K2 Inc. reported net sales for the second quarter ended June 30, 2005 of $301.4 million, an increase of 20% from $251.0 million in the prior year, as a result of 7.1% in organic growth and the balance from acquisitions completed after the second quarter of 2004. GAAP diluted earnings per share were 3 cents in the second quarter of 2005 as compared to 16 cents for the second quarter of 2004. Operating income in the second quarter of 2005 was $8.3 million as compared to $12.4 million for the 2004 comparable period, and net income for the 2005 second quarter was $1.5 million, as compared to $6.2 million for the second quarter of 2004. As K2 has forecast for the past 12 months, lower profitability in the second quarter of 2005 as compared to 2004 is principally attributable to the acquisitions of Volkl, Marker, and Marmot in the third quarter of 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.
Net sales for the six month period ended June 30, 2005 were $619.7 million, an increase of 17% over the 2004 comparable period, and operating profit for the period was $18.4 million as compared to $32.0 million for the 2004 six month period. GAAP diluted earnings per share were 8 cents for the first six months of 2005. Details on earnings per share calculations are provided in Table A below.
Richard Heckmann, chairman and chief executive officer, said, “We had a solid quarter with over 7% organic growth driven by strong results in Marine and Outdoor, Team Sports, and Apparel and Footwear. The only category that experienced softness was Action Sports, due principally to the downturn in the paintball market. We continued our margin expansion trends, with the gross margin moving up to 33% versus 31% due largely to an improved merchandising mix in team sports and apparel and footwear. Our new product pipeline continues to deliver, as evidenced by the introduction of our new Rawlings Coolflo batting helmet. As the official batting helmet to Major League Baseball, every player wears a Rawlings batting helmet and almost 75% of the major league players in the All Star game wore our new Coolflo helmets, and we are confident that our emphasis on product development will result in continued organic growth.”
Review of 2005 Second Quarter Sales and Profit Results
Comparable Sales Trends
K2's net sales in the second quarter of 2005 were $268.9 million, excluding net sales of $32.6 million in the aggregate from businesses acquired by K2 after the 2004 second quarter. K2's net sales in the second quarter of 2004 were $251.0 million, which reflects a sales increase of 7.1% in 2005 excluding the impact of these acquisitions.
Profit Trends
Gross profit as a percentage of net sales in the second quarter of 2005 increased to 33.1%, as compared to 30.8% in the comparable 2004 period. The improvement in the 2005 second quarter was attributable to higher gross margins in the Team Sports and Apparel and Footwear segments.
Operating income as a percentage of net sales for the second quarter of 2005 was 2.8% compared to 5.0% in the comparable 2004 period. Selling, general and administrative expenses were 30.3% of net sales in the second quarter of 2005 as compared to 25.9% of net sales in the prior year's second quarter. Higher selling, general and administrative expenses in the quarter are principally attributable to the acquisitions of Volkl, Marker and Marmot in the third quarter of 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.
Second 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 $130.4 million in the second quarter of 2005, an increase of 21% from the comparable quarter in 2004. Sales increases were driven by growth in water-ski vests, rainwear, inflatables, reels, kits and combos, antennas and fish line and the acquisitions of All-Star rods and Hodgman® waders during the second quarters of 2004 and 2005, respectively.
Team Sports
Rawlings, Worth, and K2 Licensing & Promotions had total net sales of $68.3 million in the 2005 second quarter, an increase of 11% from the comparable quarter in 2004. The improvement was due to increases in sales of baseballs, gloves, metal softball bats, team apparel and the acquisition of Miken® softball bats during the 2004 fourth quarter.
Action Sports
In a seasonally slow quarter, net sales of skis, snowboards, in-line skates, bikes, snowshoes and paintball products totaled $65.1 million in the second quarter of 2005 as compared to $69.2 million in the 2004 second quarter. The overall sales decline was due to lower sales of paintball products and snowboards and bikes, partially offset by net sales from the acquisition of Volkl and Marker in the 2004 third quarter. The lower profitability in the second quarter of 2005 as compared to 2004 is principally attributable to the acquisitions of Volkl and Marker in the third quarter of 2004, because they are seasonally slow from a sales standpoint in the first and second quarters.
Apparel and Footwear
Earth Products, Ex Officio, and Marmot had net sales of $37.6 million in the second quarter of 2005, an increase of 209% over the 2004 period. The increase was due to 66% growth in technical skate footwear and apparel and the acquisitions of Ex Officio on May 12, 2004 and Marmot on June 30, 2004.
The segment information presented below is for the three months ended June 30:
Sales to
Unaffiliated Operating
Customers Profit (Loss)
---------------- ---------------
2005 2004 (a) 2005 2004 (a)
------- -------- ------ --------
(in millions)
Marine and Outdoor $130.4 $107.8 $20.1 $16.4
Team Sports 68.3 61.8 1.7 (0.7)
Action Sports 65.1 69.2 (10.7) (1.0)
Apparel and Footwear 37.6 12.2 3.0 1.6
------- -------- ------ --------
Total segment data $301.4 $251.0 14.1 16.3
======= ======== ------ --------
Corporate expenses, net (4.6) (3.7)
Interest expense (7.3) (3.2)
------ --------
Income before provision for income taxes $2.2 $9.4
====== ========
(a) Results for the three months ended June 30, 2004 do not include
the results of Volkl, Marker and Marmot or K2's other acquisitions
completed after the 2004 second quarter since these companies were
acquired by K2 on or subsequent to June 30, 2004. In addition,
the 2004 second quarter results include less than a full three
months of results of Worr Game Products and IPI both of which
were acquired by K2 on April 19, 2004, and Ex Officio, which was
acquired by K2 on May 12, 2004.
Balance Sheet
K2's balance sheet at June 30, 2005 reflects acquisitions and the related seasonal working capital requirements of the acquired businesses. At June 30, 2005, cash and accounts receivable increased to $286.3 million as compared to $235.9 million at June 30, 2004, and inventories at June 30, 2005 increased to $367.1 million from $212.5 million at June 30, 2004, in each case primarily as a result of the acquisitions that occurred on or after June 30, 2004.
K2's total debt increased to $398.9 million at June 30, 2005 from $200.8 million at June 30, 2004. The increase in debt as of June 30, 2004 is primarily the result of K2's acquisitions completed on or after June 30, 2004, 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 Volkl and Marker, and Marmot in the third quarter of 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 June 30, 2005 as compared to 35.6 million shares outstanding at June 30, 2004.
Cash Flow
At the end of the of the second quarter of 2005, debt, net of cash, was $377.5 million and the twelve month trailing EBITDA (as defined below) was $102.5 million, for a ratio of net debt to EBITDA of 3.7 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 incurred total expenses of approximately $2.5 million in 2004, and projects total expenses of approximately $3.1 million in 2005.
Pro Forma Adjusted Presentation
K2 Inc. is providing actual results and forecast guidance on a financial basis in accordance with GAAP, and on a pro forma adjusted basis (“Pro Forma Adjusted”) that excludes the impact of certain non-cash expenses including: amortization of purchased intangibles resulting from K2's acquisition activities; amortization expense associated with the increase in fair market values of the inventories of acquired companies; amortization of capitalized debt costs incurred in connection with K2's credit facilities; and non-cash stock-based compensation expense. In addition, the Pro Forma Adjusted results reflect the pro forma results of the acquisitions of Volkl, Marker and Marmot as if they were acquired on January 1, 2004, the pro forma impact of additional interest expense resulting from K2's issuance of $200 million of senior notes used for the acquisitions as if the notes were issued on January 1, 2004 and the pro forma impact of additional shares of common stock resulting from the acquisitions and K2's equity offering in July 2004 as if the acquisitions and the equity offering were completed on January 1, 2004.
On June 30, 2004, K2 acquired Marmot, a premium manufacturer of technical performance apparel, and on July 7, 2004 acquired Volkl and Marker, premium manufacturers of alpine skis, bindings and snowboards. Due to the seasonality of their product lines, Volkl, Marker, and Marmot normally incur losses in the first and second quarters, and are profitable in the last two quarters of the year. As detailed in Table B, Pro Forma Adjusted diluted earnings (loss) per share for the three and six months ended June 30, 2004 equals (3 cents) and 11 cents, respectively, assuming the acquisitions of Volkl, Marker and Marmot were completed on January 1, 2004. These results do not purport to be indicative of what would have occurred had the acquisitions been made as of those dates, or of results which may occur in the future. These adjustments also do not include the results of operations of certain other acquisitions completed by K2 after the 2004 second quarter because the effects of such acquisitions were not material on either an individual basis or in the aggregate to K2's consolidated results of operations.
K2's management believes the Pro Forma Adjusted financial measures for 2004 and 2005, although not indicative of future performance, are useful for comparison against K2's historical and future operations.
Outlook for 2005
For fiscal year 2005, K2 forecasts GAAP diluted earnings per share in the range of 77 cents to 81 cents and Pro Forma Adjusted diluted earnings per share in the range of 87 cents to 91 cents, 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 85 cents to 90 cents and Pro Forma Adjusted basic earnings per share in the range of 96 cents to $1.01, in each case based on assumed basic shares outstanding of 46.4 million.
For the third and fourth quarters of 2005, K2 forecasts that the quarters will be similar to each other in size in terms of net sales and earnings per share.
K2 INC.
STATEMENTS OF INCOME
(unaudited)
(thousands except for per share figures)
SECOND QUARTER SIX MONTHS
ended June 30 ended June 30
-------------------- --------------------
2005 2004 2005 2004
-------------------- --------------------
Net sales $301,425 $250,987 $619,716 $528,351
Cost of products sold 201,667 173,622 417,139 364,353
--------- --------- --------- ---------
Gross profit 99,758 77,365 202,577 163,998
Selling expenses 54,502 41,566 113,217 83,613
General and administrative
expenses 36,910 23,354 71,003 48,418
--------- --------- --------- ---------
Operating income 8,346 12,445 18,357 31,967
Interest expense 7,285 3,210 14,538 6,512
Other income, net (1,117) (125) (1,838) (178)
--------- --------- --------- ---------
Income before provision for
income taxes 2,178 9,360 5,657 25,633
Provision for income taxes 725 3,182 1,880 8,715
--------- --------- --------- ---------
Net income $1,453 $6,178 $3,777 $16,918
========= ========= ========= =========
Basic earnings per share:
Net income 0.03 0.18 0.08 0.48
========= ========= ========= =========
Diluted earnings per share:
Net income $0.03 $0.16 $0.08 $0.43
========= ========= ========= =========
Shares:
Basic 46,216 35,273 46,196 34,894
Diluted 47,373 44,019 47,430 43,659
