K2 Inc. net sales for the third quarter ended September 30, 2005 were $340.4 million versus $333.5 million in the prior year. GAAP diluted earnings per share were 32 cents in the third quarter of 2005 as compared to 26 cents for the third quarter of 2004. Operating income in the third quarter of 2005 was $32.0 million as compared to $27.6 million for the 2004 comparable period, and net income for the 2005 third quarter was $16.7 million, as compared to $13.2 million for the third quarter of 2004.
Net sales for the nine month period ended September 30, 2005 were $960.1 million, an increase of 11.4% over the 2004 comparable period, and operating profit for the period was $50.4 million as compared to $59.5 million for the 2004 nine month period. Lower profitability in the first nine months of 2005 as compared to 2004 is principally attributable to lower paintball sales as discussed below and 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. GAAP diluted earnings per share were $0.42 for the first nine months of 2005. Details on earnings per share calculations are provided in Table A below.
Richard Heckmann, Chairman and Chief Executive Officer, said, “We generated strong results in the third quarter, with a 16% increase in operating income and a 23% increase in GAAP diluted earnings per share over the comparable 2004 period, despite the previously announced and continuing weakness in paintball. The biggest profit contributors in the third quarter were K2, Volkl, and Marker winter products as we experienced significant profit growth in those product lines due to our ongoing integration efforts and back-office efficiencies.
“Apparel and Footwear continued their previous trend line of consistent growth in sales and operating income, and Marine and Outdoor and Team Sports segments, despite a seasonally slow quarter, also generated strong results. As we had previously forecast, S,G&A expenses remained flat on a percentage basis over 2004 levels. As we look forward to the remainder of the year, we are optimistic about the strength of our brands, but we continue to have concerns about consumer confidence given the uncertainties of higher fuel and energy costs, rising interest rates, and general economic conditions.”
K2's net sales in the third quarter of 2005 were $340.4 million as compared to $333.5 million in the comparable 2004 period, which reflects a sales increase of 2.1%. If the decline in the sale of paintball products is excluded from these results, K2's other product lines generated sales growth of 4.2% in the quarter.
Gross profit as a percentage of net sales in the third quarter of 2005 increased to 36.8%, as compared to 35.7% in the comparable 2004 period. The improvement in the 2005 third quarter was attributable to higher gross margins in the winter products component of Action Sports and Marine and Outdoor segments.
Operating income as a percentage of net sales for the third quarter of 2005 was 9.4% compared to 8.3% in the comparable 2004 period. Higher operating income was due to an expansion of gross margins, and flat selling, general and administrative expenses of 27.4% of net sales in the third quarter of 2005 as compared to 27.5% of net sales in the prior year's third quarter.
Third 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 $79.1 million in the third quarter of 2005, an increase of 16.0% from the comparable quarter in 2004. Sales increases were driven by growth in Pfleuger® reels, Shakespeare® kits and combos, antennas, Hodgman® waders (acquired in second quarter 2005), Mad Dog® ATV accessories, and continued growth in floatation products.
Team Sports
In a seasonally slow quarter, Rawlings, Worth, and K2 Licensed Products had total net sales of $45.8 million in the 2005 third quarter, an increase of 14.2% from the comparable quarter in 2004. The improvement was due to increases in most major product categories, with particular strength in the sales of high performance aluminum and Miken® composite softball bats.
Action Sports
Net sales of skis, snowboards, in-line skates, bikes, snowshoes and paintball products totaled $163.2 million in the third quarter of 2005 as compared to $180.1 million in the 2004 third quarter. K2® branded alpine ski products generated significant growth in the quarter, which was offset by declines in paintball products as previously disclosed and sales of snowboards as well as a reduction in bike sales resulting from K2's decision to license this business in the third quarter of 2005. Sales of Volkl branded ski products were down in the third quarter of 2005 versus 2004 due to softness in the premium end of the market.
Apparel and Footwear
Earth Products, Ex Officio and Marmot had net sales of $52.3 million in the third quarter of 2005, an increase of 16.0% over the 2004 period. The increase was driven by significant growth in Adio® technical skate footwear and Marmot® technical apparel and outerwear.
The segment information presented below is for the three months ended September 30:
Sales to Operating
Unaffiliated Profit
Customers (Loss)
--------------- -------------
2005 2004 2005 2004
------- ------- ------ ------
(in millions)
Marine and Outdoor $79.1 $68.2 $8.5 $6.7
Team Sports 45.8 40.1 (4.9) (5.2)
Action Sports 163.2 180.1 25.0 23.2
Apparel and Footwear 52.3 45.1 6.4 6.1
------- ------- ------ ------
Total segment data $340.4 $333.5 35.0 30.8
======= ======= ------ ------
Corporate expenses, net (2.4) (2.8)
Interest expense (7.5) (7.3)
------ ------
Income before provision for income taxes $25.1 $20.7
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Balance Sheet
At September 30, 2005, accounts receivable was $343.2 million as compared to $334.7 million at September 30, 2004 primarily due to sales growth. Inventories at September 30, 2005 increased to $372.8 million from $307.1 million at September 30, 2004 due to sales growth and higher inventories at Stearns and Rawlings for new product lines.
K2's total debt increased to $437.9 million at September 30, 2005 from $383.2 million at September 30, 2004. The increase in debt from September 30, 2004 is primarily the result of sales growth and higher inventories at Stearns and Rawlings.
Common stock outstanding increased to 46.9 million shares issued and outstanding at September 30, 2005 from 46.6 million shares issued and outstanding at September 30, 2004.
Cash Flow
At the end of the of the third quarter of 2005, debt, net of cash, was $420.4 million and the twelve month trailing EBITDA (as defined below) was $108.7 million, for a ratio of net debt to EBITDA of 3.9 times.
Outlook for 2005
For fiscal year 2005, K2 forecasts GAAP diluted earnings per share in the range of $0.66 to $0.68 and Adjusted diluted earnings per share in the range of $0.75 to $0.77, in each case based on assumed fully diluted shares outstanding of 55.2 million. For the same period, K2 forecasts GAAP basic earnings per share in the range of $0.70 to $0.73 and Adjusted basic earnings per share in the range of $0.81 to $0.84, in each case based on assumed basic shares outstanding of 46.2 million. For the fourth quarter of 2005, K2 forecasts GAAP diluted earnings per share in the range of $0.23 to $0.25.
K2 INC.
STATEMENTS OF INCOME
(unaudited)
(thousands except for per share figures)
THIRD QUARTER NINE MONTHS
ended September 30 ended September 30
-------------------- --------------------
2005 2004 2005 2004
--------- --------- --------- ---------
Net sales $340,352 $333,460 $960,068 $861,811
Cost of products sold 215,225 214,274 632,364 578,627
--------- --------- --------- ---------
Gross profit 125,127 119,186 327,704 283,184
Selling expenses 57,305 56,736 170,522 140,349
General and administrative
expenses 35,809 34,877 106,812 83,295
--------- --------- --------- ---------
Operating income 32,013 27,573 50,370 59,540
Interest expense 7,519 7,299 22,057 13,811
Other income, net (583) (426) (2,421) (604)
--------- --------- --------- ---------
Income before provision
for income taxes 25,077 20,700 30,734 46,333
Provision for income taxes 8,337 7,502 10,217 16,217
--------- --------- --------- ---------
Net income $16,740 $13,198 $20,517 $30,116
========= ========= ========= =========
Basic earnings per share:
Net income 0.36 0.28 0.44 0.78
========= ========= ========= =========
Diluted earnings per share:
Net income $0.32 $0.26 $0.42 $ 0.69
========= ========= ========= =========
Shares:
Basic 46,326 46,472 46,240 38,753
Diluted 55,190 55,148 55,224 47,503
