<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 September 30, 2000 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 October 31, 2000.
Common Stock, par value $1 17,950,000 Shares
<PAGE>
FORM 10-Q QUARTERLY REPORT
PART - 1 FINANCIAL INFORMATION
Item 1. Financial Statements
STATEMENTS OF CONSOLIDATED INCOME (condensed)
(In thousands, except per share figures)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
-----------------------------------------------------------------
2000 1999 2000 1999
-------------------------------- -------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Net sales $163,486 $139,883 $504,347 $461,235
Cost of products sold 112,125 96,227 349,942 325,098
--------------- --------------- --------------- ---------------
Gross profit 51,361 43,656 154,405 136,137
Selling expenses 26,108 23,171 78,428 69,122
General and administrative expenses 15,808 12,954 43,386 38,198
--------------- --------------- --------------- ---------------
Operating income 9,445 7,531 32,591 28,817
Interest expense 2,777 2,677 11,335 9,005
Other (income) expense, net 9 8 (130) (106)
--------------- --------------- --------------- ---------------
Income before income taxes 6,659 4,846 21,386 19,918
Provision for income taxes 2,131 1,552 7,138 6,375
--------------- --------------- --------------- ---------------
Income from continuing operations 4,528 3,294 14,248 13,543
Discontinued Operations
Income from operations, net of taxes 37 1,039 1,044
Estimated loss on disposal, net of taxes - (718) -
--------------- --------------- --------------- ---------------
37 321 1,044
Net income $ 4,528 $ 3,331 $14,569 $14,587
=============== =============== =============== ===============
Basic earnings per share:
Continuing operations $ 0.25 $ 0.20 $ 0.79 $ 0.82
Discontinued operations 0.00 0.02 0.06
--------------- --------------- --------------- ---------------
Net income $ 0.25 $ 0.20 $ 0.81 $ 0.88
=============== =============== =============== ===============
Diluted earnings per share:
Continuing operations $ 0.25 $ 0.20 $ 0.79 $ 0.82
Discontinued operations 0.00 0.02 0.06
--------------- --------------- --------------- ---------------
Net income $ 0.25 $ 0.20 $ 0.81 $ 0.88
=============== =============== =============== ===============
Basic shares outstanding 17,950 16,549 17,950 16,559
Diluted shares outstanding 18,069 16,549 18,025 16,559
Cash dividend per share $ - $ - $ - $ 0.11
</TABLE>
See notes to consolidated condensed financial statements.
1
<PAGE>
CONSOLIDATED BALANCE SHEETS (condensed)
(In thousands, except number of shares)
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
2000 1999
------------------ ------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 93 $ 9,421
Accounts receivable, net 133,501 149,151
Inventories, net 164,867 172,154
Deferred taxes 6,966 10,030
Prepaid expenses and other current assets 8,514 5,053
------------------ ------------------
Total current assets 313,941 345,809
Property, plant and equipment 163,382 162,453
Less allowance for depreciation and amortization 92,580 89,858
------------------ ------------------
70,802 72,595
Intangibles, principally goodwill, net 40,435 38,928
Net assets of discontinued operations 24,706
Other 3,586 5,840
------------------ ------------------
Total Assets $ 428,764 $ 487,878
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Bank loans $ 23,085 $ 57,359
Accounts payable 46,593 44,231
Accrued payroll and related 20,976 19,781
Other accruals 38,076 32,808
Current portion of long-term debt 4,444 4,444
------------------ ------------------
Total current liabilities 133,174 158,623
Long-term debt 71,986 107,280
Deferred taxes 3,423 3,455
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
18,683,810 in 2000 and 18,682,810 in 1999 18,674 18,673
Additional paid-in capital 143,331 143,326
Retained earnings 89,817 75,248
Employee Stock Ownership Plan and stock option loans (1,835) (1,975)
Treasury shares at cost, 733,810 shares in 2000 and 733,110 in 1999 (8,998) (8,992)
Accumulated other comprehensive loss (20,808) (7,760)
------------------ ------------------
Total Shareholders' Equity 220,181 218,520
------------------ ------------------
Total Liabilities and Shareholders' Equity $ 428,764 $ 487,878
================== ==================
</TABLE>
See notes to consolidated condensed financial statements
2
<PAGE>
STATEMENTS OF CONSOLIDATED CASH FLOWS (condensed)
(In thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
-------------------------------------
2000 1999
-------------------------------------
(unaudited)
<S> <C> <C>
Operating Activities
Income from continuing operations $ 14,248 $ 13,543
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 9,711 9,763
Deferred taxes 3,032 1,794
Changes in operating assets and liabilities:
Accounts receivable 15,650 10,957
Inventories 7,287 22,158
Prepaid expenses and other current assets (3,461) (1,723)
Accounts payable 2,362 405
Payrolls and other accruals 6,463 6,078
----------------- ------------------
Net cash provided by operating activities 55,292 62,975
Investing Activities
Property, plant & equipment expenditures (7,884) (13,640)
Disposals of property, plant & equipment 607 219
Purchase of business, net of cash acquired (2,961)
Other items, net (14,225) (2,564)
----------------- ------------------
Net cash used in investing activities (21,502) (18,946)
Financing Activities
Borrowings under long-term debt 85,500 11,500
Payments of long-term debt (120,794) (28,500)
Net decrease in short-term bank loans (34,274) (22,236)
Net payment on accounts receivable facility (1,050)
Dividends paid (1,820)
----------------- ------------------
Net cash used in financing activities (70,618) (41,056)
----------------- ------------------
Net increase (decrease) in cash and cash equivalents (36,828) 2,973
from continuing operations
Discontinued operations
Income from discontinued operations 321 1,044
Proceeds received from sale of discontinued operation 27,500
Adjustments to reconcile income to net cash provided by discontinued
operations:
Depreciation and amortization 1,357 2,263
Capital expenditures (237) (2,107)
Other items, net (1,441) 2,288
----------------- ------------------
Cash provided by discontinued operations 27,500 3,488
Net increase (decrease) in cash and cash equivalents (9,328) 6,461
Cash and cash equivalents at beginning of year 9,421 3,394
----------------- ------------------
Cash and cash equivalents at end of period $ 93 $ 9,855
================= ==================
</TABLE>
See notes to consolidated condensed financial statements
3
<PAGE>
K2 INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
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 nine month periods ended
September 30, 2000 are not necessarily indicative of the results expected for
the year ended December 31, 2000.
The balance sheet at December 31, 1999 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 K2 Inc.'s ("K2's) Annual Report on
Form 10-K for the year ended December 31, 1999.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTS RECEIVABLE AND ALLOWANCES
Accounts receivable are net of allowances for doubtful accounts of $6,215,000 at
September 30, 2000 and $6,572,000 at December 31, 1999.
INVENTORIES
The components of inventory consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
2000 1999
------------------ -----------------
(Thousands)
<S> <C> <C>
Finished goods $125,810 $127,872
Work in process 14,175 10,365
Raw materials 24,882 33,917
------------------ -----------------
Total inventories $164,867 $172,154
================== =================
</TABLE>
4
<PAGE>
K2 INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEWLY ISSUED ACCOUNTING STANDARDS
In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and for Hedging Activities." In 1999, the
Financial Accounting Standards Board issued SFAS No. 137 to delay the effective
date of SFAS No. 133. The Statement will require K2 to recognize all derivatives
on the balance sheet at fair value. Derivatives that are not hedges must be
adjusted to fair value through income. If the derivative is a hedge, depending
on the nature of the hedge, changes in the fair value of the derivative will
either be offset against the change in fair value of the hedged asset, liability
or firm commitment through earnings or recognized in other comprehensive income
until the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
The Company is required to adopt SFAS No. 133 on January 1, 2001 and is
currently evaluating the impact on the financial statements.
NOTE 3 - DISCONTINUED OPERATIONS
On September 10, 1998, K2 adopted a plan to dispose of its Simplex building
products division (the "Division") as part of K2's strategic focus on the core
sporting goods and other recreational businesses. Accordingly, the Division has
been shown in the consolidated financial statements as a discontinued operation
since that date.
On June 30, 2000, K2 completed the sale of the assets and business of the
Division to Ludlow Building Products, ("Ludlow") a subsidiary of Tyco
International Ltd. Initial consideration, subject to adjustment for closing
balance sheet calculations, included $27.5 million in cash and the assumption
of certain liabilities by Ludlow. The estimated loss on disposal of the
Division, net of a tax benefit of $386,000, includes an estimate of the costs
of disposal, a reserve for final purchase price adjustments and reserves
related to the retention of certain liabilities by K2. Subsequent to the
quarter end, the closing balance sheet amounts were finalized, resulting in a
$3.1 million reduction in cash proceeds on the sale due mainly to a reduction
in net assets that occurred prior to closing.
5
<PAGE>
K2 INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
NOTE 4 - ACQUISITIONS
On October 7, 1999, K2 completed the acquisition of Ride, Inc. ("Ride"), a
designer and manufacturer of snowboard equipment, apparel and accessories, in an
all-stock merger transaction accounted for using the purchase method of
accounting. The results of operations of Ride have been included in the
consolidated financial statements since the date of acquisition. The following
summarized unaudited pro forma results of operations of K2 assume the
acquisition of Ride had occurred as of the beginning of the respective periods.
This pro forma information does not purport to be indicative of what would have
occurred had the acquisition been made as of those dates, or of results which
may occur in the future:
Pro Forma Information (Unaudited)
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
FOR THE QUARTER FOR THE NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1999
------------------ ------------------
<S> <C> <C>
Net sales $ 153,147 $ 479,712
Loss from continuing operations (1,564) (6,014)
Diluted loss per share - continuing operations (0.09) (0.33)
</TABLE>
NOTE 5 - BORROWINGS AND OTHER FINANCIAL INSTRUMENTS
Covenants contained in K2's $75 million credit line and accounts receivable
financing arrangement, among other things, restrict amounts available for
payment of cash dividends and stock repurchases by K2. As of September 30, 2000,
$11.3 million of retained earnings were free of such restrictions.
At September 30, 2000, $49 million of accounts receivable were sold under K2's
$75 million domestic accounts receivable purchase facility, with no amounts sold
under the $20 million facility available in Germany. On April 4, 2000, K2
increased the capacity of the domestic accounts receivable purchase facility
from $50 million to $75 million.
NOTE 6 - COMPREHENSIVE INCOME
Comprehensive income, net of taxes, is as follows:
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- --------------------------
2000 1999 2000 1999
-------- -------- -------- -----------
(Thousands)
<S> <C> <C> <C> <C>
Net Income $ 4,528 $3,331 $14,569 $14,587
Change in Cumulative
Translation Adjustment (4,369) 704 (8,690) (1,599)
--------------------------------------------------
Total Comprehensive Income $ 159 $4,035 $ 5,879 $12,988
===================================================
</TABLE>
6
<PAGE>
K2 INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
NOTE 7- 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. For the three and nine month periods ended September 30, 2000,
the computation of diluted EPS included the dilutive effects of options on
119,000 and 75,000 shares of K2's common stock, respectively, and excluded
968,000 stock options outstanding since their inclusion would have been
antidilutive. For both the three and nine month periods ended September 30,
1999, computation of diluted EPS excluded all options on 1,083,000 shares of
common stock since their inclusion would have been antidilutive.
NOTE 8 - SEGMENT INFORMATION
The segment information presented below is for the three months ended September
30:
<TABLE>
<CAPTION>
NET SALES TO
UNAFFILIATED
CUSTOMERS INTERSEGMENT SALES OPERATING PROFIT (LOSS)
------------------------- ------------------------- --------------------------
2000 1999 2000 1999 2000 1999
------------ ------------ ------------ ------------ ------------ -----------
(Millions)
<S> <C> <C> <C> <C> <C> <C>
Sporting goods $ 126.6 $ 102.1 $ 10.6 $ 6.2 $ 8.3 $ 5.9
Other recreational 10.7 10.4 0.2 - (0.1) (0.3)
Industrial 26.2 27.4 0.2 0.4 2.4 3.9
------------ ------------ ------------ ------------ ------------ -----------
Total segment data $ 163.5 $ 139.9 $ 11.0 $ 6.6 10.6 9.5
============ ============ ============ ============ ------------ -----------
Corporate expenses, net 1.1 2.0
Interest expense 2.8 2.7
------------ -----------
Income from continuing operations before provision for income taxes $ 6.7 $ 4.8
============ ===========
</TABLE>
7
<PAGE>
K2 INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
NOTE 8 - SEGMENT INFORMATION (CONTINUED)
The segment information presented below is for the nine months ended September
30:
<TABLE>
<CAPTION>
NET SALES TO
UNAFFILIATED
CUSTOMERS INTERSEGMENT SALES OPERATING PROFIT (LOSS)
------------------------- ------------------------- --------------------------
2000 1999 2000 1999 2000 1999
------------ ------------ ------------ ------------ ------------ -----------
(Millions)
<S> <C> <C> <C> <C> <C> <C>
Sporting goods $ 382.7 $ 339.3 $ 31.4 $ 20.1 $ 25.6 $ 20.3
Other recreational 29.4 30.7 0.6 0.1 (1.0) (1.1)
Industrial 92.2 91.2 1.1 0.9 11.9 14.5
------------ ------------ ------------ ------------ ------------ -----------
Total segment data $ 504.3 $ 461.2 $ 33.1 $ 21.1 36.5 33.7
============ ============ ============ ============ ------------ -----------
Corporate expenses, net 3.8 4.8
Interest expense 11.3 9.0
------------ -----------
Income from continuing operations before provision for income taxes $ 21.4 $ 19.9
============ ===========
</TABLE>
NOTE 9 - CONTINGENCIES
K2 is subject to various legal actions and proceedings in the normal course of
business. While the ultimate outcome of these matters cannot be predicted with
certainty, management does not believe these matters will have a material
adverse effect on K2's financial statements.
K2 is one of several named potentially responsible parties ("PRP") in three
Environmental Protection Agency matters involving discharge of hazardous
materials at old waste sites in South Carolina and Michigan. Although
environmental laws technically impose joint and several liability upon each PRP
at each site, the extent of K2's required financial contribution to the cleanup
of these sites is expected to be limited based upon the number and financial
strength of the other named PRPs and the volume and types of waste involved
which might be attributable to K2.
Environmental and related remediation costs are difficult to quantify for a
number of reasons including the number of parties involved, the difficulty in
determining the extent of the contamination, the length of time remediation may
require, the complexity of environmental regulation and the continuing
advancement of remediation technology. K2's environmental engineers, consultants
and legal counsel have developed estimates based upon cost analyses and other
available information for this particular site. K2 accrues for these costs when
it is probable that a liability has been incurred and the amount can be
reasonably estimated. At September 30, 2000 and December 31, 1999, K2 had
accrued approximately $829,000 and $806,000, respectively, with no provision for
expected insurance recovery.
The ultimate outcome of these matters cannot be predicted with certainty,
however, management does not believe these matters will have a material adverse
effect on K2's financial statements.
8
<PAGE>
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations
COMPARATIVE THIRD QUARTER RESULTS OF OPERATIONS
Net sales from continuing operations for the three months ended September 30,
2000 increased 16.9% to $163.5 million from $139.9 million in the
year-earlier period. Net income and income from continuing operations for the
third quarter of 2000 improved 37.5% to $4.5 million, or $.25 per diluted
share, from $3.3 million, or $.20 per diluted share, in the third quarter a
year ago.
NET SALES. In the sporting goods segment, net sales improved 24.0 % to $126.6
million from $102.1 million in the 1999 third quarter. Sales in the quarter
benefited from double-digit percentage increases in snowboards, Kickboard
scooters, and Stearns marine products. Snowboard product sales increased
reflecting the strong demand for K2 and Ride products and from the
acquisitions of Ride and Morrow. The newly created small-wheeled products
group reported improved sales, despite a decline in in-line skate sales,
resulting from the popularity of the Kickboard, a three-wheeled scooter sold
primarily in the European market. In-line skate sales declined due to market
conditions and from the weakening of the German currency in the past year
which resulted in lower translated sales for the period. Sales of Stearns
products increased for the quarter reflecting the benefit of new outdoor
products and a shift in the timing of shipments. Shakespeare fishing tackle
sales continued to improve in the seasonally slow third quarter with strong
worldwide sales led by the popularity of packaged rods and reels and new
product introductions. Ski shipments were comparable with the prior year's
quarter, however, the domestic market reported strong sales reflecting
initial popularity of the new K2 MOD-X ski line. Bike shipments declined in
the quarter due to the changing nature of K2's bike business.
In the other recreational products segment, net sales improved to $10.7
million from $10.4 million in the prior year's quarter. The increase was
attributable to a double-digit percentage improvement in sales of skateboard
shoes, partially offset by lower corporate apparel sales to the advertising
specialty market caused by continued sluggish market conditions.
Net sales of the two businesses in the industrial products group declined to
$26.2 million from $27.4 million in the prior year's quarter. The sales
decrease reflected reduced demand for monofilament line used in the paper
industry. Partially offsetting this were improved sales of specialty
monofilaments and composite light poles.
GROSS PROFIT. Gross profit for the third quarter of 2000 increased 17.6% to
$51.4 million, or 31.4% of net sales, as compared with $43.7 million, or
31.2% of net sales, in the year ago quarter. The gross profit improvement
reflects an increase in sales volume together with the benefits of K2's cost
reduction program that includes a shift of ski and snowboard manufacturing to
K2's overseas plants. This improvement has been partially offset by declining
margins in the industrial products businesses and the impact of a weaker Euro
on sales of dollar denominated products in Europe.
COSTS AND EXPENSES. Selling expenses for the quarter increased to $26.1
million from $23.2 million, but improved as a percentage of net sales to
16.0% from 16.6%, in the prior year's quarter. General and administrative
expenses increased to $15.8 million, or 9.7% of net sales, from $13.0
million, or 9.3% of net sales, in the 1999 third quarter. The improvement in
selling expenses as a percentage of net sales was due to the timing of
expenses which were incurred in the
9
<PAGE>
first six months of 2000 rather than the 2000 third quarter. General and
administrative expenses increased due to the inclusion of expenses resulting
from the Ride acquisition in the 1999 fourth quarter.
OPERATING INCOME. Operating income for the third quarter improved 25.3% to $9.4
million or 5.8% of net sales, as compared to operating income of $7.5 million,
or 5.4% of net sales, a year ago. The increase reflects higher sales volume,
improved gross profit margins and a reduction in operating expenses as a
percentage of sales.
INTEREST EXPENSE. Interest expense increased $100,000 to $2.8 million in the
third quarter of 2000 compared to $2.7 million in the year-earlier period. Lower
average borrowings reduced interest expense by $815,000, which was offset by an
increase in interest expense of $915,000 due to higher interest rates. The
interest rate increase was due to an increase in the LIBOR variable rate as
compared to the prior year, an increase in international borrowing costs and the
refinancing of variable debt into higher cost long-term fixed debt.
COMPARATIVE NINE-MONTH RESULTS OF OPERATIONS
Net sales from continuing operations for the nine months ended September 30,
2000 increased 9.3% to $504.3 million from $461.2 million in the year-earlier
period. Income from continuing operations for the first nine months of 2000 was
$14.2 million, or $.79 per diluted share, as compared with $13.5 million, or
$.82 per diluted share, in the first nine months of 1999. Net income was $14.6
million, or $.81 per diluted share, as compared with $14.6 million, or $.88 per
diluted share, in the prior year nine months.
NET SALES. In the sporting goods segment, net sales increased 12.8% to $382.7
million from $339.3 million in the 1999 period. The growth was primarily the
result of increased sales in snowboards, fishing tackle, small-wheeled
products and Stearns marine products. Increased snowboard sales benefitted
from strong demand for K2 and Ride products and from the Ride and Morrow
acquisitions in 1999. Fishing tackle sales improved, led by the continued
growth of new packaged rods and reels and other new products such as the
outdoor furniture line. Although sales of small-wheeled products increased,
led by new shipments of the Kickboard scooter in the European markets,
in-line skate sales declined over the prior year due to market conditions.
The substantial weakening of the German currency also had a negative impact
on translated sales of in-line skates from the German subsidiary. Sales of
Stearns marine products improved over the prior year led by increased sales
of children's water ski vests and outdoor water products. Partially
offsetting these increases were lower ski and bike sales. Bike sales declined
reflecting the changing nature of K2's bike business.
In the other recreational products segment, net sales for the first nine months
declined to $29.4 million from $30.7 million in the prior year. The decrease was
attributable mainly to lower apparel sales to the advertising specialty market
in continued sluggish market conditions.
Net sales of the two businesses in the industrial products group, improved to
$92.2 million from $91.2 million in the prior year. The sales improvement
reflects increased sales of specialty resins, elastomers and composite light
poles, partially offset by reduced demand for monofilament line used in the
paper industry.
10
<PAGE>
GROSS PROFIT. Gross profits for the first nine months of 2000 increased 13.4%
to $154.4 million, or 30.6% of net sales, from $136.1 million, or 29.5% of
net sales, in the prior year period. The gross profit improvement reflects an
increase in sales volume together with the benefits of K2's cost reduction
program that includes a shift of ski and snowboard manufacturing to K2's
overseas plants. This improvement has been partially offset by declining
margins in the industrial products businesses and the impact of a weaker Euro
on sales of dollar denominated products in Europe.
COSTS AND EXPENSES. Selling expenses increased to $78.4 million, or 15.6% of net
sales, from $69.1 million, or 15.0% of net sales, in the prior year. General and
administrative expenses were $43.4 million, or 8.6% of net sales as compared
with $38.2 million or 8.3% of net sales, in the prior year. These increases
reflect the increase in sales during the first nine months of the year along
with the inclusion of a full nine months of additional operating expenses
resulting from the Ride acquisition in the prior year's fourth quarter.
OPERATING INCOME. Operating income for the first nine months improved 13.1% to
$32.6 million, or 6.5% of net sales as compared with $28.8 million, or 6.2% in
the prior year. The improvement reflects higher sales volume and gross profit
margins, offset by increased selling and general and administrative expenses.
INTEREST EXPENSE. Interest expense increased $2.3 million to $11.3 million for
the first nine months of 2000 compared to $9.0 million in the year-earlier
period. Lower average borrowings reduced interest expense by $1.4 million, which
was offset by an increase in interest expense of $3.7 million due to higher
interest rates. The higher interest rates resulted from an increase in the LIBOR
variable rate as compared to the prior year, an increase in international
borrowing costs and the refinancing of variable debt into higher cost long-term
fixed debt.
LIQUIDITY AND SOURCES OF CAPITAL
K2's continuing operating activities provided $55.3 million of cash during the
nine months ended September 30, 2000 as compared with $63.0 million of cash
provided during the nine month period a year ago.
Net cash used for investing activities was $21.5 million in the first nine
months of 2000, compared to $18.9 million in the first nine months of 1999.
Capital expenditures in the 2000 period were $5.8 million lower compared to
the 1999 first nine months which also had a $3.0 million cash outlay for the
acquisition of certain assets of a snowboard company. The current year nine
months also reflected an increase of $10.7 million in accumulated other
comprehensive loss over the prior year nine months due to the impact of the
weakened Euro on K2's net investments overseas. There were no material
commitments for capital expenditures at September 30, 2000.
Net cash used in financing activities was $70.6 million during the nine months
ended September 30, 2000 as compared with $41.1 million of cash used during the
nine-month period a year ago. The year-to-year increase of $29.5 million in cash
used was due to higher net repayments of short and long-term debt as well as a
net paydown on the domestic accounts receivable facility.
The sale of Simplex resulted in cash of $27.5 million in the period.
11
<PAGE>
K2 anticipates its remaining cash needs in 2000 will be provided from operations
and borrowings under existing credit lines.
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 K2'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 cost reduction efforts, expense control
efforts and overall trends which involve substantial risks and uncertainties. K2
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 the impact of foreign exchange on
product costs, and other risks described in K2's Annual Report on Form 10-K
filed with the Securities and Exchange Commission.
ITEM 3 Quantitative and Qualitative Disclosures of Market Risk
K2's earnings and cash flow are subject to fluctuations due to changes in
foreign currency exchange rates. K2 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. K2's risk management objective is to reduce its exposure to the
effects of changes in exchange rates on the cost of products sold over quarterly
time horizons. Foreign currency exchange rate movements also affect K2's
competitive position, as exchange rate changes may affect business practices
and/or pricing strategies of non-U.S. based competitors and may affect the
profitability and pricing strategies of K2 as well. K2's foreign currency risk
policies entail entering into foreign currency derivative instruments only to
manage risk of currency fluctuations over a given period of time, not for
speculative investments.
Considering both the anticipated cash flows from firm purchase commitments
and anticipated purchases for the next quarter and the foreign currency
derivative instruments in place, the continued weakness of the euro and DM
against the U.S. dollar is expected to continue to increase the cost of
products purchased in U.S. dollars for sale in the European market. As a
result, this is expected to have an unfavorable impact on the remainder of
2000 and into 2001, and consequently on earnings and on cash flows for those
periods, should the Euro continue to be weak. This impact is offset in part
by the favorable impact of cost reduction programs initiated in anticipation
of the continued weakness in these currencies. This analysis ignores the
potential effects resulting from changing costs. In addition, currency
exchange rates are subject to change, which could result in lesser or greater
impacts to earnings and cash flows.
12
<PAGE>
PART II - OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed as part of this report.
27 Financial Data Schedule for the nine months ended
September 30, 2000.
(b) Reports on Form 8-K filed since the date of the last Form 10-Q
None
13
<PAGE>
SIGNATURES
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: November 14, 2000 /s/ RICHARD M. RODSTEIN
--------------------------
Richard M. Rodstein
President and Chief Executive
Officer
Date: November 14, 2000 /s/ JOHN J. RANGEL
------------------
John J. Rangel
Senior Vice President - Finance
14
