K2 Inc. reported that net sales for the first quarter ended March 31, 2005 increased 15% to $318.3 million, compared to $277.4 million in the prior year. Net income for the first quarter fell more than 78% to $2.3 million, or 5 cents per diluted share, compared to $10.7 million, or 27 cents per diluted share, for the first quarter of 2004.
Operating income in the first quarter of 2005 was $10.0 million as compared to $19.5 million for the 2004 comparable period.
Richard Heckmann, Chairman and Chief Executive Officer, said, “Our results in the first quarter of 2005 exceeded our original guidance due to strength in both our Marine and Outdoor and Apparel and Footwear platforms. Stearns and Shakespeare generated double digit sales growth in several product lines including children's flotation devices, ski vests, fishing rods and reels, and our new line of premium fishing line. Adio® skate shoes and apparel and Ex Officio's Buzz-Off(TM) apparel brand also had double digit sales growth in the quarter. Off-setting these gains were softness in in-line skates and paintball which we had previously forecast. It is also important to reiterate that quarter-to-quarter comparisons are not useful because the 2005 first quarter results are not directly comparable to last year due to the acquisitions of Volkl, Marker and Marmot completed mid-year 2004, due to the fact that these seasonal businesses incur losses in the first half of the year. The positive results of this quarter reflect our commitment to building a highly diversified revenue base capable of absorbing normal market cycles.”
Comparable Sales Trends
K2's net sales in the first quarter of 2005 were $275.2 million, excluding net sales in the aggregate of $45.1 million from the Ex Officio, Marmot, Volkl and Marker businesses acquired by K2 after the 2004 first quarter. K2's net sales in the first quarter of 2004 were $277.4 million, which reflects a sales decline of 0.8% in 2005 excluding the impact of these acquisitions. Excluding the impact of net sales from the acquisitions of Ex Officio, Marmot, Volkl, and Marker, and the previously forecasted sales decline of in-line skates of $8.4 million, K2's net sales for the 2005 first quarter were $283.6 million, an increase of 2.2%.
Profit Trends
Gross profit in the first quarter of 2005 increased to 32.3% of net sales, as compared to 31.2% in the comparable 2004 period. Gross profit as a percentage of net sales in the 2005 first quarter benefited from higher gross margins in the Apparel and Footwear segment.
Operating income as a percentage of net sales for the first quarter of 2005 was 3.1% compared to 7.0% in the comparable 2004 period. Selling, general and administrative expenses were 29.2% of net sales in the first quarter of 2005 as compared to 24.2% of net sales in the prior year. Higher selling, general and administrative expenses in the quarter are principally attributable to the acquisitions of Volkl, Marker and Marmot in 2004, as these product lines have higher levels of fixed expenses as compared to K2's other business lines, and are seasonally slow from a sales standpoint in the first and second quarters.
First Quarter 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 net sales of $112.4 million in the first quarter of 2005, an increase of 14% from the comparable quarter in 2004. Sales increases were driven by growth in children's flotation devices, water-ski vests, reels, kits and combos and fish line and the addition of All-Star® rods and ATV accessory product lines during the second quarter of 2004.
Team Sports
Rawlings, Worth, and K2 Licensing & Promotions had total net sales of $92.6 million in the 2005 first quarter as compared to $94.1 million in the 2004 first quarter. The decline was due to a decrease in sales of metal softball bats, gloves and basketballs partially offset by an increase in sales of composite softball bats.
Action Sports
In a seasonally slow quarter, net sales of skis, snowboards, in-line skates, bikes, snowshoes and paintball products totaled $80.4 million in the first quarter of 2005, an increase of 7% over the 2004 first quarter. The increase was due to the acquisitions of Volkl and Marker at the beginning of the 2004 third quarter offset by declines in sales of in-line skates and paintball products.
Apparel and Footwear
Earth Products, Ex Officio and Marmot had net sales of $32.9 million in the first quarter of 2005, an increase of 246% over the 2004 period. The increase was due to 42% growth in technical skate footwear and apparel and the acquisitions of Ex Officio and Marmot in the second and third quarters, respectively, of 2004.
The segment information presented below is for the three months ended March 31:
Sales to Unaffiliated
Customers Operating Profit (Loss)
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2005 2004(a) 2005 2004(a)
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(in millions)
Marine and Outdoor $112.4 $98.8 $16.0 $15.3
Team Sports 92.6 94.1 8.9 11.0
Action Sports 80.4 75.0 (12.4) (4.6)
Apparel and Footwear 32.9 9.5 0.9 0.5
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Total segment data $318.3 $277.4 13.4 22.2
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Corporate expenses, net (2.7) (2.6)
Interest expense (7.2) (3.3)
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Income before provision for income taxes $3.5 $16.3
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(a) Results for the three months ended March 31, 2004 do not include the results of Ex Officio, Marmot, Volkl and Marker or K2's other acquisitions completed after the 2004 first quarter since these companies were acquired by K2 Inc. subsequent to March 31, 2004. In addition, the 2004 first quarter results include less than a full three months of results of K2 Licensing & Promotions which was acquired by K2 on January 23, 2004.
Balance Sheet
K2's balance sheet at March 31, 2005 reflects acquisitions and the related seasonal working capital requirements of the acquired businesses. At March 31, 2005, cash and accounts receivable increased to $350.3 million as compared to $263.9 million at March 31, 2004, and inventories at March 31, 2005 increased to $345.2 million from $215.8 million at March 31, 2004, in each case primarily as a result of the acquisitions that occurred after March 31, 2004.
K2's total debt increased to $418.0 million at March 31, 2005 from $209.2 million at March 31, 2004. The increase in debt as of March 31, 2005 is primarily the result of K2's acquisitions completed after the 2004 first quarter, including the related seasonal working capital requirements of the acquired businesses, and the issuance of $200 million of senior notes in July 2004.
Primarily as the result of the acquisitions of Marmot, Volkl and Marker in 2004 and K2's offering of common stock in the 2004 third quarter, K2 increased its number of shares of common stock outstanding by 2.8 million shares, 1.8 million shares and 6.4 million shares, respectively, to 46.8 million shares issued and outstanding at March 31, 2005 as compared to 34.9 million shares outstanding at March 31, 2004.
Cash Flow
As detailed in the attached financial statements, net cash provided by operating activities jumped to $18.2 million in the first quarter of 2005, as compared to $6.5 million in the prior year period, and the net increase in cash in the first quarter of 2005 was $14.2 million as compared to a net reduction of $1.5 million in the first quarter of 2004. Higher net cash flow in the first quarter was driven by a higher concentration of sales in the third and fourth quarters in winter products.
At the end of the of the first quarter of 2005, debt, net of cash, was $378.2 million and the twelve month trailing EBITDA (as defined below) was $106.1 million, for a ratio of net debt to EBITDA of 3.6 times.
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 estimated that it incurred total expenses of approximately $2.5 million in 2004, and projects total expenses of approximately $3.1 million in 2005.
Outlook for 2005
For fiscal year 2005, K2 forecasts GAAP diluted earnings per share in the range of $0.77 to $0.81 and Adjusted diluted earnings per share in the range of $0.87 to $0.91, in each case based on assumed fully diluted shares outstanding of 55.5 million. For the same period, K2 forecasts GAAP basic earnings per share in the range of $0.85 to $0.90 and Adjusted basic earnings per share in the range of $0.96 to $1.00, in each case based on assumed basic shares outstanding of 46.4 million.
For the second quarter of 2005, K2 forecasts GAAP diluted earnings per share in the range of $0.01 to $0.03 and Adjusted diluted earnings per share in the range of $0.03 to $0.05, in each case based on assumed shares outstanding of 47.6 million. For the same period, K2 forecasts GAAP basic earnings per share in the range of $0.01 to $0.03 and Adjusted basic earnings per share in the range of $0.03 to $0.05, in each case based on assumed shares outstanding of 46.3 million.
Although K2 is not providing a specific forecast at this time for the remaining quarters in 2005, from a seasonality standpoint, the second quarter is anticipated to be the smallest in terms of net sales and earnings per share, and the third quarter is forecast as the largest quarter followed by the fourth quarter.
K2 forecasts strong liquidity (cash and available capacity under K2's revolving credit facility) in 2005, with total debt before acquisitions (if any) projected to decrease from current levels by the end of the second quarter.
K2 INC.
STATEMENTS OF INCOME
(in thousands, except for per share figures)
FIRST QUARTER
ended March 31
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(unaudited)
2005 2004
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Net sales $318,291 $277,364
Cost of products sold 215,472 190,731
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Gross profit 102,819 86,633
Selling expenses 58,715 42,047
General and administrative expenses 34,093 25,064
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Operating income 10,011 19,522
Interest expense 7,253 3,302
Other income, net (721) (53)
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Income before provision for income taxes 3,479 16,273
Provision for income taxes 1,155 5,533
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Net income $2,324 $10,740
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Basic earnings per share:
Net income 0.05 0.31
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Diluted earnings per share:
Net income $0.05 $0.27
