K2 Inc. saw net sales increase 4.9% for the third quarter to $356.9 million from $340.4 million last year. Adjusted net income for the third quarter was $23.0 million, or 43 cents adjusted diluted earnings per share, compared to adjusted net income of $18.1 million, or 34 cents in the third quarter of 2005.
Adjusted net income for the first nine months of 2006 was $31.4 million, or 62 cents adjusted diluted earnings per share, compared to Adjusted net income of $24.4 million, or 49 cents in the first nine months of 2005.
Richard Heckmann, chairman and CEO, said, “The strong results in the third quarter reflected a record winter business for K2 Inc., driven by K2 and Volkl ski and snowboard products, and Marmot winter and performance apparel. The Action Sports segment, led by K2 and Volkl, improved their operating income margins from 17.9% to 22.2% in the quarter due principally to improved manufacturing efficiencies. For Marmot, we were extremely pleased with significant sales and operating income growth for the quarter. The early outlook among retailers is for a good winter season, which is reflected in our results this quarter.
“Overall K2 achieved a new milestone in the third quarter of 2006, with sales of $356.9 million, operating income of $38.7 million, and an improvement of 180 basis points in our gross margin and 140 basis points in operating margin over the third quarter of 2005. We also continued our progress in reducing total debt, which is down $23.7 million from the same quarter in 2005, providing us with significant flexibility for future growth.
“As we move towards year end, we are extremely proud of the performance of all of our divisions during the course of the year, which reflects all of the hard work from previous years in integrating acquisitions, launching new products, improving relationships with retailers and consumers, and improved efficiencies in manufacturing and operations. We believe that 2006 is a foundation year from which we will continue to build a leading franchise in sporting goods.”
Review of Comparable 2006 Sales and Profit Trends
K2's net sales for the third quarter of 2006 were $356.9 million versus $340.4 million in the third quarter of 2005. The increase in sales was mainly due to increases in Apparel and Footwear and Action Sports segment sales and there were no acquisitions in the quarter.
K2's gross profit as a percentage of net sales in the third quarter of 2006 increased to 38.6% compared to 36.8% in the third quarter of 2005. For the third quarter of 2006 selling, general and administrative expenses were essentially flat as a percentage of net sales at 27.7% compared to 27.4% in the third quarter of 2005. K2's operating profit, as a percentage of net sales for the third quarter of 2006 increased to 10.8% compared to 9.4% in the comparable 2005 period, due principally to increased gross margins.
Third Quarter Segment Review
The Action Sports segment has historically included skis, snowboards, bindings, snowshoes, in-line skates and paintball products. During 2005, the paintball business declined significantly. In order to improve efficiency, K2 reorganized the paintball business to operate more in line with how the components of the Team Sports segment operates, with increased emphasis on the mass merchant and large sporting goods retailer distribution. Upon completion of the reorganization in the first quarter 2006, K2 adjusted its segment reporting to include paintball products in the Team Sports segment. For purposes of comparability, in 2005 paintball sales were $82 million and on a quarterly basis sales were approximately 19% in the first quarter, 25% in the second quarter, 21% in the third quarter, and 35% in the fourth quarter.
Marine and Outdoor
Shakespeare fishing tackle and monofilament and Stearns marine and outdoor products generated net sales of $80.8 million in the third quarter of 2006, an increase of 2.1% from the comparable quarter in 2005. The sales increase was attributed to increased sales of fishing kits and combos, Ugly Stik rods and immersion suits, offset by declines in military antennas, cutting line, Hodgman waders and drywear. For the third quarter of 2006, operating profits were $8.3 million, down from $9.9 million in 2005 due to lower gross profit as a percentage of sales and higher selling, general and administrative expenses as a percentage of sales.
Team Sports
In a seasonally slow quarter, Rawlings, Worth, K2 Licensed Products and Brass Eagle had net sales of $64.5 million in the 2006 third quarter, up 2.4% from the 2005 period. The operating loss was $3.0 million in the 2006 third quarter, a decrease from the loss of $6.1 million in the 2005 period primarily due to the gain on the sale of stock received in a customer bankruptcy settlement and improved profitability in the paintball and souvenir and promotional product lines. Sales growth in 2006 was attributed to souvenir and promotional products and paintball products offset by declines in Rawlings, Worth and Miken baseball and softball products.
Action Sports
Net sales of winter products and in-line skates totaled $149.5 million in the third quarter of 2006, an increase of 2.4% from the 2005 third quarter, primarily due to increased sales of K2 skis and K2 and Ride snowboards offset by decreased sales of Volkl skis due to the timing differences in shipments between the third and fourth quarters. Operating profit for the third quarter of 2006 was $33.1 million, a 26.6% increase compared to the operating profit in the third quarter 2005. The increase in operating profit was due to an increase in gross profit as a percentage of sales and lower selling, general and administrative expenses as a percentage of sales.
Apparel and Footwear
Apparel and Footwear had net sales of $62.1 million in the third quarter of 2006, an increase of 18.8% from the 2005 period driven by growth in Marmot winter outerwear products offset by declines in skateboard shoes and apparel. The operating profit for the third quarter of 2006 was $5.8 million compared to an operating profit of $6.4 million in the third quarter of 2005. The decrease in profit was due to lower gross profit as a percentage of sales and higher selling, general and administrative expenses as a percentage of sales.
The segment information presented below is for the three months ended
September 30:
(in millions)
Net Sales to Operating
Unaffiliated Intersegment Profit
Customers Sales (Loss)
--------------- ------------- -------------
2006 2005 2006 2005 2006 2005
------- ------- ------ ------ ------ ------
Marine and Outdoor $80.8 $79.1 $56.1 $44.4 $8.3 $9.9
Team Sports 64.5 63.0 - - (3.0) (6.2)
Action Sports 149.5 146.0 5.9 3.4 33.1 26.2
Apparel and Footwear 62.1 52.3 1.2 1.1 5.8 6.5
------- ------- ------ ------ ------ ------
Total segment data $356.9 $340.4 $63.2 $48.9 44.2 36.4
======= ======= ====== ======
Corporate expenses, net (4.4) (3.8)
Interest expense (7.2) (7.5)
------ ------
Income before provision for
income taxes $32.6 $25.1
====== ======
The segment information presented below is for the nine months ended
September 30:
(in millions)
Net Sales to Operating
Unaffiliated Intersegment Profit
Customers Sales (Loss)
----------------- --------------- -------------
2006 2005 2006 2005 2006 2005
--------- ------- ------- ------- ------ ------
Marine and Outdoor $332.7 $321.9 $142.7 $114.3 $44.0 $46.0
Team Sports 293.5 260.5 0.1 0.1 14.3 2.8
Action Sports 243.2 254.9 11.6 8.4 11.8 4.8
Apparel and Footwear 136.7 122.8 3.5 2.0 4.4 10.3
--------- ------- ------- ------- ------ ------
Total segment data $1,006.1 $960.1 $157.9 $124.8 74.5 63.9
========= ======= ======= =======
Corporate expenses, net (11.4) (11.1)
Interest expense (21.8) (22.1)
------ ------
Income before provision
for income taxes $41.3 $30.7
====== ======
Balance Sheet
At September 30, 2006, cash and accounts receivable increased 3.9% to $374.6 million as compared to $360.6 million at September 30, 2005. Inventories at September 30, 2006 increased 5.6% to $393.5 million from $372.8 million at September 30, 2005. The growth in accounts receivable and inventory is primarily a result of the growth in sales of 4.8% for the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005.
The company's total debt decreased to $414.2 million at September 30, 2006 from $437.9 million at September 30, 2005. The decrease in debt as of September 30, 2006 is primarily the result of improved profitability and cash flow from operations.
Outlook for 2006
For fiscal year 2006, K2 forecasts 2006 net sales in the range of $1.36 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 83 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 79 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.
K2 INC.
STATEMENTS OF INCOME
(unaudited in thousands, except for per share figures)
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- ---------------------
2006 2005 2006 2005
--------- --------- ----------- ---------
Net sales $356,884 $340,352 $1,006,097 $960,068
Cost of products sold 219,174 215,225 653,267 632,364
--------- --------- ----------- ---------
Gross profit 137,710 125,127 352,830 327,704
Selling expenses 61,649 57,305 181,207 170,522
General and administrative
expenses 37,371 35,809 111,147 106,812
--------- --------- ----------- ---------
Operating income 38,690 32,013 60,476 50,370
Interest expense 7,263 7,519 21,832 22,057
Other income, net (1,127) (583) (2,662) (2,421)
--------- --------- ----------- ---------
Income before provision for
income taxes 32,554 25,077 41,306 30,734
Provision for income tax
expense 11,036 8,337 14,003 10,217
--------- --------- ----------- ---------
Net income $21,518 $16,740 $27,303 $20,517
========= ========= =========== =========
Basic earnings per share (a) $0.46 $0.36 $0.58 $0.44
========= ========= =========== =========
Diluted earnings per share
(a) $0.40 $0.32 $0.54 $0.42
========= ========= =========== =========
Shares:
Basic (a) 47,084 46,326 46,971 46,240
Diluted(a) 55,412 55,190 55,388 55,224
