UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN ISSUER PURSUANT TO RULES 13a-16 OR 15d-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934
For the period ended June 30, 2004
Commission File Number: 0-29712
DOREL INDUSTRIES INC.
________________________________________________________________________________________________
1255 Greene Ave, Suite 300, Westmount, Quebec, Canada H3Z 2A4
_________________________________________________________________________________________________
Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.
Form 20-F
[ ]
Form 40-F
[ X ]
Indicate by check mark whether the registrant by furnishing the information in this Form is also thereby furnishing
the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes
[ ]
No
[ X ]
Dorel Industries Inc.
Management’s Discussion and Analysis
For the six month period ended June 30, 2004
All figures in US dollars
Management’s Discussion and Analysis of Financial Conditions and Results of Operations («MD & A») should be read in conjunction with the unaudited interim consolidated financial statements for the six months ended June 30, 2004 and the audited consolidated financial statements and MD & A for the year ended December 30, 2003.
Note that there have been no significant changes with regards to “Corporate Objectives, Core Businesses and Strategies”, “Risks” and “Critical Accounting Policies and Estimates” to those outlined in the annual MD & A contained in the Company’s 2003 Annual Report. As such, they are not repeated herein. The information in this MD & A is current as of August 3, 2004.
SIGNIFICANT EVENT IN THE FIRST QUARTER OF 2004
In the first quarter of 2004, the Company acquired Wisconsin-based Pacific Cycle, LLC, a designer and supplier of bicycles and other recreational products. The total value of the all-cash transaction was US$320.5 million, including an estimate of acquisition costs, and was financed through amended debt facilities. Pacific Cycle’s annual sales are in excess of US$325 million. Founded in 1977, Pacific Cycle is a leader in the design, marketing and distribution of high quality, branded bicycles and other recreational products. Best known for itsSchwinn, MongooseandGTbicycle brands, the Company also markets products under theRoadmaster, InStep,Pacific,andMurraylabels. Pacific Cycle combines these well-known brands with long-established, efficient Asian sourcing. It distributes its brands through its strong relationships with high volume retail ers, particularly in the mass channel as well as sporting goods chains and specialty independent dealers. This broad distribution has enabled Pacific Cycle to garner an industry-leading 27% share of total U.S. bicycle sales including 44% of the bicycle sales in the mass merchant sector. Pacific’s brand portfolio enables it to serve virtually all consumer demographics, price categories and bicycling styles. Pacific will be run as a stand-alone Dorel division and will be reported under a third segment to be known as Recreational/Leisure.
RESULTS OF OPERATIONS
Overview
Revenues for the second quarter ended June 30, 2004 were up 52.4% to $403.5 million, compared to the $264.7 million posted a year ago. Year-to-date revenues increased 46.8% to $795.4 million, compared to the $541.6 million posted a year ago. Year-to-date organic revenue growth was approximately 9%. Newly acquired Pacific Cycle contributed $156.1 million of the revenue increase recorded in 2004 with the balance of the increase coming from the Ampafrance and Carina acquisitions in 2003.
While revenues remain on plan, profitability has been affected. Continuing high raw material costs for steel, plastic and particle board have lowered juvenile and home furnishings segment margins. In the first quarter, earnings were also negatively impacted as the Company expensed an additional US$6.5 million due to a previously announced dispute with one of its insurance carriers. Offsetting these higher costs was the contribution of Pacific Cycle which for the six month period ending June has added $19.1 million to earnings from operations. For the quarter, pre-tax earnings for the quarter decreased by 14.3% to $19.5 million from $22.8 million. Net income after tax increased to $18.1 million compared to $16.3 million in 2003. Diluted earnings per share were $0.55 per share in 2004 versus $0.50 in 2003. For the first half of the year, pre-tax earnings have decreased by 14.6% to $42.9 mi llion from $50.3 million. Net income increased to $37.7 million compared to $35.5 million in 2003. Diluted earnings per share were $1.15 per share in 2004 versus $1.10 in the prior year.
An analysis of the variation of after-tax earnings from 2003 to 2004 is as follows (figures in thousands):
Earnings from operations be segment | Second Quarter | Year-to-Date |
Recreational/Leisure (Pacific Cycle) contribution | $ 12,603 | $ 19,097 |
Home Furnishings decrease | (7,470) | (14,046) |
Juvenile increase (decrease) | (5,648) | 258 |
Product liability insurance dispute | 0 | (6,500) |
Total earnings from operations decrease | (515) | (1,191) |
Increase in interest costs | (3,248) | (6,862) |
Decrease in income taxes | 5,100 | 9,551 |
Other | 505 | 696 |
Total increase in net income | $ 1,842 | $ 2,194 |
The causes of these variations over last year are discussed below.
Segmented Results
The segmented results of the Company are presented in Note 9 to these interim financial statements. Presented below are the segmented results in percentage terms for the second quarter and year-to-date:
Juvenile
Second Quarter Ended June 30 | Six Months Ended June 30 | |||
2004 | 2003 | 2004 | 2003 | |
Revenues | 100.0% | 100.0% | 100.0% | 100.0% |
Cost of Sales | 70.7% | 68.1% | 69.9% | 69.2% |
Gross Profit | 29.3% | 31.9% | 30.1% | 30.8% |
Operating Expenses | 18.2% | 17.2% | 18.2% | 15.9% |
Research and Development | 0.9% | 1.0% | 0.7% | 0.8% |
Amortization | 3.6% | 3.3% | 3.4% | 3.2% |
Earnings from operations | 6.6% | 10.4% | 7.8% | 10.9% |
Juvenile sales increased by 6.9% to $179.6 million during the second quarter compared to $168.0 million during the corresponding period a year ago. Earnings from operations for the second quarter decreased to $11.9 million from $17.5 million last year, a decrease of 32.3%. For the first half of 2004, sales increased by 15.7% to $386.2 million from $333.9 million last year. Earnings from operations decreased by 17.5% to $30.2 million, from $36.5 million last year.
The Juvenile segment year-to-date sales increase was due to organic sales growth, a stronger Euro and the contribution of an extra month’s sales from Ampafrance in Europe (acquired in February 2003). These three factors combined to increase sales by 15.7% over last year. Overall, organic year-to-date organic sales growth was 6%. All of the sales growth in North America was organic and sales were up by 12% over last year. These sales increases have occurred in the majority of its product categories. In Europe, sales have increased 21% over last year.
In 2004 gross margins for the quarter and year to date have decreased by 260 and 70 basis points respectively. These decreases occurred in North America where higher material costs, principally in plastic resin and steel, negatively affected earnings. Resin costs within the industry have risen by up to 50% over the past year. Resin is the principal component of car seats and an important part of several other product categories. In the first quarter, the Company’s North American operations were able to limit the impact of these cost increases. However in the second quarter, margins were negatively affected. In addition, margins in the second quarter of 2003 were improved by 50 basis points due to a one-time foreign exchange gain at DJG Canada. Margins in Europe remained consistent with both the first quarter and the prior year where raw material cost increases in Europe were o ffset by improvements at the Company’s operations in Holland and the United Kingdom.
Operating expenses as a percentage of sales for the quarter were 18.2% in 2004 versus 17.2% in the prior year. Year-to-date, operating costs are higher than last year at 18.2% of sales versus 15.9%. Included in the 2004 figures is the $6.5 million charge in connection with the insurance dispute described previously. If this amount is excluded, the 2004 year-to-date expense is 16.5% of sales. The remaining increase over 2003 is attributable to higher costs associated with product liability.
In light of these higher costs, earnings guidance for the juvenile segment is being reduced from between 10% and 11% of sales to between 7.5% and 8.5%. Sales are expected to remain at between $750 and $800 million.
Home Furnishings
Second Quarter Ended June 30 | Six Months Ended June 30 | |||
2004 | 2003 | 2004 | 2003 | |
Revenues | 100.0% | 100.0% | 100.0% | 100.0% |
Cost of Sales | 86.6% | 76.6% | 85.5% | 77.0% |
Gross Profit | 13.4% | 23.4% | 14.5% | 23.0% |
Operating Expenses | 6.5% | 7.3% | 6.7% | 6.9% |
Research and Development | 0.4% | 0.3% | 0.3% | 0.4% |
Amortization | 1.3% | 1.5% | 1.4% | 1.5% |
Earnings from operations | 5.2% | 14.3% | 6.1% | 14.2% |
Home Furnishing revenues increased by 25.8% to $121.7 million during the second quarter compared to $96.7 million during the corresponding period a year ago. For the first half of 2004, revenues increased by 21.8% to $253.1 million from $207.8 million last year. Earnings from operations for the second quarter decreased to $6.4 million from $13.8 million last year, a decrease of 54.0%. For the first half of the year, earnings from operations decreased by 47.7% to $15.4 million from $29.4 million last year.
Approximately one half of the year-to-date revenue growth was organic, with the remaining increase coming from the Carina acquisition in September 2003. Sales growth occurred in all three of the divisions, Ameriwood, Cosco Home & Office and Dorel Asia. The earnings from operations decrease can be attributed to several main factors. Firstly board prices have risen throughout the year. In 2003, costs were below the $200 per thousand square foot level as opposed to the current pricing of up to $295. Over and above the cost of board, availability earlier in the first half of the year was limited. This resulted in inventory levels being far too low and orders being produced in much shorter production runs causing plant efficiencies to fall below plan levels. In addition to board prices, the Home Furnishings segment is also experiencing pricing pressure on steel, used in futons and for har dware, and corrugated cardboard used for packaging.
Some price increases to the Company’s customers have been instituted. However, there is a significant lag between the initial impact of higher costs and the successful implementation of these price increases. In the case of RTA furniture, these increases have now gone into effect at certain major customers. These increases did not offset costs in the second quarter but are expected to improve earnings in the second half of the year. Year-to-date operating costs remain in line at 6.7% of sales as opposed to 6.9% of sales in 2003.
Higher raw material costs have resulted in reduced earnings expectations. Earnings from operations as a percentage of sales is now expected to be between 8.5% and 9.5% as opposed to 11% to 12%.
Recreational / Leisure
This is the first full quarter to include Pacific Cycle results, whereas the year-to-date figures include the results for five months. Upon acquisition, guidance was issued for sales of between $335 million and $375 million for the 11 months of 2004. Earnings from operations as a percentage of sales were expected to be between 11.5% and 12.5%. The results for the first half were in line with these expectations.
Second Quarter Ended June 30, 2004 | Six Months Ended June 30, 2004 |
Revenues | 100.0% | 100.0% |
Cost of Sales | 78.4% | 78.3% |
Gross Profit | 21.6% | 21.7% |
Operating Expenses | 9.2% | 9.4% |
Amortization | 0.0% | 0.1% |
Earnings from Operations | 12.4% | 12.2% |
The success of the Sting Ray bicycle introduced in 2004 is well above expectations. Unfortunately a lack of supply hindered sales in the first half of the year. This lack of supply was acute and resulted in stores having no Sting Rays in stock. In addition, production issues and the resultant lack of parts availability at the world’s principal supplier of bicycle gears, Shimano in the Orient, impacted overall bike sales. This has since been rectified and a strong second half is expected. As a result, the initial guidance of earnings from operations is being increased slightly to between 12% and 13% of sales from the prior 11.5% to 12.5%.
Other Expenses
Interest expense in 2004 was higher than 2003, due to the higher borrowings associated with the acquisition of Pacific Cycle. The Company continues to benefit from the low interest environment and interest incurred on non-fixed debt averaged less than 4% in the first half of the year. Overall the Company’s average interest rate was below 5%. Corporate expenses were consistent with the prior year. The Company’s year-to-date income tax rate has decreased from 29.4% in 2003 to 12.2% in 2004. It should be noted the Company’s tax rate is based on the expected results for the year and not the results in a given quarter. In accordance with Generally Accepted Accounting Principles, interim period income tax expense is calculated by applying to an interim period's pre-tax income the tax rate that is applicable to expected total annual earnings, that is, the estimated average annual effective income tax rate. The estimated average annual income tax rate is re-estimated at the end of each interim period on a year-to-date basis.
The tax rate in 2004 was originally expected to be in the range of 20% in light of the Company’s overall corporate structure, encompassing the newly acquired Pacific Cycle. The tax jurisdiction of earnings is a significant factor in the determination of the Company’s overall tax rate. In the first quarter, pre-tax earnings in higher tax rate jurisdictions were lower than expected, caused principally by the US$6.5 million charge booked in that quarter. This had the impact of lowering the rate to 16.3%. Further reductions in earnings now expected in these higher tax rate jurisdictions, have reduced the expected full year tax rate to 12.2%. To adjust the year-to-date tax rate to that level, the taxes booked in the second quarter equates to a rate of 7.2%. Should all assumptions and expected results remain the same, the tax rate for the second half of the year should remain i n the 12% range. However a change in the Company’s earnings, or the jurisdiction in which those earnings are earned, can have a significant impact on the rate.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow
During the first half of 2004, cash flow from operating activities was $93.9 million compared to $34.1 million in 2003, an improvement of $59.8 million. The principal reason was the timing of accounts payable and income tax disbursements in 2004 versus 2003, which accounted for $41.0 million of the improvement. The balance of the improvement came principally from improved collections of accounts receivable. Financing activities provided $263.2 million in the half, detailed as follows:
(‘000) |
Borrowed for acquisition of Pacific Cycle | $ 288,789 |
Balance of sale incurred on acquisition of Pacific Cycle | 20,980 |
Debt repaid in the period | (51,043) |
Proceeds from issuance of capital stock | 3,179 |
Increase in bank indebtedness | 1,260 |
$ 263,165 |
Pacific Cycle was acquired in the half of 2004 at a total cost of $320.5 million, including an estimate of related acquisition costs. Excluding the Pacific acquisition, the Company’s net disbursements on various investing activities in 2004 were $26.2 million, versus $14.3 million in the prior year, an increase of $11.9 million. Most of the increase was due to the ongoing factory expansion underway at DJG USA in Columbus, Indiana, as well as increased capital spending on new product development, specifically in the Juvenile segment.
Balance Sheet
The Company’s balance sheet changed significantly from year-end due to the Pacific Cycle acquisition. Details of the assets and liabilities acquired can be found in Note 2 to the June 30, 2004 interim financial statements. As can be seen, major assets acquired were accounts receivable and inventories, offset by current accounts payable. If these acquired assets and liabilities are removed from the June 30, 2004 balance sheet, the balance sheet is consistent with the year-end and all significant working capital ratios remained constant.
Goodwill acquired with Pacific Cycle was recorded at $285.6 million. However, the allocation of the purchase price in a major business acquisition necessarily involves a number of estimates as well as gathering information over a number of months following the date of acquisition. The Company has performed only a preliminary evaluation of Pacific Cycle’s assets and liabilities. The Company will be continuing to evaluate the value of these assets and liabilities and accordingly there will be changes to the assigned values. In particular, several of Pacific Cycle’s trademarks are being revalued at their fair market value. As a result, the goodwill amount above will be reduced for these trademarks’ value before the end of the fiscal year.
Debt levels at June 30, 2004, excluding cash on hand, were $530.0 million compared to $290.9 million at December 30, 2003, an increase of $239.1 million. Details of the change are provided above in the cash flow analysis.
OTHER INFORMATION
As required under new National Instrument 51-102, the Company is required in its Management Discussion and Analysis, to disclose the designation and number of principal amount of each class and series of its shares outstanding. Therefore, these items are listed below as of June 30, 2004. There were no significant changes to these values in the period between the quarter end and the date of the preparation of this MD & A.
The capital stock of the Company is as follows:
•
An unlimited number of Class "A" Multiple Voting Shares without nominal or par value, convertible at any time at the option of the holder into Class "B" Subordinate Voting Shares on a one-for-one basis, and;
•
An unlimited number of Class "B" Subordinate Voting Shares without nominal or par value, convertible into Class "A" Multiple Voting Shares, under certain circumstances, if an offer is made to purchase the Class "A" shares.
Details of the issued and outstanding shares are as follows:
Class A | Class B | Total | ||
Number | $(‘000) | Number | $(‘000) | $(‘000) |
4,808,294 | $ 2,109 | 27,957,148 | $ 157,369 | $ 159,478 |
OUTLOOK
In light of the reduced earnings now expected in the Juvenile and Home Furnishings segments, the Company had announced revised guidance on July 7, 2004. Currently issued guidance for fiscal 2004 is for earnings of between $3.00 to $3.15 per share, an approximate 30% to 35% increase over the $2.32 per share earned in 2003.
FORWARD LOOKING STATEMENTS
Certain sections of this Management’s Discussion and Analysis may contain forward looking statements. Such statements, based on the current expectations of management, inherently involve numerous risks and uncertainties, known and unknown. Actual future results may differ. The risks, uncertainties and other factors that could influence actual results are described in the "Risks and Uncertainties" section of the Management’s Discussion and Analysis contained in the Company’s annual report for 2003 and in the Corporation’s Annual Information Form.
DOREL INDUSTRIES INC.
CONSOLIDATED BALANCE SHEET
ALL FIGURES IN THOUSANDS OF US $
As at June 30, 2004 (unaudited) | As at December 30, 2003 (audited) |
ASSETS | ||
CURRENT ASSETS | ||
Cash and cash equivalents | $ 27,075 | $ 13,877 |
Funds held by ceding insurer | 9,721 | 6,803 |
Accounts receivable | 217,881 | 210,905 |
Inventories | 267,178 | 207,371 |
Prepaid expenses | 11,778 | 10,719 |
Future income taxes | 5,598 | 9,184 |
539,241 | 458,859 | |
CAPITAL ASSETS | 153,744 | 147,837 |
GOODWILL | 658,425 | 380,535 |
DEFERRED CHARGES | 19,315 | 18,501 |
INTANGIBLE ASSETS | 85,130 | 85,448 |
FUTURE INCOME TAXES | 7,860 | 8,382 |
OTHER ASSETS | 10,504 | 10,995 |
$ 1,474,219 | $ 1,110,557 |
LIABILITIES | ||
CURRENT LIABILITIES | ||
Bank indebtedness | $ 2,022 | $ 764 |
Accounts payable and accrued liabilities | 334,712 | 253,145 |
Income taxes payable | 1,748 | 2,037 |
Balance of sale payable | 7,494 | - |
Current portion of long-term debt | 6,008 | 7,758 |
351,983 | 263,704 |
LONG-TERM DEBT (Note 3) | 521,944 | 282,421 |
PENSION OBLIGATION | 13,914 | 13,818 |
BALANCE OF SALE | 15,735 | 2,314 |
FUTURE INCOME TAXES | 39,807 | 45,148 |
OTHER LONG-TERM LIABILITIES | 7,148 | 8,266 |
SHAREHOLDERS’ EQUITY | ||
CAPITAL STOCK | 159,478 | 156,274 |
RETAINED EARNINGS | 325,289 | 287,583 |
CUMULATIVE TRANSLATION ADJUSTMENT | 38,921 | 51,029 |
523,688 | 494,886 |
$ 1,474,219 | $ 1,110,557 |
DOREL INDUSTRIES INC.
CONSOLIDATED STATEMENT OF INCOME
ALL FIGURES IN THOUSANDS OF US $, EXCEPT PER SHARE AMOUNTS
Second quarter ended | Six months ended | |||
June 30, 2004 (unaudited) | June 30, 2003 (unaudited) | June 30, 2004 (unaudited) | June 30, 2003 (unaudited) | |
Sales | $ 398,810 | $ 263,427 | $ 787,247 | $ 539,746 |
Licensing and commission income | 4,717 | 1,314 | 8,126 | 1,880 |
TOTAL REVENUE | 403,527 | 264,741 | 795,373 | 541,626 |
EXPENSES | ||||
Cost of sales | 312,540 | 188,437 | 608,453 | 390,934 |
Operating | 53,313 | 39,972 | 108,456 | 74,713 |
Amortization | 8,469 | 7,039 | 17,421 | 14,302 |
Research and development costs | 1,978 | 2,057 | 3,676 | 3,817 |
Interest on long-term debt | 7,380 | 4,202 | 13,938 | 7,313 |
Other interest | 334 | 264 | 497 | 260 |
384,014 | 241,971 | 752,441 | 491,339 |
Income before income taxes | 19,513 | 22,770 | 42,932 | 50,287 |
Income taxes (Note 7) | 1,410 | 6,509 | 5,226 | 14,777 |
NET INCOME | $ 18,103 | $ 16,261 | $ 37,706 | $ 35,510 |
EARNINGS PER SHARE: | ||||
Basic | $ 0.55 | $ 0.51 | $ 1.15 | $ 1.12 |
Diluted | $ 0.55 | $ 0.50 | $ 1.15 | $ 1.10 |
SHARES OUTSTNDING: | ||||
Basic – weighted average | 32,712,577 | 31,688,074 | 32,679,375 | 31,581,570 |
Diluted – weighted average | 32,955,200 | 32,422,777 | 32,921,590 | 32,317,008 |
DOREL INDUSTRIES INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
ALL FIGURES IN THOUSANDS OF US $
Second quarter ended | Six months ended | |||
June 30, 2004 (unaudited) | June 30, 2003 (unaudited) | June 30, 2004 (unaudited) | June 30, 2003 (unaudited) | |
CASH PROVIDED BY (USED IN): | ||||
OPERATING ACTIVITIES | ||||
Net income from continuing operations: | $ 18,103 | $ 16,261 | $ 37,706 | $ 35,510 |
Adjustments for: | ||||
Amortization | 8,469 | 7,039 | 17,421 | 14,302 |
Future income taxes | (82) | 47 | (1,233) | (22) |
Funds held by ceding insurer | (2,884) | (949) | (2,917) | (949) |
Loss (gain) on disposal of capital assets | 329 | (333) | 329 | (464) |
23,935 | 22,065 | 51,306 | 48,377 |
Changes in non-cash working capital: | ||||
Accounts receivable | 42,252 | 26,643 | 22,614 | 9,032 |
Inventories | (17,874) | (13,531) | (10,557) | (9,815) |
Prepaid expenses and other assets | (1,219) | (977) | 1,742 | (1,364) |
Accounts payable and accrued liabilities | (7,782) | (11,011) | 28,146 | (2,840) |
Income taxes payable | 418 | 1,592 | 673 | (9,294) |
15,794 | 2,716 | 42,619 | (14,281) |
CASH PROVIDED BY OPERATING ACTIVITIES | 39,728 | 24,781 | 93,925 | 34,096 |
FINANCING ACTIVITIES | ||||
Increase (decrease) in long-term debt | (15,119) | 6,869 | 237,746 | 185,174 |
Balance of sale and other amounts payable | (808) | (27,759) | 20,980 | 1,636 |
Issuance of capital stock | 1,655 | 2,739 | 3,179 | 7,515 |
Repurchase of capital stock | - | - | - | (129) |
Increase (decrease) in bank indebtedness | 180 | (8,096) | 1,260 | (7,530) |
CASH PROVIDED BY (USED) IN FINANCING ACTIVITIES | (14,092) | (26,247) | 263,165 | 186,666 |
INVESTING ACTIVITIES | ||||
Acquisition of subsidiary companies | - | - | (320,530) | (247,198) |
Cash acquired | - | - | 3,734 | 7,207 |
- | - | (316,796) | (239,991) | |
Additions to capital assets – net | (8,701) | (6,847) | (16,690) | (9,846) |
Deferred charges | (1,824) | (1,707) | (6,877) | (4,245) |
Intangible assets | (2,302) | - | (2,601) | (245) |
CASH USED IN INVESTING ACTIVITIES | (12,827) | (8,554) | (342,964) | (254,327) |
Effect of exchange rate change on cash | (246) | (1,141) | (928) | (1,069) |
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 12,563 | (11,161) | 13,198 | (34,634) |
Cash and cash equivalents, | ||||
beginning of period | 14,512 | 30,977 | 13,877 | 54,450 |
CASH AND CASH EQUIVALENTS, END OF PERIOD | $ 27,075 | $ 19,816 | $ 27,075 | $ 19,816 |
DOREL INDUSTRIES INC.
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
ALL FIGURES IN THOUSANDS OF US $
Six months ended | ||
June 30, 2004 (unaudited) | June 30, 2003 (unaudited) | |
BALANCE, BEGINNING OF PERIOD | $ 287,583 | $ 212,660 |
Net income | 37,706 | 35,510 |
Premium paid on purchase of shares | - | (103) |
BALANCE, END OF PERIOD | $ 325,289 | $ 248,067 |
Notes to the Consolidated Financial Statements
As at June 30, 2004
All figures in thousands of US$, except share amounts (Unaudited)
1. Accounting Policies
Basis of Presentation
These interim consolidated financial statements have been prepared in accordance with Canadian Generally Accepted Accounting Principles (GAAP) using the U.S. dollar as the reporting currency. They have been prepared on a basis consistent with those followed in the most recent audited financial statements with the exception of the changes in accounting policies as indicated below. These interim consolidated financial statements do not include all of the information and notes required by GAAP for annual financial statements and therefore should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s audited financial statements for the year ended December 30, 2003.
Change in Accounting Policies
Stock Based Compensation
In 2003, the Canadian Institute of Chartered Accountants (CICA) modified Section 3870 “Stock Based Compensation and other Stock Based Payments”, which the Company has adopted on a prospective basis. As a result, effective for fiscal years beginning before January 1, 2004, the Company is required to recognize as an expense to income, all stock options granted, modified or settled using the fair value based method. As the Company has elected for prospective treatment of this section, only option grants issued in 2003 or later have an impact on operating results.
In addition, pro-forma disclosure is required for all options granted between January 1, 2002, the Company’s original adoption date of CICA Section 3870, and January 1, 2003. The Company’s year-to-date net income and earnings per share would be reduced by these option grants to the following pro-forma amounts:
2004 | 2003 | ||
Net income | As reported | $ 37,706 | $ 35,510 |
Pro forma | $ 37,001 | $ 34,705 | |
Basic Earnings per share | As reported | $ 1.15 | $ 1.12 |
Pro forma | $ 1.13 | $ 1.09 | |
Fully diluted earnings per share | As reported | $ 1.15 | $ 1.10 |
Pro forma | $ 1.13 | $ 1.07 |
Pro-forma figures were computed using assumptions consistent with those followed in the Company’s most recent audited financial statements.
Hedging Relationships
Effective January 1, 2004, the Company has adopted the recommendations of the Canadian Institute of Chartered Accountants Accounting Guideline 13 “Hedging Relationships”, which establishes certain conditions for when hedge accounting may be applied. Any derivative instrument that does not qualify for hedge accounting will be reported on a mark-to-market basis in income. The Company’s interest rate swap instrument is not considered as a hedge for accounting purposes and is therefore recognized at fair value and the resulting gain or loss is recorded in earnings. This change in accounting treatment did not have a material impact on the Company’s results.
Segmented Information
During the first quarter of 2004 the Company acquired Pacific Cycle, LLC. In accordance with Canadian Generally Accepted Accounting Principles (GAAP), the operations of Pacific Cycle are reported as a separate reporting segment referred to as “Recreational/Leisure”. Segmented results can be found in Note 9 to these financial statements.
Reclassifications
Certain of the prior year’s accounts have been reclassified to conform to the 2004 financial statement presentation.
2. Business Acquisition
On February 3, 2004, the Company acquired all the outstanding shares of Pacific Cycle, LLC, a designer and supplier of bicycles and other recreational products for a total consideration of $320.5 million, including an estimate of all related acquisition costs. The majority of the acquisition cost was financed through long-term debt with the balance being paid with cash on hand. In addition, a balance of sale of $21.0 million remains to be paid and is included in liabilities.
The combination has been recorded under the purchase method of accounting with the results of operations of the acquired business being included in the accompanying consolidated financial statements since the date of acquisition.
The assets acquired and liabilities assumed consist of the following:
Assets | |
Cash | $ 3,734 |
Accounts receivable | 31,587 |
Inventories | 50,953 |
Capital assets | 1,590 |
Other | 2,392 |
Goodwill | 285,589 |
375,845 | |
Liabilities | |
Accounts payable and other current liabilities | 55,315 |
Total purchase price | $ 320,530 |
Allocation of the purchase price in a major business acquisition necessarily involves a number of estimates as well as gathering information over a number of months following the date of acquisition. Given the timing of the acquisition, the Company has performed only a preliminary evaluation of Pacific Cycle’s assets and liabilities. The Company will be continuing to evaluate the value of these assets and liabilities and accordingly there will be changes to the assigned values. In particular, several of Pacific Cycle’s trademarks are being revalued at their fair market value. As a result, the goodwill amount above will be reduced for these trademarks’ value.
3. Long-term Debt
Effective January 29, 2004 the Company amended its unsecured credit facility, increasing availability to $470 million. This increased availability replaced the Company’s previous limit of $245 million as disclosed in the Company’s year end financial statements dated December 30, 2003. As at June 30, 2004, an amount of $341.5 million relating to this facility is included in long-term debt.
The Company may grant stock options on the Class “B” Subordinate Voting Shares, at the discretion of the board of directors, to senior executives and certain key employees. The exercise price is the market price of the securities at the date the options may be granted. No option may be exercised during the first year following its granting and is exercisable, on a cumulative basis, at the rate of 25% in each of the following four years, and will expire no later than the year 2009.
The Company's stock option plan is as follows:
Six months ended June 30, 2004 | Year Ended December 30, 2003 | |||
Options | Weighted Average Exercise Price | Options | Weighted Average Exercise Price | |
Options outstanding, beginning of period | 1,099,750 | $ 21.52 | 2,079,000 | $ 16.55 |
Granted | 565,500 | 33.57 | 151,000 | 24.67 |
Exercised | (146,500) | 20.69 | (1,118,250) | 12.39 |
Cancelled | - | - | (12,000) | 21.75 |
Options outstanding, end of period | 1,518,750 | $ 26.09 | 1,099,750 | $ 21.52 |
A summary of options outstanding as of June 30, 2004 is as follows:
Total Outstanding | Total exercisable | |||
Options | Range of Exercise Prices | Weighted Average Exercise Price | Options | Weighted Average Exercise Price |
64,250 | $ 16.00 - $ 18.00 | $ 17.61 | 6,000 | $ 18.00 |
889,000 | $ 20.41 - $ 27.47 | $ 21.95 | 383,500 | $ 24.77 |
565,500 | $ 30.00 - $ 33.74 | $ 33.57 | - | - |
1,518,750 | $ 26.09 | 389,500 | $ 24.66 |
5. Benefit Plans
Second quarter ended June 30 | Six months ended June 30 | |||
2004 | 2003 | 2004 | 2003 | |
Defined contribution plans | $ 577 | $ 365 | $ 1,176 | $ 1,251 |
Defined benefit plans | $ 250 | $ 188 | $ 502 | $ 375 |
Post-retirement benefit plan | $ 145 | $ 429 | $ 505 | $ 671 |
6. Product Liability
As detailed in the Company’s year-end consolidated financial statements, the Company is insured for product liability, by the use of both traditional insurance and by the Company's wholly owned subsidiary, Dorel Insurance Corporation, which functions as a captive insurance company, providing a self-funded insurance program to mitigate its product liability exposure.
The estimated product liability exposure was calculated by an independent actuary based on historical sales volumes, past claims history and management and actuarial assumptions. The estimated exposure includes incidents that have occurred, as well as incidents anticipated to occur. Significant assumptions used in the actuarial model include management’s estimates for pending claims, product life cycle, discount rates, and the frequency and severity of product incidents.
The Company has recorded an additional provision in the amount of $6,500 in connection with a dispute with one of its insurers over the aggregate amount of insurance available to the Company, including one claim that came due in the quarter. The Company disagrees with the position being asserted by the insurer and has engaged in legal proceedings with the insurance company. Should a decision be made in the Company’s favour, the recovery will be included in net income in future periods.
7. Income taxes
The following table provides the reconciliation between the Canadian statutory federal and provincial income taxes and the effective consolidated income tax rate:
Second quarter ended June 30 | Six months ended June 30 | |||
2004 | 2003 | 2004 | 2003 | |
Provision for income taxes at statutory rate of 35% | $ 6,830 | $ 7,970 | $ 15,026 | $ 17,600 |
Difference in effective tax rates of foreign subsidiaries | (3,592) | (1,689) | (7,089) | (2,397) |
Recovery of income taxes arising from the use of unrecorded tax benefits | (1,371) | (705) | (2,397) | (1,488) |
Other | (457) | 933 | (314) | 1,062 |
Actual provision for income taxes | $ 1,410 | $ 6,509 | $ 5,226 | $ 14,777 |
8. Earnings per Share
The following table provides a reconciliation between the number of basic and fully diluted shares outstanding:
Second quarter ended June 30 | Six months ended June 30 | |||
2004 | 2003 | 2004 | 2003 | |
Weighted daily average number of Class “A” Multiple and Class “B” Subordinate Voting Shares | 32,712,577 | 31,688,074 | 32,679,375 | 31,581,570 |
Dilutive effect of stock options | 243,984 | 734,703 | 242,640 | 735,438 |
Weighted average number of diluted shares | 32,956,561 | 32,422,777 | 32,922,015 | 32,317,008 |
Number of anti-dilutive stock options excluded from fully earnings per share calculation | 545,500 | - | 545,500 | - |
9. Segmented Information
Industry Segments
Total | Juvenile | Home Furnishings | Recreational / Leisure | |||||
2004 | 2003 | 2004 | 2003 | 2004 | 2003 | 2004 | 2003 | |
For the six-month period ended June 30
(In thousands of US Dollars)
Total Revenues | $ 795,373 | $ 541,626 | $ 386,165 | $ 333,861 | $ 253,083 | $ 207,765 | $ 156,125 | $ - |
Cost of sales | 608,453 | 390,934 | 269,933 | 230,927 | 216,346 | 160,007 | 122,174 | - |
Operating expenses | 101,873 | 67,384 | 70,232 | 52,927 | 17,015 | 14,457 | 14,626 | - |
Research and development | 3,676 | 3,817 | 2,794 | 3,018 | 882 | 799 | - | - |
Amortization | 16,679 | 13,610 | 12,981 | 10,523 | 3,470 | 3,087 | 228 | - |
Earnings from Operations | 64,692 | 65,881 | $ 30,225 | $ 36,466 | $ 15,370 | $ 29,415 | $ 19,097 | $ - |
Interest | 14,435 | 7,573 | ||||||
Corporate expenses | 7,325 | 8,021 | ||||||
Income taxes | 5,226 | 14,777 |
Net income | $ 37,706 | $ 35,510 |
Total | Juvenile | Home Furnishings | Recreational / Leisure | |||||
2004 | 2003 | 2004 | 2003 | 2004 | 2003 | 2004 | 2003 | |
For the quarter ended June 30
(In thousands of US Dollars)
Total Revenues | $ 403,527 | $ 264,741 | $ 179,617 | $ 167,960 | $ 121,716 | $ 96,781 | $ 102,194 | $ - |
Cost of sales | 312,640 | 188,437 | 127,024 | 114,317 | 105,419 | 74,120 | 80,097 | - |
Operating expenses | 50,069 | 36,041 | 32,723 | 28,929 | 7,903 | 7,112 | 9,443 | - |
Research and development | 1,978 | 2,057 | 1,535 | 1,749 | 443 | 308 | - | - |
Amortization | 8,127 | 6,876 | 6,482 | 5,462 | 1,595 | 1,414 | 50 | - |
Earnings from Operations | 30,813 | 31,330 | $ 11,853 | $ 17,502 | $ 6,356 | $ 13,827 | $ 12,604 | $ - |
Interest | 7,714 | 4,466 | ||||||
Corporate expenses | 3,586 | 4,093 | ||||||
Income taxes | 1,410 | 6,509 |
Net income | $ 18,103 | $ 16,261 |
Total Assets | $ 1,422,441 | $ 1,087,714 | $ 824,600 | $ 876,164 | $ 224,011 | $ 211,550 | $ 393,831 | $ - |
The continuity of goodwill by business is as follows:
Total | Juvenile | Home Furnishings | Recreational / Leisure | |||||
2004 (Six months) | 2003 (full year) | 2004 (six months) | 2003 (full year) | 2004 (six months) | 2003 (full year) | 2004 (Six months) | 2003 (full year) | |
Balance, beginning of year | $ 380,535 | $ 155,669 | $ 341,485 | $ 151,247 | $ 39,050 | $ 4,422 | $ - | $ - |
Additions | 285,589 | 195,087 | - | 160,459 | - | 34,628 | 285,589 | - |
Foreign exchange and other | (7,699) | 29,779 | (7,699) | 29,779 | - | - | - | - |
Balance, end of period | $ 658,425 | $ 380,535 | $ 333,786 | $ 341,485 | $ 39,050 | $ 39,050 | $ 285,589 | $ - |
Geographic Segments – Origin of Revenues
For the six-month period ended June 30 | For the second quarter ended June 30 | |||||||
2004 | 2003 | 2004 | 2003 | |||||
$ | % | $ | % | $ | % | $ | % | |
Canada | $ 89,154 | 11.2% | $ 73,212 | 13.5% | $ 35,270 | 8.7% | $ 34,170 | 12.9% |
United States | 516,648 | 65.0% | 316,487 | 58.4% | 273,743 | 67.8% | 143,365 | 54.2% |
Europe | 157,169 | 19.8% | 129,537 | 23.9% | 72,963 | 18.1% | 73,489 | 27.8% |
Other foreign countries | 32,402 | 4.1% | 22,390 | 4.1% | 21,551 | 5.3% | 13,717 | 5.2% |
Total | $ 795,373 | 100.0% | $ 541,626 | 100.0% | $ 403,527 | 100.0% | $ 164,741 | 100.0% |
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
DOREL INDUSTRIES INC.
By: /s/ Martin Schwartz_____________
Martin Schwartz
Title: President, Chief Executive Officer
By: /s/ Jeffrey Schwartz_____________
Jeffrey Schwartz
Title: Chief Financial Officer, Secretary
August 6, 2004
