K2 Reports Third Quarter, Nine-Months Results

LOS ANGELES–(BUSINESS WIRE)–Oct. 25, 2001–K2 Inc. (NYSE:KTO) today announced results for the third quarter and nine months ended September 30, 2001. The company also announced it has taken further actions to reduce its cost and expense structure, which should produce annualized pretax savings of over $15 million. The cost of this restructuring and downsizing is included in K2’s third quarter and nine month results.

For the 2001 third quarter, net sales totaled $149.4 million, compared with $166.1 million in the comparable 2000 period. The decline in sales reflected a substantial industry-wide slowdown of sales of small-wheeled products, including primarily scooters and skates. During the third quarter, K2’s sales of such products dropped $16.9 million from the comparable quarter of the prior year mainly from a lack of Kickboard scooter sales in the European market and to a lesser degree inline skate sales. This decline offset gains reported by the company’s domestic fishing tackle, ski and snowboard businesses. These gains reflect higher domestic preseason orders for K2’s skis and snowboard products and strong sell through of Shakespeare fishing tackle at retail. Income from continuing operations, before the impact of restructuring and downsizing charges, for the third quarter ended September 30, 2001 decreased to $1.0 million, or $0.06 per diluted share, from $4.5 million, or $0.25 per diluted share a year ago. The company recorded charges for restructuring and downsizing of $11.7 million, or $.65 per diluted share, net of tax. Net loss for the third quarter ended September 30, 2001 was $10.7 million (after the $11.7 million restructuring and downsizing charges), or $0.59 per diluted share, as compared with net income of $4.5 million, or $0.25 per diluted share in the year ago period.

For the nine months ended September 30, 2001, net sales decreased to $467.5 million, compared with $512.9 million in the comparable 2000 period. Income from continuing operations, before the impact of the restructuring and downsizing charges, totaled $6.5 million, or $0.36 per diluted share, compared with income from continuing operations of $14.2 million, or $0.79 per diluted share, reported in the prior year period. Net loss for the nine months ended September 30, 2001 was $5.2 million (after the $11.7 million restructuring and downsizing charges), or $0.29 per diluted share, as compared with net income of $14.6 million, or $0.81 per diluted share in the year ago period.

K2 President and Chief Executive Officer Richard M. Rodstein said, “Absent the collapse of small-wheeled product sales, our earnings for the third quarter and nine-month periods would have exceeded prior year levels. This reflects the strength of our product lines and the success of our cost reduction activities. In response to the severe reduction in small-wheeled products sales, we have taken aggressive actions to downsize both our European operation and domestic skate business in order to return our inline skate business to profitability on a declining sales base.”

Restructuring of Manufacturing and Downsizing of Operations

In ongoing cost reduction moves, the company has completed the previously announced move of its remaining ski production to China and closed its Washington ski manufacturing facility during the third quarter. In addition, the company has also shut down three other smaller facilities in Minnesota and Alabama, servicing its Stearns and Hilton operations, with most of the production also moving overseas. With the downsizing of small-wheeled products, K2’s cost reduction actions have resulted in the reduction of approximately 600 positions worldwide, representing nearly 20 percent of the workforce.

K2 recorded a pretax charge in the third quarter of $18.0 million

($11.7 million or $0.65 per diluted share, net of tax), primarily related to severance and the impact of asset impairments, including a reduction in the net carrying value of small-wheeled products inventory and the write down of facilities and equipment. The size of this charge has been increased from the previous announcement to reflect the one-time costs associated with additional activities described above. Based on the improved cost structure currently being experienced in the China factory and as a consequence of the expense reductions implemented, K2 estimates that over $15 million in annualized pretax cost savings could be achieved in 2002.

Third-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 third quarter totaled $115.1 million, compared with $128.0 million in the year-ago quarter. The company’s strong position in the marketplace and continued product innovation have resulted in increased sales of its K2 skis, Ride and K2 snowboard products, and Shakespeare Fishing Tackle reels and kits. However, sales of inline skates and Kickboard scooters declined 71 percent for the period, which more than offset the gains reported.

“K2 skis and K2 and Ride snowboard products reported sales increases, reflecting the growth in preseason orders received from retailers,” said Rodstein. “The K2 Axis ski line has been well received by our customers, especially in the domestic market, and early retail sales suggest that K2 skis and certain Ride and K2 brand snowboard products are also popular with the consumer despite a slowing economy. The inline skate market continued to be sluggish in Europe and the U.S., resulting in a decline in purchases by cautious retailers as they managed their inventory levels. In addition to downsizing its operations to achieve profitability at current lower levels of inline skate sales, the company has recently introduced its new laceless Slip Fit(TM) technology skates representing a major product innovation in the category. The convenience and comfort of the new inline skates that do not require lacing before skating represents an opportunity to stimulate retail sales. As retailers continued to liquidate scooter inventory in Europe, the company reported no sales of scooters in the third quarter in this market. By contrast, worldwide fishing tackle sales increased despite a slowing economy, due entirely to growth in the U.S. market and apparent gains in market share in rod and reel kits, the fastest growing segment of the market. Sales of Stearns flotation vests have begun to reflect the impact of a slowdown in the economy, partially offset by higher sales of outdoor accessories.”

The company said industrial sales decreased to $24.9 million, from $27.0 million during the quarter because of soft demand for paperweaving and other monofilaments, composite light poles and marine antennas. “We have recently seen an uptick in orders for monofilament products, and our profitability for the quarter has benefited from aggressive cost reduction measures taken,” Rodstein explained.

Excluding the impact of the restructuring charges, gross profit as a percentage of sales in the third quarter decreased to 31.7 percent, compared with 32.5 percent in the prior year. Higher sales of reduced margin products, including close out sales of skates in Europe, an unfavorable mix of sales, and the impact of lower sales volume offset cost reductions obtained from selling product manufactured in China.

Nine-Months Review

For the nine months ended September 30, 2001, sales of the sporting goods group were $352.7 million, as compared with $387.5 million in the prior year’s period. The decline in the category was primarily due to declines in small-wheeled products, partially offset by increases in winter sports, Stearns and the fishing tackle business. Excluding the impact of the small-wheeled products in the period, sales for the group improved mid-single digits.

Sales of the industrial products group were $85.8 million, down from $94.6 million in the prior year due to lower monofilament, light pole and antenna sales.

Business Ou

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, “The current difficult economic environment in the markets we serve will have an impact on K2’s results in the fourth quarter. Although the company is well positioned in the market place with strong market shares and momentum in several product lines and has initiated aggressive cost reduction programs, the uncertain economic outlook should result in lower sales and earnings in the fourth quarter. While we are reasonably confident in being able to achieve our cost and expense reduction objectives, unpredictable market trends make it difficult to predict revenues. Based upon limited visibility we currently believe that full year 2001 diluted earnings per share from continuing operations of $0.25 before restructuring and downsizing charges may be achievable. During the next year, the company should benefit from the full impact of our $15 million of cost and expense reduction initiatives implemented in 2001. However the amount of the savings that are ultimately reflected in earnings will be partially influenced by revenue levels that will be dependent on international developments and the strength of the economy. Our sales will benefit from a strong array of new products introduced throughout the company, including our new laceless softboot inline skate, new products in every category of winter sports and new Shakespeare reels and kits. We are confident that we have taken, and are taking, the appropriate steps to enhance K2’s competitive position and to increase profitability.”

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 inline 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.