Dorel Industries' Recreational/Leisure Segment fourth quarter revenue was $75.2 million, a 6.3% decrease from the previous year's $80.2 million. Earnings from operations decreased 11.8% to $5.7 million from $6.5 million. Revenue for the year was off 4.7% to $328.4 million from $344.7 million while earnings from operations decreased 29.9% to $24.4 million from $34.9 million in 2005.
The revenue decline was due to lower sales of bicycles to the mass merchant channel. Partially offsetting these declines were increased sales in the new product categories of swing sets and motor scooters. These two new product lines combined to add an additional $15 million in sales to the top line in 2006. This segment now generates a greater proportion of its revenue from non-bicycle sales as it continues to develop into a true recreational company as opposed to strictly a bicycle business.
Gross margins decreased by 170 basis points in the year. However, of this amount, 100 basis points were due to a one-time $3.5 million inventory write- down in the second quarter of 2006. The remainder of the decrease was due to a less favourable product mix.
Overall revenue for the fourth quarter was up 4.1% to $447.9 million compared to $430.3 million last year. Net income for the quarter decreased by 3.9% to $21.7 million, or 66 cents per diluted share, in 2006 versus $22.5 million, or 69 cents per diluted share in 2005. The 2006 results include pre-tax $4.0 million of restructuring costs incurred in the fourth quarter as Dorel Europe initiated a restructuring related to their production facilities. The fourth quarter of 2005 also included restructuring costs incurred as part of the Ameriwood plant closure initiated in the third quarter of 2005. Therefore, adjusted net income for the quarter, excluding those restructuring costs rose 6.5% to $24.4 million or 74 cents per diluted share compared to adjusted net income of $22.9 million or 70 cents per diluted share in the prior year.
Full year revenue was $1.77 billion versus last year's $1.76 billion. 2006 net income totaled $88.9 million or $2.70 per diluted share, compared to 2005 net earnings of $91.3 million or $2.77 per diluted share. Excluding restructuring costs in both years, adjusted net income was $92.0 million or $2.80 per diluted share compared to adjusted net income of $97.5 million or $2.96 per diluted share a year ago.
The Company is including adjusted earnings figures in this press release that are considered non-GAAP financial measures, as it believes this permits more meaningful comparisons of its core business performance between the periods presented. Therefore the terms “adjusted gross margin”, “adjusted earnings from operations”, “adjusted pre-tax income” and “adjusted net income” should be considered as non-GAAP measures. Where applicable the following segmented results exclude restructuring costs and use the term “adjusted” when describing these results. A reconciliation of adjusted earnings to GAAP earnings is attached to the end of this press release.
In the fourth quarter of 2006, Dorel Europe initiated restructuring activities which will affect the Juvenile Segment. Significant operational changes related to the production facility in Telgate, Italy will be implemented. A similar initiative is in progress regarding the facilities located in Cholet, France. The plan's objective is to reduce operational costs through strategic sourcing and manufacturing. These restructuring initiatives are expected to be completed by 2008 and result in cumulative restructuring charges totaling between $11.5 million and $14.5 million of which US$4.0 million has been recorded in 2006.
“There has been an important change in the market dynamics of the European juvenile industry,” stated Dorel President and CEO, Martin Schwartz. “There is increasing pressure to lower prices which is requiring the sector to seek alternate, less expensive sources of production. To maintain its competitive edge, Dorel Europe must align its operational costs with this new reality.”