Head N.V. is beginning to see the results of its multi-year restructuring efforts trickle down to the bottom line. The company has been shifting much of its manufacturing to Eastern Europe in an effort to reduce labor costs. This year, Head reduced tennis racquet production in Kennelbach, Austria and Budweis, Czech Republic by 90%; reduced ski binding production in its plant in Rapallo, Italy; and transferred the remaining ski boot production from Maser, Italy to Litovel, Czech Republic. These changes helped to drive better gross margins, operating margins, and net income in spite of a slight revenue shortfall for the quarter.
The company has seen considerable upside over the last couple of years from its practice of reporting in U.S. Dollars while most of its business resides primarily in non-U.S. markets. That practice is expected to end soon as the company moves back to Euros in Q1. Roughly 59% of Heads revenue was derived in Europe and only 27% from North America. This represents a three point decline in the EUs share of sales and a one point gain for North American share. For the fourth quarter, Head recorded a foreign currency exchange gain of $400,000, compared to a loss of $900,000 in 2004. For the full year, the company recorded a foreign currency exchange gain of $2.8 million, compared to a loss of $600,000 million last year.
Winter Sports revenues for the fourth quarter decreased 11.4% to $110.7 million from $124.9 million in the year-ago period, but when measured in Euro terms for the quarter, sales only declined 3%. Gross margin in the division declined 110 basis points to 39.0%.
For the year, sales of skis declined 5.7% in U.S. Dollars to approximately $78 million, or 36% of total Winter Sports revenues, versus 37% of sales in 2004. In Euro terms, ski sales fell 5.8% for the year. After a strong year last year, binding sales declined 6.1% in U.S. dollars (6.2% in Euro terms) to roughly $67 million, or 32% of Winter Sports revenues. Boots sales led the category with growth of about 6% for the year to approximately $52 million, or a gain of 5.6% in Euro terms. Snowboard revenues declined 3.2% in Euros and 3.1% in USD to roughly $19.5 million for the year.
In 2005, Head shipped 572,000 pairs of skis compared to 596,000 last year; 1.52 million pairs of bindings were sold in 2005 versus 1.64 million in 2004. Ski boot shipments increased considerably to 612,000 pairs versus 567,000 last year. Head Snowboard equipment shipments also increased to 294,000 units versus 268,000 last year with the new snowboard protection category contributing 33,000 additional units.
For the full year, Winter Sports gross margin declined 30 basis points to 38.2% due to product mix and a “slight” issue with late deliveries. Management said that good snow conditions at the end of the year resulted in strong re-orders and should have a positive impact on the 2006 first quarter.
Racquet Sports revenues for the quarter increased 4.8% to $34.1 million from $32.5 million in Q4 last year, but decreased nearly 1% when measured in Euro terms, due primarily to pricing pressure in the racquet market and reduced OEM business following the closure of a ball manufacturing facility in Ireland. Gross margin increased four full percentage points to 36.4% of sales compared to 32.4% in the year-ago period in spite of a considerable increase in raw material costs.
The increase in total year Racquet Sports sales was said to be mainly from the introduction of new product, namely FlexPoint Technology racquets. Head continued to see a decrease in sales volumes of balls. The Racquets Sports division gained some ground compared to the other divisions, jumping to 37% of total group sales in 2005 compared to 35% of total Head NV sales in 2004.
North America makes up a bit more of the full year number in this division, contributing about 46% of total Racquet Sports sales for 2004, compared to roughly 41% of sales derived from the Europe region.
For the year, sales of racquets rose more than 28% to approximately $108 million, or 50% of total Racquet Sports division sales, compared to nearly $84 million, or 50% of division sales in 2004. Measured in Euros, sales of racquets rose nearly 29% for the year. Ball sales decreased roughly 1% for the year to almost $58.3 million, or 35% of total division sales, compared to more than $59 million, or about 35% of division sales, in the prior year. In units, racquet sales increased 9% to 1.88 million units compared to 1.79 million in 2004. Balls declined to 6.3 million dozen compared to 6.4 million dozen in 2004, generally an indicator of less players in the sport. Sales of balls also fell 1% when measured in the home country Euros.
Full year gross margin for Racquet Sports improved to 41.1% of sales, up 190 basis points from 39.2% of sales in 2004. Management expects the global racquet sports market to be relatively flat in 2006 with increased pressure from raw material prices.
Diving division revenues fell nearly 40% to $10.4 million in the fourth quarter compared with $16.8 million in the same period in 2004. This results mainly from unfavorable market conditions, termination of distribution agreements in Switzerland, UK & Japan, as well as a reduced product range. Sales declined 33% when measured in Euros. Europe makes up about 64% of the Diving division revenues for the year, compared to just 18% of revenues originating in North America.
The Mares brand contributes roughly 89% of Diving sales, up from 84% in the prior year.
Licensing revenues decreased 16.7% in the quarter, but declined 9% when measured in Euros.
Fourth quarter net income increased to $5.1 million compared to $84,000 last year. Much of the net income increase for the year was due to one-time charges in 2004. Head was hit by one-time interest expenses on repayment of old Senior Notes, write-off of debt issuance costs and premiums, as well as a change in the Austrian income tax rate in 2004.
While market conditions have not improved significantly, Head management believes that their performance continues to improve. The company is encouraged by the strong performance in 2005, and anticipates that the on-going restructuring program will produce further efficiencies and savings in 2006. However, they see the operating environment in 2006 as challenging, with adverse pressure on prices and margins, due to anticipated rises in raw material costs. The move back to Euros in Q1 and compliance with international accounting standards (IFAs) may also have an impact.
>>> Reporting in U.S. Dollars has helped the top-line look better over the last few years, but the restructuring benefits should create more long-term upside
| Head N.V. | ||||
| Full Year Results | ||||
| (in $ millions) | 2005 | 2004 | Change | Chg |
| Total Sales | $458.0 | $479.1 | -4.4% | -4.5% |
| Europe | $270.2 | $297.0 | -9.0% | -9.1% |
| N. America | $123.7 | $124.6 | -0.7% | -0.8% |
| Rest of World | $64.1 | $57.5 | 11.5% | 11.4% |
| Winter Sports | $216.3 | $223.2 | -3.1% | -3.2% |
| Europe | $164.4 | $167.4 | -1.8% | -1.9% |
| N. America | $28.1 | $31.2 | -10.0% | -10.1% |
| Rest of World | $23.8 | $24.6 | -3.1% | -3.2% |
| Racquet Sports | $166.6 | $168.0 | -0.8% | -0.9% |
| Europe | $68.3 | $72.3 | -5.4% | -5.5% |
| N. America | $76.7 | $77.3 | -0.8% | -0.9% |
