K2 Restructures, Lays Off 38

In an announcement three weeks ago, K2 let go 38 people worldwide, most from its main offices in Vashon, Washington, in what the company has termed an internal restructuring. The move corresponds with recent new management changes, including the naming of Robert Marcovitch president of the snowboard, ski, and bike divisions based out of the Vashon offices. Marcovitch was previously president of K2 Canada. He joined K2 when the company bought Ride Snowboards in 1999, where Marcovitch had been president and CEO.

The restructuring affected the K2 Snowboard staff most, with three long-time staff members getting pink slips, including Director of Marketing Hayley Martin, Field Marketing Manger Dave Billinghurst, and K2 Softgoods Product Manager Ammi Borenstein. Geoff Rittmeyer, who was a product manager in the bags department, was also affected, as were staff from other departments, including customer service. Ride Snowboards Brand Manager Scott Mavis was promoted to head the entire snowboard division, and the rest of the Ride staff was left intact.

K2 Snowboards has undergone an almost complete transformation in the last year. First there was the departure of the long-time and much-loved-by-retailers Sales Manager Luke Edgar last spring. Then, just a week before the SIA show in January, long-time Snowboard General Manager Brent Turner was let go. He had overseen the snowboard program for almost 15 years, helped launch the brand, and was a vp in charge of all snowboard brands, including Ride, 5150, Morrow, and Liquid.

The layoffs were surprising considering the company had just posted its best financial results in more than a year. Net sales for the year ended December 31, 2002 totaled $582.2 million compared with $589.5 million in 2001. While sales were off slightly, operating income surged to $27.3 million from $1.3 million a year earlier. Net income for the 2002 year grew to $12.1 million, or $0.67 per diluted share, from a net loss of $7.7 million, or $0.43 per share. Results in 2001 included down-sizing costs of $18.0 million ($11.7 million, or $0.65 per share, net of taxes). Included in the 2002 results was a $1.2 million charge ($0.8 million, or $0.04 per share after tax) for further down-sizing and severance costs.

In a press release dated February 18, Richard J. Heckmann, K2 chairman and chief executive officer, said “We are now beginning to realize the tangible benefits from the restructuring and refocusing of the company, in particular the shift of manufacturing for skis, snowboards, fishing tackle, and flotation devices to China. Gross profit margins in this year’s fourth quarter were comparable with last year notwithstanding our aggressive initiative to reduce inventory levels of discontinued items. The result of the hard work of K2’s worldwide team was a remarkable $64-million reduction in total debt and a $4.7-million reduction in 2002 interest expense,” he added.

The company said that improved cash flow from operations and inventory reductions resulted in a much improved balance sheet with debt-to-capital at year-end reduced to 29% from 43% a year earlier.

In an exclusive interview granted to the SNOWboarding Business staff last week at K2’s new corporate headquarters in Carlsbad, California, Heckmann, Marcovitch, VP of Global Sales Tim Petrick, and VP of Global Marketing Anthony De Rocco sat down to discuss the changes going on at the company. Here are excerpts from that interview:

SNOWboarding Business: These layoffs were surprising considering K2 just posted some of its best financial results in the last year. Why were they necessary?

K2 Chairman and CEO Richard Heckmann: You have to distinguish between layoffs and restructurings. The company tended to operate in silos because that’s the way previous management did things. There was very little interaction between the divisions. In the Vashon offices we had silos.

Sometimes you’re trying to get a great change with hothings have been done and how you should do things a certain way. I always used the lead-elephant theory. I kind of liken it to being out in the jungle and you’re getting charged by a heard of elephants. You just shoot the lead elephant. And the other elephants get confused and try to figure out who the new leader is.

One of the things you’ve got to do sometimes to break down the silos is you have to shoot the lead elephant. It has nothing to do with business and profits. It’s how do we want to do business. Every once in a while you have to go through a company and say these are the people who are just going to stand in the way and they’ve got to go.

I think you have to look not only what’s going on in Vashon, but what’s going on in the rest of the company, and this is just the first of what will be many things to come.

We’re selling snowboards, skis, fishing equipment, baseball equipment, and floatation devices to many of the same customers, and yet sometimes we have one of our staff in one room and they don’t even know their sister-company people are in the next room.

We have every one of our 44 worldwide managers in this office right now, and we’ve been together for two days. Here in this meeting, they’re sharing best practices, they’re finding out that Rawlings does some really cool things that the rest can optimize, and they’re finding out Seattle does some cool things on its web site that they want to learn about.

K2 Snowboard, Ski, and Bike President Robert Marcovitch: Vashon started as a simple ski company that evolved into a snowboard company, got into the inline skating market, and it’s tough enough to do with one brand. All of the sudden, the one brand and one product line became multiple products, and then acquisitions came into the fold. And before you knew it, through no fault of anybody, you end up in these pillars.

Heckmann: Here’s a classic example. There’s a big problem with aluminum bats. The balls come off of them much faster than they used to, and the kids are getting hurt in little leagues. They can’t field the hits. Massachusetts is the first state that’s passed a law defining how fast a bat can hit the ball back, in the same way the PGA has told Callaway it can’t sell certain golf clubs. So what does this have to do with snowboarding?

What it means is now all aluminum bats are the same. You can’t buy a bat because it’s going to hit the ball harder, because of the law. Who buys aluminum bats? Eight year olds up to fourteen year olds. What else do they do? They snowboard. Who has the greatest graphics on the planet? The snowboard and skateboard companies. We have snowboard and skateboard companies.

So why don’t we unleash the snowboard and skateboard designers on the bats so we can sell bats because they’re cool, because you can’t sell them because they hit the ball harder. And already, the guys from the Seattle snowboard division have sent down a book with graphic ideas. It got here yesterday, and we gave it to the Rawlings guys and they have 40 to 50 bat designs that are really far out. The Rawlings guys are excited.

Marcovitch: Which has the guys on Vashon pretty excited because it’s something they’ve never done.

Heckmann: So if we can break down these silos, we can take the talent we’ve got in some of these businesses and move it across the lines of businesses.

Marcovitch: And just within Seattle, we have an MIT PHD graduate in plastic materials who was working in the inline skate division. He’s been doing an unbelievable job, and he’s sitting next to a guy in the snowboard department who’s developing plastic snowboard bindings. They’ve never talked to each other. Not because they don’t like each other, but one guy’s doing inline skates and one’s doing snowboard bindings.

Now all of the sudden, because of this structure we have in place, he’s responsible for new material development and part of our R&D facility. Now he’s going to bring huge value to an area, and I think it keeps people intellectually stimulated and challenged. And that’s a big part of it.

Heckman: Why should people graduate out of the snowboard business when they’re 32 because they don’t snowboard anymore? Or because they burn out? But now we can put them somewhere else in the department.

SNOWboarding Business: Are you planning on moving divisions together and consolidating offices?

Marcovitch: These are each digestible chunks. What’s nice is as a family, we’re not disfunctional, we actually get together and talk to each other. But Seattle is a clearly defined group including K2, Ride, Liquid, 5150, Morrow, and Dana Designs.

Heckmann: The other thing is if you do that you run the risk of losing the authenticity. Here is where the corporate offices are. This is where the analysts come. And the analysts want to see everything.

But Ride and Morrow and the snowboard teams in Seattle are authentic and know what they need and you don’t really want them hanging around the baseball guys. And the Rawlings guys, they’re the number-one baseball company in the world. They can get some great ideas on graphics, but I want them focused on baseball, and gloves and bats. I don’t want them to care about the next snowboard.

In order to keep the authenticity and keep the focus, they have to stay in the buildings where they are. Rawlings has been in St. Louis since 1887. They’re not going to move here.

SNOWboarding Business: Would you move the company off of Vashon Island?

Heckman: It’s not going to work at this point. We own the building. It’s free and clear. It’s been appreciated to zero. And some of the staff live on Vashon.

Would I like it to be moved? Absolutely. It’d be a hell of a lot easier to visit. But it doesn’t make any sense.

SNOWboarding Business: Describe how the company has been restructured a little more.

Marcovitch: We have sales, marketing, research and development, and finance and operations, and they’ll be divided into functional businesses, and the key is where you put the pods of people. If you look up and down, you don’t see the snowboard division, but if you look left and right, it’s alive and well. In fact, there’s even more people involved across functional responsibilities, and I think that’s a key part of this organization is to be able to maximize people and what they do and how they do it and communicate with each other.

SNOWboarding Business: How many people work at K2 worldwide?

Heckman: Including China? Probably 8,000 to 9,000. It’s a lot. So letting go 30 people isn’t a big percentage.

SNOWboarding Business: How many work for K2 directly?

VP of Global Marketing Anthony De Rocco: I’d say 400 to 500. And that doesn’t include the factories in China.

Marcovitch: Someone said to me, “Did you get to the number you wanted to get to Robert?”

If someone would have asked me what the right number was, I would have answered, “The right number.”

We didn’t approach this from a financial perspective. This is purely functionally driven for us to make this company more efficient. How do we make it more functional? And whether it was one person who had unfortunately lost their job or 150, that wasn’t the point. It was how do we set this up to be more responsible to our customers, to be quicker on the product side, and to cross-pollinate between skill sets?

We’ve created this R&D area and an advanced planning group where, for example, we’re on a different project and it’s kind of an incubator, and we’ve created this area where we can start cross-pollinating other groups.

De Rocco: You’ll see this whole group-development organization area that’s brand new. All the engineers are together. One of the things is that we were so split up and in different buildings and it was hard to discuss ideas. It’s exciting.

Heckmann: The other thing ishuge value to an area, and I think it keeps people intellectually stimulated and challenged. And that’s a big part of it.

Heckman: Why should people graduate out of the snowboard business when they’re 32 because they don’t snowboard anymore? Or because they burn out? But now we can put them somewhere else in the department.

SNOWboarding Business: Are you planning on moving divisions together and consolidating offices?

Marcovitch: These are each digestible chunks. What’s nice is as a family, we’re not disfunctional, we actually get together and talk to each other. But Seattle is a clearly defined group including K2, Ride, Liquid, 5150, Morrow, and Dana Designs.

Heckmann: The other thing is if you do that you run the risk of losing the authenticity. Here is where the corporate offices are. This is where the analysts come. And the analysts want to see everything.

But Ride and Morrow and the snowboard teams in Seattle are authentic and know what they need and you don’t really want them hanging around the baseball guys. And the Rawlings guys, they’re the number-one baseball company in the world. They can get some great ideas on graphics, but I want them focused on baseball, and gloves and bats. I don’t want them to care about the next snowboard.

In order to keep the authenticity and keep the focus, they have to stay in the buildings where they are. Rawlings has been in St. Louis since 1887. They’re not going to move here.

SNOWboarding Business: Would you move the company off of Vashon Island?

Heckman: It’s not going to work at this point. We own the building. It’s free and clear. It’s been appreciated to zero. And some of the staff live on Vashon.

Would I like it to be moved? Absolutely. It’d be a hell of a lot easier to visit. But it doesn’t make any sense.

SNOWboarding Business: Describe how the company has been restructured a little more.

Marcovitch: We have sales, marketing, research and development, and finance and operations, and they’ll be divided into functional businesses, and the key is where you put the pods of people. If you look up and down, you don’t see the snowboard division, but if you look left and right, it’s alive and well. In fact, there’s even more people involved across functional responsibilities, and I think that’s a key part of this organization is to be able to maximize people and what they do and how they do it and communicate with each other.

SNOWboarding Business: How many people work at K2 worldwide?

Heckman: Including China? Probably 8,000 to 9,000. It’s a lot. So letting go 30 people isn’t a big percentage.

SNOWboarding Business: How many work for K2 directly?

VP of Global Marketing Anthony De Rocco: I’d say 400 to 500. And that doesn’t include the factories in China.

Marcovitch: Someone said to me, “Did you get to the number you wanted to get to Robert?”

If someone would have asked me what the right number was, I would have answered, “The right number.”

We didn’t approach this from a financial perspective. This is purely functionally driven for us to make this company more efficient. How do we make it more functional? And whether it was one person who had unfortunately lost their job or 150, that wasn’t the point. It was how do we set this up to be more responsible to our customers, to be quicker on the product side, and to cross-pollinate between skill sets?

We’ve created this R&D area and an advanced planning group where, for example, we’re on a different project and it’s kind of an incubator, and we’ve created this area where we can start cross-pollinating other groups.

De Rocco: You’ll see this whole group-development organization area that’s brand new. All the engineers are together. One of the things is that we were so split up and in different buildings and it was hard to discuss ideas. It’s exciting.

Heckmann: The other thing is by the end of the year, we’ll be a billion-dollar company. That’s good news.

There’s an enormous amount of talented people working here, but it doesn’t do us any good if we can’t get our hands on them. It’s just a waste.

Another thing about a company like K2, is more upward mobility around the company is going to attract talent. Nobody wants to join a company if they can’t move anywhere, or there are people blocking them. We’ve set up a mechanism that if you get stuck here, you can go this way, or you can go another way.

The good news of size is it gives you enormous strength and resources, R&D, development, and new products. This is the kind of company that depends on fresh blood. You don’t see any 50 year olds. This is a company that has to grow, but it has to organize itself so that it can.

Marcovitch: That’s what we’ve done. Everything is still there if you look at the org. chart, but it’s been re-jigged. It’s all driven by sales, which is what Tim Petrick is responsible for worldwide.

Then worldwide marketing is headed by Anthony. Things will be driven by the sales side who pass it to marketing, where brand directors look after getting the message together. Then product directors will build it, and take it to R&D and make sure it works, and then get it out and looking at it. It’s just a different way to do business.

So basically what we have is a sales director, a brand director, a product director, and then we have our director of brand services. Those four entities, whether it’s snowboard boots or ski boots, it’s those four who make it happen.

SNOWboarding Business: Was it just coincidence that this happened when snowboard orders were coming in?

Heckmann: That’s not when it happened. I took the business over in October. One of the main things we saw in Seattle was this big silo problem. We really sensed that the people in Seattle wanted something changed. So shortly after I took over, we decided, Robert’s had lots of experience in this business, let’s see if he’ll go in there run things now that Rich Rodstein is gone. Let’s make these changes.

So the first change was me, the second was Robert, and the third change was Seattle. It had nothing to do with when the orders came in.

Marcovitch: What’s exciting this is a global business. But we had silos in Seattle. There was no communication between us and the worldwide offices. Nobody was really talking to each other. Guys were going off and doing something that was great for their market, and people were saying if you had told them, they would have done it.

We spent two days before these meetings with that group, and there are all kinds of stuff that we can do to help each other. Up until this point, Vashon was an American company that exported to Japan and Europe. The world is looking for great brands. We’re certainly coming to the table with that. g is by the end of the year, we’ll be a billion-dollar company. That’s good news.

There’s an enormous amount of talented people working here, but it doesn’t do us any good if we can’t get our hands on them. It’s just a waste.

Another thing about a company like K2, is more upward mobility around the company is going to attract talent. Nobody wants to join a company if they can’t move anywhere, or there are people blocking them. We’ve set up a mechanism that if you get stuck here, you can go this way, or you can go another way.

The good news of size is it gives you enormous strength and resources, R&D, development, and new products. This is the kind of company that depends on fresh blood. You don’t see any 50 year olds. This is a company that has to grow, but it has to organize itself so that it can.

Marcovitch: That’s what we’ve done. Everything is still there if you look at the org. chart, but it’s been re-jigged. It’s all driven by sales, which is what Tim Petrick is responsible for worldwide.

Then worldwide marketing is headed by Anthony. Thiings will be driven by the sales side who pass it to marketing, where brand directors look after getting the message together. Then product directors will build it, and take it to R&D and make sure it works, and then get it out and looking at it. It’s just a different way to do business.

So basically what we have is a sales director, a brand director, a product director, and then we have our director of brand services. Those four entities, whether it’s snowboard boots or ski boots, it’s those four who make it happen.

SNOWboarding Business: Was it just coincidence that this happened when snowboard orders were coming in?

Heckmann: That’s not when it happened. I took the business over in October. One of the main things we saw in Seattle was this big silo problem. We really sensed that the people in Seattle wanted something changed. So shortly after I took over, we decided, Robert’s had lots of experience in this business, let’s see if he’ll go in there run things now that Rich Rodstein is gone. Let’s make these changes.

So the first change was me, the second was Robert, and the third change was Seattle. It had nothing to do with when the orders came in.

Marcovitch: What’s exciting this is a global business. But we had silos in Seattle. There was no communication between us and the worldwide offices. Nobody was really talking to each other. Guys were going off and doing something that was great for their market, and people were saying if you had told them, they would have done it.

We spent two days before these meetings with that group, and there are all kinds of stuff that we can do to help each other. Up until this point, Vashon was an American company that exported to Japan and Europe. The world is looking for great brands. We’re certainly coming to the table with that.