K2 Inc. net sales for the fourth quarter increase 4.3% to $353.5 million from $338.9 million in the prior year. Adjusted net income for the fourth quarter of 2005 was $14.7 million, or 28 cents adjusted diluted earnings per share, compared to pro forma adjusted net income of $11.8 million, or 23 cents pro forma adjusted diluted earnings per share, for 2004. Net sales for the year were $1.3 billion versus $1.2 billion in the prior year, an increase of 9.4%. Adjusted net income for fiscal year 2005 was $39.0 million, or 78 cents adjusted diluted earnings per share, compared to adjusted net income of $31.9 million, or 65 cents pro forma adjusted diluted earnings per share, for 2004.
Richard Heckmann, Chairman and Chief Executive Officer, said, “In terms of core operations before charges, we are very pleased with our results in the fourth quarter with strong growth in earnings over the comparable period in 2004. With the exception of paintball, all of our major business lines generated an improvement in 2005. We continue to feel strongly that we have assembled at K2 the most unique collection of brands in sporting goods, with a #1 market share in 8 major product categories. From 2002 to 2005 our sales have grown from $582 million to $1.3 billion, and our operating income from $27 million to over $78 million before the charges that we are taking in 2005. We have demonstrated the power of our brands and our manufacturing and distribution capabilities as evidenced by 2005 sales growth in excess of 9%, improved profitability with gross margins increasing from 29.3% in 2002 to 34.6% in 2005, and operating margins from 4.7% in 2002 to 5.9% in 2005 before charges. Our balance sheet is strong, and we have recently closed a new $250 million five year bank facility with lower pricing and increased flexibility.
“Despite our steady progress in growing earnings, we have taken a non-cash charge related to our goodwill and certain other intangibles. One of the key indicators which led to the charge was that our book value significantly exceeded our market capitalization on the date of our annual impairment test. Due to the current accounting standards and valuation techniques used for measuring the value of intangible assets, a significant charge was necessary. As a result of the charges, our book value per share is now lower than the recent trading price of our stock. I would emphasize that this charge is non-cash, and does not have any impact on operations, or any material effect on any debt agreement or material contract at the company.
“For 2006, our forecast range is for growth in both operating and net income in excess of 10% over 2005 levels, before charges. We expect to achieve these results by a continued focus on new product introductions and innovations, and efficiencies in manufacturing, distribution, and cost containment. As we complete this year's ski season, we are particularly proud of the fact that we have again improved our U.S. market position in winter sports, and that athletes on K2, Volkl and Madshus skis and snowboards won a total of 43 medals at the Winter Olympics, a record for our company.”
Review of Comparable 2005 Sales and Profit Trends
K2's net sales were $1,014 million and $1,069 million for the 2004 and 2005 fiscal years, respectively, reflecting sales growth of 5.5% for 2005, excluding sales of 2004 material acquisitions including Volkl, Marker and Marmot, which were acquired in the third quarter of 2004. K2's net sales were $907 million and $987 million for the 2004 and 2005 fiscal years, respectively, reflecting sales growth of 8.8%, excluding sales from these 2004 material acquisitions and paintball products, which declined in 2005. K2's net sales were $306 million and $325 million for the 2004 and 2005 fourth quarters, respectively, reflecting sales growth of 6.2%, excluding sales from paintball products which declined in the 2005 fourth quarter.
K2's gross profit, excluding restructuring charges of $2.8 million, in the fourth quarter of 2005 increased to 35.9% of net sales, as compared to 34.5% in the comparable 2004 period. Gross profit, excluding restructuring charges, for the twelve months ended December 31, 2005 increased to 34.6% of net sales, as compared to 33.3% for the 2004 comparable period. Gross profit as a percentage of net sales in the 2005 fourth quarter benefited from higher gross margins from winter sports product lines.
K2's operating profit, excluding non-cash intangible charges and restructuring charges as set forth in Table B, as a percentage of net sales for the fourth quarter of 2005 increased to 7.9% compared to 6.3% in the comparable 2004 period. Operating profit, excluding non-cash intangible charges and restructuring charges, increased to 5.9% of net sales for the full year 2005 as compared to 5.5% for the full year 2004 including Pro Forma operating losses for the first and second quarters of 2004 for Volkl, Marker and Marmot which were acquired mid-year 2004. For the fourth quarter of 2005 selling, general and administrative expenses, excluding non-cash intangible charges and restructuring charges, as a percentage of net sales decreased slightly to 28.0% compared to 28.1% of net sales for the fourth quarter of 2004. For the twelve months ended December 31, 2005, selling, general and administrative expenses, excluding non-cash intangible charges and restructuring charges, increased as a percentage of net sales to 28.7% as compared to 26.6% in the prior year, with the increase due principally to the full year inclusion of Volkl, Marker and Marmot which closed mid-year 2004.
Fourth Quarter and 2005 Segment Review
Due to the acquisitions of Ex Officio and Marmot in the 2004 second and third quarters, respectively, K2 formed an Apparel and Footwear segment in the 2004 third quarter that also includes Earth Products. Earth Products was formerly included in the Action Sports segment.
Marine and Outdoor
Shakespeare fishing tackle and monofilament, and Stearns marine and outdoor products, generated sales of $70.3 million in the fourth quarter of 2005, an increase of 13.0% from the comparable quarter in 2004. For fiscal year 2005, sales increased 16.4 % and operating profits were 12.8% of sales in 2005, up slightly from 12.6% in 2004 due principally to sales growth and a decline in selling, general and administrative expenses as a percentage of sales. Sales growth in 2005 was driven primarily by fishing tackle, antennas, children's flotation devices, ski vests, and Hodgman waders (acquired in second quarter 2005).
Team Sports
Rawlings, Worth, and K2 Licensed Products had total sales of $58.5 million in the 2005 fourth quarter, up 7.6% from the 2004 period. For fiscal year 2005, sales increased 5.9%, and operating profits were $7.1 million before non-cash intangible charges of $84.9 million, $2.5 million in non-cash amortization charges (relating to acquired intangible asset charges resulting from K2's acquisition activities), and a $1.7 million loss at K2 Licensed Products. Sales growth in 2005 was driven primarily by baseball and softball aluminum and Miken® composite bat product lines.
Action Sports
Sales of winter products, in-line skates and paintball products totaled $173.8 million in the fourth quarter of 2005, a decrease of 2.5% from the 2004 fourth quarter, due primarily to the decline in paintball sales. For fiscal year 2005, excluding sales and operating profit from paintball products, non-cash intangible charges of $168.2 million and restructuring charges of $4.0 million, sales in the Action Sports segment were $400.2 million and operating profits were $26.9 million, including normal seasonal operating losses for Volkl and Marker of $9.1 million in the first and second quarters of 2005. The $4.0 million restructuring charge relates primarily to severance, inventory and tooling write downs. The 2004 segment operating profits of $29.7 million (excluding operating profit from paintball products) are not directly comparable to 2005 as they do not include the 2004 seasonal losses of Volkl and Marker prior to their acquisition at the beginning of the 2004 third quarter. Sales decline in 2005 was driven by paintball products, in-line skates and bike products (which were licensed in the third quarter of 2005) offset by growth in alpine skis, bindings and snowshoes.
Apparel and Footwear
Earth Products, Ex Officio and Marmot had sales of $50.9 million in the fourth quarter of 2005, an increase of 15.8% over the 2004 period. For fiscal year 2005, operating profits declined to 9.0% from 10.0% of sales in 2004 due primarily to normal seasonal operating losses for Marmot of $1 million in the first quarter of 2005. The 2004 segment operating profits of $11.0 million are not directly comparable to 2005 as they do not include the 2004 seasonal losses of Marmot prior to its acquisition at the beginning of the 2004 third quarter. Sales growth was driven primarily by skate footwear and apparel, and winter and outdoor apparel.
The segment information presented below is for the three months ended
December 31:
(in millions)
Net Sales
to Unaffiliated Intersegment Operating
Customers Sales Profit (Loss)
2005 2004 2005 2004 2005 2004
------- ------- ------ ------ -------- ------
Marine and Outdoor $70.3 $62.1 $32.5 $29.2 $5.7 $4.0
Team Sports (a) 58.5 54.5 - - (87.7) (2.7)
Action Sports (b) 173.8 178.4 2.1 2.1 (149.3) 21.7
Apparel and Footwear 50.9 43.9 0.7 0.1 5.4 2.8
------- ------- ------ ------ -------- ------
Total segment data $353.5 $338.9 $35.3 $31.4 (225.9) 25.8
======= ======= ====== ======
Corporate expenses, net (3.0) (4.7)
Interest expense (8.3) (7.6)
-------- ------
Income (loss) before
provision for income
taxes $(237.2) $13.5
======== ======
The segment information presented below is for the twelve months ended
December 31:
(in millions)
Net Sales
to Unaffiliated Intersegment Operating
Customers Sales Profit (Loss)
2005 2004 2005 2004 2005 2004
--------- --------- ------- ------- -------- ------
Marine and Outdoor $392.2 $336.9 $146.8 $117.2 $50.3 $42.4
Team Sports (a) 265.2 250.4 - - (82.0) 2.4
Action Sports (b) 482.5 502.7 10.5 5.0 (147.4) 39.3
Apparel and
Footwear 173.7 110.7 2.8 1.0 15.7 11.0
--------- --------- ------- ------- -------- ------
Total segment
data $1,313.6 $1,200.7 $160.1 $123.2 (163.4) 95.1
========= ========= ======= =======
Corporate expenses,
net (12.7) (13.9)
Interest expense (30.4) (21.4)
-------- ------
Income (loss)
before provision
for income taxes $(206.5) $59.8
======== ======
(a) 2005 Operating loss includes non-cash intangible charges of
$84.9 million.
(b) 2005 Operating loss includes non-cash intangible charges of
$168.2 million and restructuring charges of $4.0 million.
Balance Sheet
At December 31, 2005, cash and accounts receivables decreased slightly to $392.2 million as compared to $395.5 million at December 31, 2004. Inventories at December 31, 2005 increased to $359.0 million from $325.1 million at December 31, 2004, primarily as a result of the growth in new product lines.
The company's total debt increased to $437.3 million at December 31, 2005 from $415.9 million at December 31, 2004. The increase in debt as of December 31, 2005 is primarily the result of growth in working capital.
Sarbanes-Oxley Act of 2002
Section 404 of the Sarbanes-Oxley Act of 2002 requires K2, commencing with its 2004 Annual Report, to provide management's annual report on its assessment of the effectiveness of its internal control over financial reporting and, in connection with such assessment, an attestation report from its independent registered public accountant, Ernst & Young LLP. In order to comply with the requirements of Section 404, K2 estimates that it incurred total expenses of approximately $2.9 million in 2005 and total expenses of approximately $2.5 million in 2004.
Outlook for 2006
For fiscal year 2006, K2 forecasts 2006 sales in the range of $1.33 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 82 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 78 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. Table C provides a reconciliation of GAAP operating income to Adjusted operating income and GAAP net income to Adjusted net income for the forecast 2006 fiscal year.
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 first and second quarters of 2006, K2 forecasts sales in the range of $635 million to $650 million, and GAAP diluted earnings per share in the range of $0.08 to $0.10, and Adjusted diluted earnings per share in the range of $0.13 to $0.16, in each case based on an assumed diluted share count of 47.9 million. Table C provides a reconciliation of GAAP operating income to Adjusted operating income and GAAP net income to Adjusted net income for the first and second quarters of 2006.
K2 INC.
STATEMENTS OF OPERATIONS
(in thousands, except for per share figures)
Fourth Quarter Twelve Months
Ended December 31, Ended December 31,
2005 2004 2005 2004
(unaudited) (unaudited) (unaudited) (audited)
----------- ----------- ----------- -----------
Net sales $353,530 $338,916 $1,313,598 $1,200,727
Cost of products
sold 229,591 (a) 222,051 861,955 (a) 800,678
----------- ----------- ----------- -----------
Gross profit 123,939 116,865 451,643 400,049
Selling expenses 59,891 56,785 230,413 197,134
General and
administrative
expenses 40,264 (b) 38,600 147,076 (b) 121,895
Non-cash intangible
charges 253,154 - 253,154 -
----------- ----------- ----------- -----------
Operating income
(loss) (229,370) 21,480 (179,000) 81,020
Interest expense 8,295 7,638 30,352 21,449
Other (income)
expense, net (419) 358 (2,840) (246)
----------- ----------- ----------- -----------
Income (loss)
before
provision for
income taxes (237,246) 13,484 (206,512) 59,817
Provision for
income tax expense
(benefit) (5,168) 4,659 5,049 20,876
----------- ----------- ----------- -----------
Net income (loss) $(232,078) $8,825 $(211,561) $38,941
=========== =========== =========== ===========
Basic earnings
(loss) per share $(5.01) $0.19 $(4.57) $0.97
=========== =========== =========== ===========
Diluted earnings
(loss) per share $(5.01) $0.18 $(4.57) $0.86
=========== =========== =========== ===========
Shares:
Basic 46,364 46,077 46,272 40,285
Diluted 46,364 55,442 46,272 49,345
(a) Includes $2,829 of restructuring charges
(b) Includes $1,158 of restructuring charges
