Dorel Industries Inc., the parent company of some of the biggest brand names in cycling products, reported that total revenues for second quarter ended June 30 declined 7.2% to $551.1 million from $593.7 million for the same period a year ago. Second quarter revenues for the Recreational / Leisure division, which houses the Schwinn, Cannondale, Mongoose, GT and Sugoi businesses, were up 2.1% versus the 2008 second quarter.
Total company net income was $24.8 million, or 74 cents per diluted share, for the second quarter ended June 30, compared with $31.3 million, or 94 cents per diluted share, for the corresponding quarter of 2008. The 2009 results include significant mark-to-market losses on foreign exchange contracts. These losses totaled $12.6 million in the second quarter and represent an after tax amount of 27 cents per diluted share. Excluding these losses, diluted EPS for the second quarter this year would have been $1.01.
Year-to-date net income was $52.8 million or $1.58 per diluted share compared to $66.5 million or $1.99 per diluted share for the first half of 2008. Excluding year-to-date mark-to-market losses on foreign exchange contracts, earnings were $61.3 million, or $1.84 per diluted share. First half revenue was $1.076 billion or a decrease of 6.4% from the $1.150 billion last year.
To protect itself from variations in foreign exchange rates and their impact on the company's cash flow, it enters into foreign exchange forward contracts and other types of derivative financial instruments, the great majority of which are at Dorel Europe within the Juvenile segment. As the company does not follow the accounting practice of “hedge accounting”, non-cash “mark-to-market” gains and losses are recognized, representing the difference between the contracted exchange rate and the market rate on these instruments at the end of a given accounting period. Therefore, the gains and losses on these instruments are recognized relative to fluctuations in current exchange rates as opposed to the date of maturity of the contracts, when the cash flow impact is recorded. The majority of the unrealized losses booked in 2009 thus far pertain to contracts that were in place as of December 30, 2008 on which the related unrealized gains were recorded in 2008.
“For the second consecutive quarter we have surpassed our internal earnings forecasts due to the implementation of stringent cost constraint measures, a focus on working capital management and a more stable cost environment. While sales are down, a significant percentage of the decrease is attributable to foreign exchange translation. High-end bicycle sales are still not where we want them to be as consumers remain selective in their discretionary spending. Overall, our divisions are performing well notwithstanding the challenging economy. Product development remains a key driver for Dorel. Exciting new products, such as our revolutionary Safety 1st Air Protect car seat, are being introduced to the market. At this year's Tour de France two members of Team Liquigas, riding Cannondale's new 2010 SuperSix road bike, finished in the top ten and a third took the prestigious King of the Mountains Polkadot Jersey. This is the first time ever that a Cannondale sponsored team had two riders finish in the top ten. These are examples of how our R D commitment will further grow our strong competitive position,” commented Dorel CEO and President, Martin Schwartz.
Recreational / Leisure Division
Second quarter Recreational / Leisure revenue increased by 2.1% over 2008, and year-to-date this increase was 7.4%. Excluding the impact of new business acquisitions and foreign exchange variations, the segment's organic revenue decline was approximately 5% for the quarter and 4% year-to-date. Revenues within the segment's core bicycle business at the mass merchant level were down from the prior year, but these declines were offset by the contribution of the parts and accessories business that was acquired late in June of 2008. Bicycle sales by the Cycling Sports Group to the company's Independent Bike Dealers (IBD) and sporting goods customers were also down as consumers are purchasing less of the company's high-end product or are trading down to lower priced items. The company also believes that the poor weather that was experienced in most of North America throughout May and June also has a negative impact on sales.
In July and August the company announced the acquisitions of certain assets of Iron Horse Bicycles, based in the United States, and Australian-based distributor Gemini Bicycles. The Iron Horse transaction of $5.2 million comprised of inventory and various trademarks and trade names, including the well-recognized “Iron Horse” brand. At a cost of $2.2 million, the assets acquired in the Gemini purchase will be merged with Cannondale's existing Australian operations under the new Cycling Sports Group (CSG) Australia division and will be dedicated to the Independent Bike Dealer (IBD) channel.
“I am particularly proud of our successes at this year's Tour de France. Two riders on Team Liquigas riding Cannondales finished in the top ten with Vincenzo Nibali placing seventh and Roman Kreuziger placing ninth. In addition, Franco Pellizotti won the prestigious King of the Mountains Polka Dot Jersey. As we approach the 2010 model year, early reaction to our new IBD product line has been outstanding and our pre-delivery order level is up significantly from last year at this time. Based on the feedback we have received thus far, we believe we will increase our bike sales next year to the IBD retail chain, regardless of the economic situation,” commented Mr. Schwartz.
While all of the segment's divisions posted second quarter sales that were flat or down from last year, earnings more than doubled. The earnings improvement was driven by Ameriwood as that division continued to show consistent sales and earnings of domestically produced furniture, helping factory efficiencies and resultant earnings. Gross margins and earnings were aided by the more favorable rate of exchange of the Canadian dollar versus the US dollar as two of the Segment's plants are located in Canada and sell the majority of their product to US based customers. Included in the 2009 cost of sales figures are mark-to-market gains on foreign exchange contracts of $1.1 million in the second quarter and $2.2 million year-to-date.
Year-to-date revenues were also down versus last year, though less so with a decline of 2.7%. As in the quarter, gross margins and earnings improved despite the lower sales levels due to a more favourable dollar and improvements at Ameriwood.
Cash Flow
During the first half of 2009, cash flow from operating activities was $75.0 million an improvement of 17.4% over the $63.9 million that was provided by operations in the corresponding period of 2008. As the company anticipated, inventory levels remained in line with the first quarter at $423.0 million, down from $509.5 million at year end. Free cash flow, defined as cash flow from operating activities less, capital expenditures and dividends, for the first six months of the year was $49.4 million an improvement of almost 50% over the first half of 2008.
Quarterly Dividend
The Board of Directors of Dorel declared its regular quarterly dividend of $0.125 per share on the outstanding number of the company's Class A Multiple Voting Shares, Class B Subordinate Voting Shares and Deferred Share Units. The dividend is payable on September 9, 2009 to shareholders of record as at the close of business on August 26, 2009.
Outlook
“Year-to-date our various businesses have generally performed well, particularly in light of the prevailing general economic conditions. A continuous focus on product development over the past 18 months has been instrumental in securing important additional placements at retailers. Though the challenges within the Recreational / Leisure segment are expected to remain through the balance of 2009, we continue to look forward to a solid second half and we remain on track to generate significant free cash flow in the year.
“Throughout 2009 we have remained committed to the long-term vision that we hold for Dorel. We are putting into place an improved infrastructure at our Recreational / Leisure segment and have continued to focus on new product development and have broadened our product line. We have added valuable brands with Iron Horse in bicycles and HopHop in Juvenile and we have established new distribution platforms in Brazil and Australia. We are investing for the future and believe strongly that the benefits will be seen in 2010 and beyond,” concluded Mr. Schwartz.
DOREL INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF INCOME
ALL FIGURES IN THOUSANDS OF US $, EXCEPT PER SHARE AMOUNTS
Second Quarters Ended Six Months Ended
————————- ————————–
June 30, June 30, June 30, June 30,
2009 2008 2009 2008
———— ———— ———— ————-
(unaudited) (unaudited) (unaudited) (unaudited)
Sales $ 547,253 $ 590,742 $ 1,068,668 $ 1,141,775
Licensing and
commission income 3,870 2,982 7,685 7,983
———— ———— ———— ————-
TOTAL REVENUE 551,123 593,724 1,076,353 1,149,758
———— ———— ———— ————-
EXPENSES
Cost of sales 430,008 456,279 832,028 875,260
Selling, general
and administrative
expenses 77,953 81,604 155,177 162,033
Depreciation and
amortization 6,311 7,275 11,990 13,293
Research and
development costs 2,573 2,508 5,048 5,221
Restructuring costs 70 802 72 1,625
Interest on
long-term debt 4,092 5,332 8,151 10,037
Other interest 313 619 506 522
———— ———— ———— ————-
521,320 554,419 1,012,972 1,067,991
———— ———— ———— ————-
Income before income
taxes 29,803 39,305 63,381 81,767
Income taxes 5,039 7,958 10,588 15,287
———— ———— ———— ————-
NET INCOME $ 24,764 $ 31,347 $ 52,793 $ 66,480
———— ———— ———— ————-
———— ———— ———— ————-
EARNINGS PER SHARE
Basic $ 0.74 $ 0.94 $ 1.58 $ 1.99
———— ———— ———— ————-
———— ———— ———— ————-
Diluted $ 0.74 $ 0.94 $ 1.58 $ 1.99——————————
Recreational / Leisure
——————————
2009 2008
(unaudited) (unaudited)
Total revenue $ 199,093 $ 195,073
Cost of sales 154,841 149,450
Selling, general and
administrative 27,049 26,836
Depreciation and
amortization 1,194 1,535
Research and
development costs – –
Restructuring costs – –
—————————–
Earnings from
operations $ 16,009 $ 17,252
