K2 Reports 2001 2Q and Six Months Financials

LOS ANGELES–K2 Inc. (NYSE:KTO) announced results for the second quarter and six months ended June 30, 2001.

The company also moved to further reduce its cost structure by shifting more production to lower cost offshore facilities, moves that the company expects to produce annualized pretax savings of approximately $7 million. The cost of this restructuring will be included in K2’s third quarter results.

For the 2001 second quarter, net sales totaled $144.9 million, compared with $161.9 million in the comparable 2000 period. The sales decline stemmed from a drop in small-wheeled products, which offset increased sales in virtually all other major sporting goods categories, including record results of the worldwide Shakespeare Fishing Tackle business.

Worldwide winter sports products continued to gain momentum particularly in the domestic market where preseason orders, scheduled to be shipped primarily in the third quarter, increased 20 percent over the prior year. Income from continuing operations for the second quarter ended June 30, 2001 decreased to $2.3 million, or $0.13 per diluted share, from $6.4 million, or $0.36 per diluted share a year ago.

For the first half ended June 30, 2001, net sales decreased to $318.1 million, compared with $346.8 million in the comparable 2000 period. Income from continuing operations totaled $5.5 million, or $0.30 per diluted share, compared with income from continuing operations of $9.7 million, or $0.54 per diluted share, reported in the prior year period.

K2 President and Chief Executive Officer Richard M. Rodstein said: “Second quarter sales and earnings declined as compared with the prior year reflecting soft retail sales of inline skates and scooters in the market. As a result, K2 has taken dramatic steps to stimulate sales of inline skates as we embark upon a new season.

“We believe that the introduction of our new laceless Slip Fit(TM) technology skate represents the first major product innovation in the category since K2 introduced the Softboot(TM) skate in 1994. The convenience and comfort of these new inline skates that no longer require lacing before skating represents a major opportunity to stimulate retail sales. Furthermore, we are offering K2 Softboot(TM) technology at lower price points so that more skaters can purchase K2 products.

“After a sudden decline in Kickboard scooter sales during the first six months of 2001 in Europe, we are positioning K2 to be the high performance leader in a much smaller market.”

Rodstein added: “We have several additional bright spots in the company. Our winter sports businesses have benefited from robust preseason orders and our summer sports businesses, led by Shakespeare Fishing Tackle, have gained momentum through the success of new products such as Looney Toons(TM) fishing kits.

“We continue to introduce other innovative new products as evidenced by our recent introduction of the Biosonic(TM) backpack with its patented built-in flat speakers. This pack enables the wearer to listen to music from miniature speakers embedded in the shoulder straps.”

Restructuring of Manufacturing

In 1999 and 2000, K2 moved a significant portion of its ski and all of its snowboard production to its factory in China. Now that it has achieved its targets for quality, cost and production from that move, the company said it is now prepared to move additional products to the Chinese plant to further benefit from the strategic advantage of manufacturing overseas.

As a result, K2 announced that it would move its remaining ski production to China and close its Vashon Island, Wash., ski manufacturing facility by the end of the third quarter. In addition, the company has also announced the shutdown of three other smaller facilities in Minnesota and Alabama, servicing its Stearns and Hilton operations, with most of the production also moving overseas.

These actions will result in the reduction of approximately 450 positions at those locations. In conjunction with the closures, K2 expects to record a pre-tax reserve in the third quarter of between $10 to $11 million, primarily related to the reduction of jobs and asset impairments on the facilities closed.

Based on the improved cost structure currently being experienced in the China factory, K2 estimates approximately $7 million in annualized pretax cost savings will be achieved.

Second-Quarter Review

The Sporting Goods segment includes K2’s ski and snowboard businesses, K2 inline skates, Shakespeare Fishing Tackle and Stearns outdoor products. Sales of the sporting goods group for the second quarter totaled $105.5 million, compared with $118.4 million in the year-ago quarter.

The company’s strong brands and continued product innovation and promotion resulted in strong sales of its K2 skis, Ride and K2 snowboard products, Shakespeare Fishing Tackle reels and kits and Stearns flotation devices and raingear, however sales of inline skates and Kickboard scooters declined for the period.

“In a seasonally slow quarter of the year, K2 skis and K2 and Ride snowboard products reported double digit percentage sales increases reflecting the growth in preseason orders received from retailers,” said Rodstein. “The response to the K2 Axis ski line has been strong, especially in the domestic market, and certain Ride and K2 brand snowboard products have also helped drive growth in our winter sports group.

“The quality and cost of our China-produced skis and snowboards has allowed us to expand our market opportunities by aggressively entering price point categories previously unattractive to us. Sluggish retail sales of inline skates in Europe and the U.S., caused in part by poor weather, resulted in higher retail inventory levels for the industry and a 46 percent reduction in shipments for the quarter. Demand for scooters declined precipitously for the quarter in Europe.

“Worldwide fishing tackle sales were up 12 percent, due entirely to growth in the U.S. market, with increasing demand for new reels and kits. We believe we are continuing to gain market share, as we have for the last several years, through our strategy of introducing a stream of new products at popular price points. We are also benefiting from new product introductions by Stearns, with a 14 percent increase in sales, mainly from children’s flotation devices and raingear.”

The other Recreational Products segment includes Adio and Hawk skateboard shoes, Planet Earth apparel and Hilton active apparel. Sales of the recreational products group for the second quarter totaled $8.9 million, compared with $9.9 million in the year-ago quarter.

“Our Adio and Hawk skateboard shoe lines reported a 12 percent increase in sales for the quarter, however sluggish ad specialty sales by our Hilton business accounted for the decrease in overall category sales,” Rodstein explained.

The company said industrial sales decreased to $30.4 million, from $33.6 million during the quarter because of continued soft demand for paperweaving monofilaments, composite light poles and marine antennas.

Gross profit as a percentage of sales in the second quarter decreased to 32.4 percent, compared with 33.9 percent in the prior year. Higher sales of reduced margin skate sales in Europe and Japan, the margin impact of weak European currencies on products purchased in U.S. dollars for sale in Europe and an unfavorable mix of sales, offset cost reductions obtained from selling products manufactured in China.

Six-Months Review

For the six months ended June 30, 2001, sales of the sporting goods group were $237.7 million, as compared with $259.6 million in the prior year’s period. The decline in the category was primarily due to similar factors as outlined for the second quarter except for the fishing tackle business that had a slow first quarter but higher second quarter sales resulting in record results.

A decline in Hilton sales offset increased skateboard shoe sales resulting in sales of $19.5 mill
ion in the current year for the recreational products group. Sales of the industrial products group were $60.9 million, down from $67.6 million in the prior year due mainly to lower monofilament sales that declined 12 percent due to softness in the paperweaving market.

Business Outlook

The following statements are based on management plans for the year and reflect assumptions as to numerous factors beyond K2’s control. These statements are forward-looking, and actual results may differ materially. Certain of the material uncertainties are more specifically referenced below.

In looking ahead to the remainder of the year, Rodstein said: “K2 continues to be well positioned in the market place with its product lines benefiting from brand strength and sustained product innovation. Our fishing tackle business has been gaining market share through the continuation of our program to introduce new Shakespeare, Pfleuger and licensed products into the marketplace. Stearns life vests and rain gear are well positioned in their respective categories.

“We have received a strong response to our new snowboard and ski product lines and as a result our preseason orders have increased significantly over the prior year. Our brands have been strong at retail during the past six months relative to our competition. We have introduced several new products incorporating important new innovations, including our laceless inline skates and Biosonic(TM) backpacks.

“The ramping up of our China production is on target to deliver strong second half margin enhancements as we deliver most of our winter sports orders. The economy continues to be sluggish resulting in uncertainty for certain of our product categories. While we expect to have strong third quarter momentum, fueled by our winter sports businesses, we anticipate the fourth quarter to be impacted by continued softness in inline skate and Kickboard sales and margins, partially offset by shipments of Slip Fit(TM) skates.

“As a result of the uncertainties raised by the sluggish economy, we are currently forecasting full year 2001 diluted earnings per share from continuing operations of $0.65 to $0.75, before manufacturing restructuring charges. In looking to 2002, we believe that despite the uncertain economy, our results will benefit from cost reduction programs and from the breadth of new product introductions.”

K2 Inc. 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, Ride and Morrow snowboards, boots and bindings; K2 in-line skates; Stearns sports equipment; Shakespeare fishing tackle; K2 bikes; and Dana Design backpacks.

K2’s other recreational products include Planet Earth apparel, Adio skateboard shoes and Hilton corporate casuals. K2’s industrial products include Shakespeare extruded monofilaments, marine antennas and composite light poles.