LOS ANGELES–K2 Inc. (NYSE:KTO) announced that income from continuing operations for the quarter ended March 31, 2001, decreased modestly from a year ago, on a weather-influenced decline in net sales for the same period.
Preseason winter sports orders and related anticipated manufacturing gains, however, indicate a stronger second half of 2001.
Income from continuing operations declined to $3.2 million, or $0.17 per diluted share, from $3.3 million, or $0.18 per diluted share a year ago. Net sales for the current quarter decreased to $173.2 million, compared with $185.0 million in the comparable 2000 period. Net income for the 2000 quarter, including discontinued operations, was $3.7 million, or $0.20 per diluted share.
“Our winter sports businesses continue to gain in momentum resulting in double digit percentage increases in preseason orders for both our snowboard business and our K2 skis,” said Richard M. Rodstein, K2’s president and chief executive officer. “A favorable late winter season in North America, increased consumer demand for several key K2 and Ride snowboard products and very favorable dealer response to our recently introduced K2 Axis skis has given us reason to be optimistic about second half sales of our winter sports collection. The late season rain and snow throughout much of the U.S. and Europe, however, has had an unfavorable impact on early sales of our in-line skates and fishing tackle in the first quarter. Our small-wheeled products group benefited from a significant increase in the sales of our Kickboard scooters in the European market that partially offset the decline in skate sales.”
Despite the unfavorable weather during the quarter, the company’s strategic focus on growing strong brands through continued product innovation resulted in higher sales of its K2 Kickboard scooters, Ride and K2 snowboard products, K2 skis, Shakespeare fishing kits and reels, Stearns flotation devices and raingear, and Adio and Hawk skateboard shoe lines.
Despite a sales increase of $6.6 million of K2’s innovative Kickboard scooters due to strong demand in the European market, sales of the small-wheeled products group decreased 14 percent for the quarter. The company noted that the decline in European exchange rates against the dollar contributed to the decline in sales as reported in this category for the quarter.
Rodstein further noted, “Although sales of our high performance, small-wheeled products were adversely affected by poor spring weather, the response to our Kickboard scooters has so far been very favorable in the European market. K2’s market position in inline skates remains strong and participation trends are favorable so future sales should improve with warmer weather.”
Rodstein continued, “In a seasonally slow quarter, the company reported double digit percentage growth of its K2 ski brand in the U.S. market reflecting the success of the MOD technology and more modest growth of Ride and K2 snowboards. Additionally, our preseason orders included double-digit growth in virtually all winter sports categories. We are pleased with the results of our increased production of snowboards and skis in our factory in China, and we are on target to meet the goals we established for the program. The combination of more competitively priced China-produced skis and snowboards and an exciting new product line should result in improved operating results in the second half of 2001.
“We are also benefiting from new product introductions by Stearns, with a nine percent increase in sales, mainly from children’s flotation devices, new outdoor water products and raingear. Sales of our Adio and Hawk skateboard shoes and K2 bikes increased approximately 40 percent over the prior year’s period.”
The company said industrial sales fell during the quarter because of the slowdown and consolidation in the paperweaving industry and slower sales of composite light poles sold to utilities.
Gross profit as a percentage of sales was comparable with the prior year’s quarter at 29.3 percent. Reduced costs associated with the China manufacturing facility were offset by the impact of selling products in Europe that were purchased using European currencies that were weak against the dollar and by declining margins in the manufacture of light poles. Interest expense declined $1.3 million primarily due to reduced borrowing levels.
The company has also successfully continued to generate significant cash flow, resulting in strong first quarter cash flow and debt repayment of $14 million.
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 rest of 2001, Rodstein said, “Our winter sports brands had strong sell-through at retail during the season just ended, and the favorable response to our new K2 ski line and snowboard collection has resulted in an increase in preseason orders as compared to the prior year. However, a wet and cold spring has already had an unfavorable impact on spring orders for inline skates and fishing tackle as inventory levels of these products have increased at retail. Improved sales will depend on more normalized weather patterns in the remainder of April and May. Additionally, the impact of declining consumer confidence, the uncertainty in the market caused by a slowing economy and continued worldwide softness in retail sales might further impact sales growth during 2001.
“On the positive side, the benefits from cost savings derived from increasing China production to 75 percent of our winter sports products should help boost margins and profitability. We are also encouraged that the profitability of our Monofilament business should rebound due to significant cost reduction measures implemented and the impact of an acquisition completed in the first quarter. Due to the uncertainty caused by the economic slowdown and the unfavorable weather conditions, and since our cost reduction programs and higher preseason orders are not expected to provide benefits until the related shipments of winter sports products are made in the third and fourth quarters, we are forecasting a decline in sales and earnings in the second quarter with earnings momentum building in the second half of the year. Our previously stated full year diluted EPS forecast of $1.05 to $1.15 depends in part on improved weather conditions as described above. Our cash flow projections for the year remain on track as evidenced by the success of our working capital management program in the first quarter of the year.”
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.