K2 Inc. reported that net sales for the first quarter increased 9.4% to $348.1 million from $318.3 million in the prior year period. Adjusted net income for the first quarter of 2006 was $5.0 million, or 10 cents adjusted diluted earnings per share, compared to adjusted net income of $4.0 million, or 8 cents adjusted diluted earnings per share, for 2005.
Richard Heckmann, Chairman and Chief Executive Officer, said, “We generated outstanding performance in the first quarter, with significant sales growth in our seasonal product categories, and an improvement in our operating income as a percentage of sales of approximately 50 basis points over the same period in 2005. We are particularly proud of our Team Sports business, with sales growth of 22.4% compared to the first quarter of 2005, and an increase in operating income in the quarter to 9.7% of sales from 7.4% in the same period of 2005. Team Sports has been a work in progress the past few years as we have launched significant new product lines in bats, gloves, and protective equipment, integrated sales forces and improved our retail presence, combined distribution, and transitioned a significant amount of our manufacturing to our China facilities. We are now beginning to reap the benefits of those efforts. The other major seasonal contributor to the quarter was Marine and Outdoor, which also generated strong sales growth due to continued product innovation and brand extensions. In addition, we would like to emphasize that consistent with our original forecast for 2006, we brought our total debt down more than $44 million from year end 2005 due to a combination of higher profitability and improved working capital management.”
Review of Comparable 2006 Sales and Profit Trends
K2's net sales for the first quarter of 2006 were $348.1 million, reflecting sales growth of 9.4% from the first quarter 2005. The increase in sales was due to increased sales in Team Sports and Marine and Outdoor segments offset by a decline in the Action Sports segment.
K2's gross profit as a percentage of sales in the first quarter of 2006 stayed constant at 32.3% compared to the first quarter of 2005. K2's operating profit, as a percentage of net sales for the first quarter of 2006 increased to 3.6% compared to 3.1% in the comparable 2005 period. The increase in operating margin for the quarter was due to decreased selling, general and administrative expenses as a percentage of sales in the Team Sports segment. For the first quarter of 2006 consolidated selling, general and administrative expenses, as a percentage of consolidated net sales decreased to 28.7% compared to 29.2% of net sales for the first quarter of 2005.
First 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 has adjusted its segment reporting to include paintball products in the Team Sports segment. Historical numbers presented below have been restated to reflect the change in segment reporting. 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 sales of $123.1 million in the first quarter of 2006, an increase of 9.5% from the comparable quarter in 2005. The sales increase was due to increased sales of fishing tackle, antennas, ski vests, and the addition of sales of Hodgman waders (acquired in the second quarter of 2005). For the first quarter of 2006, operating profits were $16.1 million, up slightly from $16.0 million in 2005.
Team Sports
Rawlings, Worth, K2 Licensed Products, and Brass Eagle had total sales of $132.5 million in the 2006 first quarter, up 22.4% from the 2005 period. Operating profits were $12.9 million in the 2006 first quarter, up 60.1% from the 2005 period. Sales growth in 2006 was driven primarily by Rawlings, Worth, and Miken baseball and softball products and Rawlings apparel product lines.
Action Sports
The first quarter is a seasonally slow quarter. Sales of winter products and in-line skates totaled $56.1 million in the first quarter of 2006, a decrease of 13.4% from the 2005 first quarter, partially due to licensing bikes to a third party in the third quarter of 2005. The operating loss was $10.9 million, a decrease in the loss of 6.1% from the first quarter 2005 loss of $11.6 million primarily due to a decline in selling and general and administrative costs.
Apparel and Footwear
Earth Products, Ex Officio, and Marmot had sales of $36.4 million in the first quarter of 2006, an increase of 10.6% over the 2005 period due to an increase in sales of skateboard shoes and Marmot and Ex Officio products. The operating loss for the first quarter of 2006 was $1.8 million compared to an operating profit of $0.9 million in the first quarter of 2005. The decrease in profit was due to start up expenses associated with the opening of a new distribution center in Reno, Nevada, and integration expenses for combining design, development, and sourcing for several apparel brands.
The segment information presented below is for the three months ended March 31:
(in millions)
Net Sales to
Unaffiliated Intersegment Operating
Customers Sales Profit (Loss)
--------------- ------------- -------------
2006 2005 2006 2005 2006 2005
------- ------- ------ ------ ------ ------
Marine and Outdoor $123.1 $112.4 $40.5 $33.2 $16.1 $16.0
Team Sports 132.5 108.2 - - 12.9 8.1
Action Sports 56.1 64.8 0.9 2.7 (10.9) (11.6)
Apparel and Footwear 36.4 32.9 1.5 0.8 (1.8) 0.9
------- ------- ------ ------ ------ ------
Total segment data $348.1 $318.3 $42.9 $36.7 16.3 13.4
======= ======= ====== ======
Corporate expenses, net (3.0) (2.7)
Interest expense (7.8) (7.2)
------ ------
Income before provision for
income taxes $5.5 $3.5
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Balance Sheet
At March 31, 2006, cash and accounts receivable decreased to $328.2 million as compared to $350.3 million at March 31, 2005. Inventories at March 31, 2006 increased to $358.7 million from $345.2 million at March 31, 2005, primarily as a result of the growth in new product lines.
The company's total debt decreased to $392.8 million at March 31, 2006 from $418.0 million at March 31, 2005. The decrease in debt as of March 31, 2006 is primarily the result of improved profitability and a reduction in working capital.
Sarbanes-Oxley Act of 2002
Section 404 of the Sarbanes-Oxley Act of 2002 requires K2 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 $3.3 million in 2005 and projects total expenses of approximately $3.4 million in 2006.
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 cebnts 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.
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 six months of 2006, K2 forecasts net sales in the range of $635 million to $650 million, and GAAP diluted earnings per share in the range of 8 cents to 10 cents, and Adjusted diluted earnings per share in the range of 13 cents to 16 cents, in each case based on assumed diluted shares outstanding of 47.9 million.
K2 INC.
STATEMENTS OF OPERATIONS
(unaudited in thousands, except for per share figures)
First Quarter
Ended March 31,
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2006 2005
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Net sales $348,071 $318,291
Cost of products sold 235,516 215,472
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Gross profit 112,555 102,819
Selling expenses 61,875 58,715
General and administrative expenses 38,073 34,093
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Operating income 12,607 10,011
Interest expense 7,833 7,253
Other income, net (752) (721)
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Income before provision for income taxes 5,526 3,479
Provision for income tax expense 1,884 1,155
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Net income $3,642 $2,324
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Basic earnings per share $0.08 $0.05
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Diluted earnings per share $0.08 $0.05
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Shares:
Basic 46,593 46,177
Diluted 47,397 47,502
