K2 Inc. reported that fourth quarter sales increased 51.8% to $193.8 million from $127.7 million in the 2002 fourth quarter. Diluted earnings per share in the fourth quarter increased 133% to $0.07, including $0.01 relating to a gain on the sale of the light pole division, as compared to $0.03 in the year-earlier period, and $0.02 higher than guidance estimates of $0.05 previously provided by the Company.
2003 fiscal year sales increased 23.4% to $718.5 million from $582.2 million in 2002. Fiscal year 2003 earnings per share were $0.62, including $0.06 relating to a gain on the sale of the light pole division, before early debt extinguishment charges and the dilutive impact of the convertible debt, as compared to guidance estimates previously provided by the Company of earnings per share of $0.57 on the same basis. Diluted earnings per share were $0.44, including the gain on the sale of the light pole division, after giving effect to the debt extinguishment charges and assuming partial conversion of the convertible debt.
Richard Heckmann, Chairman and Chief Executive Officer, said, “In 2003, we laid the foundation for future growth at K2. We completed seven strategic acquisitions and now have the #1 brand in five major sports categories. In 2003, we improved our gross margin over 100 basis points from 2002, reflecting continued progress in manufacturing efficiencies. We chose to reinvest a portion of our higher gross profits in selling and marketing expense to further solidify our brand position in the current consolidating retail environment. Despite this significant growth, we also preserved our financial flexibility in maintaining a debt-to-capital ratio of 33% by raising $100 million in convertible debt, and by selling our non-strategic light pole business. The basic earnings per share guidance that we have provided of $0.92 to $0.94 (before the dilutive impact of the convertible debt) for 2004 demonstrates our belief in the underlying strength of both our existing businesses and our recent acquisitions, and represents a 39% increase when compared to the $0.67 that we earned in 2002.”
In 2003, K2 sales were $718.5 million, of which $113.9 million were from businesses acquired in that year. On May 19, 2003, K2 sold its light pole division, which contributed sales of $32.7 million in 2002 and $12.6 million in 2003 from January 1 to May 19. Sales in 2002 were $582.2 million, and no material acquisitions were completed in that year. Sales in 2003 excluding sales from acquisitions and the light pole division were $592.1 million, and sales in 2002 excluding the light pole division were $549.4 million, which results in sales growth excluding acquisitions and divestitures in 2003 of 8%.
In February and May of 2003, K2 completed two private placements of convertible debt with a total face amount of $100 million. The $25 million issue has a coupon of 7.25% and is convertible into 2.1 million shares of K2 common stock at a conversion price of $11.92 per share. The $75 million issue has a coupon of 5% and is convertible into 5.7 million shares of K2 common stock at a conversion price of $13.14 per share. In accordance with accounting principles generally accepted in the United States (“GAAP”), the Company is required to test whether the convertible debt “if converted” would have a dilutive impact on earnings per share. Consequently, the Company included 5.7 million shares in the diluted shares outstanding for the quarter ended September 30, 2003; there was no impact for the quarter ended December 31, 2003, and 3.2 million shares were included in the diluted shares outstanding for the fiscal year ended December 31, 2003. Although the Company has no expectation that the convertible debt will be converted in 2004, it is expected that GAAP will require that the total 7.8 million shares underlying the convertible debt will be included in the calculation of diluted earnings per share in future reporting periods.
K2 Sports, which includes skis, snowboards, in-line skates, snowshoes, and bikes, generated sales of $72.2 million in the fourth quarter, up 24.7% from the 2002 fourth quarter. Sales for the twelve-month period were $241.7 million, up 10.9% from the previous year. Sales increases in this group in 2003 have been driven by significant growth in both skis and snowboards, growth in in-line skates despite the softness in that category, and the inclusion of sales of Winter Quest, which was acquired on October 17, 2003. Margins have improved due to increased manufacturing efficiencies and fewer closeout sales.
Marine and Outdoor, comprised of Shakespeare fishing tackle and monofilament and Stearns marine and outdoor products, generated sales of $60.5 million for the fourth quarter, down slightly from $61.1 million in the 2003 period due to lost sales associated with the previously announced divestiture of the light pole division in May of 2003, which had been combined with monofilament results and contributed sales of $32.7 million in 2002 and $12.6 million in 2003. Sales for the twelve-month period were $324.0 million, down slightly from $328.7 million in sales in 2002, again due to this divestiture. Net of the divestiture of the light pole division, sales in this division increased 5% in 2003 over 2002, and margins improved slightly.
Rawlings Team Sports, comprised of Rawlings and Worth, generated sales of $47.6 million in the fourth quarter and $116.9 million since the dates of their respective acquisitions in 2003. The Company acquired Rawlings on March 26, 2003, and Worth on September 16, 2003, and comparisons to the 2002 period are difficult since Rawlings previously reported earnings on a November, February, May, and August quarterly reporting basis.
Planet Earth generated sales for the fourth quarter of $8.2 million, up 137.3% over the 2002 fourth quarter, and sales for the twelve-month period were $30.6 million, up 88.5% for the comparable period in 2002. Margins in this division have improved primarily due to higher sales volumes.
Results are not provided for Brass Eagle, which was acquired on December 8, 2003, as the sales contribution was not material to K2's total sales for the fourth quarter or the fiscal year.
K2's balance sheet and working capital debt at December 31, 2003, reflects acquisitions and the seasonality associated with the build-up for winter products in the fourth quarter and team sports in the first quarter. At December 31, 2003, cash and receivables totaled $246.6 million as compared to $154.3 million at December 31, 2002. Inventories increased to $239.4 million from $144.2 million in the prior-year period.
Compared with the 2002 fourth quarter, the Company's total debt increased to $216.1 million at December 31, 2003, from $96.1 million in 2002. The increase in debt as of December 31, 2003, is primarily caused by the Company's acquisitions during 2003 and seasonal working capital requirements of these acquired businesses.
As a result of the acquisition of Rawlings in the first quarter, Worth in the third quarter, and Brass Eagle in the fourth quarter, the Company increased its number of shares of common stock outstanding by 8.8 million shares, 0.9 million shares, and 4.5 million shares, respectively, to 33.4 million shares outstanding at December 31, 2003, as compared to 17.9 million shares outstanding at December 31, 2002.
The Company today also reconfirmed guidance for the first quarter of 2004 and fiscal 2004. For the quarter ended March 31, 2004, the Company expects first quarter sales of approximately $250 million and basic earnings per share of $0.30 assuming 34.4 million basis shares outstanding, and diluted earnings per share of $0.25 assuming outstanding shares of 43.9 million as if the convertible debt were converted into shares. On a full-year basis for fiscal 2004, the Company expects sales of $920 to $930 million, and basic earnings per share to be in the range of $0.92 to $0.94 assuming 34.4 million basis shares outstanding, and diluted earnings per share in the range of $0.80 to $0.82 on projected average diluted shares of 43.9 million as if the convertible debt were converted into shares.
K2 INC.
STATEMENTS OF INCOME
(unaudited)
(thousands, except for per share figures)
FOURTH QUARTER TWELVE MONTHS
ended December 31, ended December 31,
-------------------- --------------------
2003 2002 2003 2002
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Net sales $193,785 $127,696 $718,539 $582,159
Cost of products sold 136,096 92,051 498,620 411,620
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Gross profit 57,689 35,645 219,919 170,539
Selling expenses 33,395 21,228 116,509 86,394
General and administrative
expenses 18,845 11,972 71,358 56,862
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Operating income 5,449 2,445 32,052 27,283
Interest expense(a) 2,702 1,836 16,695 8,966
Other income, net(b) (564) (194) (2,218) (253)
--------- --------- --------- ---------
Income before provision
for income taxes 3,311 803 17,575 18,570
Provision for income taxes 1,159 282 6,151 6,500
--------- --------- --------- ---------
Net income $2,152 $521 $11,424 $12,070
========= ========= ========= =========
Basic earnings per share:
Net income 0.07 0.03 0.46 0.67
========= ========= ========= =========
Diluted earnings per share:
Net income $0.07 $0.03 $0.44 $0.67
