| | | |
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 – | 32,860,490 | 32,940,164 | |
diluted weighted average |
| | | |
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 – | 32,859,883 | 32,951,503 | |
diluted weighted average |
Juvenile Segment
Second quarter Juvenile revenue was up 12.1% to US$216.2 million from US$192.8 million during the same period a year ago. Earnings from operations rose slightly to US$20.1 million compared to US$19.8 million last year. For the first half, revenue rose 4.6% to US$456.3 million from US$436.3 million a year ago, while earnings from operations were up 6.3% to US$50.3 million from US$47.3 million. Gross margins were consistent with 2005 levels for both the quarter and year-to-date at 29.0% and 28.7% respectively. However, higher product liability costs partially offset the increase in gross margin dollars, dampening earnings from operations.
Revenues in North America increased by 21.8% in the quarter whereas revenues in Europe increased by 1.4%. For the quarter, the value of the Euro and Canadian dollar against the U.S. dollar did not significantly impact organic sales growth. Year-to-date organic sales growth for the segment as a whole was 6.3%, as opposed to the 4.6% as reported, due principally to the stronger U.S. dollar versus the Euro in the first quarter of 2006.
Revenue gains in the US during the second quarter were driven by the introduction of several new items, including a new opening price point collection comprised of a travel system, swing, playard, and high chair as well as new Disney items. A new Eddie Bauer travel system performed exceptionally well during the quarter. In Europe, overall Euro-denominated revenues rose 1.7% in with solid car seat and stroller sales growth, mainly due to the on-going popularity of the Maxi-Cosi and Quinny brands.
Home Furnishings Segment
Home Furnishings revenue decreased 8.9% to US$120.1 million from US$131.9 million during the second quarter a year ago. Earnings from operations were down 24.2% to US$4.7 million versus US$6.2 million last year. For the six months, revenue slipped 8.5% to US$253.8 million from US$277.3 million. Earnings from operations for the first half decreased 45.3%, to US$9.3 million from US$17.0 million last year.
Sales of ready-to-assemble (RTA) furniture declined by US$10.7 million from the second quarter of 2005, or 19%, due principally to lower sales to the mass merchant channel. Ameriwood’s futon sales in the quarter declined by 18% compared to the prior year. This was due to delays in orders from certain customers. It is still expected that futon sales for the year will exceed 2005 levels. Revenues during the second quarter at Dorel Asia and Cosco Home & Office increased moderately, by 3% and 2% respectively over last year. Both these businesses continue to make inroads into new customers and in new product categories. The segment’s year-to-date revenue decline of 8.5% is due to declines in RTA furniture, futon and Cosco Home & Office sales decreases of 23.8%, 9.7% and 3.1% respectively. Dorel Asia achieved revenue growth of 19.1% versus 2005.
For the segment as a whole, second quarter gross margins were essentially flat with 2005 levels as higher margins at Dorel Asia and Cosco Home & Office offset declines at Ameriwood. Importantly, RTA furniture margins for the quarter improved by 210 basis points over the first quarter. Year-to-date gross margins have declined by 140 basis points as the gains Dorel Asia and Cosco Home & Office only partially offset declines at Ameriwood. For the quarter, Ameriwood’s earnings declined by US$3.4 million versus last year due both to RTA and futon sales declines. Cosco Home & Office earnings in the quarter increased by US$1.1 million, due to an improved product mix, selling in product categories with higher margins. Dorel Asia’s second quarter earnings improved by US$0.7 million compared to last year.
In RTA, particle board prices rose sharply in the second quarter, at one point 50% higher year-over-year. The availability of board also had a significant impact on production costs as the Company sought to maintain the required levels of customer service. Shorter, less efficient production runs were scheduled and higher priced fiberboard was used on many occasions to produce orders. Currently, board prices have stabilized and supply is less of an issue. While the additional cost of particle board was completely absorbed by Ameriwood in the second quarter, price increases to its customers should take effect toward the end of the current third quarter. Domestic production and efficiencies have stabilized with continuous improvement expected throughout the year.
Ameriwood was successful in placing promotional back-to-college RTA furniture and futon products at major retail accounts. The division is also working with several large retailers to develop and launch new storage and organization, closet, garage and other programs that are expected to ship in the fourth quarter. Import product design and development is also accelerating.
Recreational/Leisure Segment
Second quarter Recreational/Leisure revenue decreased 9.9% to US$99.6 million from US$110.6 million last year. Earnings from operations were down 57.5% to US$5.7 million from US$13.4 million. For the six months, revenue dropped 8.7% to US$176.8 million from US$193.7 million. Year-to-date earnings from operations decreased 42.5% to US$12.7 million from US$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 US$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 US$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.
Other
The Company recorded a tax recovery of US$0.4 million in the second quarter of 2006 on pre-tax earnings of US$17.5 million. This compares to a tax expense of US$3.5 million in the second quarter of 2005 on pre-tax earnings of US$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
Cash flow from operations in 2006 for the six months ended June 30 was US$44.1 million compared to US$37.6 in 2005. This improvement was despite a decline in after-tax earnings of US$6.8 million. Year-to-date free cash flow was US$30.2 million as compared to US$18.2 million in 2005, an improvement of US$12.0 million. Inventory levels have risen by US$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.
CONFERENCE CALL
Dorel Industries Inc. will hold a conference call to discuss these results today at 1:00 P.M. Eastern Time. Interested parties can join the call by dialling 1-800-814-4853. The conference call can also be accessed via live webcast atwww.dorel.com ,www.newswire.ca orwww.q1234.com. If you are unable to call in at this time, you may access a tape recording of the meeting by calling 1-877-289-8525 and entering the passcode 21197756# on your phone. This tape recording will be available on Wednesday, August 2, 2006 as of 3:00 P.M. until 11:59 P.M. on Wednesday, August 9, 2006.
Complete financial statements will be available on the Company's website,www.dorel.com, and will be available through the SEDAR and EDGAR websites.
Profile
Dorel Industries (TSX: DII.A, DII.B; NASDAQ: DIIB) is a global consumer products company engaged in the designing, manufacturing and marketing of a diverse portfolio of powerful consumer brands, sold through its Juvenile, Home Furnishings, and Recreational/Leisure segments. Headquartered in Montreal, Dorel employs approximately 4,500 people in fourteen countries. Dorel also has eight offices in China, headquartered in Shanghai, which oversee the sourcing, engineering and logistics of the Company’s Asian supplier chain. 2005 sales were US$1.8 billion.
US operations include Dorel Juvenile Group USA, which markets the Cosco and Safety 1st brands as well Eddie Bauer and Disney Baby licensed products; Ameriwood Industries, which markets ready-to-assemble furniture products under the Ameriwood, Carina, SystemBuild, Altra Furniture and Ridgewood/Charleswood brands as well as the California Closets license; Cosco Home & Office, which markets home/office products under the Cosco brand and Samsonite license as well as home healthcare products under the Cosco Ability Essentials and Adepta brands; and Pacific Cycle, which markets the Schwinn, Mongoose, GT, InSTEP, Playsafe and Roadmaster brands. In Canada, Dorel operates Dorel Distribution Canada, Ridgewood Industries and Dorel Home Products. Dorel Europe markets juvenile products throughout Europe, under the Bébé Confort, Maxi-Cosi, Quinny, Safety 1st, Babidéal, Mon Bébé and Baby Relax brands. Dorel Asia sources and imports home furnishings products.
Caution Concerning Forward-Looking Statements
Except for historical information provided herein, this press release may contain information and statements of a forward-looking nature concerning the future performance of Dorel Industries Inc. These statements are based on suppositions and uncertainties as well as on management's best possible evaluation of future events. The business of the Company and these forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ from expected results. Important factors which could cause such differences may include, without excluding other considerations, increases in raw material costs, particularly for key input factors such as particle board and resins; increases in ocean freight container costs; failure of new products to meet demand expectations; changes to the Company’s effective income tax rate as a result of changes in the anticipated geographic mix of revenues; the impact of price pressures exerted by competitors, and settlements for product liability cases which exceed the Company’s insurance coverage limits. A description of the above mentioned items and certain additional risk factors are discussed in the Company’s Annual MD&A and Annual Information Form, filed with the securities regulatory authorities in Canada and the U.S. The risk factors outlined in the previously mentioned documents are specifically incorporated herein by reference. The Company’s business, financial condition, or operating results could be materially adversely affected if any of these risks and uncertainties were to materialize. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.
CONSOLIDATED BALANCE SHEET
ALL FIGURES IN THOUSANDS OF US $
| | | | | | |
| As at
June 30, 2006 | | As at
December 30, 2005 |
| | | (unaudited) | | (audited) |
| | | | | | |
ASSETS | | | | | | |
CURRENT ASSETS | | | | | | |
Cash | | | $ 18,585 | | | $ 12,345 |
Accounts receivable | | | 264,308 | | | 287,225 |
Income taxes receivable | | | 10,555 | | | 14,817 |
Inventories | | | 316,528 | | | 279,265 |
Prepaid expenses | | | 10,360 | | | 10,288 |
Funds held by ceding insurer | | | 3,704 | | | 3,647 |
Future income taxes | | | 28,955 | | | 26,060 |
| | | 652,995 | | | 633,647 |
| | | | | | |
PROPERTY, PLANT AND EQUIPMENT | | | 144,046 | | | 144,248 |
DEFERRED CHARGES | | | 15,021 | | | 15,561 |
INTANGIBLE ASSETS | | | 259,358 | | | 253,245 |
GOODWILL | | | 494,270 | | | 481,518 |
OTHER ASSETS | | | 10,265 | | | 10,750 |
ASSETS HELD FOR SALE | | | 3,699 | | | 3,699 |
| | | $ 1,579,654 | | | $ 1,542,668 |
| | | | | | |
LIABILITIES | | | | | | |
CURRENT LIABILITIES | | | | | | |
Bank indebtedness | | | $ 3,918 | | | $ 4,828 |
Accounts payable and accrued liabilities | | | 301,285 | | | 305,922 |
Income taxes payable | | | 10,550 | | | 18,483 |
Balance of sale payable | | | – | | | 4,946 |
Current portion of long-term debt | | | 265,122 | | | 8,025 |
| | | 580,875 | | | 342,204 |
| | | | | | |
LONG-TERM DEBT | | | 163,887 | | | 439,634 |
BALANCE OF SALE PAYABLE | | | 665 | | | 665 |
PENSION & POST-RETIREMENT BENEFIT OBLIGATIONS | | | 20,014 | | | 19,081 |
FUTURE INCOME TAXES | | | 67,954 | | | 62,986 |
OTHER LONG-TERM LIABILITIES | | | 5,913 | | | 5,656 |
| | | | | | |
SHAREHOLDERS’ EQUITY | | | | | | |
CAPITAL STOCK | | | 162,545 | | | 162,503 |
CONTRIBUTED SURPLUS | | | 4,886 | | | 3,639 |
RETAINED EARNINGS | | | 520,272 | | | 478,155 |
CUMULATIVE TRANSLATION ADJUSTMENT | | | 52,643 | | | 28,145 |
| | | 740,346 | | | 672,442 |
| | | $ 1,579,654 | | | $ 1,542,668 |
| | | | | | |
CONSOLIDATED STATEMENT OF INCOME
ALL FIGURES IN THOUSANDS OF US $, EXCEPT PER SHARE AMOUNTS
| | | | | | | | | | |
| Second Quarter Ended | | Six Months Ended |
| June 30, 2006 | | June 30, 2005 | June 30, 2006 | June 30, 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 |
| | | | | | | |
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
ALL FIGURES IN THOUSANDS OF US $
| | | | | | |
| | Six Months Ended |
| | June 30, 2006 | | June 30, 2005 |
| | | (unaudited) | | | (unaudited) |
| | | | | | |
BALANCE, BEGINNING OF PERIOD | | | $ 478,155 | | | $ 386,833 |
Net income | | | 42,117 | | | 48,950 |
| | | | | | |
BALANCE, END OF PERIOD | | | $ 520,272 | | | $ 435,783 |
| | | | | | |
CONSOLIDATED STATEMENT OF CASH FLOWS
ALL FIGURES IN THOUSANDS OF US $
| | | | | | | |
| Second Quarter Ended | | Six Months Ended |
| June 30, 2006 | | June 30, 2005 | | June 30, 2006 | | June 30, 2005 |
| (unaudited) | | (unaudited) | | (unaudited) | | (unaudited) |
CASH PROVIDED BY (USED IN): | | | | | | | |
OPERATING ACTIVITIES | | | | | | | |
Net income | $ 17,936 | | $ 21,745 | | $ 42,117 | | $ 48,950 |
Items not involving cash: | | | | | | | |
Depreciation and amortization | 9,144 | | 9,376 | | 18,070 | | 18,647 |
Amortization of deferred financing costs | 38 | | 401 | | 436 | | 803 |
Future income taxes | (2,046) | | (222) | | (694) | | 1,452 |
Stock based compensation | 630 | | 720 | | 1,247 | | 1,421 |
Pension and post-retirement defined benefit plans |
361
| |
436
| |
966
| |
924
|
Loss (gain) on disposal of property, plant and equipment |
(6)
| |
162
| |
25
| |
167
|
| 26,057 | | 32,618 | | 62,167 | | 72,364 |
Net changes in non-cash balances related to operations |
6,574
| |
(21,939)
| |
(18,084)
| |
(34,786)
|
CASH PROVIDED BY OPERATING ACTIVITIES |
32,631
| |
10,679
| |
44,083
| |
37,578
|
|
| | | | | | |
FINANCING ACTIVITIES | | | | | | | |
Bank indebtedness | 766 | | 2,372 | | (939) | | 2,223 |
Long-term debt | (27,564) | | (1,271) | | (18,721) | | (9,975) |
Issuance of capital stock | 17 | | 1,290 | | 34 | | 1,417 |
CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES |
(26,781)
| |
2,391
| |
(19,626)
| |
(6,335)
|
| | | | | | | |
INVESTING ACTIVITIES | | | | | | | |
Acquisition of subsidiary companies |
–
| |
(2,495)
| |
(4,946)
| |
(7,440)
|
Additions to property, plant and equipment – net |
(4,059)
| |
(5,030)
| |
(7,530)
| |
(11,729)
|
Deferred charges | (2,085) | | (2,407) | | (3,928) | | (4,703) |
Funds held by ceding insurer | (32) | | (34) | | (57) | | (89) |
Intangible assets | (874) | | (52) | | (2,399) | | (2,859) |
CASH USED IN INVESTING ACTIVITIES
|
(7,050)
| |
(10,018)
| |
(18,860)
| |
(26,820)
|
| | | | | | | |
Effect of exchange rate changes on cash | 602 | | 384 | | 643 | | 177 |
NET (DECREASE) INCREASE IN CASH | (598) | | 3,436 | | 6,240 | | 4,600 |
Cash, beginning of period | 19,183 | | 12,452 | | 12,345 | | 11,288 |
CASH, END OF PERIOD | $ 18,585 | | $ 15,888 | | $ 18,585 | | $ 15,888 |
|
| | | | | | |
SEGMENTED INFORMATION
ALL FIGURES IN THOUSANDS OF US $
Industry Segments
| | | | | | | | | | |
| For The Second Quarter Ended June 30, |
| | Total | Juvenile | Home Furnishings | Recreational / Leisure |
| | 2006 | 2005 | 2006 | 2005 | 2006 | 2005 | 2006 | 2005 |
Total Revenue | |
$435,914
|
$435,375
|
$ 216,223
|
$ 192,848
|
$ 120,079
|
$ 131,910
|
$ 99,612
|
$ 110,617
|
Cost of sales | | 341,741 | 338,167 | 153,560 | 136,940 | 104,141 | 114,433 | 84,040 | 86,794 |
Selling, general and administrative expenses | |
52,349
|
45,945
|
33,758
|
26,986
|
8,951
|
8,678
|
9,640
|
10,281
|
Depreciation & amortization | |
9,121
|
9,375
|
7,202
|
7,319
|
1,657
|
1,911
|
262
|
145
|
Research and development costs | |
2,252
|
2,462
|
1,580
|
1,795
|
672
|
667
|
–
|
–
|
Earnings from Operations | |
30,451
|
39,426
|
$ 20,123
|
$ 19,808
|
$ 4,658
|
$ 6,221
|
$ 5,670
|
$ 13,397
|
Interest | | 7,546 | 8,066 | | | | | | |
Corporate expenses | |
5,358
|
6,099
| | | | | | |
Income taxes | | (389) | 3,516 | | | | | | |
Net income | | $ 17,936 | $ 21,745 | | | | | | |
| | | | | | | | | |
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