LOS ANGELES–July 20, 2000–K2 Inc. (NYSE:KTO) today announced second quarter sales and earnings and improved gross and operating margins for the period. K2 also completed the sale of its Simplex building products business on June 30, 2000 and reported a $55 million reduction of K2 debt during the quarter.
Second Quarter Comparisons
For the quarter ended June 30, 2000, K2 reported net sales from continuing operations of $159.0 million, from $158.3 million a year earlier. Income from continuing operations for the quarter decreased to $6.4 million, from the prior year’s comparable quarter of $7.1 million. For the 2000 second quarter, earnings from continuing operations per diluted share totaled $0.36 based on 18.0 million average diluted shares outstanding, compared with the comparable year-earlier period in which the company reported earnings from continuing operations per diluted share of $0.43 based on 16.6 million average diluted shares. The additional shares were issued in connection with the acquisition of Ride Inc. in October 1999.
With the completion of the previously announced sale of Simplex, the company recorded an estimated loss on sale of $718,000 offset by income of $623,000 for the period, resulting in a net loss on discontinued operations of $95,000 as compared with a profit of $858,000 in the prior year’s period. Net income for the 2000 quarter, including discontinued operations, was $6.3 million, or $0.35 per diluted share, compared with net income of $8.0 million, or $0.48 per diluted share in the prior year’s second quarter.
Continuing the trend of the first quarter, gross profits as a percentage of sales for the second quarter increased to 32.7%, up from 30.4% in the prior year. The company’s operating income increased to $13.7 million, or 8.6 % of sales, from $13.5 million, or 8.5% of sales in the year ago period. The improvements in gross profit and operating income were offset by interest expense that increased to $4.0 million, up from $3.0 million in the prior year, reflecting higher interest rates.
Richard M. Rodstein, K2’s president and chief executive officer, noted that, compared with the year-earlier quarter, the company reported improved sales of domestic fishing tackle, Stearns water products, K2 Kickboard scooters and Shakespeare industrial products, offset by sales declines in skis, inline skates, bikes and apparel. Gross margins continued to improve due to previously announced cost reduction efforts, however, higher Ride-related seasonal expenses and, to a lesser extent, a shift in the timing of certain other expenses restrained the improvement in operating margin. Further contributing to the decline in earnings was increased interest expense resulting from higher interest rates incurred in the current year.
“The improvement in our gross profit margin indicates that our program to reduce costs by increasing our offshore sourcing of products and shifting of manufacturing to our overseas plants has begun to produce results. From a sales standpoint, the quarter once again benefited from significant growth in fishing tackle shipments, bringing the six-month growth rate to 18%. The snowboard business also grew in a seasonally slow sales quarter, but incremental Ride expenses had a negative impact on the second quarter, since the second half of the year is the heaviest shipping period. We also initiated certain marketing programs in the second quarter which ordinarily would have occurred in the third quarter.” Rodstein added: “The previously announced sale of the Simplex building products business was completed in the quarter and the cash resulting from the closing, together with cash generated by our operations, was used to pay down debt. K2’s total balance sheet debt is now $95 million as compared with $138 million a year ago. This reduction in debt will allow us to become more aggressive in our acquisition program as we continue to look for growth opportunities.”
Six Month Cparisons
For the six months ended June 30, 2000, K2 reported net sales from continuing operations of $340.9 million, up from $321.4 million a year earlier. Income from continuing operations for the period decreased to $9.7 million, from the prior year’s first half of $10.2 million. On a per share basis, income from continuing operations was impacted by the issuance of 1.5 million shares to acquire Ride Inc. last October. For the current year, earnings from continuing operations per diluted share was $0.54 based on 18.0 million average diluted shares outstanding, compared with the year-earlier period in which the company reported earnings from continuing operations per diluted share of $0.62 based on 16.6 million average diluted shares. Net income for the first six months of 2000, including discontinued operations, was $10.0 million, or $0.56 per diluted share, compared with net income of $11.3 million, or $0.68 per diluted share in the corresponding prior-year’s quarter.
Gross profit as a percentage of sales for the period increased to 30.2%, up from 28.8% in the prior year. The company’s operating income increased to $23.2 million, or 6.8% of sales, up from $21.3 million, or 6.6% of sales in the year ago period. The company’s interest expense increased to $8.6 million, up from $6.3 million in the prior year.
Sporting Goods Results
K2’s sporting goods segment reported sales for the 2000 second quarter of $116.8 million, up from the $115.9 million a year ago. “Sporting goods sales benefited from strong demand for domestic fishing tackle products, Kickboard scooters, Stearns products and from higher snowboard shipments, partially offset by lower skate, ski and bike shipments,” Rodstein said. “Shakespeare fishing tackle sales have grown dramatically in the domestic market this year, led by the popular Ugly Stik fishing rod series, new reels and new product introductions such as our line of outdoor furniture. K2 has also benefited from the extreme popularity of its Kickboard, primarily in the European market where it has recreational and transportation uses. As expected, shipments of Stearns products increased in the second quarter reflecting a shift in the timing of its business.” Rodstein added: “As a result of an extremely strong first quarter, skate sales increased for the six months of the year despite a decline in second quarter sales as compared to the prior year’s periods. Additionally, since the German currency has weakened significantly in the past year, the dollar equivalent of our European sales has declined 12% reflecting these translation losses. Ski shipments declined for the quarter as we have elected to move to more offshore production and due to our plan to deliver closer to the season. We have also been encouraged by this year’s reception of our dealers and the magazine reviews of our MOD ski technology. Bike shipments declined in a seasonally slow sales quarter reflecting the changing nature of our bike business.” Sales of skateboard shoes, skateboard apparel and corporate apparel declined to $9.5 million from $10.4 million, mainly due to softness experienced in the corporate apparel market.
Industrial Product Sales
Sales of K2’s industrial products group increased 3% to $32.8 million from $32.0 million a year ago. Higher demand for specialty resins and composite light poles accounted for the improvement.
Innovation, Improved Margins and Debt Reduction
Rodstein concluded, “We have continued to focus on product innovation, product cost reduction, consolidation of some of our operations and debt reduction. K2’s strong product innovation program and acquisitions have contributed to the overall year-to-date sales increases in various categories. While our cost reduction program has already helped improve our gross profit margins this year, most of the benefit of this program will not become apparent until the second half of the year when most of our winter sports products are shipped. Additionally, our cost reduction program should help offset the expected impact of the weak European currencies on sales in Europe. The Ride and Morrow snowboard operations have been successfully integrated. Our focus on balance sheet management and the successful sale of Simplex have resulted in significantly reduced debt, which should soften the impact of higher interest rates on future quarters and allow us to pursue acquisition opportunities.”ditionally, our cost reduction program should help offset the expected impact of the weak European currencies on sales in Europe. The Ride and Morrow snowboard operations have been successfully integrated. Our focus on balance sheet management and the successful sale of Simplex have resulted in significantly reduced debt, which should soften the impact of higher interest rates on future quarters and allow us to pursue acquisition opportunities.”