Head N.V. reported that net revenues for the three months ended 31 March 2004 increased by 28.3% to $94.4 million compared to $76.6 million in the year-ago quarter. The company's net loss increased 46% to $14.4 million from a net loss of $9.9 million in Q1 2003.
The net loss for the quarter was said to have increased due to increased interest expenses associated with a 8.5% senior note issuance in January. This caused a one-time charge of $7.5 million due to the write-off of the capitalized debt issuance costs and the premium for early redemption of old 10.75% senior notes.
Head said they are encouraged by signs of an improvement in economic conditions and of increased demand for sporting goods equipment. the first quarter of 2004 TIA data shows that the market for both tennis racquets and balls in the U.S. showed the biggest year-on-year quarterly increase for over five years and for the first time in one and a half years the Japanese tennis racquet market did not decline.
Winter Sports
Winter Sports revenues for the three months ended March 31, 2004 increased by $5.6 million, or 34.2%, to $22.1 million from 16.5 million in the comparable 2003 period. This increase was due to higher sales volumes of bindings and snowboard products, increased average sales prices resulting from improved product mix and the strengthening of the euro against the U.S. dollar.
Racquet Sports
Racquet Sports revenues for the three months ended March 31, 2004 increased by $7.1 million, or 16.7%, to $49.5 million from $42.4 million in the comparable 2003 period. This mainly resulted from improved sales prices in tennis racquets, higher sales volumes in balls and the strengthening of the euro against the U.S. dollar.
Diving
Diving revenues for the three months ended March 31, 2004 increased by $7.5 million, or 60.0%, to $19.9 million from $12.4 million in the comparable 2003 period, mainly due to increased sales volumes resulting from earlier shipment of products compared to last year as a result of better product availability and delivery efficiency and the strengthening of the euro against the U.S. dollar. The effect of the earlier shipments will reverse in the second quarter of 2004.
Licensing
Licensing revenues for the three months ended March 31, 2004 increased by $0.6 million, or 26.8%, to $2.9 million from $2.3 million in the comparable 2003 period due to new licensing agreements as well as timing impacts, partially offset by run-offs of licensing agreements and the strengthening of the euro against the U.S. dollar.
Profitability
For the three months ended March 31, 2004, gross profit increased by $9.8 million to $36.5 million from $26.8 million in the comparable 2003 period due to revenue and margin increases. Gross margin increased to 38.7% in 2004 from 36.3% in the comparable 2003 period due to improved operating performance and the product mix of sales.
For the three months ended March 31, 2004, selling and marketing expenses increased by $3.8 million, or 14.4%, to $30.1 million from $26.3 million in the comparable 2003 period. This increase was due to higher revenues as well as the strength of the euro against the U.S. dollar.
For the three months ended March 31, 2004, general and administrative expenses increased by $2.0 million, or 23.6%, to $10.7 million from $8.7 million in the comparable 2003 period. This increase was mainly due to the strength of the euro against the U.S. dollar.
For the three months ended March 31, 2004 and 2003, respectively, we also recorded $0.1 million and $0.2 million of non-cash compensation expense due to the grant of stock options under our stock option plans 1998 and 2001 and the resulting amortization expense.
In addition, in the three months ended March 31, 2004 we recorded restructuring costs of $0.3 million consisting of dismissal and transportation costs in connection with the closing of our production facility in Mullingar, Ireland and our plant in Tallinn, Estonia. In comparison, in the three months ended March 31, 2003 we incurred restructuring costs of $0.5 million consisting of severance payments, stay bonuses and excess rent due to the movement of our U.S. winter sports organization to our U.S. headquarters.
As a result of the foregoing factors, our operating loss for the three months ended March 31, 2004 decreased by $4.2 million to $4.6 million from $8.9 million in the comparable 2003 period.
For the three months ended March 31, 2004, interest expense increased by $9.5 million, or 280.6%, to $12.9 million from $3.4 million in the comparable 2003 period. This increase was mainly due to the write-off of capitalized debt issuance costs of $3.1 million relating to our former 10.75% senior notes, which were repaid upon issuance of our new 8.5% senior notes in January 2004; the premium of $4.4 million for the early redemption of the 10,75% senior notes; and higher interest expenses due to higher debt of the group. In addition, this increase was also influenced by the strength of the euro against the U.S. dollar.
For the three months ended March 31, 2004, interest income increased by $0.1 million, or 53.2%, to $0.4 million from $0.3 million in the comparable 2003 period. This increase was due to higher cash on hand.
For the three months ended March 31, 2004, we had a foreign currency gain of $0.1 million compared to a nominal loss in the comparable 2003 period.
For the three months ended March 31, 2004, other income, net remained insubstantial as in the comparable 2003 period.
For the three months ended March 31, 2004, income tax benefit was $2.6 million, an increase of $0.5 million compared to income tax benefit of $2.1 million in the comparable 2003 period. This increase relates to a higher loss before income taxes.
As a result of the foregoing factors, for the three months ended March 31, 2004, we had net loss of $14.4 million, compared to net loss of $9.9 million in the comparable 2003 period.
In terms of guidance for the remainder of 2004, we reiterate the guidance we gave in February at the time of our 2003 results announcement. This is that whilst we do not expect conditions in the sporting goods market to improve dramatically during 2004, we believe the signs are that there will be some growth in demand in our product categories.
We intend to continue to launch innovative products to help stimulate market demand and also to grow our market share.
We also expect to largely complete our restructuring program during 2004 and the benefits of this will be felt from 2004 onwards.
In conclusion, we expect reported revenues and operating profits, excluding one-time charges, for 2004 to be ahead of the levels achieved in 2003.
Due to a reduction in the Austrian income tax rate from 34% to 25% we will have to release a proportion of our capitalised tax losses during 2004. Whilst this will affect the tax charge in our profit and loss account, it will not impact our cashflow.
For the Three Months
Ended 31 March,
2003 2004
REVENUES
Total revenues $ 73,600 $ 94,399
Cost of sales 46,848 57,851
Gross profit. 26,752 36,548
Gross margin 36.3% 38.7%
Selling & marketing expense 26,287 30,080
General & administrative expense 8,659 10,705
(excl. non-cash compensation expense)
Non-cash compensation expense 164 139
Restructuring costs 530 272
Operating loss (8,888) (4,648)
Interest expense (3,382) (12,871)
Interest income 263 403
Foreign exchange gain (loss) (3) 79
Other income (expense), net 27 (6)
Loss from operations before income taxes (11,983) (17,043)
Income tax benefit 2,129 2,648
Net loss $ (9,854) $ (14,394)
