Head N.V. announced net sales decreased 1.7% to $73.6 million. The net loss increased 177% to $9.9 million for the three months ended 31st March, 2003.
Based on current trading conditions, Head has prudently decided not to pay a 2002 dividend.
Johan Eliasch, Chairman and CEO, commented: “Trading conditions are becoming more difficult, especially in racquet sports and diving which has impacted our results for the quarter. We are proactively managing the business through these difficult conditions, but based on current market conditions, we believe that our results will be below those achieved in 2002.”
Revenues
For the Three Months Ended 31st March,
2002 2003 %
(unaudited) (unaudited) Change
(in thousands)
Product Category
Winter Sports $11,921 $16,451 38.0%
Racquet Sports 47,171 42,424 -10.1%
Diving 14,092 12,444 -11.7%
Licensing 1,680 2,281 35.8%
Total Revenues $74,864 $73,600 -1.7%
Winter Sports
For the three-month period ended 31st March 2003, our winter sports sales increased by 38% compared with the same period in the prior year. Sales increased in all of our product segments (skis, bindings, boots and snowboard equipment) due in part to the strengthening of the Euro against the US $ and also due to the positive reaction by the market to our product offering. We have had a very successful sell-through of our ski boots, especially our new EDGE range, and positive results in the trade with Intelligence skis.
We believe that the world wide winter sports market declined by 5% in 2002. This, we believe, was due to several winter seasons without good snow, followed by a late start to the 2002/03 season. Once the snow arrived in 2002 however, the season was excellent, and this has lead to more normal levels of stock in trade and we hope a flattening of the decline experienced in the market in the last few years.
Whilst the first three months of the year are not significant due to the seasonality of our business, we are pleased to report that our order book for the 2003/04 season is above the level achieved at this time last year and approximately 70% of our 2003 business is already booked.
Currency movements combined with the product mix change has impacted the gross margin, reducing it by 210 basis points for the first three months.
Racquet Sports
For the three months ended 31st March 2003, sales declined by 10.1%, with balls declining at a slightly higher rate than racquets. By geography, in our reporting currency, our sales increased in Europe, but this was offset by a double-digit decline in North America. The decline was due to the very tough market conditions currently being experienced particularly in the USA, where both the tennis racquet and tennis ball markets were down by 14% for the first three months and also due to a large one-off OEM-business shipment in the first quarter of 2002 that was not repeated in 2003.
We believe that the decline in the market is short term due to customer distractions such as the war in Iraq and economic uncertainties. The unprecedented decline in the tennis ball market is a result of a lack of participation. However, we are confident that consumers will return to the sport once these distractions are eliminated.
Whilst market conditions remain tough, Head continues to make advances, Penn market share in the US was up by nearly one percentage point in the first quarter 2003 compared to the first quarter 2002 and Head is holding market share despite tough competition.
The gross margin for the Racquet Sports division declined by 200 basis points as a result of the strengthening of the Euro and a reflection of the tough market conditions, which have resulted in increased competition and lower average prices.
Diving
For the three months ended 31st March 2003, diving product revenues decreased 11.7%. The overall market for diving equipment is generally perceived to have declined by 10% in 2002, with some of our important markets such as the US and Japan showing, according to some estimates, a downturn in demand of up to 20%. This overall decline was, we believe, principally due to the general world wide economic slowdown and a consequent decrease in the number of the end users of diving products travelling on holiday to diving and other resorts. In the first quarter of 2003, the Iraq war and the SARS epidemic exacerbated this effect.
In addition to the poor market conditions, our Diving division’s results were also effected by the timing of shipments.
Gross margins have declined due to higher sales of close-out products at low margins in the USA and the strengthening of the Euro against the US Dollar compared to the first quarter 2002.
Sales are expected to recover in the second quarter when a number of recently launched products reach the market. The momentum should extend into the second half of the year with the launch of our new dive computer line and a special sales campaign planned for the Fall.
Licensing
Licensing revenues grew by 35.8% in the three months to 31st March 2003 compared to the first three months of 2002. The increase was due in part to the timing of licensing income receipts and in part due the strengthening of the Euro against the US Dollar compared to the first quarter 2002.
Profitability
For the three months ended 31st March, 2003, due to lower revenues and margins, gross profit decreased by $2.7 million to $26.8 million from $29.4 million in the first three months of the prior year.
Gross margins reduced by 300 basis points due mainly to the strengthening of the Euro, and some margin erosion in racquet sports due to increased competition in the market.
For the three months ended 31st March, 2003, selling and marketing expenses increased by $2.5 million, or 10.7%, to $26.3 million from $23.7 million in the first three months of the prior year. The increase was entirely due to exchange rate effects on these predominantly Euro denominated costs.
For the three months ended 31st March 2003, general and administrative expenses increased by $1.5 million, or 20.7%, to $8.7 million from $7.2 million in the prior year. The increase was almost entirely due to exchange rate effects on these predominantly Euro denominated costs.
For the three months to 31st March 2003, operating loss increased by $7.0 million to $8.9 million from $1.9 million in the first three months of the 2002.
Interest expenses for the three months ended 31st March 2003 increased by $0.7 million compared to the first three months of 2002 due to exchange rate effects, in particular on the Euro denominated bond.
Cash flow from operations for the first three months of 2003 was $19.7 million, compared to $17.1 million for the first three months of 2002. Consolidated Results
For the Three Months Ended 31st March,
2002 2003
REVENUES
Total revenues $ 74,864 $ 73,600
Cost of sales 45,439 46,848
Gross profit 29,425 26,752
Gross margin 39.3% 36.3%
Selling & marketing expense 23,738 26,287
General & administrative 7,176 8,659
expense (excl. non-cash
compensation expense and
restructuring costs)
Non-cash compensation 408 164
expense
Restructuring costs - 530
Operating loss (1,898) (8,888)
Interest expense (2,636) (3,382)
Interest income 161 263
Foreign exchange gain/(loss) 262 (3)
Other income, net 9 27
Loss from continuing (4,102) (11,983)
operations before income
taxes
Income tax benefit 545 2,129
Net loss $ (3,556) $ (9,854)
