Head NV reported net revenues inched up 0.3% in the third quarter to €93.1 million ($116.8mm) thanks to an 11.1% gain in winter sports sales. When measured in constant currencies, sales rose 4.6% for the period. But the growth was not enough to offset declines in racquet sports and diving, as well as a stronger euro.  Head also could not stave off a big drop in operating and net income and questions about the Austrian company’s liquidity.


Company CFO Ralf Bernhart said Head was headed toward its peak production period in November with about $6.5 million to $7.8 million in free cash after drawing down about $4 million of a new short-term $10.5 million credit line from an Austrian bank. Pressed by an analyst to articulate how Head would deal with a “precariously close” liquidity problem, Chairman and CEO Johan Eliasch declined to speculate on whether he would be able to extend the credit line if needed when it matures Dec. 31. 


“This is an impossibility to forecast given the fact that credit has dried up,” he said. “And it's impossible to estimate what the ramifications of shall we say the fallout of the economic system will have on consumer demand going forward.”


Head reported that its gross profits for the quarter slipped 4.4% as gross margin dropped 190 basis points due to higher raw material and energy prices and a less profitable mix of winter and racquet product sales. Operating profit plummeted 45.4% to €4.8 million ($7.2mm). Even after excluding the impact of the non-cash compensation, it would have fallen 36.6% to €4.5 million ($6.8mm). Net profit for the period dropped 70.7%. Operations, meanwhile consumed 22.6% more cash flow, or €14.1 million ($14.9mm), during the first nine months compared to the same period in 2007.  


“The markets in which we operate are very challenging,” said Eliasch. “For the first six months of the year the tennis racquet market shrunk by nearly 8% in Europe and the ball market by over 12%. We see continuing pressure in the diving market and orders are starting to slow down as anticipated.”


The company has previously said it will record a loss for the year.
While winter sports sales spurred consolidated revenue, they could not overcome rising energy and raw material costs and a less profitable mix of racquet sports sales.


Winter Sports revenues rose 11.1% thanks to higher sales of skis, ski boots and protection wear. The company said it recaptured a third of the sales it lost in 2007 due to poor snow conditions, except in binding sales to OEMs.  Average selling prices remained broadly stable compared to last year with the exception of bindings, where ASPs rose due to a better mix with fewer OEM bindings.


For the year-to-date, skis made increased from 215,000 pairs to 263,000 pairs. Bindings were down from 697,000 pairs to 643,000 pairs. Ski boots increased from 193,000 to 244,000 pairs. Snowboard equipment was up from 109,000 units to 112,000 units and shipments of helmets and other protective gear rose from 32,000 to 56,000 units. Skis accounted for 40% of sales, while bindings, boots and snowboards accounted for 25%, 24% and 11%, respectively.


Racquet Sports sales fell by 12.3%, or three times faster than unit sales, as the dollar continued to fall against the euro and sales shifted toward lower margin products. Year-to-date sales were off 8.4% thanks to a lift from a new line of tennis footwear.


Gross margin in the business declined 190 basis points to 36.4%. North America generated half the sales. Excluding contract manufacturing, tennis racquet sales rose 1.4% to 1.59 million units. Balls rose 6.5% to 5.57 million. Executives estimated Head’s share of racquet sales fell 1 to 1.5 percentage points in the quarter.


Diving revenues slipped 3.6% in the quarter, but were flat on a constant currency basis and up by 3.0% for the first nine months thanks to new products. Gross margins rose 270 basis point to 36.3% because of less close-outs and bad debts. Orders slowed in the quarter and the company does not expect to see sales growth in the fourth quarter. The company estimates diving sales will fall 10% in Mares’ home market of Italy this year.


Finally, Head said its licensing revenues fell 14.0% for the quarter due to fewer licensing agreements.