the first six months of 2006, sales were up 4.8%, and excluding the net gain of the plant closure, operating income was up 14.0%, and Adjusted earnings per share were up 23.1%.
“For the remainder of 2006, we feel very good about the strength of our orders for ski and snowboard equipment, winter and performance apparel, and our line of fall hunting and fishing products. Despite the uncertain outlook for the economy, we continue to expect our earnings to be at the upper end of the guidance range of $0.83 to $0.86 Adjusted diluted earnings per share.”
Review of Comparable 2006 Sales and Profit Trends
K2’s net sales for the second quarter of 2006 were $301.1 million versus $301.4 million in the second quarter of 2005, which included the K2(R) Bike business which has been licensed.
K2’s gross profit as a percentage of sales in the second quarter of 2006 increased to 34.1% compared to 33.1% in the second quarter of 2005. K2’s operating profit, as a percentage of net sales for the second quarter of 2006 increased to 3.0% compared to 2.8% in the comparable 2005 period. The increase in operating margin for the quarter was due to increased gross margins offset by increased selling, general and administrative expenses as a percentage of sales in the Action Sports and Apparel and Footwear segments. For the second quarter of 2006 consolidated selling, general and administrative expenses, as a percentage of consolidated net sales increased to 31.0% compared to 30.3% of net sales for the second quarter of 2005.
Second Quarter Segment Review
The Action Sports segment has historically included skis, snowboards, bindings, snowshoes, in-line skates and paintball products. During 2005, the paintball business declined significantly. In order to improve efficiency, K2 reorganized the paintball business to operate more in line with how the components of the Team Sports segment operates, with increased emphasis on the mass merchant and large sporting goods retailer distribution. Upon completion of the reorganization in the first quarter 2006, K2 has adjusted its segment reporting to include paintball products in the Team Sports segment. Historical numbers presented below have been restated to reflect the change in segment reporting. For purposes of comparability, in 2005 paintball sales were $82 million and on a quarterly basis sales were approximately 19% in the first quarter, 25% in the second quarter, 21% in the third quarter, and 35% in the fourth quarter.
Marine and Outdoor
Shakespeare(R) fishing tackle and monofilament and Stearns(R) marine and outdoor products generated net sales of $128.8 million in the second quarter of 2006, a decrease of 1.2% from the comparable quarter in 2005. The sales decrease was due to decreased sales of cutting line, marine antennas and ski vests, offset by increased sales of fishing kits and combos, children’s flotation devices and Hodgman(R) waders (acquired in the second quarter of 2005). For the second quarter of 2006, operating profits were $19.6 million, down slightly from $20.1 million in 2005 due to the decrease in sales.
Team Sports
Rawlings, Worth, K2 Licensed Products and Brass Eagle had net sales of $96.5 million in the 2006 second quarter, up 8.1% from the 2005 period. Operating profits were $4.4 million in the 2006 second quarter, up 405.7% from the 2005 period due to improved profitability in the paintball and souvenir and promotional product lines and the gain on the previously mentioned facility sale. Sales growth in 2006 was driven primarily by Rawlings(R), and Miken(R) baseball and softball products and paintball products.
Action Sports
The first and second quarters are seasonally slow quarters. Net sales of winter products and in-line skates totaled $37.5 million in the second quarter of 2006, a decrease of 14.9% from the 2005 second quarter, primarily due to licensing bikes to a third party in the third quarter of 2005. The operating loss was $10.5 million, a slight increase in the loss compared to the loss of $9.9 million in the second quarter 2005.
Apparel and Footwear
Apparel and Footwear had net sales of $38.3 million in the second quarter of 2006, an increase of 1.8% from the 2005 period driven by growth in skateboard shoes and the Ex Officio and Marmot combination. The operating profit for the second quarter of 2006 was $0.4 million compared to an operating profit of $3.0 million in the second quarter of 2005. The decrease in profit was due to start up expenses associated with the opening of a new distribution center in Reno, Nevada, and integration expenses for combining design, development, and sourcing for several apparel brands.
The segment information presented below is for the three months ended June 30:
(in millions)
Net Sales to
Unaffiliated Intersegment Operating
Customers Sales Profit (Loss)
--------------- ------------- -------------
2006 2005 2006 2005 2006 2005
------- ------- ------ ------ ------ ------
Marine and Outdoor $128.8 $130.4 $46.2 $36.7 $19.6 $20.1
Team Sports 96.5 89.3 - 0.1 4.4 0.9
Action Sports 37.5 44.1 4.8 2.3 (10.5) (9.9)
Apparel and Footwear 38.3 37.6 0.8 0.2 0.4 3.0
------- ------- ------ ------ ------ ------
Total segment data $301.1 $301.4 $51.8 $39.3 13.9 14.1
======= ======= ====== ======
Corporate expenses, net (4.0) (4.6)
Interest expense (6.7) (7.3)
------ ------
Income before provision for
income taxes $3.2 $2.2
====== ======
Balance Sheet
At June 30, 2006, cash and accounts receivable increased to $288.4 million as compared to $286.3 million at June 30, 2005. Inventories at June 30, 2006 increased to $383.3 million from $367.1 million at June 30, 2005, primarily as a result of the growth in new product lines.
The company’s total debt decreased to $367.0 million at June 30, 2006 from $398.9 million at June 30, 2005. The decrease in debt as of June 30, 2006 is primarily the result of improved profitability and cash flow from operations.
Outlook for 2006
For fiscal year 2006, K2 forecasts 2006 net sales in the range of $1.36 to $1.38 billion, GAAP diluted earnings per share in the range of 73 cents to 76 cents and Adjusted diluted earnings per share in the range of 83 cents to 86 cents, in each case based on assumed fully diluted shares outstanding of 55.8 million. For the same period, K2 forecasts GAAP basic earnings per share in the range of 79 cents to 83 cents and Adjusted basic earnings per share in the range of 90 cents to 95 cents, in each case based on assumed basic shares outstanding of 47.1 million.
On a quarterly basis for 2006, K2 expects that seasonality in sales and earnings per share will be similar to the quarterly trends in 2005. For the second six months of 2006, K2 forecasts net sales in the range of $710 million to $730 million, and GAAP diluted earnings per share in the range of 59 cents to 62 cents, and Adjusted diluted earnings per share in the range of 64 cents to 67 cents, in each case based on assumed diluted shares outstanding of 56.3 million.
K2 INC.
STATEMENTS OF INCOME
(unaudited in thousands, except for per share figures)
Three Months Six Months
Ended June 30, Ended June 30,
------------------- -------------------
2006 2005 2006 2005
--------- --------- --------- ---------
Net sales $301,142 $301,425 $649,213 $619,716
Cost of products sold 198,577 201,667 434,093 417,139
--------- --------- --------- ---------
Gross profit 102,565 99,758 215,120 202,577
Selling expenses 57,683 54,502 119,558 113,217
General and administrative
expenses 35,703 36,910 73,776 71,003
--------- --------- --------- ---------
Operating income 9,179 8,346 21,786 18,357
Interest expense 6,736 7,285 14,569 14,538
Other income, net (783) (1,117) (1,535) (1,838)
--------- --------- --------- ---------
Income before provision for
income taxes 3,226 2,178 8,752 5,657
Provision for income tax
expense 1,083 725 2,967 1,880
--------- --------- --------- ---------
Net income $2,143 $1,453 $5,785 $3,777
========= ========= ========= =========
Basic earnings per share (a) $0.05 $0.03 $0.12 $0.08
========= ========= ========= =========
Diluted earnings per share (a) $0.05 $0.03 $0.12 $0.08
