UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2004
Commission File No. 1-4290
K2 INC.
(Exact Name of Registrant as Specified in Its Charter)
| DELAWARE | 95-2077125 | |
| (State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) | |
| 2051 Palomar Airport Road Carlsbad, California |
92009 | |
| (Address of Principal Executive Offices) | (Zip Code) | |
Registrant’s Telephone Number, Including Area Code (760) 494-1000
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report:
Not applicable
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of July 31, 2004.
| Common Stock, par value $1.00 |
46,651,747 Shares |
FORM 10-Q QUARTERLY REPORT
PART - 1 FINANCIAL INFORMATION
Item 1. Financial Statements
STATEMENTS OF CONSOLIDATED CONDENSED INCOME
(Thousands, except per share figures)
| Three months ended June 30 |
Six months ended June 30 |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
| (Unaudited) | ||||||||||||||||
| Net sales |
$ | 250,987 | $ | 199,671 | $ | 528,351 | $ | 356,791 | ||||||||
| Cost of products sold |
173,622 | 139,454 | 364,353 | 249,430 | ||||||||||||
| Gross profit |
77,365 | 60,217 | 163,998 | 107,361 | ||||||||||||
| Selling expenses |
41,566 | 30,444 | 83,613 | 53,614 | ||||||||||||
| General and administrative expenses |
23,354 | 19,679 | 48,418 | 34,899 | ||||||||||||
| Operating income |
12,445 | 10,094 | 31,967 | 18,848 | ||||||||||||
| Interest expense |
3,210 | 2,814 | 6,512 | 4,608 | ||||||||||||
| Debt extinguishment costs |
— | — | — | 6,745 | ||||||||||||
| Other income, net |
(125 | ) | (1,604 | ) | (178 | ) | (1,600 | ) | ||||||||
| Income before income taxes |
9,360 | 8,884 | 25,633 | 9,095 | ||||||||||||
| Provision for income taxes |
3,182 | 3,110 | 8,715 | 3,184 | ||||||||||||
| Net income |
$ | 6,178 | $ | 5,774 | $ | 16,918 | $ | 5,911 | ||||||||
| Basic earnings per share: |
||||||||||||||||
| Net income |
$ | 0.18 | $ | 0.22 | $ | 0.48 | $ | 0.27 | ||||||||
| Diluted earnings per share: |
||||||||||||||||
| Net income |
$ | 0.16 | $ | 0.19 | $ | 0.43 | $ | 0.26 | ||||||||
| Basic shares outstanding |
35,273 | 26,832 | 34,894 | 21,954 | ||||||||||||
| Diluted shares outstanding |
44,019 | 30,733 | 43,659 | 23,034 | ||||||||||||
See notes to consolidated condensed financial statements.
1
CONSOLIDATED CONDENSED BALANCE SHEETS
(Thousands, except number of shares)
| June 30 2004 |
December 31 2003 |
|||||||
| (Unaudited) | ||||||||
| Assets |
||||||||
| Current Assets |
||||||||
| Cash and cash equivalents |
$ | 18,173 | $ | 21,256 | ||||
| Accounts receivable, net |
217,741 | 224,818 | ||||||
| Inventories, net |
212,534 | 237,152 | ||||||
| Deferred taxes and income taxes receivable |
34,678 | 40,023 | ||||||
| Prepaid expenses and other current assets |
16,862 | 13,083 | ||||||
| Total current assets |
499,988 | 536,332 | ||||||
| Property, plant and equipment |
221,775 | 204,738 | ||||||
| Less allowance for depreciation and amortization |
125,224 | 113,716 | ||||||
| 96,551 | 91,022 | |||||||
| Goodwill |
189,431 | 147,047 | ||||||
| Intangible assets, net |
82,409 | 81,800 | ||||||
| Other |
19,243 | 15,670 | ||||||
| Total Assets |
$ | 887,622 | $ | 871,871 | ||||
| Liabilities and Shareholders’ Equity |
||||||||
| Current Liabilities |
||||||||
| Bank loans |
$ | 7,225 | $ | 10,751 | ||||
| Accounts payable |
52,452 | 77,304 | ||||||
| Accrued payroll and related |
31,626 | 33,040 | ||||||
| Other accrued liabilities |
70,417 | 61,540 | ||||||
| Current portion of long-term debt |
36,215 | 72,126 | ||||||
| Total current liabilities |
197,935 | 254,761 | ||||||
| Long-term pension liabilities |
11,173 | 11,173 | ||||||
| Long-term debt |
59,034 | 35,194 | ||||||
| Deferred taxes |
38,636 | 38,636 | ||||||
| Convertible subordinated debentures |
98,301 | 98,067 | ||||||
| Commitments and Contingencies |
||||||||
| Shareholders’ Equity |
||||||||
| Preferred Stock, $1 par value, authorized 12,500,000 shares, none issued |
||||||||
| Common Stock, $1 par value, authorized 110,000,000 shares in 2004 and 60,000,000 in 2003, issued and outstanding shares 36,327,121 in 2004 and 34,146,798 in 2003 |
36,327 | 34,147 | ||||||
| Additional paid-in capital |
342,123 | 313,142 | ||||||
| Retained earnings |
124,535 | 107,617 | ||||||
| Employee Stock Ownership Plan and stock option loans |
(1,160 | ) | (1,214 | ) | ||||
| Treasury shares at cost, 747,234 shares in 2004 and 2003 |
(9,107 | ) | (9,107 | ) | ||||
| Accumulated other comprehensive loss |
(10,175 | ) | (10,545 | ) | ||||
| Total Shareholders’ Equity |
482,543 | 434,040 | ||||||
| Total Liabilities and Shareholders’ Equity |
$ | 887,622 | $ | 871,871 | ||||
See notes to consolidated condensed financial statements.
2
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
(Thousands)
| Six months ended June 30 |
||||||||
| 2004 |
2003 |
|||||||
| Operating Activities |
||||||||
| Net income |
$ | 16,918 | $ | 5,911 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
| Gain on sale of operating division |
— | (1,504 | ) | |||||
| Depreciation and amortization |
12,743 | 10,095 | ||||||
| Deferred taxes |
6,782 | 559 | ||||||
| Changes in current assets and current liabilities |
20,517 | 48,180 | ||||||
| Net cash provided by operating activities |
56,960 | 63,241 | ||||||
| Investing Activities |
||||||||
| Property, plant & equipment expenditures |
(14,258 | ) | (7,948 | ) | ||||
| Disposals of property, plant & equipment |
406 | (11 | ) | |||||
| Purchase of businesses, net of cash acquired |
(28,672 | ) | (3,002 | ) | ||||
| Proceeds received from sale of operating division |
— | 19,000 | ||||||
| Other items, net |
(5,291 | ) | (49 | ) | ||||
| Net cash provided by (used in) investing activities |
(47,815 | ) | 7,990 | |||||
| Financing Activities |
||||||||
| Issuance of convertible subordinated debentures |
— | 100,000 | ||||||
| Borrowings under long-term debt |
379,149 | 338,007 | ||||||
| Payments of long-term debt |
(391,942 | ) | (448,849 | ) | ||||
| Net payments on accounts receivable purchase facility |
— | (25,702 | ) | |||||
| Net decrease in short-term bank loans |
(3,526 | ) | (137 | ) | ||||
| Debt issuance costs |
— | (7,491 | ) | |||||
| Proceeds received from exercise of stock options |
4,091 | 2,589 | ||||||
| Net cash used in financing activities |
(12,228 | ) | (41,583 | ) | ||||
| Net increase (decrease) in cash and cash equivalents |
(3,083 | ) | 29,648 | |||||
| Cash and cash equivalents at beginning of year |
21,256 | 11,228 | ||||||
| Cash and cash equivalents at end of period |
$ | 18,173 | $ | 40,876 | ||||
3
K2 INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 30, 2004
NOTE 1 - Basis of Presentation
The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended June 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004.
The consolidated condensed balance sheet at December 31, 2003 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.
K2 reports its financial statements using a 13 week quarter ending on the last Sunday of March, June, September and December. For purposes of the consolidated financial statements, the end of each quarter is stated as of March 31, June 30, September 30 and December 31, respectively.
The interim financial statements should be read in connection with the financial statements in K2 Inc.’s (“K2’s”) Annual Report on Form 10-K for the year ended December 31, 2003.
NOTE 2 - Summary of Significant Accounting Policies
Accounts Receivable and Allowances
Accounts receivable are net of allowances for doubtful accounts of $8,728,000 at June 30, 2004 and $7,558,000 at December 31, 2003.
Inventories
The components of inventories consisted of the following:
| June 30, 2004 |
December 31, 2003 | |||||
| (Thousands) | ||||||
| Finished goods |
$ | 147,480 | $ | 180,379 | ||
| Work in process |
13,060 | 10,843 | ||||
| Raw materials |
51,994 | 45,930 | ||||
| $ | 212,534 | $ | 237,152 | |||
4
K2 INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
June 30, 2004
NOTE 2 - Summary of Significant Accounting Policies (Continued)
Warranty
K2 records the estimated cost of product warranties at the time sales are recognized. K2 estimates warranty obligation by reference to historical product warranty return rates, material usage and service delivery costs incurred in correcting the product. Should actual product warranty return rates, material usage or service delivery costs differ from the historical rates, revisions to the estimated warranty liability would be required.
The following activity related to product warranty liabilities:
| Three Months Ended June 30 |
Six Months Ended June 30 |
|||||||||||||||
| (Thousands) | 2004 |
2003 |
2004 |
2003 |
||||||||||||
| Beginning Balance |
$ | 5,520 | $ | 3,477 | $ | 5,526 | $ | 2,954 | ||||||||
| Charged to costs and expenses |
1,586 | 1,066 | 3,117 | 2,109 | ||||||||||||
| Increase to reserve resulting from acquisitions |
325 | — | 325 | 420 | ||||||||||||
| Amounts charged to reserve |
(966 | ) | (736 | ) | (2,503 | ) | (1,676 | ) | ||||||||