Head N.V. posted third quarter net income that was nearly three times the year-ago level, due primarily to the divesture of a tennis ball manufacturing facility in Ireland. The increase in operating profits and the bottom line was also attributed to the upside the company is starting to see from its restructuring efforts.
Head, which is based in Austria, still saw some top-line upside to their practice of listing the company in the U.S. and reporting in U.S. dollars, but also saw some margin pressure on goods made in Europe.
In a conference call with analysts company management indicated that they are doing a cost benefit analysis of continuing to list in the U.S as the costs of complying with Sarbanes-Oxley start to outweigh the perceived benefits.
Head looked to Europe for roughly 61% of revenues generated in Q3, up from 58% of the business in the year-ago quarter and 54% of sales in Q3 2002. The increase came from foreign currency exchange benefits as well as improving Winter Sports sales. North America held steady at 29% of the business in Q3, but was down 300 basis points from two years ago.
Measured in the home regions Euro currency, Heads third quarter sales would have actually declined 3.1% versus the 5.2% increase reported. European sales rose just 1.9% in Euros versus the reported 10.7% increase reported in U.S. currency. The total company sales decline comes on top of a 3.1% decline in revenues in Euro terms last year.
Winter Sports, which made up 56% of total sales in Q3 versus 51% of sales in the year-ago period, still sees 90% of its sales in the back half of the year. Management said the increase here was due in large part to FX rate benefits as well as higher sales volumes and bindings prices and an “improved mix” in ski and ski boot sales.
The shift in mix was clear as unit sales in bindings, including contract manufacturing, increased roughly 31% versus last year to 590,000 pairs, while boot unit sales declined 2.5% to approximately 158,000 pairs and skis dipped nearly 2% to 176,000 pair shipped in Q3.
Snowboard shipments, which were said to have been impacted by a shift in timing, fell 33% to just 69,000 units in third quarter.
In the reporting U.S. Dollar terms, sales of Skis increased approximately 9% to about $26 million in the period. Bindings sales jumped 34% to $24 million and Boots sales increased 15% to roughly $14 million.
Snowboard sales fell 20% to just under $5 million.
Skis made up 38% of sales in Q3, down for 40% of sales in Q3 last year. Bindings are now 35% of the business versus 30% in Q3 last year, while Boots remained steady at 20% of the Winter Sports business. Snowboards declined to 7% of sales from 10% in 2003.
Europe, which made up 76% of Winter Sports sales in Q3 versus 71% of sales in Q3 last year, saw Winter Sports sales increase nearly 23% in the third quarter. In Euro terms, sales in the region increased about 13%, while the Rest of World numbers fell 52% measured in Euros.
Gross margins in the Winter Sports division dipped 20 basis points from Q3 last year to 41.5% of sales in Q3 2004, due in large part to a change in the product mix in the division again this year and also the negative currency impact of costs that are largely incurred in Euros. Head is now selling more OEM bindings and higher margin skis make up a smaller piece of the mix.
The inventory position was said to be up about $5 million in constant currencies, due to higher levels of bindings, snowboards and Penn tennis balls.
The gain from the sale of the facility in Ireland was recorded in the quarter, helping push G&A down 65.8% to $3.4 million from $9.8 million in the comparable 2003 period. Due to the gain here and other charges and restructuring expenses, operating income for the quarter increased by $7.6 million to $15.3 million from $7.7 million in the comparable 2003 period.
