K2 Fourth Quarter Earnings Fall
LOS ANGELES -- K2 Inc. Wednesday reported income from continuing operations of $3.9 million or 23 cents per diluted share, and including discontinued operations, net income of $4.8 million, or 29 cents per diluted share.
This compares with income from continuing operations of $19.3 million, or $1.15 per diluted share, and net income of $21.9 million, or $1.31 per diluted share, in the prior year. Sales for the year excluding discontinued operations, rose to $574.5 million from $559.0 million in the prior year.
Income from continuing operations for the fourth quarter ended Dec. 31, 1998, was $1.6 million, or 10 cents per diluted share. This compares with income from continuing operations in the year-ago quarter of $3.5 million, or 21 cents per diluted share.
Net income, including discontinued operations, was $2.0 million, or 12 cents per diluted share, as compared with net income of $4.3 million, or 26 cents per diluted share in the prior year. Sales for the quarter, excluding discontinued operations, were $132.8 million, down from $141.5 million in the prior year.
In commenting on the results for the year, Richard M. Rodstein, president and chief executive officer, said: "The bicycle business was a large contributor to the unfavorable reduction in operating profits of our sporting goods and other recreational products group. During 1998, as we previously reported, the high-end of the full-suspension bike market abruptly declined.
"Shipments of K2 bikes were sharply lower during this period and a large portion of the shipments were sold as closeout products at little or no margin. The worldwide ski market declined year-to-year reflecting sluggishness in demand and the impact of an unseasonably warm winter in the domestic market. These conditions impacted K2's year-end reorders.
"The lower sales and an unfavorable mix of skis sold contributed to an overall decline in profitability of the ski business. Skate sales for the year were flat with the prior period reflecting the strong sales of our children's skates which offset the decline in aggressive skates; however, the lower margin children's skates and closeout sales resulted in a modest decline in earnings.
"Strong demand for the Clicker step-in binding system enabled snowboard sales to grow 16 percent for the year despite a soft weather-related reorder season in the U.S."
Rodstein continued: "New product introductions helped the sales and earnings of our fishing tackle business grow substantially during the year in a market which has shown weakness. New product introductions also helped Stearns report modest sales growth, while the earnings of Hilton Corporate Casuals benefited from lowered costs and expenses.
"In the industrial products group, the year benefited from volume-driven earnings gains in our Shakespeare monofilament products division and volume gains and expense reductions in our light pole and composite products business.
"As to the fourth quarter, sales declined in the sporting goods and other recreational products group. As previously mentioned, ski sales were impacted by unseasonably warm winter weather in the U.S. While the weather also impacted reorders, snowboard sales grew for the period, but profitability was affected by an unfavorable sales mix, which included a greater proportion of international sales.
"Skate sales were unfavorably impacted by the timing of shipments. Despite a strong year for our domestic fishing tackle business, during the fourth quarter certain major retailers reduced their purchases to lower inventory levels. The group also reflected the impact of downsizing the bike operation and delayed shipments of bikes featuring our new Smart Technology fork."
Rodstein continued: "The overall condition of the company's product lines and brand are strong and enable us to enjoy leading positions in many of our markets. The warm winter in the U.S. continued into the first quarter of 1999 and we must evaluate the impact of retail inventory levels of skis and snowboards at season's end.
"However, retail inventory levels of skates have improved over the year-ago period and the brand has a strong position in the high price point segment. Our new children's skate has been well received and our snowboard sales should benefit from the introduction of many new products including a new expanded outerwear collection.
"The repositioning of the bike unit to focus on lower-priced models and the downsizing of the operation is well underway. Our fishing tackle business continues to introduce new products, led by the new graphite Ugly Stik. Most importantly, we continue to add new product categories as evidenced by the successful launch of our skateboard and K2 lifestyle shoe lines.
"We continue to be committed to product innovation and on extending the brand into logical crossover lifestyle categories, while renewing our emphasis on cost and expense reduction to improve margins and increase profitability," Rodstein concluded.
The board of directors Wednesday declared a regular cash dividend of 11 cents per share payable April 1, 1999, to shareholders of record at the close of business March 11, 1999.
K2 is a leading designer, manufacturer and marketer of brand-name sporting goods, recreational and industrial products. The company's sporting goods and recreational products include well-known names such as K2 and Olin alpine skis; K2 snowboards, boots and bindings; K2 in-line skates; Stearns sports equipment; Shakespeare fishing tackle; K2 bikes; Dana Design backpacks; and Hilton active apparel.
K2's industrial products include Shakespeare extruded monofilaments, marine antennas and fiberglass light poles.
This news release contains forward-looking statements regarding sales and earnings; market conditions; product innovation, introduction and acceptance; product demand; restructuring, repositioning and growth efforts; all of 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 filings with the Securities and Exchange Commission.
SUMMARY OF OPERATIONS
(in thousands except for per share figures)
FOURTH QUARTER YEAR ENDED
ended December 31 ended December 31
(unaudited)
1998 1997 1998(a) 1997
Net Sales $ 132,794 $ 141,521 $ 574,510 $ 559,030
Cost of products
sold (b) 95,779 101,940 418,950 391,860
Gross profit 37,015 39,581 155,560 167,170
Selling, general
and administrative
expenses (c) 32,086 32,735 138,810 130,114
Operating income 4,929 6,846 16,750 37,056
Interest expense 3,016 2,788 12,163 10,560
Other income, net (28) (513) (236) (619)
Income before
provision for
income taxes 1,941 4,571 4,823 27,115
Provision for
income taxes 312 1,036 955 7,815
Income from
continuing
operations 1,629 3,535 3,868 19,300
Discontinued
operations,
net of taxes 348 749 975 2,600
Net Income $ 1,977 $ 4,284 $ 4,843 $ 21,900
Income from continuing
operations before
1998 charge for
reserves ($9,425 net
of taxes) and 1997
restructuring costs
($1,560 net of taxes) $ 1,629 $ 3,535 $ 13,293 $ 20,860
Basic earnings
per share:
Continuing operations
before 1998 charge for
reserves ($.57 per
share) and 1997
restructuring costs
($.09 per share) $ 0.10 $ 0.21 $ 0.80 $ 1.26
Continuing operations $ 0.10 $ 0.21 $ 0.23 $ 1.17
Discontinued operations 0.02 0.05 0.06 0.15
Net income $ 0.12 $ 0.26 $ 0.29 $ 1.32
Diluted earnings
per share:
Continuing operations
before 1998 charge for
reserves ($.57 per
share) and 1997
restructuring costs
($.09 per share) $ 0.10 $ 0.21 $ 0.80 $ 1.24
Continuing operations $ 0.10 $ 0.21 $ 0.23 $ 1.15
Discontinued operations 0.02 0.05 0.06 0.16
Net income $ 0.12 $ 0.26 $ 0.29 $ 1.31
Basic shares outstanding 16,553 16,542 16,554 16,541
Diluted shares
outstanding 16,649 16,718 16,637 16,713
Cash dividend $ 0.11 $ 0.11 $ 0.44 $ 0.44
(a) Gross profit and operating income are $166,060 and $31,250, respectively, before charges for reserves totaling $14,500 ($9,425 net of taxes).
(b) The year ended 1998 includes a third-quarter charge for reserves of $10,500.
(c) The year ended 1998 includes a third-quarter charge for reserves of $4,000 and the year ended 1997 includes restructuring costs of $2,400.