<PAGE>
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 June 30, 1998 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
-------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of July 31, 1998.
Common Stock, par value $1 16,566,893 Shares
<PAGE>
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)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
-------------------------------------------------------------
1998 1997 1998 1997
---------------------------- ----------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Net sales $ 180,951 $ 171,522 $ 354,116 $ 343,063
Cost of products sold 129,869 120,376 258,843 245,536
--------- --------- --------- ---------
Gross profit 51,082 51,146 95,273 97,527
Selling expenses 23,145 22,891 45,946 45,282
General and administrative expenses 12,789 12,926 26,407 26,196
--------- --------- --------- ---------
Operating income 15,148 15,329 22,920 26,049
Interest expense 3,175 2,679 6,314 5,198
Other expense (income), net (86) 63 (148) (228)
--------- --------- --------- ---------
Income before provision for income taxes 12,059 12,587 16,754 21,079
Provision for income taxes 3,980 3,900 5,530 6,530
--------- --------- --------- ---------
Net income $ 8,079 $ 8,687 $ 11,224 $ 14,549
--------- --------- --------- ---------
--------- --------- --------- ---------
Earnings per share:
Basic $ 0.49 $ 0.53 $ 0.68 $ 0.88
Diluted $ 0.49 $ 0.52 $ 0.68 $ 0.87
Shares:
Basic 16,548 16,540 16,544 16,547
Diluted 16,629 16,703 16,624 16,714
Cash dividend $ 0.11 $ 0.11 $ 0.22 $ 0.22
</TABLE>
See notes to consolidated condensed financial statements.
1
<PAGE>
CONSOLIDATED BALANCE SHEETS (condensed)
(Dollars in thousands)
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1998 1997
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 4,720 $ 5,914
Accounts receivable, net 123,004 118,579
Inventories
Finished goods 138,680 137,123
Work in process 11,610 20,802
Raw materials 36,778 35,238
---------- ----------
187,068 193,163
Less LIFO reserve 3,855 3,795
---------- ----------
183,213 189,368
Deferred taxes 2,755 9,236
Prepaid expenses and other current assets 5,553 7,071
---------- ----------
Total current assets 319,245 330,168
Property, Plant and Equipment 190,541 179,562
Less allowance for depreciation and amortization 107,947 101,774
---------- ----------
82,594 77,788
Intangibles, principally goodwill 17,279 17,561
Other 3,573 3,411
---------- ----------
Total Assets $ 422,691 $ 428,928
---------- ----------
---------- ----------
</TABLE>
See notes to consolidated condensed financial statements.
2
<PAGE>
CONSOLIDATED BALANCE SHEETS (condensed)
(Dollars in thousands)
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1998 1997
----------- -----------
(Unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Bank loans $ 36,721 $ 48,967
Accounts payable 23,848 29,607
Accrued payroll and related 15,275 17,740
Other accruals 20,508 21,794
Current portion of long-term debt 4,444 4,445
---------- ----------
Total current liabilities 100,796 122,553
Long-Term Debt 100,668 88,668
Deferred Taxes 11,376 14,822
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 1998 and 17,160,080 in 17,191 17,160
1997
Additional paid-in capital 132,488 132,086
Retained earnings 77,253 69,668
Employee Stock Ownership Plan and
stock option loans (3,113) (3,006)
Treasury shares at cost, 623,759 shares
in 1998 and in 1997 (8,106) (8,106)
Cumulative translation adjustments (5,862) (4,917)
---------- ----------
Total Shareholders' Equity 209,851 202,885
---------- ----------
Total Liabilities and Shareholders'
Equity $ 422,691 $ 428,928
---------- ----------
---------- ----------
</TABLE>
See notes to consolidated condensed financial statements.
3
<PAGE>
STATEMENTS OF CONSOLIDATED CASH FLOWS (condensed)
(In thousands)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30
----------------------
1998 1997
----------------------
(unaudited)
<S> <C> <C>
Operating Activities
Net income $ 11,224 $ 14,549
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 8,175 6,615
Deferred taxes 3,035 (170)
Changes in operating assets and liabilities:
Accounts receivable (4,425) (8,960)
Inventories 6,155 (3,939)
Prepaid expenses and other current assets 1,518 398
Accounts payable (5,759) (4,402)
Payrolls and other accruals (3,751) 7,244
--------- ---------
Net cash provided by operating activities 16,172 11,335
Investing Activities
Property, plant & equipment expenditures (12,679) (12,245)
Disposals of property, plant & equipment 289 50
Sale of investments 6,408
Other items, net (1,090) (2,719)
--------- ---------
Net cash used in investing activities (13,480) (8,506)
Financing Activities
Borrowings under long-term debt 26,000 18,667
Payments of long-term debt (14,001) (28,087)
Net (decrease) increase in short-term bank loans (12,246) 4,092
Repurchase of accounts receivable facility (4,725)
Dividends paid (3,639) (3,642)
Repayment of loans to ESOP 4,533
--------- ---------
Net cash used in financing activities (3,886) (9,162)
--------- ---------
Net decrease in cash and cash equivalents (1,194) (6,333)
Cash and cash equivalents at beginning of year 5,914 10,860
--------- ---------
Cash and cash equivalents at end of period $ 4,720 $ 4,527
--------- ---------
--------- ---------
Supplemental disclosure of cash flow information:
Interest paid $ 6,115 $ 4,936
Income taxes paid 2,495 6,700
</TABLE>
See notes to consolidated condensed financial statements.
4
<PAGE>
K2 INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1998
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 and six month periods ended June 30, 1998, are not necessarily
indicative of the results that may be expected for the year ended
December 31, 1998. 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, 1997.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTS RECEIVABLE AND ALLOWANCES
Accounts receivable are net of allowances for doubtful accounts of $7,072,000
at June 30, 1998 and $7,418,000 at December 31, 1997.
NOTE 3 - 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 by the Company. As of June 30, 1998,
$18.7 million of retained earnings were free of such restrictions.
At June 30, 1998, $50 million of accounts receivable were sold, fully
utilizing the existing accounts receivable purchase facility.
NOTE 4 - COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income". SFAS No. 130
establishes new rules for the reporting and display of comprehensive income
and its components; however, the adoption of this Statement had no impact on
the Company's net income or shareholders' equity. SFAS No. 130 requires
foreign currency translation adjustments, which prior to adoption were
reported separately in shareholders' equity, to be included in other
comprehensive income.
During the three and six months ended June 30, 1998, total comprehensive
income amounted to $7.6 million and $10.6 million, respectively. For the
three and six months ended June 30, 1997, total comprehensive income amounted
to $6.3 million and $12.6 million, respectively.
5
<PAGE>
ITEM 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
A. COMPARATIVE SECOND QUARTER RESULTS OF OPERATIONS
Net sales for the three months ended June 30, 1998 increased to $181.0
million from $171.5 million in the year-earlier period. Net income for the
second quarter of 1998 declined to $8.1 million, or $.49 per diluted share,
from $8.7 million, or $.52 per diluted share, in the second quarter of 1997.
NET SALES. In the sporting goods and other recreational products group, net
sales increased 6.8% to $121.7 million from $114.0 million in the
year-earlier period. The growth was mainly due to double digit increases in
shipments of snowboard products. The popularity of the Company's step-in
bindings and boots and strong demand for high performance snowboards has
resulted in an increase in orders in the current year. Sales of Shakespeare
fishing tackle and Stearns equipment grew at strong double digit rates.
Shakespeare fishing tackle benefited from the impact of new products recently
introduced and from demand for its core fishing tackle products. Stearns
grew based on new product sales and from a shift in customer ordering
patterns. Sales of in-line skate sales rose moderately in the quarter,
primarily driven by growth in the European market. In the US, although sales
were comparable with the prior year, retailers continued to order cautiously
to manage inventory levels and to more closely match purchases with sales
rates. Cautious buying by ski retailers after a disappointing retail ski
season has resulted in an industry-wide decline in preseason orders.
Shipments for the quarter of the Company's K2 and Olin ski products were
impacted by this condition. Sales of recreational products to the Japanese
market declined reflecting economic conditions in that market.
Net sales of the industrial products group in the second quarter rose 3.1% to
$59.3 million from $57.5 million in the prior year's quarter. The gain was
due to increased sales of monofilament products, and secondarily of composite
light poles. Sales of residential and commercial building products declined
due to competitive pricing pressures.
GROSS PROFIT. Gross profit for the second quarter of 1998 was unchanged at
$51.1 million from the year ago quarter, although as a percentage of net
sales it declined to 28.2% from 29.8%. The decline was largely due to margin
erosion from closeout sales of certain skate and bike inventories and higher
manufacturing costs and competitive pricing pressures in certain segments of
the industrial group.
COSTS AND EXPENSES. In the second quarter of 1998, selling expenses of $23.1
million, or 12.8% of net sales were comparable to the prior year's quarter of
$22.9 million, or 13.4% of net sales. General and administrative expenses for
the quarter of $12.8 million, or 7.1% of net sales were also comparable to
$12.9 million, or 7.5% of net sales, in the year-earlier period.
6
<PAGE>
OPERATING INCOME. Operating income in the second quarter of 1998 declined
slightly to $15.1 million, or 8.3% of net sales, from $15.3 million, or 8.9%
of net sales, in the year-earlier period. The decline in percentage was
attributable to the effect of the lower gross profit percentage.
INTEREST EXPENSE. Interest expense increased $496,000 to $3.2 million in the
second quarter of 1998 compared to the year-earlier period. Higher average
borrowings incurred to support the growth in sales increased interest expense
by $786,000, which was offset by a reduction of $290,000 of interest due to
lower interest rates.
B. COMPARATIVE SIX-MONTH RESULTS OF OPERATIONS
Net sales for the six months ended June 30, 1998 increased to $354.1 million
from $343.1 million in the corresponding prior-year period. Net income for
the first half of 1998 declined to $11.2 million, or $.68 per diluted share,
from $14.5 million, or $.87 per diluted share, in the first half of 1997.
NET SALES. In the sporting goods and other recreational products group, net
sales increased slightly to $238.2 million, from $235.8 million in the 1997
period. Shipments of snowboard products significantly increased due to
strong demand for performance boards and Clicker step-in bindings and boots.
Shakespeare fishing tackle products grew at a strong double digit rate from
the introduction of new Shakespeare branded products and continued gains in
core fishing tackle products. Stearns sports equipment contributed to sales
growth as a result of new products as well as continued strength of core
products. Partially offsetting these gains were lower shipments of K2
in-line skates, reflecting continued cautious ordering by retailers as they
proceed to reduce inventory levels of plastic skates (manufactured by others)
which have been high relative to retail sales levels. Sales of skis also
declined due to a disappointing retail season industry-wide. Shipments of
bikes declined during the seasonally weak first half of the year.
The industrial products group reported an 8.0% increase in sales to $115.9
million from $107.3 million. The improvement was primarily due to increased
sales of paperweaving product and cutting line in the monofilament business.
GROSS PROFIT. Gross profit as a percentage of net sales for the period fell
to 26.9% from 28.4% in the year-earlier period, resulting in gross profit
declining to $95.3 million from $97.5 million a year ago. The reduction in
the gross profit percentage reflects a less than favorable sales mix of
higher margin products, margin pressures from closeout sales of certain skate
and bike inventories and higher manufacturing costs and competitive pricing
pressures in certain segments of the industrial group.
COST AND EXPENSES. Selling expenses at $45.9 million, or 13.0% of net sales
were comparable to the $45.3 million, or 13.2% of net sales in the
corresponding year-earlier period. General and administrative expenses of
$26.4 million, or 7.5% of net sales, were also comparable with the prior year
period of $26.2 million, or 7.6% of net sales.
7
<PAGE>
OPERATING INCOME. Operating income declined 11.9% to $22.9 million, or 6.5%
of net sales, from $26.0 million, or 7.6% of net sales. The decline was
mainly attributable to the effect of the lower gross profit percentage.
INTEREST EXPENSE. Interest expense increased $1.1 million to $6.3 million in
the first six months of 1998 compared to $5.2 million in the year-earlier
period. Higher average borrowings incurred to support the growth in sales
and new product development increased interest expense by $1.6 million, which
was offset by a reduction of $500,000 of interest due to lower interest rates.
C. FINANCIAL CONDITION
The Company's operating activities provided $16.2 million of cash during the
six months ended June 30, 1998, as compared with $11.3 million of cash during
the six months ended June 30, 1997. The improvement in net cash provided in
the 1998 period is attributable to a smaller seasonal buildup of accounts
receivable and inventories as compared with the prior year's period which
included a significant increase in in-line skate sales.
Net cash used for investing activities was $13.5 million in the first half of
1998, compared to $8.5 million used in the first half of 1997. The 1997
period includes $6.4 million received in connection with a one-time sale of
investments. Excluding the one-time sale, net cash used in investing
activities is consistent from year to year. There were no material
commitments for capital expenditures at June 30, 1998.
Net cash used in financing activities was $3.9 million in the 1998 six month
period as compared with $9.2 million in the corresponding year ago period.
The net reduction of $5.3 million in cash used was due to an increase in
borrowing to support the growth in sales and a decrease in the repayment of
long-term borrowings.
The Company anticipates its remaining cash needs in 1998 will be provided
from operations and borrowings under existing credit lines.
D. OTHER MATTERS
The Company is currently working to resolve the potential impact of the year
2000 on the processing of date-sensitive information by the Company's
computerized information systems. The year 2000 problem is the result of
computer programs being written using two digits (rather than four) to define
the applicable year. Any of the Company's programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the
year 2000, which could result in miscalculation or system failures. Based on
a preliminary study, the Company's management believes that most of the
Company's information systems are Year 2000 compliant. Those systems that
are not Year 2000 compliant will be either upgraded or replaced by the end of
1998 to ensure compliance. The total anticipated cost of compliance is not
expected to be material.
8
<PAGE>
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 regarding softboot in-line skates and skis, inventory levels at
retail and overall market 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 filing with the Securities and Exchange Commission.
9
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K filed in the second quarter ended
June 30, 1998
None
10
<PAGE>
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: August 12, 1998 /s/ RICHARD M. RODSTEIN
-----------------------------------
Richard M. Rodstein
President and Chief Executive
Officer
Date: August 12, 1998 /s/ JOHN J. RANGEL
-----------------------------------
John J. Rangel
Senior Vice President - Finance
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 4,720
<SECURITIES> 0
<RECEIVABLES> 130,076
<ALLOWANCES> (7,072)
<INVENTORY> 183,213
<CURRENT-ASSETS> 319,245
<PP&E> 190,541
<DEPRECIATION> (107,947)
<TOTAL-ASSETS> 422,691
<CURRENT-LIABILITIES> 100,796
<BONDS> 0
0
0
<COMMON> 17,191
<OTHER-SE> 192,660
<TOTAL-LIABILITY-AND-EQUITY> 422,691
<SALES> 354,116
<TOTAL-REVENUES> 354,264
<CGS> 258,843
<TOTAL-COSTS> 258,843
<OTHER-EXPENSES> 71,305
<LOSS-PROVISION> 1,048
<INTEREST-EXPENSE> 6,314
<INCOME-PRETAX> 16,754
<INCOME-TAX> 5,530
<INCOME-CONTINUING> 11,224
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,224
<EPS-PRIMARY> .68
<EPS-DILUTED> .68
</TABLE>
