Dorel Industries Inc. reported revenues for fourth quarter ended Dec. 30, 2008 increased 4.6% to $479.9 million from $458.9 million a year ago.


Organic revenue growth was approximately 10%. Net income decreased 14.2% to $19.2 million, or 57 cents per diluted share, from $22.3 million, or 67 cents per diluted share a year ago. Excluding restructuring costs, net income in 2007 was $24.0 million, or 72 cents per diluted share.

Revenue for the year rose 20.3% to $2.2 billion versus last year's $1.81 billion. Organic revenue growth for the year was 6% and was on track to be higher had it not been for the slowdown in the fourth quarter.


Net income grew 29% to $112.9 million or $3.38 per diluted share from $87.5 million or $2.63 per diluted share. Excluding restructuring costs in 2007, net income for that year was $100.1 million or $3.01 per diluted share.

 

Pre-tax earnings were $19.6 million compared to $28.6 million for the quarter and $132.0 million compared to $106.6 for the year.



 

                   Summary of Financial Highlights
    ————————————————————————-
                      Fourth Quarters Ended December 30
    ————————————————————————-
         All figures in thousands of US $, except per share amounts
                                                2008        2007     Change %
    ——————————————————–  —————-
    Revenues                                 479,880     458,853         4.6%
    Net income                                19,167      22,348       -14.2%
      Per share – Basic                         0.57        0.67       -14.9%
      Per share – Diluted                       0.57        0.67       -14.9%
    ————————————————————————-
    Average number of shares outstanding
     – diluted weighted average           33,404,118  33,397,773
    ————————————————————————-



    ————————————————————————-
                       Summary of Financial Highlights
    ————————————————————————-
                       For the Year Ended December 30
    ————————————————————————-
         All figures in thousands of US $, except per share amounts
                                                2008        2007      Change%
    ————————————————————————-
    Revenues                               2,181,880   1,813,672        20.3%
    Net income                               112,855      87,492        29.0%
      Per share – Basic                         3.38        2.63        28.5%
      Per share – Diluted                       3.38        2.63        28.5%
    ————————————————————————-
    Average number of shares outstanding
     – diluted weighted average           33,398,892  33,293,248

Recreational/Leisure Q4


Recreational/Leisure segment revenues increased by 79.2% in the fourth quarter, in large part due to the acquisitions of Cannondale/SUGOI and PTI Sports.


Organic sales growth also occurred at the segment's mass merchant customers in the quarter. Earnings, however, were hampered by several factors. Product mix had a negative impact on margins as did the fact that the apparel component of this segment has a unique seasonality that usually results in the fourth quarter operating at a loss and this occurred in 2008.

 

Additionally as Dorel focuses on building the right infrastructure and re-engineers certain aspects of the operations, higher costs were incurred. Finally, selling and marketing costs were higher due to the timing of certain promotional costs and warranty costs rose driven by higher sales volumes.

Recreational/Leisure FY


Earnings from operations for the year improved by 31.4%, benefiting from both the acquisitions in the year and organic improvements at Pacific Cycle. The increase in the segment's revenue was principally due to the 2008 acquisitions of Cannondale/SUGOI and PTI. Organic sales growth was also substantial at 8.0%. The increase was driven by the core bicycle business with sales gains at the majority of the mass merchants. Gross margins increased to 23.4% from 19.5% in the prior year primarily due to the contribution of higher margin products sold by Cannondale and SUGOI. The parts and accessories now sold through Pacific Cycle also attract higher margins.


                     Fourth Quarters Ended December 30
    ————————————————————————-
                                 2008                  2007
    ————————————————————————-
                            $      % of rev.      $      % of rev.    Change%
    Revenues*          153,834                85,836                  79.2%
    Gross Profit          33,884       21.7%    15,569       18.1%     117.6%
    Earnings from
     operations            3,324        2.1%     5,830        6.8%     -43.0%
    ————————————————————————-
    * 2008 revenue figures exclude Inter-segment sales of US$ 2.0 million



    ————————————————————————-
                       For The Years Ended December 30
    ————————————————————————-
                                 2008                  2007
    ————————————————————————-
                            $      % of rev.      $      % of rev.    Change%
    Revenues*       643,985                  374,783                  71.8%
    Gross Profit      152,502          23.4%    72,948       19.5%     109.1%
    Earnings from
     operations        43,312           6.7%    32,952        8.8%      31.4%
    ————————————————————————-
    * 2008 revenue figures exclude Inter-segment sales of US$ 6.7 million

Due to Dorel's multi-national operations, foreign exchange rates can have a significant impact on earnings. Over the past several years Dorel has generally benefitted from the weakness of the US dollar versus other currencies. This trend was reversed in the fourth quarter with the sudden surge in the value of the US dollar against practically all foreign currencies. The company uses hedging instruments such as foreign exchange contracts in an attempt to stabilize the impact of foreign exchange rates, especially in Europe and has some contracts in place for 2009 US dollar requirements.


As the company does not apply hedge accounting, the benefit of these contracts is being recognized in 2008 as opposed to 2009, in the amount of $10.5 million pre-tax or $7.4 million after-tax.

The company's income tax expense was $400,000 in the fourth quarter of 2008 as compared to $6.2 million in 2007. The unusually low tax rate in the quarter was due to earnings being generated in lower tax rate jurisdictions.


Additionally, the company recognized a tax benefit of $1.8 million pertaining to a prior year's estimated tax position. Excluding this out-of-period benefit, the company tax rate for the quarter would have been 11.0%.

 

In August 2008 the company stated that it expected its annual tax rate would be between 15% and 20%. Removing the out-of-period benefit, the tax rate becomes 15.9% as opposed to the 14.5% reported, in line with expectations.

Cash flow


During 2008 free cash flow, a non-GAAP financial measure, was $15.7 million in 2008 versus $116.2 million in 2007. Cash flow from operations, before changes in working capital, increased by $15.5 million. After changes in non-cash working capital items, cash flow from operations decreased by US$87.5 million. The majority of this decline was due to an increase in inventories.


Over and above the increase in inventories due to the acquisitions of Cannondale/SUGOI and PTI, inventories were up substantially due to significant reductions by retailers in the fourth quarter and higher average input costs in 2008. While the spike in inventories did significantly reduce cash flow in 2008, in 2009 cash flow will improve materially as that inventory is sold and brought back down to more normal levels. Already in 2009, the company has seen inventory reductions already across most of its divisions