K2 Inc: Why We Didn’t Buy It and What We Will and Won’t Acquire…

June 7, 2004
SGB Update

At the SunTrust Robinson Humphrey Conference in Atlanta, Dudley Mendenhall, K2 Inc.’s SVP Finance, outlined his company’s performance and future strategy for investors. Mendenhall said K2 now represents about $1 billion of the $50 billion U.S. wholesale sporting goods market. In spite of reaching this benchmark, Mendenhall gave no indication that K2 is satisfied with its current size.

Mendenhall said that the Rawlings/Worth integration is “largely complete” and K2 will move its fielder glove production to China in early 2005. Currently K2 is running parallel manufacturing facilities for baseball and softball bats with its original U.S. facility and the new production in China. Mendenhall said that they are being “very conservative” on quality control, and while this may cost a few margin points in the short term, making sure the systems are in place is necessary for long-term growth. K2 expects to close the U.S. bat facility in late 2004.

K2’s recent acquisition of Ex-Officio should “fit nicely” with its current distribution through Stearns, Shakespeare and “other outdoor product.”
K2’s growth strategy is relatively simple – acquire and integrate. Mendenhall said the two major stumbling blocks for most acquisitions are overpayment and lack of integration.

“Huffy is the classic case of a company who overpaid,” said Mendenhall. “We looked at Gen-X and passed on it.” Mendenhall also said that K2 is not interested in HUF in its current condition, but might be interested in getting into the basketball backboard business. K2 is not interested in Huffy’s bike business because the 17% margins are too low.

To solve the pricing problem, K2 stays within the 5x to 7x EBITDA range, but “might go a little higher for an apparel company.” Mendenhall cited several companies that K2 has looked at but passed on because of the premium price tags. CamelBak sold for 9x EBITDA; Vans sold for 16x EBITDA; and The Hockey Company sold for “way too much”, according to Mendenhall.

“It is hard for us to see how you can make any money with price tags like this,” said Mendenhall.

As far as future acquisitions go, Mendenhall said that tennis and golf did not fit K2’s current distribution, but they might think about those markets when K2 is a “two billion dollar company.”

Mendenhall did mention that their might be some opportunities for K2 in the fitness equipment market.

>>> The latest rumors have K2 kicking the tires at Marmot, which would make a nice fit with EXO on the technical end. However, the multiple appears to be a bit high for K2’s sweet spot…

K2 Inc: Why We Didn’t Buy It and What We Will and Won’t Acquire…

June 1, 2004
SGB Executive
by

At the SunTrust Robinson Humphrey Conference in Atlanta, Dudley Mendenhall, K2 Inc.’s SVP Finance, outlined his company’s performance and future strategy for investors. Mendenhall said K2 now represents about $1 billion of the $50 billion U.S. wholesale sporting goods market. In spite of reaching this benchmark, Mendenhall gave no indication that K2 is satisfied with its current size.

Mendenhall said that the Rawlings/Worth integration is “largely complete” and K2 will move its fielder glove production to China in early 2005. Currently K2 is running parallel manufacturing facilities for baseball and softball bats with its original U.S. facility and the new production in China. Mendenhall said that they are being “very conservative” on quality control, and while this may cost a few margin points in the short term, making sure the systems are in place is necessary for long-term growth. K2 expects to close the U.S. bat facility in late 2004.

K2’s recent acquisition of Ex-Officio should “fit nicely” with its current distribution through Stearns, Shakespeare and “other outdoor product.”

K2’s growth strategy is relatively simple – acquire and integrate. Mendenhall said the two major stumbling blocks for most acquisitions are overpayment and lack of integration.

“Huffy is the classic case of a company who overpaid,” said Mendenhall. “We looked at Gen-X and passed on it.” Mendenhall also said that K2 is not interested in HUF in its current condition, but might be interested in getting into the basketball backboard business. K2 is not interested in Huffy’s bike business because the 17% margins are too low.

To solve the pricing problem, K2 stays within the 5x to 7x EBITDA range, but “might go a little higher for an apparel company.” Mendenhall cited several companies that K2 has looked at but passed on because of the premium price tags. CamelBak sold for 9x EBITDA; Vans sold for 16x EBITDA; and The Hockey Company sold for “way too much”, according to Mendenhall.

“It is hard for us to see how you can make any money with price tags like this,” said Mendenhall.
As far as future acquisitions go, Mendenhall said that tennis and golf did not fit K2’s current distribution, but they might think about those markets when K2 is a “two billion dollar company.”

Mendenhall did mention that their might be some opportunities for K2 in the fitness equipment market.

>>> Cybex just put out a release that they are doing investor presentations in five cities next month. Perhaps they should just go to Carlsbad and call it a day…

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