Dorel Industries Inc. second quarter net earnings were $17.9 million or 55 cents per diluted share compared to $21.7 million or 66 cents per diluted share a year ago. Revenue for the period was $435.9 million compared to $435.4 million during the second quarter last year.
Six month earnings decreased to US$42.1 million or US$1.28 per diluted share from US$49.0 million or US$1.49 per diluted share a year ago. Year-to-date revenue was US$886.9 million, down from last year’s first half revenue of US$907.3 million. Over the past 12 months, Dorel’s return on its equity is 11.4% and its book value per share as of June 30, 2006 is US$22,53.
In both the second quarter and year-to-date, sales gains in the Juvenile segment have offset revenue declines in the Home Furnishings and Recreational / Leisure segments. For the quarter, overall revenues were flat whereas for the first half sales increases in Juvenile partially offset the other segments revenue decreases. As such, total year-to-date revenues have declined by 2.2%. The first quarter initiative by a major customer to reduce its on-hand inventory levels continued into the second quarter. As a result, revenues were affected, specifically in Recreational / Leisure and Home Furnishings.
Earnings were affected by a $3.5 million reserve taken against Sting Ray bicycle inventory in the Recreational / Leisure segment. The after tax impact of this reserve was $2.1 million or 6 cents per diluted share. Additionally, as anticipated, product liability costs have increased over 2005 levels. In the Juvenile segment, these costs in 2006 increased by $6.4 million in the quarter and $6.2 million year-to-date.
“As anticipated, the quarter was disappointing. While Juvenile posted solid revenue gains, particularly in the US, we are continuing to work through issues in ready-to-assemble furniture and to strengthen Pacific Cycle’s foundation in recreational products. Progress is being made at Ameriwood. Particle board pricing has stabilized and price increases have been negotiated with major retailers, which are expected to take effect later in the third quarter,” stated Dorel President and CEO, Martin Schwartz.
-------------------------------------------------------------------------
Summary of Financial Highlights
-------------------------------------------------------------------------
Second quarter ended June 30
-------------------------------------------------------------------------
All figures in thousands of US $, except per share amounts
2006 2005 Change%
-------------------------------------------------------------------------
Revenue 435,914 435,375 0.1%
Net income 17,936 21,745 -17.5%
Per share - Basic 0.55 0.66 -16.7%
Per share - Diluted 0.55 0.66 -16.7%
-------------------------------------------------------------------------
Average number of shares
outstanding -
diluted weighted average 32,860,490 32,940,164
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Summary of Financial Highlights
-------------------------------------------------------------------------
Six months ended June 30
-------------------------------------------------------------------------
All figures in thousands of US $, except per share amounts
2006 2005 Change%
-------------------------------------------------------------------------
Revenue 886,938 907,278 -2.2%
Net income 42,117 48,950 -14.0%
Per share - Basic 1.28 1.49 -14.1%
Per share - Diluted 1.28 1.49 -14.1%
-------------------------------------------------------------------------
Average number of shares
outstanding -
diluted weighted average 32,859,883 32,951,503
-------------------------------------------------------------------------
Recreational/Leisure Segment
Second quarter Recreational/Leisure revenue decreased 9.9% to $99.6 million from $110.6 million last year. Earnings from operations were down 57.5% to $5.7 million from $13.4 million. For the six months, revenue dropped 8.7% to US$176.8 million from $193.7 million. Year-to-date earnings from operations decreased 42.5% to US$12.7 million from $22.1 million last year
Gross margins decreased by 590 basis points in the quarter and by 380 basis points year-to-date. This decline includes the $3.5 million pre-tax reserve taken against Sting Ray bicycle inventory in the second quarter. This reserve had the impact of lowering gross margins by 350 basis points in the quarter and 200 basis points year-to-date. Without this reserve, gross margins for the quarter and year-to-date would have been 19.1% and 20.0% respectively. The decline over 2005 margins is due to a less favourable product mix.
Lower bicycle inventories being carried at a particular mass merchant customer as well as lower sales to other mass merchants reduced revenues overall. These declines were partially offset by increased sales to the Independent Bike Dealer (IBD) chain as well as new product category sales. Sales of Schwinn gas-powered motor scooters were on plan. For the first time in June, Pacific Cycle shipped over $1 million of scooters, the highest amount for a single month since the line was introduced. This reflects EPA certification of the units in all 50 US states and continued growth of the dealer network.
The Company recorded a tax recovery of $0.4 million in the second quarter of 2006 on pre-tax earnings of $17.5 million. This compares to a tax expense of $3.5 million in the second quarter of 2005 on pre-tax earnings of $25.3 million. The recovery in 2006 was a result of lower earnings in higher tax rate jurisdictions and a change in the valuation allowance of a benefit for tax losses. The Company’s year-to-date tax rate is currently 10.5% compared to 17.2% in 2005. Despite the unusually low tax rate in the quarter, the Company still expects its tax rate for the year to be in the range of 15% to 20%.
Cash flow from operations in 2006 for the six months ended June 30 was $44.1 million compared to $37.6 in 2005. This improvement was despite a decline in after-tax earnings of $6.8 million. Year-to-date free cash flow was $30.2 million as compared to $18.2 million in 2005, an improvement of $12.0 million. Inventory levels have risen by $32.7 million from year-end levels, using free cash in the first half of the year. However, this increase was expected as it is to service second half shipping needs. Year-end inventory levels for 2006 are expected to be in the range of December 2005 levels.
CONSOLIDATED STATEMENT OF INCOME
ALL FIGURES IN THOUSANDS OF US $, EXCEPT PER SHARE AMOUNTS
Second Quarter Ended Six Months Ended
---------------------- ----------------------
June 30, June 30, June 30, June 30,
2006 2005 2006 2005
(unaudited) (unaudited) (unaudited) (unaudited)
----------- ----------- ----------- -----------
Sales $ 429,403 $ 430,181 $ 874,294 $ 895,805
Licensing and
commission income 6,511 5,194 12,644 11,473
---------- ---------- ---------- ----------
TOTAL REVENUE 435,914 435,375 886,938 907,278
---------- ---------- ---------- ----------
EXPENSES
Cost of sales 341,741 338,167 691,657 700,901
Selling, general
and administrative
expenses 57,684 52,043 110,134 107,792
Depreciation and
amortization 9,144 9,376 18,070 18,647
Research and
development costs 2,252 2,462 4,533 4,652
Interest on
long-term debt 7,486 7,629 15,260 15,549
Other interest 60 437 203 594
---------- ---------- ---------- ----------
418,367 410,114 839,857 848,135
---------- ---------- ---------- ----------
Income before
income taxes 17,547 25,261 47,081 59,143
Income taxes (389) 3,516 4,964 10,193
---------- ---------- ---------- ----------
NET INCOME $ 17,936 $ 21,745 $ 42,117 $ 48,950
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
EARNINGS PER SHARE
Basic $ 0.55 $ 0.66 $ 1.28 $ 1.49
---------- ---------- --------- ---------
---------- ---------- --------- ---------
Diluted $ 0.55 $ 0.66 $ 1.28 $ 1.49
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
SHARES OUTSTANDING
Basic -
weighted
average 32,860,228 32,825,827 32,859,722 32,814,402
Diluted -
weighted
average 32,860,490 32,940,164 32,859,883 32,951,503
