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 September 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 October 31, 2004.
| Common Stock, par value $1.00 |
46,685,505 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 September 30 |
Nine months ended September 30 |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
| (Unaudited) | ||||||||||||||||
| Net sales |
$ | 333,460 | $ | 167,963 | $ | 861,811 | $ | 524,754 | ||||||||
| Cost of products sold |
214,274 | 113,094 | 578,627 | 362,524 | ||||||||||||
| Gross profit |
119,186 | 54,869 | 283,184 | 162,230 | ||||||||||||
| Selling expenses |
56,736 | 29,500 | 140,349 | 83,114 | ||||||||||||
| General and administrative expenses |
34,877 | 17,614 | 83,295 | 52,513 | ||||||||||||
| Operating income |
27,573 | 7,755 | 59,540 | 26,603 | ||||||||||||
| Interest expense |
7,299 | 2,640 | 13,811 | 7,248 | ||||||||||||
| Debt extinguishment costs |
— | — | — | 6,745 | ||||||||||||
| Other income, net |
(426 | ) | (54 | ) | (604 | ) | (1,654 | ) | ||||||||
| Income before income taxes |
20,700 | 5,169 | 46,333 | 14,264 | ||||||||||||
| Provision for income taxes |
7,502 | 1,808 | 16,217 | 4,992 | ||||||||||||
| Net income |
$ | 13,198 | $ | 3,361 | $ | 30,116 | $ | 9,272 | ||||||||
| Basic earnings per share: |
||||||||||||||||
| Net income |
$ | 0.28 | $ | 0.12 | $ | 0.78 | $ | 0.39 | ||||||||
| Diluted earnings per share: |
||||||||||||||||
| Net income |
$ | 0.26 | $ | 0.12 | $ | 0.69 | $ | 0.38 | ||||||||
| Basic shares outstanding |
46,472 | 27,274 | 38,753 | 23,576 | ||||||||||||
| Diluted shares outstanding |
55,148 | 34,487 | 47,503 | 26,623 | ||||||||||||
See notes to consolidated condensed financial statements.
1
CONSOLIDATED CONDENSED BALANCE SHEETS
(Thousands, except number of shares)
| September 30 2004 |
December 31 2003 |
|||||||
| (Unaudited) | ||||||||
| Assets |
||||||||
| Current Assets |
||||||||
| Cash and cash equivalents |
$ | 37,196 | $ | 21,256 | ||||
| Accounts receivable, less allowances for doubtful accounts of $12,832 (2004) and $7,558 (2003) |
334,650 | 224,818 | ||||||
| Inventories, net |
307,140 | 237,152 | ||||||
| Deferred taxes and income taxes receivable |
30,758 | 40,023 | ||||||
| Prepaid expenses and other current assets |
27,250 | 13,083 | ||||||
| Total current assets |
736,994 | 536,332 | ||||||
| Property, plant and equipment |
259,717 | 204,738 | ||||||
| Less allowance for depreciation and amortization |
127,841 | 113,716 | ||||||
| 131,876 | 91,022 | |||||||
| Goodwill |
360,600 | 147,047 | ||||||
| Intangible assets, net |
89,442 | 81,800 | ||||||
| Other |
25,128 | 15,670 | ||||||
| Total Assets |
$ | 1,344,040 | $ | 871,871 | ||||
| Liabilities and Shareholders’ Equity |
||||||||
| Current Liabilities |
||||||||
| Bank loans |
$ | 48,065 | $ | 10,751 | ||||
| Accounts payable |
95,300 | 77,304 | ||||||
| Accrued payroll and related |
44,262 | 33,040 | ||||||
| Other accrued liabilities |
101,628 | 61,540 | ||||||
| Current portion of long-term debt |
18,596 | 72,126 | ||||||
| Total current liabilities |
307,851 | 254,761 | ||||||
| Long-term pension liabilities |
11,173 | 11,173 | ||||||
| Long-term debt |
218,093 | 35,194 | ||||||
| Deferred taxes |
42,169 | 38,636 | ||||||
| Convertible subordinated debentures |
98,418 | 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 47,402,981 in 2004 and 34,146,798 in 2003 |
47,403 | 34,147 | ||||||
| Additional paid-in capital |
498,921 | 313,142 | ||||||
| Retained earnings |
137,733 | 107,617 | ||||||
| Employee Stock Ownership Plan and stock option loans |
(1,131 | ) | (1,214 | ) | ||||
| Treasury shares at cost, 747,234 shares in 2004 and 2003 |
(9,107 | ) | (9,107 | ) | ||||
| Accumulated other comprehensive loss |
(7,483 | ) | (10,545 | ) | ||||
| Total Shareholders’ Equity |
666,336 | 434,040 | ||||||
| Total Liabilities and Shareholders’ Equity |
$ | 1,344,040 | $ | 871,871 | ||||
See notes to consolidated condensed financial statements.
2
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
(Thousands)
| Nine months ended September 30 |
||||||||
| 2004 |
2003 |
|||||||
| Operating Activities |
||||||||
| Net income |
$ | 30,116 | $ | 9,272 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
| Gain on sale of operating division |
— | (1,504 | ) | |||||
| Depreciation and amortization |
19,879 | 14,275 | ||||||
| Deferred taxes |
13,343 | — | ||||||
| Changes in current assets and current liabilities |
(46,066 | ) | 27,522 | |||||
| Net cash provided by operating activities |
17,272 | 49,565 | ||||||
| Investing Activities |
||||||||
| Property, plant & equipment expenditures |
(24,242 | ) | (15,067 | ) | ||||
| Disposals of property, plant & equipment |
381 | 21 | ||||||
| Purchase of businesses, net of cash acquired |
(113,467 | ) | (16,300 | ) | ||||
| Proceeds received from sale of operating division |
— | 20,132 | ||||||
| Other items, net |
(1,474 | ) | (2,365 | ) | ||||
| Net cash used in investing activities |
(138,802 | ) | (13,579 | ) | ||||
| Financing Activities |
||||||||
| Issuance of senior notes |
200,000 | — | ||||||
| Issuance of convertible subordinated debentures |
— | 100,000 | ||||||
| Borrowings under long-term debt |
479,015 | 388,507 | ||||||
| Payments of long-term debt |
(615,069 | ) | (492,844 | ) | ||||
| Net payments on accounts receivable purchase facility |
— | (25,702 | ) | |||||
| Net increase (decrease) in short-term bank loans |
(15,956 | ) | 1,855 | |||||
| Net proceeds from equity issuance |
93,740 | — | ||||||
| Debt issuance costs |
(8,353 | ) | (7,917 | ) | ||||
| Proceeds received from exercise of stock options |
4,093 | 3,502 | ||||||
| Net cash provided by (used in) financing activities |
137,470 | (32,599 | ) | |||||
| Net increase in cash and cash equivalents |
15,940 | 3,387 | ||||||
| Cash and cash equivalents at beginning of year |
21,256 | 11,228 | ||||||
| Cash and cash equivalents at end of period |
$ | 37,196 | $ | 14,615 | ||||
3
K2 INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 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 nine month periods ended September 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 – Newly Adopted Accounting Standards
Newly Adopted Accounting Standards
In January 2003, the FASB issued FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities” and issued FIN 46(R) in December 2003, which amended FIN 46. FIN 46 requires certain variable interest entities to be consolidated in certain circumstances by the primary beneficiary even if it lacks a controlling financial interest. Adopting FIN 46 and FIN 46(R) did not have an impact on K2’s operational results or financial position since K2 does not have any variable interest entities.
During 2003, the FASB revised SFAS 132, “Employer’s Disclosures about Pensions and Other Postretirement Benefits”: This statement revises employers’ disclosures about pension plans and other postretirement benefit plans. It requires disclosures beyond those in the original SFAS 132 about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other defined postretirement plans.
4
K2 INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
September 30, 2004
NOTE 2 – Newly Adopted Accounting Standards (Continued)
In addition, the revised statement requires interim-period disclosures regarding the amount of net periodic benefit cost recognized and the total amount of the employers’ contributions paid and expected to be paid during the current fiscal year. It does not change the measurement or recognition of those plans.
The following table provides the components of benefit costs for the three and nine months ended September 30:
| For the three months ended September 30 |
For the nine months ended September 30 |
|||||||||||||||
| (Thousands) | 2004 |
2003 |
2004 |
2003 |
||||||||||||
| Service cost |
$ | 428 | $ | 420 | $ | 1,328 | $ | 1,260 | ||||||||
| Interest cost |
1,278 | 1,030 | 3,338 | 3,090 | ||||||||||||
| Expected return on assets |
(1,017 | ) | (890 | ) | (2,837 | ) | (2,670 | ) | ||||||||
| Amortization of: |
||||||||||||||||
| Prior service cost |
16 | 20 | 46 | 60 | ||||||||||||
| Actuarial loss |
462 | 260 | 732 | 780 | ||||||||||||
| Curtailment/settlement loss recognized |
353 | 10 | 353 | 30 | ||||||||||||
| Total net periodic benefit cost |
$ | 1,520 | ||||||||||||||