MONTREAL - Dorel Industries Inc. (TSX: DII.B DII.A) today announced results for the fourth quarter and year ended December 30, 2011. Revenue for the fourth quarter increased 4.1% to US$561.6 million from US$539.5 million a year ago. Net income rose 5.5% to US$27.4 million or $US0.85 per diluted share from US$25.9 million, or US$0.79 per diluted share last year.

Revenue for the full year grew 2.2% to US$2.4 billionas compared to US$2.3 billion in 2010. Net income decreased 18.1% to US$104.6 million, or US$3.21 per diluted share from US$127.7 million or US$3.85 per diluted share last year. Net income includes US$12.2 million recorded as a reduction in corporate general and administrative expenses. This non-taxable amount is from a change in the assumed estimated future acquisition price on contingent consideration and put option liabilities related to certain past business acquisitions.

Commenting on the results, Dorel CEO and President, Martin Schwartz stated: "Versus the third quarter, the Juvenile segment did reverse the year's downward earnings trend, although results were not yet where we had hoped they would be. Demand for juvenile products in the U.S. has increased somewhat. In Europe, despite the general negative economic environment, Dorel Europe improved its performance over the third quarter and maintained market share. Dorel Chile, established after our November 2011 transaction with the Silfa Group, has been accretive to earnings, even with its contribution limited to the month of December.

"In Recreational / Leisure, a shift in the timing of the introduction of new model year bikes meant sales for the quarter were down slightly versus last year, but this business remains very solid in both the independent bicycle dealer (IBD) and mass market channels. A clear indication of the success of our R&D efforts was the recognition by "Tour", a prestigious German bicycle trade magazine, of the Cannondale Super Six Evo Ultimate. It was awarded the top score in a review of "The Best Road Bikes in the World over the Past Ten Years". This is the first time this magazine has given this award which was based on ten years of reviews of over 2000 bikes. Home Furnishings had a very good quarter and we are pleased to see that demand has once again picked up," concluded Mr. Schwartz.

 

 

 

 

Summary of Financial Highlights

Fourth Quarters Ended December 30

All figures in thousands of US $, except per share amounts

 

2011

2010

Change
%

Total revenue

561,608

539,523

4.1%

Net income

27,362

25,947

5.5%

 

Per share - Basic

0.85

0.79

7.6%

 

Per share - Diluted

0.85

0.79

7.6%

Average number of shares outstanding -

 

 

 

diluted weighted average

32,130,001

33,038,961

 

 

 

 

 

 

 

 

 

Summary of Financial Highlights

For the years Ended December 30

All figures in thousands of US $, except per share amounts

 

2011

2010

Change
%

Total revenue

2,364,229

2,312,986

2.2%

Net income

104,593

127,727

-18.1%

 

Per share - Basic

3.22

3.89

-17.2%

 

Per share - Diluted

3.21

3.85

-16.6%

Average number of shares outstanding -

 

 

 

diluted weighted average

32,621,583

33,218,267

 

 

Juvenile Segment

 

 

 

 

 

 

Fourth Quarters Ended December 30

 

2011

2010

 

 

$

% of
rev.

$

% of
rev.

Change
%

Total revenue

239,532

 

236,204

 

1.4%

Gross profit

63,673

26.6%

63,202

26.8%

0.7%

Operating profit

10,390

4.3%

14,926

6.3%

-30.4%

 

 

 

 

 

 

 

 

 

 

 

 

For the years Ended December 30

 

2011

2010

 

 

$

% of
rev.

$

% of
rev.

Change
%

Total revenue

980,197

 

1,030,209

 

-4.9%

Gross profit

247,118

25.2%

281,412

27.3%

-12.2%

Operating profit

53,851

5.5%

96,470

9.4%

-44.2%

 

Fourth quarter
Fourth quarter revenue increased 1.4%. However, excluding the impact of foreign exchange and the acquired sales of Dorel Chile, the organic revenue decline was approximately 2%. The decline was in most markets, the notable exception being in the US, which improved sales over both year-over-year and sequentially, as the retail environment began to stabilize. In Europe, local currency sales decreased by approximately 5%, with sales in Southern Europe facing the greatest challenges. Gross margin dollars were slightly higher than in the prior year, but earnings declined by US$4.5 million principally due to an increase in operating expenses. The main reasons were higher product liability costs, professional fees and other costs incurred for the Dorel Chile acquisition and a US$1.4 million impairment of goodwill related to Dorel Brazil. The fourth quarter includes one month of Dorel Chile results, and the acquisition was immediately accretive to earnings.

Full y ear
2011 Juvenile revenues decreased 4.9% compared to 2010 levels. Excluding the impact of foreign exchange and the fourth quarter Dorel Chile acquisition, the organic revenue decline for the segment was 8.5%. The decline was in all divisions, but the majority of the segment's decline was in the U.S. As for revenues, the majority of the operating profit decrease in 2011 was due to lower gross margin dollars on lower sales and higher costs in the U.S. Europe faced similar challenges, though the drop in earnings was less acute. In Brazil, revenues declined due to the reduced enforcement of local car seat usage and as a result, demand dropped, resulting in price discounting and a less profitable product mix. Selling, general and administrative expenses also increased in 2011. A large portion of this increase was strategic spending related to new business acquisitions and developing a stronger presence in the U.S. independent specialist channel.

Recreational / Leisure Segment

 

 

 

 

 

 

Fourth Quarters Ended December 30

 

2011

2010

 

 

$

% of
rev.

$

% of
rev.

Change %

Total revenue

202,410

 

205,892

 

-1.7%

Gross profit

46,410

22.9%

46,491

22.6%

-0.2%

Operating profit

11,604

5.7%

10,638

5.2%

9.1%

 

 

 

 

 

 

 

 

 

 

 

 

For the years Ended December 30

 

2011

2010

 

 

$

% of
rev.

$

% of
rev.

Change
%

Total revenue

861,754

 

774,987

 

11.2%

Gross profit

205,052

23.8%

183,553

23.7%

11.7%

Operating profit

60,657

7.0%

51,829

6.7%

17.0%

Fourth quarter
Fourth quarter revenue declined by US$3.5 million, or 1.7%. In the mass market channel, sales declined in the low single digits. In the IBD channel, sales were down less than 1% year-over-year as there was a shift of some orders from the fourth quarter to the preceding third quarter. Despite the revenue decline, gross margin dollars were consistent with the prior year. Operating profit for the quarter increased by US$1.0 million as operating expenses were lower in 2011, mostly due to the timing of a promotional campaign in the fourth quarter of 2010 that did not re-occur in 2011.

Full year
The revenue increase of 11.2% to US$861.8 millionwas due mainly to a sales improvement of over 25% in the IBD distribution channel. This growth was driven by new products that were exceptionally well received by the market place. Sales also benefited from strong marketing, improvements in supply chain and distribution, and enhanced dealer support. Cycling Sports Group (CSG) sales were up in all markets, with most of the growth outside North America, which comprises over 50% of CSG revenue. Sales of Pacific Cycle products, servicing the mass merchant and sporting goods channels, were relatively flat with the prior year.

Supporting the revenue and gross margin dollar increase in the year was enhanced spending in selling and marketing and as a result, selling expenses increased in the year. Despite the increase, both selling and general and administrative expenses declined in 2011 by a combined 30 basis points. Earnings were also affected by a decline in profitability of approximately US$3 million at the segment's apparel division which markets the SUGOI brand. The decrease was due mainly to a write-down of excess inventory from prior model years and costs of US$1.8 million related to the strategic decision to outsource the "custom manufacturing" business to a third party.

Home Furnishings Segment

 

 

 

 

 

 

Fourth Quarters Ended December 30

 

2011

201 0

 

 

$

% of
rev.

$

% of
rev.

Change
%

Total revenue

119,666

 

97,427

 

22.8%

Gross profit

17,091

14.3%

11,845

12.2%

44.3%

Operating profit

8,486

7.1%

5,563

5.7%

52.5%

 

 

 

 

 

 

 

 

 

 

 

 

For the years Ended December 30

 

2011

2010

 

 

$

% of
rev.

$

% of
rev.

Cha nge
%

Total revenue

522,278

 

507,790

 

2.9%

Gross profit

65,589

12.6%

69,083

13.6%

-5.1%

Operating profit

29,251

5.6%

34,587

6.8%

-15.4%

 

Fourth quarter
Revenue in the fourth quarter recovered markedly year-over-year, increasing 22.8% to US$119.7 million. In the prior year, the comparable quarter of 2010 was particularly affected by a slowdown at retail and as a result customer replenishment orders were reduced. With the improved retail furniture environment in the US, customers once again gravitated toward Dorel's home furnishings product lines. The period's increase was driven by higher sales of imported furniture items and particularly strong sales to the Internet retail channel. Operating profit was driven by higher gross margin dollars on increased sales, lower freight rates, reduced warehousing costs made possible by significant inventory level reductions and the fact that in 2010, fixed overhead absorption was reduced due to the lower sales volumes.

Full year
Revenues were up 2.9%, reaching US$522.3 millioncompared to US$507.8 million the prior year. Within the segment, the mix of sales did vary from the prior year. Sales at Cosco Home& Office decreased due to the decision to exit unprofitable product SKUs as it became strategically advantageous to no longer sell these items. More than offsetting this was strong sales growth of imported furniture items in principally the categories of futons, mattresses, bunk beds and upholstered items. Full year operating profit declined in 2011 as gross margins were lower on higher input costs and less favourable exchange rates.

Other
2011 results include an income amount of US$12.2 million, of which $US11.1 million was recorded in the fourth quarter and which is recorded as an income in general and administrative expenses within the corporate results. This amount, which is non-taxable, was due to a change of assumptions on contingent consideration and put option liabilities related to certain past business acquisitions. In particular, the contingent consideration and put option liabilities with regards to Dorel Brazil, IGC (Australia) and Hot Wheels (CSG U.K.) have been reduced based on lower estimated future earnings when the financial liabilities will be resolved. These amounts have been recorded as a reduction of other financial liabilities on the statement of financial position.

The contingent consideration and put option liabilities established at the outset are recorded at net present value. With the passage of time, to increase the liability to the amount assumed to be eventually paid, an amount is recorded in finance expenses. As a result of these new reduced liabilities, the finance expenses pertaining to these above entities will be approximately US$1.2 million lower annually going forward.

For the year, cash flow provided by operating activities more than doubled to US$162.5 million. This compares to US$78.9 million recorded in 2010, an increase of US$83.6 million. Free cash flow, a non-GAAP financial measure defined as cash flow from operating activities less capital expenditures, share repurchases and dividend payments, was US$77.4 million for the year. This compares to negative US$10.3 million in the prior year. This was despite lower year-over-year after-tax earnings of US$23.1 millionand was principally due to improved working capital management driven by inventory reductions.

As has been stated in the past, the Company estimates the appropriate level of inventory to support the business to be from US$450 million to US$470 million. As a result of management's focus on right sizing inventory levels, the balance as at December 30, 2011 was US$442.4 million. This inventory reduction alone generated cash flow of US$81.4 millionin the year.

In 2011 the Company's effective tax rate was 8.1% as compared to 9.8% in 2010.

Outlook
"In Juvenile in particular, we are challenged by declining birth rates and fragile economies in most of the Company's markets. However, throughout the year we continued to focus on the long term, as evidenced by aggressively broadening our market through acquisitions such as Dorel Chile in South America and Poltrade in Eastern Europe, and in focusing on markets such as the specialist channel in the U.S. and the fast growing Internet retail channel. In Juvenile we did see an improvement in the fourth quarter over the third, an indication of an improving outlook. Sales thus far in 2012 are slightly ahead of 2011", stated Mr. Schwartz.

"We expect South America to become an important contributor to earnings with the establishment of Dorel Chile late in the year and improvements are expected in Brazil. For the Juvenile segment as a whole, we are concerned about the cost environment, as evidenced by recent increases in oil prices affecting resin, transportation costs and other key inputs of our juvenile products, and as such remain cautious at this time about 2012.

"Dorel's bicycle business had another very strong year, significantly improving on 2010's positive results. We are confident this is sustainable and that the Recreational / Leisure segment will continue to deliver growth. To help ensure this, we will continue to invest in research and development and promote our brands through new innovative marketing throughout the world, and thus further penetrate our markets. In Home Furnishings, we are cautiously optimistic. The year ended on a strong note and 2012 has started well. Sales and POS levels at major customers for the first two months were up from prior year.

"By most measures 2011 was not an acceptable year for Dorel. While others may have cut back to help short-term earnings at the expense of long term gain, we did not. We were able to focus on long-term objectives and expanded our global reach, improved our products and supported our brands. We were also able to generate good cash flow, allowing us to make these investments. This long term vision will help us in 2012 and we anticipate improved earnings from our operations," concluded Mr. Schwartz.

Source: Dorel Industries Inc.

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