Head NV reported net revenues inched up 0.3% in the third quarter ended Sept. 30, 2008 to 93.1 million ($116.8 mm) from 92.8 million. ($116.4 mm) Gains in winter sports offset declines in racquet sports and diving. Net profit for the period dropped 70.8% to 1.2 million ($1.5 mm) from 4.1 million ($5.1 mm) in last year's third quarter.
Operating profit decreased to 4.8 million from 8.8 million. Excluding the impact of the non cash share-based compensation, operating profit would have decreased by 2.6 million to a profit of 4.5 million from $7.1 million.
- Net revenues were down 0.4% to 211.0 million
- Operating loss improved by 0.1m to a loss of 5.3m
- Excluding the impact of the non cash share-based compensation, the operating loss would have deteriorated by 4.7m from a loss of 5.1 million in 2007 to 9.7 million in 2008
- The net loss for the period was 8.5 million compared to a net loss of 11.9 million in the comparable 2007 period.
Johan Eliasch, chairman and CEO, said “The markets in which we operate are very challenging, 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 and communicated last quarter.
Even given the tough economic conditions and the further strengthening of the Euro compared to the comparable 2007 period, we achieved a sales growth in the quarter mainly as a result of a strong performance by the Winter Sports division. This growth, however, did not translate into improved profitability for the group due proportionately higher growths in raw material and energy prices and a weakening product mix particularly in our racquet sports division.
The market challenges we are facing can only be addressed by ensuring that restructuring continues to be a core focus of the group and it will be essential to continue to undertake these projects in order to return the group to profitability.
Our outlook for the year remains unchanged, and we continue to anticipate that we will record an operating loss for 2008. We are taking every step to adapt to the tougher trading conditions and to mitigate the pressures on the companys resources. In the face of the global financial crisis and the weakening of the global economy such steps will be vital.”
Winter Sports
Winter Sports revenues for the three months ended September 30, 2008 increased by 5.4 million, or 11.1%, to 54.3 million from 48.9 million in the comparable 2007 period. This increase was due to higher sales volumes of skis, ski boots and protection wear. For the nine months ended Sept. 30, 2008 Winter Sports revenues increased by 8.0 million, or 11.5%, to 77.7 million from 69.6 million in the comparable 2007 period. This increase was due to higher sales volumes of all of the winter sports products compared to sales volumes for the comparable 2007 period.
Racquet Sports
Racquet Sports revenues for the three months ended Sept. 30, 2008 decreased by 4.3 million, or 12.3%, to 30.5 million from 34.8 million in the comparable 2007 period. This decrease was mainly due to the strengthening of the euro against the U.S. dollar as well as unfavorable product mix partially offset by higher sales volumes of balls.
For the nine months ended Sept. 30, 2008 Racquet Sports revenues decreased by 8.6 million, or 8.4%, to 93.7 million from 102.3 million in the comparable 2007 period. This decrease was due to the strengthening of the euro against the U.S. dollar as well as unfavorable product mix partially offset by higher sales volumes of balls and sales from the company's newly introduced tennis footwear.
Diving
Diving revenues for the three months ended Sept. 30, 2008 decreased by 0.4 million, or 3.6%, to 10.0 million from 10.4 million in the comparable 2007 period due the strengthening of the euro against the U.S. dollar in the reporting period. For the nine months ended Sept. 30, 2008, Diving revenues increased by 1.2 million, or 3.0%, to 41.9 million from 40.7 million in the comparable 2007 period. This increase was mainly driven by the introduction of new advanced products but negatively affected by the strengthening of the euro against the U.S. dollar.
Licensing
Licensing revenues for the three months ended Sept. 30, 2008 decreased by 0.2 million, or 14.0% to 1.2 million from 1.4 million in the comparable 2007 period. For the nine months ended Sept. 30, 2008 Licensing revenues decreased by 1.1 million, or 20.6%, to 4.1 million from 5.1 million in the comparable 2007 period due to fewer licensing agreements.
Total Revenues
Total Net Revenues. For the three months ended Sept. 30, 2008 total net revenues increased by 0.3 million, or 0.3%, to 93.1 million from 92.8 million in the comparable 2007 period. This increase was mainly due to higher sales volumes of winter sport products partially offset by the effect of the strengthening of the euro against the U.S. dollar.
Profitability
Sales deductions for the three months ended Sept. 30, 2008 increased by 0.3 million, or 9.7%, to 2.9 million from 2.7 million in the comparable 2007 period due to higher sales. For the nine months ended Sept. 30, 2008 sales deductions increased by 0.4 million, or 6.9%, to 6.4 million from 6.0 million in the comparable 2007 period due to promotion sales of close out products during the second quarter 2008.
Gross Profit
For the three months ended Sept. 30, 2008 gross profit decreased by 1.6 million to 34.7 million from 36.4 million in the comparable 2007 period. Gross margin decreased to 37.3% in 2008 from 39.2% in the comparable 2007. For the nine months ended Sept. 30, 2008 gross profit decreased by 3.0 million to 80.7 million from 83.7 million in the comparable 2007 period. Gross margin decreased to 38.2% in 2008 from 39.5% in the comparable 2007 period. This decrease was due to increased raw material and energy prices as well as unfavorable product mix in Winter Sports and Racquet Sports.
Selling and Marketing Expense
For the three months ended Sept. 30, 2008, selling and marketing expense decreased by 0.2 million, or 1.0%, to 22.1 million from 22.4 million in the comparable 2007 period. For the nine months ended Sept. 30, 2008, selling and marketing expense decreased by 0.1 million, or 0.2%, to 67.9 million from 68.0 million in the comparable 2007 period. Higher advertising costs for the sponsored professional ski racers, the company's newly introduced badminton products and tennis footwear were partly offset by lower shipment costs and the strengthening of the euro against the U.S. dollar.
General and Administrative Expense
For the three months ended Sept. 30, 2008, general and administrative expense decreased by 0.2 million, or 3.3%, to 7.1 million from 7.4 million in the comparable 2007 period. For the nine months ended Sept. 30, 2008, general and administrative remained stable compared to 2007.
Share-Based Compensation Expense (Income)
The liability relating to the Stock Option Plans recorded on Head NV's balance sheet is depending on share price. During the three months ended Sept. 30, 2008, the company recorded a 0.4 million non cash share-based compensation income (2007 comparable period: 1.7 million) as the share price declined in the period. For the nine months ended Sept. 30, 2008, Head NV recorded 4.4 million of non cash share-based compensation income for the Stock Option Plans as the share price also declined over this period, compared to 0.3 million of non cash share-based compensation expense in the comparable 2007 period when the company experienced a slight increase in the share price.
Restructuring Cost
For the nine months ended Sept. 30, 2008, Head NV recorded 0.4 million re-movement cost in relation to the transfer of parts of the ski production from its site in Kennelbach, Austria to its site in Budweis, Czech Republic and 0.4 million additional depreciation of fixed assets due to the reduction of the remaining useful life relating to the planned reduction in production capacity resulting from shifting of international tennis ball production from USA to China.
Other Operating Expense (Income), net
For the three months ended September 30, 2008, other operating expense, net increased by 0.8 million, to 0.3 million from an income, net of 0.5 million in the comparable period in 2007. For the nine months ended Sept. 30, 2008, other operating income, net decreased by 1.0 million, to 0.2 million from 1.2 million in the comparable 2007 mainly due to a release of an environmental accrual for the Estonian premises in 2007 and foreign currency exchange losses in 2008.
Operating Profit (Loss)
As a result of the foregoing factors, operating profit for the three months ended Sept. 30, 2008 decreased by 4.0 million to 4.8 million from 8.8 million in the comparable 2007 period. For the nine months ended Sept. 30, 2008, operating loss decreased by 0.1 million to 5.3 million from 5.4 million in the comparable 2007 period.
Interest Expense
For the three months ended Sept. 30, 2008, interest expense increased by 0.1 million, or 2.9%, to 3.2 million from 3.1 million in the comparable 2007. For the nine months ended Sept. 30, 2008, interest expense increased by 0.2 million, or 2.6%, to 9.5 million from 9.3 million in the comparable 2007 mainly due to an increase in short-term borrowings.
Interest Income
For the three months ended Sept. 30, 2008, interest income decreased by 0.1 million, or 44.2%, to 0.2 million from 0.3 million in the comparable 2007 period. For the nine months ended Sept. 30, 2008, interest income decreased by 0.5 million, or 38.4% to 0.9 million from 1.4 million in the comparable 2007 period. This decrease was due to lower cash and cash equivalents.
Other Non-operating Income (Expense), net
For the three months ended Sept. 30, 2008, other non-operating income, net remained stable. For the nine months ended Sept. 30, 2008, other non-operating income, net increased by 1.9 million to an income, net of 1.5 million from an expense, net of 0.3 million in the comparable 2007 period mainly attributable to foreign currency gains.
Income Tax Benefit (Expense)
For the three months ended September 30, 2008, the income tax expense was 1.0 million, a decrease of 1.2 million compared to income tax expense of 2.2 million in the comparable 2007 period due to lower taxable income.
For the nine months ended September 30, 2008, the income tax benefit was 3.9 million, an increase of 2.2 million compared to an income tax benefit of 1.7 million in the comparable 2007 period. This increase resulted from lower current income tax expense and higher taxable losses before share-based compensation (income) expense as this income/expense has no tax effect.
Net Profit (Loss)
As a result of the foregoing factors, for the three months ended September 30, 2008, Head NV had a net profit of 1.2 million, compared to a net profit of 4.1 million in the comparable 2007 period. For the nine months ended Sept. 30, 2008, the company had a net loss of 8.5 million compared to a net loss of 11.9 million in the comparable 2007 period.
