Dorel Industries Inc. recorded a 5.3% increase in second quarter net revenues to $459.0 million from $435.9 million for the same period last year. Net income for the period was $10.8 million or 32 cents per diluted share, down 39.7% from $17.9 million or 55 cents per diluted share in 2006. These figures include the costs associated with the previously announced restructuring activities at both Dorel Europe and Ameriwood, complete details of which are included within this press release. Excluding these restructuring costs, adjusted net income for the second quarter was $19.8 million or 59 cents per diluted share versus $18.1 million or 55 cents per diluted share in 2006.
Revenue for the six months totaled $914.7 million, compared to $886.9 million a year ago. Year-to-date net income was $38.8 million or $1.17 per diluted share, compared to last year's $42.1 million or $1.28 per diluted share. 2007 adjusted six month net income, excluding restructuring costs, was $49.1 million or $1.48 per diluted share. 2006 adjusted net income for the six months ending June 30 was $42.6 million or $1.30 per diluted share.
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Summary of Financial Highlights
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Second quarter ended June 30
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All figures in thousands of US $, except per share amounts2007 2006 Change%
————————————————————————-
Revenue 459,035 435,914 5.3%
Adjusted net income(x) 19,760 18,076 9.3%
Per share – Basic 0.59 0.55 7.3%
Per share – Diluted 0.59 0.55 7.3%
Net income 10,845 17,936 -39.5%
Per share – Basic 0.32 0.55 -41.8%
Per share – Diluted 0.32 0.55 -41.8%
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Average number of shares
outstanding –
diluted weighted average 33,399,633 32,860,490
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(x)adjusted to exclude after-tax impact of restructuring costs————————————————————————-
Summary of Financial Highlights
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Six months ended June 30
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All figures in thousands of US $, except per share amounts2007 2006 Change%
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Revenue 914,704 886,938 3.1%
Adjusted net income(x) 49,076 42,559 15.3%
Per share – Basic 1.48 1.30 13.8%
Per share – Diluted 1.48 1.30 13.8%
Net income 38,784 42,117 -7.9%
Per share – Basic 1.17 1.28 -8.6%
Per share – Diluted 1.17 1.28 -8.6%
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Average number of shares
outstanding –
diluted weighted average 33,197,047 32,859,883
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(x)adjusted to exclude after-tax impact of restructuring costs
“Our earnings improvement over last year's levels is attributed to our gains at both Dorel Europe and at Pacific Cycle. While we are pleased with those results, we are disappointed in the earnings at our Home Furnishings segment. Each of the divisions within this segment has challenges that they are dealing with. As such, our focus will continue to be on this segment. Finally, while the juvenile business in the United States is experiencing lower 2007 sales levels, key new products have been introduced and others will be launched later in the year that will help improve sales in 2008,” commented Dorel President and CEO, Martin Schwartz.
Restructuring Costs
The European restructuring that was initiated in the fourth quarter of 2006 continued into 2007 and as such the second quarter includes pre-tax restructuring charges of $3.8 million in the Juvenile segment. Year-to-date, these costs total $5.9 million. Since the inception of the plan, a total of $9.9 million has been expensed out of the total expected cost of approximately $15 million. As announced in May of 2007, Ameriwood planned to suspend operations at its Dowagiac, Michigan plant. This occurred in July and resulted in the company recording a second quarter pre-tax restructuring charge of $9.7 million, of which $3.7 million is grouped in cost of sales. Of the total amount, $9.5 million represents the write-down of building, equipment and inventory, a non-cash expense. The remaining $0.2 million is mainly for employee severance and will be paid out over the course of the year. The total cost of the restructuring is expected to be $11.5 million, the majority of which will be recorded in the current year.
For the quarter, the combined after-tax impact of these two restructuring initiatives is $8.9 million or 27 cents per diluted share. Year-to-date the amount is $10.3 million or 31 cents per diluted share. Note that 2006 did include some residual restructuring costs from the 2005 closure of an RTA furniture manufacturing plant which for the six month period totaled after-tax $0.4 million, or 2 cents per diluted share.
Recreational/Leisure Segment
Pacific Cycle's second quarter revenue was up 16.7% to $119.8 million from $102.6 million a year ago. Earnings from operations jumped 132.7% to $13.9 million from $6.0 million. For the six months, revenue totaled $207.7 million, up 12.7% from $184.3 million, while earnings from operations rose 57.6% to $21.1 million, compared to $13.4 million last year. The segment has broadened its product line in 2007, but the majority of the revenue growth in 2007 is due to improved bicycle sales to both new and existing customers. A portion of the significant earnings improvement in 2007 is due to the fact that the second quarter of 2006 included a $3.5 million reserve that was taken at that time on specific bicycle inventory.
Bicycle sales were up substantially with strong sell-through at a number of large retailers. Sales to the independent bicycle dealer network also increased over the second quarter last year. Response to the new Schwinn electric bike, first shipped earlier this year, has been better than expected. Sales of motor scooters are progressing with the dealer network now numbering around 350 on the way to a forecast of 500 for the year. The ride-on category, formerly with Juvenile, is doing well with a specific team dedicated to this product line.
Taxes
The company's year-to-date tax rate is 16.4%, within the expected range of 14% to 18%. The company's tax rate can vary widely from quarter to quarter given its multi-jurisdictional nature and the impact of changes within certain jurisdictions in a particular period. The current quarter tax rate of 35.8%, which is higher than is typical for Dorel, was due to the re-assessment of prior year's taxes at certain divisions, as well as adjustments made by other divisions to bring their tax rates in line with revised full year expectations. For the balance of the year, the tax rate is expected to return to less than 20%.
Cash flow
Cash flow improved over 2006 with year-to-date cash flow from operations increasing to $50.4 million, up from last year's $44.1 million. This increase was realized despite lower pre-tax earnings as the majority of the restructuring costs incurred in 2007 were non-cash items. Year-to-date capital expenditures, comprising fixed assets, deferred development costs and intangible assets, total $15.6 million in 2007, consistent with 2006 spending of $13.9 million.
Outlook
Expectations remain that organic revenue growth will be modest in 2007, but that earnings improvements, excluding restructuring costs, will outpace revenue increases. In the Juvenile segment, given the progress at Dorel Europe and the strength of the Euro, revenue growth is expected to be in the high single digits. The Juvenile segment adjusted earnings from operations percentage is expected to remain at year-to-date levels. Due to the furniture inventory reduction initiatives at some major customers, revenue in the Home Furnishings segment is now forecast to be less than 2006 levels. The revenue decline that is now anticipated means adjusted earnings are not expected to exceed prior year levels for this segment. The pace of both revenue and earnings increases in the Recreational/Leisure segment, will slow slightly over the second half. However based on the strong first half, this segment's revenue and earnings will improve significantly over 2006 levels.
CONSOLIDATED STATEMENT OF INCOME
ALL FIGURES IN THOUSANDS OF US $, EXCEPT PER SHARE AMOUNTSSecond Quarter ended Six Months ended
————————– ————————–
June 30, June 30, June 30, June 30,
2007 2006 2007 2006
———— ———— ———— ————
(unaudited) (unaudited) (unaudited) (unaudited)Sales $ 452,975 $ 429,403 $ 903,134 $ 874,294
Licensing and
commission income 6,060 6,511 11,570 12,644
———— ———— ———— ————TOTAL REVENUE 459,035 435,914 914,704 886,938
———— ———— ———— ————EXPENSES
Cost of sales 349,095 341,741 693,597 691,657
Selling, general
and administra-
tive expenses 65,040 57,684 125,859 110,134
Depreciation and
amortization 10,124 9,144 19,668 18,070
Research and
development
costs 1,880 2,252 4,488 4,533
Restructuring
costs 9,755 – 11,881 –
Interest on long-
term debt 6,011 7,486 12,559 15,260
Other interest 239 60 239 203
———— ———— ———— ————
442,144 418,367 868,291 839,857
———— ———— ———— ————Income before
income taxes 16,891 17,547 46,413 47,081Income taxes 6,046 (389) 7,629 4,964
———— ———— ———— ————NET INCOME $ 10,845 $ 17,936 $ 38,784 $ 42,117
———— ———— ———— ————
———— ———— ———— ————EARNINGS PER
SHARE
Basic $ 0.32 $ 0.55 $ 1.17 $ 1.28
———— ———— ———— ————
———— ———— ———— ————
Diluted $ 0.32 $ 0.55 $ 1.17 $ 1.28
———— ———— ———— ————
———— ———— ———— ————SHARES OUTSTANDING
Basic – weighted
average 33,397,192 32,860,228 33,174,177 32,859,722
Diluted –
weighted
average 33,399,633 32,860,490 33,197,047 32,859,883
