Dorel Industries Inc. reported total revenue was US$646.7 million compared to US$645.9 million a year ago. Adjusted net income for the quarter increased 15.4 company to US$22.7 million or US 69 cents per diluted share from US$19.7 million, or US 60 cents per diluted share in 2016. Reported net income decreased to US$8.8 million, or US27 cents per diluted share, compared to US$16.7 million or US51 cents per diluted share last year.

“Dorel’s adjusted operating profit improved by over 15 percent versus last year’s first quarter when excluding restructuring and other costs within our income statement. Of our three business segments, Dorel Home was again a standout with revenues increasing 9 percent and operating profit approaching 10 percent of revenues. Dorel Sports also improved earnings from prior year, leveraging better margins and its more efficient cost structure. Dorel Juvenile is benefitting from its strategic direction on improving gross margins, but faced challenges at its China facility with a large ramp up on new products and labour shortages around the Chinese New Year which delayed some scheduled launches. In our smaller Juvenile markets, Brazil and Australia performed exceptionally well and are now recognized as industry leaders. At the corporate level, with the support of our lenders, we successfully re-negotiated our credit facilities. This resulted in a first quarter pre-tax expense of US$10.2 million, or US 30 cents per diluted share, related to the extinguishment of existing debt. This change will allow for better management of our long-term capital needs and will decrease our financing costs going-forward. Interest costs are expected to be reduced by approximately US$4 million through the balance of 2017 and will continue annually going forward,” stated Martin Schwartz, Dorel President & CEO.

The company is presenting adjusted financial information, excluding restructuring and other costs, re-measurement of forward purchase agreement liabilities and loss on early extinguishment of long-term debt as it believes this provides a more meaningful comparison of its core business performance between the periods presented. These previously announced items are detailed in the attached tables of this press release. Contained within this press release are reconciliations of non-GAAP financial measures to the most directly comparable financial measures calculated in accordance with GAAP.

First quarter revenue rose US$16.6 million, or 8.8 percent to US$204 million, representing the best quarter in the segment’s history. Growth was driven by increased sales to on-line retailers in all divisions, representing 46 percent of total segment sales compared to 42 percent in the first quarter of 2016. Brick and mortar sales remained flat compared with last year’s first quarter.

Gross profit, at 16.9 percent, remained comparable to last year’s first quarter as improved margins from increased on-line sales were offset by higher input and warehousing costs.

Operating profit for the quarter was also a record, at US$19.8 million, up 12 percent from US$17.6 million a year ago, driven by higher sales volumes, slightly offset by a modest increase in selling expenses in line with the sales growth.

Dorel Juvenile
Dorel Juvenile’s first quarter revenue decreased by US$13.2 million or 5.5 percent to US$228.7 million compared with US$241.9 million in 2016, which was mostly organic. The decline in revenue was mainly attributable to the European market and reduced sales by Dorel Juvenile China to non-domestic third-party customers. Certain scheduled product launches were delayed due to production issues at the China factory caused by labour shortages associated with the Chinese New Year and the large number of concurrent new products, placing additional strain on the factory’s ability to deliver on schedule. This also negatively impacted sales in several markets.

The benefits of a focused effort to improve sales mix, as well as cost savings and other operational efficiencies from our restructuring activities resulted in an adjusted gross profit of 31.1 percent. This represented a year-over-year improvement of 180 basis points on an adjusted basis and was in almost all markets. Adjusted operating profit decreased by US$2.1 million, or 11.9 percent to US$15.3 million from US$17.4 million in 2016 due to higher operating expenses.

Dorel Sports
First quarter revenue decreased US$2.5 million or 1.1 percent to US$214 million and approximately 1.3 percent after removing the impact of varying exchange rates year-over-year. Organic revenue declined approximately 9.9 percent when removing foreign exchange fluctuations and the change in Cycling Sports Group (CSG) International’s business model for which the revenue recognition transitioned from a licensing model to a distribution platform. Part of the revenue shortfall in the mass channel was due to unfavurable North American weather and a shift in Easter holiday sales moving from the end of the first quarter to April 2017. Lower first quarter CSG sales volumes were also caused by inclement weather, lower discounted sales than prior year and continued reductions in IBD retailers’ inventories which reached historically low levels.

Dorel Sports initiated restructuring actions last year which are expected to result in annualized savings of US$5 million. First quarter operating profit rose by US$4.9 million, or 92.5 percent to US$10.1 million as a result of the restructuring plan, improved margins and cost control initiatives in almost all regions. A combination of less discounting and selective price increases in CSG as well as Pacific Cycle’s improved product mix also contributed to the improvement. Caloi achieved higher margins with its improved pricing and product mix as well as from the strengthening of the Brazilian Real.

Other
Effective March 24, 2017, the company amended its Credit Agreement with respect to its revolving bank loans and secured a term loan of US$200 million with the same maturity date as its revolving bank loans. As such, the net proceeds from the term loan were used by the company to repay its Series “B” and “C” Senior Guaranteed Notes, its Brazilian non-convertible debentures and to reduce bank indebtedness. Included in finance expenses for the three months ended March 31, 2017, is a cost of US$10.2 million or US 30 cents per diluted share for early extinguishment of long-term debt. With the lower average interest rates of the term loan facilities going forward, the company expects to reduce its interest costs by approximately US$4 million in the balance of 2017.

During the first quarter of 2017, the company’s effective tax rate was 35.7 percent versus 17.2 percent in the prior year. Excluding income taxes on restructuring and other costs, on re-measurement of forward purchase agreement liabilities and on loss on early extinguishment of long-term debt, the company’s adjusted tax rate was 22.6 percent and 17 percent respectively. The main cause of the variation year-over-year of the adjusted tax rate is due to changes in the jurisdictions in which the company generated its income. The company has stated that for the full year it expects its annual adjusted tax rate to be between 15 percent and 20 percent. However, variations in earnings across quarters mean that this rate may vary significantly between quarters.

During the first three months of 2017, cash flow used in operating activities was US$17.5 million compared to US$5.9 million used in last year’s first quarter mainly explained by lower net income, increased inventories and product liability costs payments during the first quarter of 2017 related to settlements in 2016, partly offset by increases in trade and other receivables as well as trade and other payables.

Quarterly Dividend
Dorel’s Board of Directors declared its regular quarterly dividend of US 30 cents per share on the outstanding number of the company’s Class A Multiple Voting Shares, Class B Subordinate Voting Shares, Deferred Share Units and cash-settled Performance Share Units. The dividend is payable on June 2, 2017 to shareholders of record as at the close of business on May 19, 2017.

Outlook
“In the outlook provided with our year end results, we stated that for 2017 all three of our business segments were positioned to improve earnings. In the first quarter, both Dorel Home and Dorel Sports delivered on that expectation. Dorel Juvenile had a slower than anticipated start to the year as our factory in China faced challenges on new product launches, but we are proactively managing this and will see improvements through the year,” stated Martin Schwartz, Dorel President & CEO.

“We still expect all three segments to exceed prior year earnings. Dorel Home again demonstrated its ability to deliver an expanded product range to consumers with its industry leading e-commerce platform. This will continue to drive sales and earnings improvements for the balance of the year. We expect a strong second half at Dorel Juvenile due to multiple new product introductions and new local management in China delivering on needed improvements in operations. In addition, 2016’s abnormally high product liability costs will return to normal levels, contributing to the segment’s substantial earnings improvement. The bicycle industry is currently facing short-term challenges, therefore sales growth opportunities in 2017 could be limited. Dorel Sports has re-structured itself to increase earnings this year through improved margins and lower operating expenses, and we expect this to more than offset sales challenges.

In addition, we made the strategic decision to amend the company’s Credit Agreement and the related costs impacted the quarter, but this will lower our finance expenses through the rest of the year,” concluded Schwartz.

Photo courtesy Dorel