Jarden Corp. delivered record revenue and cash flow in 2007, although accounting for its August acquisition of K2 required it to report a big drop in earnings for the fourth quarter and the year. The company reported a net loss of $11.2 million in Q4, compared to net income of $35.7 million in Q4 last year, despite a 38% rise in net sales to $1.5 billion.
JAH said fourth-quarter earnings would have risen 11% to $68.7 million, or 89 cents per share if not for purchase rules of accounting, which required it to mark up the value of K2's inventory to fair market value before calculating cost of sales. That mark-up and similar adjustments to inventory at Pure Fishing, which Jarden also acquired last year, reduced profit at Jarden's Outdoor Solutions segment by $44.9 million. There were also $7.4 million in restructuring and integration costs, which when combined with depreciation charges resulted in an operating loss of $21.5 million on sales of $570.2 million at Outdoor Solutions for the quarter.
Without the charges, the segment, which includes the Abu Garcia, Coleman, Marmot, Penn, Rawlings, Shakespeare, Stearns, Völkl and other brands, would have reported earnings of $46.6 million. Jarden calls these its “as adjusted” earnings. In the fourth quarter of 2006, the company reported an as adjusted loss of $2.7 million on sales of $132.6 million. That means that on an as adjusted basis, the segment's profit margins improved from -2% to a positive 8.2%, or by 1,020 basis points.
“All this adjustment does is to present the inventory numbers included in cost of goods sold as if the company had not been acquired,” explained Jarden CFO Ian Ashken in a conference call with analysts.
Jarden's cash flow statement may provide better insight into the impact of the K2 business. It showed cash flow from operations rose by $73.3 million, or 35%, to $281.5 million in the fourth quarter. The cash will come in handy at a time when many outdoor companies are bracing for significant increases in the cost of Chinese labor, raw materials and other inputs, said CEO Martin Franklin.
For the year, Jarden's net sales increased 21% to $4.7 billion compared to $3.8 billion for the same period in the previous year. Net income plunged 73.5% to $28.1 million, or 38 cents per diluted share versus $106.0 million, or $1.59 per diluted share, for the year ended Dec. 31, 2006. The loss was again caused primarily by the mark-up in K2's inventory. Still, Franklin said K2 and Völkl moved into the 2008/09 season with the lowest inventory levels “those businesses have seen in a long time.” He said the two brands have sold through “very well,” so no aggressive markdowns were needed.
Jarden's other outdoor products were having a “relatively strong sell” compared to products sold by Jarden's Consumer Solutions and Branded Consumables segments, which sell everything from Bicycle playing cards and First Alert carbon monoxide detectors to Crock Pot, Oster and Sunbeam appliances. Franklin said Jarden will invest to build up its salt water fishing business and the Penn brand it acquired in the K2 deal.
In 2008, Jarden expects to deliver a minimum of 10% “as adjusted” EPS growth for the seventh consecutive year, Franklin said. The company plans to take $15 million to $40 million in reorganization charges in 2008 and 2009 to squeeze another $25 million to $50 million in annual costs out of its operations. It will focus much of that effort on the Outdoor Solutions segment, which became Jarden's second biggest segment with its $1.2 billion acquisition of K2 Inc.
Ashken said he expects Outdoor Solutions to grow organically in the 2008 first half as the soft economy dampens growth in their other segments.
