K2 Inc. Reports Financial Results for 2000 Fourth Quarter and Year
K2 Inc. (NYSE:KTO) announced net sales for the year ended December 31, 2000 increased to $670.8 million, from $646.0 million a year ago. Gross profit as a percentage of sales for the year improved to 31.1 percent from 28.5 percent in 1999, an improvement of 9 percent.
Income from continuing operations for the year increased to $16.7 million, or $0.93 per diluted share, on 18.0 million diluted shares, from $8.5 million, or $0.50 per diluted share on 16.9 million diluted shares a year ago. Net income for the 2000 year, including discontinued operations, rose 68 percent to $16.6 million as compared with $9.8 million in the prior year. Earnings per diluted share increased 59 percent to $0.92 from $0.58 for the year ago period. Discontinued operations consisted of K2’s former Simplex Products division, which was sold in June 2000. On a per share basis, income from continuing operations was impacted by the issuance of additional shares in conjunction with the acquisition of Ride Inc. in October 1999.
For the 2000 fourth quarter, income from continuing operations totaled $2.5 million, or $0.14 per diluted share, on 18.1 million diluted shares, compared with a loss from continuing operations of $5.0 million, or $0.29 per diluted share, on 17.6 million diluted shares, reported in the prior year period. Net income for the quarter, including discontinued operations, was $2.0 million, or $0.12 per diluted share, up from a net loss of $4.7 million, or $0.27 per diluted share, reported in the fourth quarter last year.
The company’s cash flow during 2000 was strong, resulting in $39.5 million of cash generated which was used to pay down debt.
Net sales for the current quarter totaled $157.9 million with gross profit as a percentage of sales of 28.9 percent, compared with $176.8 million and 22.6 percent, respectively, in the comparable 1999 period.
Sales and selling expense for the periods discussed reflect a reclassification of freight expense and recoveries required by the Emerging Issues Task Force (EITF) Issue No. 00-10. This change had no impact on the company’s reported earnings, but resulted in an annual 1999 sales increase of $10.9 million and fourth quarter 1999 increase of $3.0 million, each offset by a corresponding increase in selling expense.
2000 Operations Review
Sales for the year increased 3.8 percent. The company’s strategic focus on growing strong brands through continued product innovation and promotion resulted in strong sales performance for its K2 Kickboard scooters, Ride and K2 snowboard products, Shakespeare Fishing Tackle reels and kits, Stearns flotation devices, raingear, and Adio and Hawk skateboard shoe lines.
Sales of the small-wheeled product group increased 5 percent for the year. K2’s innovative Kickboard scooter sales increased $24 million with strong demand in the European market. The company said that in the second half of the year there was softness in European inline skate sales. They further noted that the decline in European exchange rates against the dollar also had an unfavorable impact when comparing translated European sales to the prior year’s period. Richard M. Rodstein, K2’s president and chief executive officer said, “It is our goal to create high performance, small-wheeled products. Our Kickboard scooters are designed for performance recreation and transportation uses. The strong response to our products resulted in our current open orders exceeding our full year 2000 sales.”
Rodstein continued, “The company also experienced double digit worldwide growth of our Ride and K2 snowboard products. The gains reflected a full year of Ride sales and broad based growth in virtually all snowboard equipment categories. The K2 brand also experienced double-digit growth in the US ski market reflecting the success of our MOD technology. Ski sales declined internationally, however, reflecting the higher price of dollar denominated U.S.-produced skis. With more competitively priced China-produced skis and snowboards and an exciting new product line, we expect accelerated worldwide sales momentum in 2001.”
Worldwide Fishing Tackle sales were up 14 percent, due entirely to growth in the U.S. market, with increasing demand for new reels, kits and foldable furniture. Rodstein said, “We believe we are gaining market share through the introduction of new reels and kits at popular price points.
“We are also benefiting from new product introductions by Stearns, with a 10 percent increase in sales, mainly from children’s flotation devices and raingear. Our Adio and Hawk skateboard shoe lines have become increasingly popular due to our innovative designs and expanded distribution as they reported a 17 percent increase in sales for the year.”
The company said industrial sales fell during the year because of the slowdown and consolidation in the paperweaving industry resulting in a fourth quarter decline in demand for paperweaving monofilaments. This was partially offset by gains from growth of composite light poles.
“The improved gross profit margins reflect the benefits from our global cost reduction initiatives such as China production of winter sports products and improved costs on many sourced products sold,” Rodstein said. “The positive results were partially offset by the product cost impact of weak European currencies, declining margins in our Monofilament business and costs incurred to move production to our China manufacturing plant.” Included in the prior year’s gross profit was a charge for restructuring and downsizing costs totaling $10.5 million.
Fourth Quarter Review
Sales of K2’s Kickboards continued strong in the 2000 fourth quarter. While sales of inline skates declined due to lower sales reported in the European market, the company said that more than half of the decline was attributable to translating European currency sales into dollars using lower exchange rates as compared to the prior year.
An increase in ski sales in the U.S. market was offset by lower international sales, resulting in worldwide ski sales in the 2000 fourth quarter that were comparable with the prior-year period. Shipments of snowboards grew double digits for the year, however more timely shipments made into the third quarter resulted in a decline in the fourth quarter.
In a seasonally slow quarter, sales in the company’s fishing tackle business were strong in the U.S. market, as compared with the prior year. Monofilament sales, however, declined 28 percent due to softness experienced in the paperweaving market.
Gross profit as a percentage of sales increased to 28.9 percent in the fourth quarter compared with 22.6 percent reported last year. Reduced costs associated with the China manufacturing facility were partially offset by the impact of selling products in Europe that were purchased during 2000 using European currencies that were weak against the dollar and by declining margins in the manufacture of monofilaments. The prior year quarter included restructuring and downsizing costs.
The following statements are based on management plans for the year and reflect assumptions as to numerous factors beyond K2’s control. These statements are forward-looking, and actual results may differ materially. Certain of the material uncertainties are more specifically referenced below.
In looking ahead to 2001, Rodstein said, “We have developed a strong array of new products for Shakespeare fishing tackle, Stearns and K2. Our brands had strong sell-through at retail during the past year positioning the company for positive growth during the current year. However, the uncertainty in the market caused by a slowing economy, continued worldwide softness in retail sales of in-line skates and concerns over the impact of weather on spring business might negatively impact sales growth during 2001. Kickboard sales, however, continue to be strong and the current order position gives us reason to be opti
mistic. Further, favorable winter conditions in the important North American market, in conjunction with a strong response to our new snowboard and ski product lines leads us to believe that our preseason orders will increase over the prior year. We believe that margins should benefit from cost savings derived from increasing China production to 75 percent of our winter sports products. Additionally, sales should grow approximately 6 percent should, among other factors, the expected increases in Kickboard and winter sports sales be realized. We also expect sales and earnings of our Monofilament business to have bottomed and believe that along with the effects of a recent acquisition, a rebound should result. Against the backdrop of economic uncertainty and since our cost reduction programs are not expected to provide benefits until the related shipments of winter sports products are made in the third and fourth quarters, we are forecasting that earnings will gain momentum in the second half of the year with full year diluted EPS of $1.05 to $1.15. Additionally our program to manage working capital should allow us to again generate favorable cash flow in 2001.”
K2 Inc. is a leading designer, manufacturer and marketer of brand- name sporting goods, recreational and industrial products. The company’s sporting goods and recreational products include well-known names such as K2 and Olin alpine skis; K2, Ride and Morrow snowboards, boots and bindings; K2 in-line skates; Stearns sports equipment; Shakespeare fishing tackle; K2 bikes; and Dana Design backpacks. K2’s other recreational products include Planet Earth apparel, Adio skateboard shoes and Hilton corporate casuals. K2’s industrial products include Shakespeare extruded monofilaments, marine antennas and composite light poles.