K2 Inc. net sales for the first quarter ended March 31, 2007 were $372.7 million versus $348.1 million in the prior year, an increase of 7.1%. Adjusted net income for the first quarter of 2007 was $7.1 million, or 14 cents adjusted diluted earnings per share, compared to adjusted net income of $5.0 million, or 10 cents adjusted diluted earnings per share in the first quarter of 2006.
Wayne Merck, president and CEO, said, “We had an excellent quarter as reflected by solid sales and profit growth led by Team Sports and Marine and Outdoor, after adjusting Marine and Outdoor for $1.3 million in amortization related to recent acquisitions. We are also very pleased with Action Sports which generated consistent results in the first quarter of 2007 as compared to the same period in 2006 despite the soft conditions in the market for winter products. In the first quarter we closed the acquisition of Penn® fishing tackle, which is a legendary 75 year old brand in salt water fishing. Penn® is highly complementary to our Shakespeare® branded product, and we expect a strong financial contribution in the future after we have completed its integration.
“As we look forward this year, we continue to be very optimistic about our ability to achieve our sales and earnings forecast for 2007. We are expecting continued gains from Team Sports and Marine and Outdoor, respectable profitability from Action Sports, despite the conditions in that market, and a significant improvement in Apparel and Footwear after the warehouse start-up expenses that we absorbed in 2006. K2 is built upon a portfolio of leading brands, and we are excited about our long-term prospects for growth in sales and profitability.”
Review of Comparable 2006 Sales and Profit Trends
K2's net sales for the first quarter of 2007 were $372.7 million versus $348.1 million in the first quarter of 2006. The increase was mainly due to growth in sales within the Marine and Outdoor and Apparel and Footwear segments. K2's gross profit as a percentage of net sales on an adjusted basis, increased to 33.4% in the first quarter of 2007 compared to 32.3% last year. The increase in gross profit as a percentage of sales was due to higher gross margins in the Action and Team Sports segments offset by lower gross margins in Apparel and Footwear. Gross margins in Marine and Outdoor were up slightly year-over-year.
Selling expenses as a percentage of net sales on an adjusted basis increased to 18.6% in the first quarter of 2007 compared to 17.8% in the first quarter of 2006, due primarily to higher selling expenses as a percentage of sales in the Action and Team Sports segments. General and administrative expenses as a percentage of net sales on an adjusted basis decreased from 10.5% in the first quarter of 2006 to 10.3% in the comparable 2007 quarter. K2's operating profit as a percentage of net sales on an adjusted basis for the first quarter of 2007 increased to 4.5% compared to 4.0% in the comparable 2006 period, due to a higher gross profit as a percentage of sales.
First Quarter 2007 Segment Review
The results of K2's China manufacturing operations are consolidated under the Marine and Outdoor segment. Historically, K2 has eliminated the intersegment sales from the China manufacturing operations, but has not allocated its operating profit from those intersegment sales to the other segments. In the fourth quarter of 2006, K2 implemented new financial reporting systems in its China manufacturing operations that now allow it to allocate profitability by segment. Historical numbers presented below have been restated to reflect the change in segment reporting.
Shakespeare and Penn fishing tackle, Stearns and Sevylor marine and outdoor products and monofilament products generated net sales of $142.2 million in the first quarter of 2007, an increase of 15.5% from the comparable quarter in 2006. The first quarter sales increase was due to increased sales of fishing kits and combos, Ugly Stik rods, Sevylor inflatables (acquired in December 2006) and Penn fishing tackle (acquired in January 2007), offset by declines in personal flotation devices, immersion suits, Hodgman waders and drywear. The decrease in operating income for the first quarter from $15.9 million in 2006 to $15.3 million in 2007 was due principally to $1.3 million in non-cash amortization expense associated with the acquisition of Sevylor and Penn, consisting of $0.8 million of inventory step-up and $0.5 million of acquired intangible amortization.
Rawlings, Worth, K2 Licensed Products and JT Sports (formerly known as Brass Eagle) had net sales of $134.4 million in the 2007 first quarter, up 1.4% from the 2006 period primarily due to increased sales of paintball products. Operating income was $15.4 million in the 2007 first quarter, an improvement from $12.9 million in the 2006 period, primarily due to higher gross profit as a percentage of net sales.
Net sales of winter products and in-line skates totaled $56.3 million in the first quarter of 2007, an increase of 0.3% from the 2006 first quarter, due primarily to increased sales of K2 in-line skates and skis, offset by decreased sales of Volkl alpine skis and Marker bindings. The operating loss for the first quarter of 2007 was $10.6 million, a decrease from the $10.7 million operating loss in the first quarter 2006. The decrease in operating loss for the first quarter was primarily due to higher gross profit as a percentage of net sales.
Apparel and Footwear had net sales of $39.8 million in the first quarter of 2007, an increase of 9.6% from the 2006 period due to increased sales of Marmot winter outerwear and Ex Officio spring apparel products, offset by declines in sales of skateboard shoes and apparel. The operating loss for the first quarter of 2007 was $1.3 million compared to an operating loss of $1.8 million in the first quarter of 2006 due to the increase in sales and lower selling, general and administrative expenses as a percentage of net sales offset by lower gross profit as a percentage of net sales.
The segment information presented below is for the three months ended March 31:
(in millions)
Net Sales to Operating
Unaffiliated Intersegment Profit
Customers Sales (Loss)
2007 2006 2007 2006 2007 2006
------- ------- ------ ------ ------ ------
Marine and Outdoor $142.2 $123.1 $52.0 $40.5 $15.3 $15.9
Team Sports 134.4 132.5 - - 15.4 12.9
Action Sports 56.3 56.1 5.4 0.9 (10.6) (10.7)
Apparel and Footwear 39.8 36.4 0.9 1.5 (1.3) (1.8)
------- ------- ------ ------ ------ ------
Total segment data $372.7 $348.1 $58.3 $42.9 18.8 16.3
======= ======= ====== ======
Corporate expenses, net (4.2) (3.0)
Interest expense (7.2) (7.8)
------ ------
Income before provision
for income taxes $7.4 $5.5
====== ======
Balance Sheet
At March 31, 2007, cash and accounts receivable increased 14.4% to $375.6 million as compared to $328.2 million at March 31, 2006. Inventories at March 31, 2007 increased 12.9% to $405.0 million from $358.7 million at March 31, 2006. The growth in accounts receivable and inventory is primarily a result of the growth in sales of 7.1% for the three months ended March 31, 2007 compared to the same period last year and due to working capital associated with the Sevylor and Penn acquisitions.
The company's total debt decreased to $391.3 million at March 31, 2007 from $392.8 million one year ago. The decrease in debt is primarily the result of improved profitability and cash flow from operations and from the conversion of $25 million in subordinated convertible debt to equity on November 6, 2006 offset by cash paid for acquisitions in the fourth quarter of 2006 and first quarter of 2007. Total debt, net of cash decreased from $376.4 million at March 31, 2006 to $367.2 at March 31, 2007.
For fiscal year 2007, K2 forecasts 2007 net sales in the range of $1.46 billion to $1.51 billion, GAAP diluted earnings per share in the range of 73 cents to 77 cents and adjusted diluted earnings per share in the range of 90 cents to 94 cents, in each case based on assumed fully diluted shares outstanding of 56.9 million. For the same period, K2 forecasts GAAP basic earnings per share in the range of 78 cents to 83 cents and adjusted basic earnings per share in the range of 98 cents to $1.02, in each case based on assumed basic shares outstanding of 49.7 million. On a quarterly basis for 2007, K2 expects that seasonality in sales and earnings per share will be similar to the quarterly trends in 2006.
K2 INC.
STATEMENTS OF INCOME
(in thousands, except for per share figures)
Three Months
Ended March 31, 2007
------------------------------------
GAAP (a) Non-GAAP
(unaudited) Adjustments Adjusted
----------- ----------- ---------
Net sales $ 372,725 $ - $372,725
Cost of products sold 249,115 (825)(b) 248,290
----------- ----------- ---------
Gross profit 123,610 825 124,435
Selling expenses 69,236 (52)(c) 69,184
General and administrative
expenses 40,472 (2,086)(d) 38,386
----------- ----------- ---------
Operating income 13,902 2,963 16,865
Interest expense 7,169 (425)(e) 6,744
Other income, net (687) - (687)
----------- ----------- ---------
Income before provision (benefit)
for income taxes 7,420 3,388 10,808
Provision for income tax expense 2,653 1,071 (f) 3,729
----------- ----------- ---------
Net income $ 4,767 $ 2,317 $ 7,079
=========== =========== =========
Basic shares outstanding 49,387 - 49,387
Diluted shares outstanding 50,564 5,706 (g) 56,360
Basic earnings per share $ 0.10 $ 0.04 $ 0.14
Diluted earnings per share $ 0.09 $ 0.05 $ 0.14
Three Months
Ended March 31, 2006
------------------------------------
GAAP (a) Non-GAAP
(unaudited) Adjustments Adjusted
----------- ----------- ---------
Net sales $ 348,071 $ - $348,071
Cost of products sold 235,516 - 235,516
----------- ----------- ---------
Gross profit 112,555 - 112,555
Selling expenses 61,875 - 61,875
General and administrative
expenses 38,073 (1,408)(d) 36,665
----------- ----------- ---------
Operating income 12,607 1,408 14,015
Interest expense 7,833 (598)(e) 7,235
Other income, net (752) - (752)
----------- ----------- ---------
Income before provision (benefit)
for income taxes 5,526 2,006 7,532
Provision for income tax expense 1,884 684 (f) 2,568
----------- ----------- ---------
Net income $ 3,642 $ 1,322 $ 4,964
=========== =========== =========
Basic shares outstanding 46,719 - 46,719
Diluted shares outstanding 47,397 - 47,397
Basic earnings per share $ 0.08 $ 0.03 $ 0.11
Diluted earnings per share $ 0.08 $ 0.02 $ 0.10
