FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report under Section 13
of the Securities Exchange Act of 1934
For the Quarter Ended March 31, 1999 Commission File No. 1-4290
K2 INC.
(exact name of registrant as specified in its charter)
DELAWARE 95-2077125
(State of Incorporation) (I.R.S. Employer Identification No.)
4900 South Eastern Avenue
Los Angeles, California 90040
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (323) 724-2800
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, and (2) has been subject to such
filing requirements for the past 90 days.
Yes X
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of April 30, 1999.
Common Stock, par value $1 16,565,806 Shares
FORM 10-Q QUARTERLY REPORT
PART - 1 FINANCIAL INFORMATION
ITEM 1 Financial Statements
STATEMENTS OF CONSOLIDATED INCOME (condensed)
(Dollars in thousands, except per share figures)
THREE MONTHS
ENDED MARCH 31
---------------------------
1999 1998
---------------------------
(Unaudited)
Net sales $ 163,060 $ 151,041
Cost of products sold 118,749 109,599
--------- ---------
Gross profit 44,311 41,442
Selling expenses 23,096 21,054
General and administrative expenses 13,457 13,271
--------- ---------
Operating income 7,758 7,117
Interest expense 3,297 3,139
Other income, net (100) (62)
--------- ---------
Income before income taxes 4,561 4,040
Provision for income taxes 1,458 1,321
--------- ---------
Income from continuing operations 3,103 2,719
Discontinued operations, net of taxes 149 426
--------- ---------
Net income $ 3,252 $ 3,145
--------- ---------
--------- ---------
Basic earnings per share:
Continuing operations $ 0.19 $ 0.16
Discontinued operations 0.01 0.03
--------- ---------
Net income 0.20 0.19
--------- ---------
--------- ---------
Diluted earnings per share:
Continuing operations $ 0.19 $ 0.16
Discontinued operations 0.01 0.03
--------- ---------
Net income 0.20 0.19
--------- ---------
--------- ---------
Basic shares outstanding 16,566 16,537
Diluted shares outstanding 16,566 16,616
Cash dividend $ 0.11 $ 0.11
See notes to consolidated condensed financial statements
1
CONSOLIDATED BALANCE SHEETS (condensed)
(In thousands, except share and per share figures)
MARCH 31 DECEMBER 31
1999 1998
----------- -----------
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 3,843 $ 3,394
Accounts receivable, net 138,601 126,011
Inventories, net 163,867 188,348
Deferred taxes 11,528 12,780
Prepaid expenses and other current assets 6,831 5,037
--------- ---------
Total current assets 324,670 335,570
Property, plant and equipment 153,727 151,071
Less allowance for depreciation and amortization 86,834 84,480
--------- ---------
66,893 66,591
Intangibles, principally goodwill, net 19,284 19,564
Net assets of discontinued operations 27,382 27,511
Other 6,455 3,759
--------- ---------
Total Assets $ 444,684 $ 452,995
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Bank loans $ 61,718 $ 64,350
Accounts payable 14,142 20,807
Accrued payroll and related 17,070 15,982
Other accruals 22,941 21,555
Current portion of long-term debt 4,444 4,444
--------- ---------
Total current liabilities 120,315 127,138
Long-term debt 110,224 110,724
Deferred taxes 13,014 13,014
Commitments and Contingencies
SHAREHOLDERS' EQUITY
Preferred Stock, $1 par value, authorized 12,500,000 shares, none issued
Common Stock, $1 par value, authorized 40,000,000 shares, issued shares -
17,190,652 in 1999 and 1998 17,191 17,191
Additional paid-in capital 132,488 132,488
Retained earnings 68,657 67,227
Employee Stock Ownership Plan and stock option loans (1,975) (1,981)
Treasury shares at cost, 624,846 shares in 1999 and 623,759 in 1998 (8,118) (8,106)
Accumulated other comprehensive loss (7,112) (4,700)
--------- ---------
Total Shareholders' Equity 201,131 202,119
--------- ---------
Total Liabilities and Shareholders' Equity $ 444,684 $ 452,995
--------- ---------
--------- ---------
See notes to consolidated condensed financial statements
2
STATEMENTS OF CONSOLIDATED CASH FLOWS (condensed)
(In thousands)
THREE MONTHS
ENDED MARCH 31
---------------------------
1999 1998
-------- --------
(unaudited)
Operating Activities
Income from continuing operations $ 3,103 $ 2,719
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation and amortization 3,131 3,259
Deferred taxes 396 437
Changes in operating assets and liabilities:
Accounts receivable (12,590) (5,091)
Inventories 24,481 388
Prepaid expenses and other current assets (1,866) (485)
Accounts payable (6,665) (4,024)
Payrolls and other accruals 2,475 480
-------- --------
Net cash provided by (used in) operating activities 12,465 (2,317)
Investing Activities
Property, plant & equipment expenditures (3,210) (5,390)
Disposals of property, plant & equipment 74 84
Purchase of business (2,961)
Other items, net (1,816) (1,675)
-------- --------
Net cash used in investing activities (7,913) (6,981)
Financing Activities
Borrowings under long-term debt 5,500 13,000
Payments of long-term debt (6,000) (2,001)
Net decrease in short-term bank loans (2,632) (186)
Dividends paid (1,822) (1,820)
-------- --------
Net cash (used in) provided by financing activities (4,954) 8,993
-------- --------
Net decrease in cash and cash equivalents from continuing operations (402) (305)
Discontinued operations
Income from discontinued operations 149 426
Adjustments to reconcile income to net cash
provided by (used in)
discontinued operations:
Depreciation and amortization 755 757
Capital expenditures (1,360) (1,325)
Other items, net 1,307 1,177
-------- --------
Cash provided by discontinued operations 851 1,035
Net increase in cash and cash equivalents 449 730
Cash and cash equivalents at beginning of year 3,394 5,706
-------- --------
Cash and cash equivalents at end of period $ 3,843 $ 6,436
-------- --------
-------- --------
Supplemental disclosure of cash flow information:
Interest paid $ 2,830 $ 2,740
Income taxes paid 287 1,113
See notes to consolidated condensed financial statements
3
K2 INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1999
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles 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 generally accepted accounting
principles 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 month period ended March 31, 1999 are not necessarily indicative of
the results that may be expected for the year ended December 31, 1999.
The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements.
For further information, refer to the Consolidated Financial Statements and
Notes to Financial Statements included in the Company's Annual Report on Form
10-K for the year ended December 31, 1998.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTS RECEIVABLE AND ALLOWANCES
Accounts receivable are net of allowances for doubtful accounts of $5,341,000
at March 31, 1999 and $5,798,000 at December 31, 1998.
INVENTORIES
The components of inventory consist of the following:
March 31 December 31
1999 1998
--------- -----------
(Thousands)
Finished goods $126,867 $146,233
Work in process 9,537 8,078
Raw materials 31,192 37,911
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Total at lower of FIFO cost or market
(approximates current cost) 167,596 192,222
Less LIFO valuation reserve 3,729 3,874
-------- --------
$163,867 $188,348
-------- --------
-------- --------
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K2 INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
NOTE 3 - ACQUISITION
On March 26, 1999, the Company acquired certain assets relating to the Morrow
snowboard business, including the Morrow trademark, from Morrow Snowboards,
Inc.
NOTE 4 - BORROWINGS AND OTHER FINANCIAL INSTRUMENTS
Covenants contained in the Company's $100 million credit line and accounts
receivable financing arrangement, among other things, restrict amounts
available for payment of cash dividends and stock repurchases by the Company.
As of March 31, 1999, $7.5 million of retained earnings were free of such
restrictions.
At March 31, 1999, $50 million of accounts receivable were sold, fully
utilizing the existing accounts receivable purchase facility.
NOTE 5 - COMPREHENSIVE INCOME
Total comprehensive income was $.8 million and $3.0 million for the three
months ended March 31, 1999 and 1998, respectively.
NOTE 6- EARNINGS PER SHARE DATA
Basic earnings per share ("EPS") is determined by dividing net income by the
weighted average number of shares outstanding during the period. Diluted EPS
reflects the potential dilutive effects of stock options, using the treasury
stock method. The March 31, 1999 computation of diluted EPS excluded all
1,115,000 stock options outstanding since their inclusion would have been
antidilutive. The March 31, 1998 computation of diluted EPS included the
dilutive effects of 79,000 stock options and excluded 612,000 stock options
since their inclusion would have been antidilutive.
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K2 INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999
NOTE 7 - SEGMENT INFORMATION
The segment information presented below is as of March 31:
Net Sales to
Unaffiliated
Customers Intersegment Sales Operating Profit (Loss)
------------------ ------------------ -----------------------
1999 1998 1999 1998 1999 1998
------ ------- ------- ----- ---------- --------
(Millions)
Sporting goods $121.3 $107.2 $5.8 $5.3 $ 4.9 $ 4.4
Other recreational 9.9 9.4 - - (0.7) (0.7)
Industrial 31.9 34.4 0.3 0.3 5.1 5.0
------ ------ ---- ---- ----- -----
Total segment data $163.1 $151.0 $6.1 $5.6 9.3 8.7
------ ------ ---- ---- ----- -----
------ ------ ---- ----
Corporate expenses, net (1.4) (1.6)
Interest expense 3.3 3.1
----- ------
Income from continuing operations before provision for income taxes $ 4.6 $ 4.0
----- ------
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ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations
COMPARATIVE FIRST QUARTER RESULTS OF OPERATIONS
Net sales from continuing operations for the three months ended March 31,
1999 increased 8.0% to $163.1 million from $151.0 million in the year-earlier
period. Income from continuing operations for the first quarter of 1999 rose
14.8% to $3.1 million, or $.19 per diluted share, from $2.7 million, or $.16
per diluted share, in the first quarter of 1998. Net income increased to $3.3
million, or $.20 per diluted share, from $3.1 million, or $.19 per diluted
share, in the prior year quarter.
NET SALES. In the sporting goods segment, net sales increased 13.2% to $121.3
million from $107.2 million in the 1998 first quarter. The growth was
primarily the result of a double-digit increase in worldwide skate sales.
Shakespeare fishing tackle has experienced a strong order rate in the
domestic market led by continued growth of the Ugly Stik line, new packaged
rods and reels and other new products. Timing of certain shipments to large
customers, however, resulted in first quarter overall sales that were flat
with the prior year. Stearns sales were off slightly, reflecting decline in
the water ski vest and wetsuit business which offset growth from new
products. The mild winter produced lower sales and a higher proportion of
closeout sales of ski and snowboard products in the seasonally weak first
quarter.
In the other recreational products segment, net sales of $9.9 million rose
slightly from the year ago period of $9.4 million. The improvement arose from
sales of new skateboard shoes, which more than offset lower sales to the
advertising specialty market due to continued sluggish market conditions.
Net sales of the two businesses in the industrial products group, Shakespeare
composites and electronics and Shakespeare monofilaments and specialty
resins, fell 7.4% to $31.9 million from $34.4 million in the prior year's
quarter. The decline was due to reduced demand for paperweaving monofilament
line which was only partially offset by an increase in cutting line and
marine antenna sales.
GROSS PROFIT. Gross profits for the first quarter of 1999 rose 7.0% to $44.3
million, or 27.2% of net sales, as compared with $41.4 million, or 27.4% of
net sales, in the year ago quarter. The decline in the gross profit
percentage was mainly due to costs incurred resulting from a planned shutdown
of the ski and snowboard plant in the first quarter to reduce inventory
levels.
COSTS AND EXPENSES. Selling expenses increased 9.5% to $23.1 million, or
14.2% of net sales, from $21.1 million, or 14.0% of net sales, in the prior
year's quarter. The dollar increase is attributable to expanded marketing of
the various brands and products throughout the Company. General and
administrative expenses were comparable at $13.5 million, or 8.3% of net
sales, from $13.3 million, or 8.8% of net sales, in the 1998 first quarter.
The decline as a percentage of net sales is due to the effect of ongoing
expense controls throughout this Company, particularly in the bike business.
7
OPERATING INCOME. Operating income for the first quarter improved 9.8% to
$7.8 million, or 4.8% of net sales, as compared to operating income of $7.1
million, or 4.7% of net sales, a year ago. The dollar increase is due to a
higher gross profit, offset by increased selling expenses.
INTEREST EXPENSE. Interest expense increased $158,000 to $3.3 million in the
first quarter of 1999 compared to $3.1 million in the year-earlier period.
Higher average borrowings incurred to support the growth in sales increased
interest expense by $427,000, which was offset by a reduction of $269,000 of
interest due to lower interest rates.
LIQUIDITY AND SOURCES OF CAPITAL
The Company's continuing operating activities provided $12.5 million of cash
during the three months ended March 31, 1999, as contrasted with $2.3 million
of cash used during the three- month period a year ago. The $14.8 million
year-to-year improvement in cash largely reflected lower inventory levels in
the current period which more than offset higher levels of accounts
receivable.
Net cash used for investing activities was $7.9 million in the current first
quarter compared to $7.0 million in the 1998 first quarter. The 1999 period
included a $3.0 million cash outlay for the acquisition of certain assets of
a snowboard company, and reflected $2.2 million of lower capital
expenditures. There were no material commitments for capital expenditures at
March 31, 1999.
Net cash used in financing activities was $5.0 million in the 1999 first
quarter compared with $9.0 million provided in the corresponding year-ago
quarter. The year to year decrease of $14.0 million in cash used in financing
activities was due to a higher net repayment of debt.
The Company anticipates its remaining cash needs in 1999 will be provided
from operations and borrowings under existing credit lines.
YEAR 2000 ISSUE
As is more fully described in the Company's annual report on Form 10-K for
the year ended December 31, 1998, the Company is modifying or replacing
portions of its software as well as certain hardware to enable continued
operations beyond December 31, 1999. As of March 31, 1999, the Company
estimates that its progress toward completion of its Year 2000 remediation
plan is as described below.
The Company's plan to resolve the Year 2000 issue involves the following four
phases: assessment, remediation, testing, and implementation. To date, the
Company has fully completed its assessment of all systems that it believes
could have a material impact on the sales, liquidity or operations of the
Company and that could be significantly affected by the Year 2000 issue. The
completed assessment indicated that most of the Company's significant
information technology systems could be affected. That assessment also
indicated that certain software and hardware (embedded chips) used in
production and manufacturing systems (hereafter also referred to as operating
equipment) are at risk. Based on a review of its product line, the Company
has determined that the products it has sold and will continue to sell do not
require
8
remediation to be Year 2000 compliant. Accordingly, the Company does not
believe that the Year 2000 presents a material exposure as it relates to the
Company's products. In addition, the Company has gathered information about
the Year 2000 compliance status of its significant suppliers and
subcontractors and continues to monitor their compliance.
For its information technology exposures, to date the Company is
approximately 75% complete on the remediation phase overall. The Company
expects to complete software reprogramming and replacement no later than
September 30, 1999. Once software is reprogrammed or replaced for a system,
the Company begins testing and implementation. These phases run concurrently
for different systems. To date, the Company has completed approximately 50%
of its testing overall and has implemented approximately 75% of its
remediated systems where such remediation was found to be necessary.
Completion of the testing and remediation phases for all significant systems
is expected by September 30, 1999. The Company is approximately 90% complete
in the remediation phase of its operating equipment and the Company is 100%
complete with the testing of its remediated operating equipment.
The Company's billing system interfaces directly with certain significant
customers. The Company is in the process of working with these customers to
ensure that the Company's systems that interface directly with them are Year
2000 compliant by December 31, 1999. The Company has completed its assessment
and testing phases and is approximately 75% complete with the remediation
phase.
The Company has queried its significant suppliers and subcontractors that do
not share information systems with the Company (external agents). To date,
the Company is not aware of any external agent with a Year 2000 issue that
would materially impact the Company's results of operations, liquidity, or
capital resources. However, the Company has no means of ensuring that
external agents will be Year 2000 ready. The inability of external agents to
complete their Year 2000 resolution process in a timely fashion could
materially impact the Company. The effect of non-compliance by external
agents is not determinable.
The total cost of the Year 2000 issue continues to be estimated at $1.5
million and is being funded through operating cash flows. To date, the
Company has incurred approximately $350,000 ($275,000 expensed and $75,000
capitalized for new systems) related to all phases of the Year 2000 project.
Management's assessment of the risks associated with the Year 2000 issue are
unchanged from that described in the 1998 annual report on Form 10-K.
The Company's plan to complete the Year 2000 modifications is based on
management's best estimates, which are based on numerous assumptions about
future events including the continued availability of certain resources and
other factors. Estimates on the status of completion and the expected
completion dates are based on the level of effort expended to date to total
expected (internal) staff effort. However, there can be no guarantee that
these estimates will be achieved and actual results could differ materially
from those plans. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel
trained in this area, the ability to locate and correct all the relevant
computer codes and similar uncertainties.
9
STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE
This Form 10-Q contains certain "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, which represent the
Company's expectations or beliefs concerning future events, including, but
not limited to, the following: statements regarding sales and earnings,
market trends, market conditions, market positioning, product acceptance and
demand, inventory reduction efforts, the impact of the Year 2000 on
computerized information systems, cost reduction efforts and overall trends
which involve substantial risks and uncertainties. The Company cautions that
these statements are further qualified by important factors that could cause
actual results to differ materially from those in the forward-looking
statements, including, but not limited to, economic conditions, product
demand, competitive pricing and products, and other risks described in the
Company's Annual Report on Form 10-K filed with the Securities and Exchange
Commission.
ITEM 3 Quantitative and Qualitative Disclosures of Market Risk
The Company's earnings and cash flow are subject to fluctuations due to
changes in foreign currency exchange rates. The Company manages its exposure
to changes in foreign currency exchange rates on certain firm purchase
commitments and anticipated, but not yet committed purchases, by entering
into foreign currency forward contracts. A hypothetical 10% weakening of the
U.S. dollar relative to all other currencies would not materially adversely
affect expected second quarter 1999 earnings or cash flows. This analysis is
dependent on actual purchases during the next quarter occurring within 90% of
budgeted forecasts. The effect of the hypothetical change in exchange rates
ignores the effect this movement may have on other variables including
competitive risk. If it were possible to quantify this competitive impact,
the results could well be different than the sensitivity effects shown above.
In addition, it is unlikely that all currencies would uniformly strengthen or
weaken relative to the U.S. dollar. In reality, some currencies may weaken
while others may strengthen.
10
PART II - OTHER INFORMATION
ITEM 4 SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
(c) At the Annual Meeting of the Stockholders of the Company held
May 6, 1999, the following actions were taken:
(1) Three directors were elected:
Jerry E. Goldress - 12,052,924 votes for and 398,964
votes withheld;
John H. Offermans - 12,034,227 votes for and 417,661
votes withheld;
Alfred E. Osborne, Jr. - 12,051,813 votes for and 400,075
votes withheld.
(2) The K2 1999 Stock Option Plan was adopted as follows:
8,510,201 votes for, 749,367 votes against and 168,394
votes abstained.
(3) The selection by the Board of Directors of Ernst & Young LLP
as the Company's independent auditors for the year 1999 was
ratified as follows:
12,283,723 votes for, 85,683 votes against and 82,482
votes abstained.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K filed in the first quarter ended March
31, 1999
None
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
K2 INC.
(registrant)
Date:May 14, 1999 /s/ RICHARD M. RODSTEIN
-----------------------------
Richard M. Rodstein
President and Chief Executive
Officer
Date:May 14, 1999 /s/ JOHN J. RANGEL
-------------------------------
John J. Rangel
Senior Vice President - Finance
12