In early February, Dorel warned investors that continued discounting and delayed orders at its bicycle business will cause it to report 2013 fourth quarter consolidated earnings below 2012 levels.
Companywide, Dorel Industries' revenue for the fourth quarter was US$633.5 million up 1.8 percent from US$622.6 million a year ago. Net income was US$11.0 million or US$0.34 per diluted share compared to net income of US$29.1 million or US$0.91 per diluted share in 2012.
The Company had previously announced a restructuring of its Recreational/Leisure segment, with a total pre-tax charge of US$14 million to US$16 million. Included in this fourth quarter is US$13.5 million pre-tax, of which 65 percent is non-cash, related to this restructuring with the balance to be incurred in 2014. Excluding the impact of these restructuring charges, adjusted net income for the quarter was US$19.2 million or US$0.60 per diluted share.
Revenue for the full year was US$2.4 billion, down 2.2 percent from last year's US$2.5 billion. Net income was US$57.7 million or US$1.79 per diluted share, compared to US$108.5 million or US$3.39 per diluted share a year ago. Excluding full year restructuring charges of US$15.4 million pre-tax in the Recreational/Leisure segment, adjusted net income for the year was US$67.1 million or US$2.09 per diluted share.
"2013's performance was disappointing," stated Dorel's President and CEO, Martin Schwartz. "A number of the issues we faced were industry and economy related, while others were the result of less than perfect execution on our part. As announced last month, our Recreational/Leisure segment was negatively affected by top line weakness and a poorer product mix as mass merchant store traffic in general was reduced and the independent bike dealer (IBD) channel was reluctant to increase inventories going into the new year. Matters in our direct control are being addressed and there has been definite progress."
Dorel communicated in January that the Recreational/Leisure segment is restructuring its operations to enhance its competitiveness. "Specifically, we want to significantly reduce development and supply chain lead times with our global partners, improve cost structures and operating margins. This plan will result in higher levels of service for our customers and consumers and will improve profit through 2014 and 2015. We expect to realize annualized cost savings of at least US$6 million once the restructuring is completed in late 2014," added Schwartz.
"The Juvenile segment faced headwinds last year, particularly in North America and Europe where the marketplace is challenging. Our Latin American expansion continued to be a bright spot, as Dorel Juvenile Chile performed well and Dorel Juvenile Brazil substantially improved over 2012. In Home Furnishings, we are pleased with their continued gains in the Internet sales channel which serves as a good model for the rest of our businesses," concluded Schwartz.
Fourth quarter
Excluding the impact of foreign exchange, organic revenue decreased by approximately 4 percent. While sales were lower than the prior year, versus the third quarter of 2013, they increased by almost 7 percent with improvements in several markets. Most of the segment's markets saw their currency weaken against the U.S. dollar and this had the effect of dampening earnings. The exception was the Euro which strengthened against its U.S. counterpart in the quarter, helping to offset these other declines. Overall the segment recorded earnings similar to the prior year, despite the lower revenues.
Full year
Revenues declined approximately 6 percent from the prior year excluding the impact of foreign exchange and acquisitions. As it was the case in the fourth quarter, the reduced sales were in North America and Europe, whereas Latin America sales growth was strong in all regions. Retail continues to grow in importance in Chile and Peru with 18 new locations opened through the year bringing the total number of stores there to 88.
In almost all markets the earnings decline was driven by sales shortfalls and in Canada and Australia by a decrease in the value of local currencies. Strong cost management across the segment kept gross profit stable, offsetting the impact of lower volumes and unfavourable exchange.
Subsequent to year end, Dorel acquired Israeli-based Tiny Love, a global, award-winning baby products and developmental toy company whose 2013 sales were approximately US$45 million and consist of a product line that is complementary to Dorel's and is sold in more than 50 countries worldwide.
Fourth quarter
Segment revenues were up US$18.8 million or 8.3 percent for the quarter. The organic sales increase was approximately 1 percent, excluding the impact of foreign exchange and the acquisition of Caloi. Sales were affected by the global bike market slowdown, a sluggish start to the holiday season in both the IBD and mass merchant channels as well as an unfavourable product mix. Industry discounting continued throughout the quarter and more 2013 model year bicycles with lower gross profit were sold than had been anticipated. As well, supply for firm customer orders for more than US$10 million of CSG 2014 models did not arrive in time for fourth quarter delivery and were shipped during the current first quarter.
The US$13.5 million pre-tax restructuring charges and costs resulted in a decline of the segment's results to an operating loss of US$5.4 million from an operating profit of US$16.5 million in 2012. Excluding the restructuring charges, the segment posted US$8.1 million in operating profit. All organic businesses experienced a profit decline in the fourth quarter. Caloi, acquired in August 2013, contributed a full quarter of profitability.
Full year
The organic sales decrease after removing the impact of foreign exchange and acquisitions was approximately 2 percent and was in both the IBD and the mass merchant distribution channels. In both cases the decline was driven by a 2013 global decrease in the bicycle market, predominantly caused by the extremely poor weather during the first half of 2013.
For the year the segment recorded a total of US$15.4 million pre-tax in restructuring charges and costs. Operating profit in all of the segment's divisions, with the exception of Caloi, was down as increased price discounting was prevalent through the year. Unfavorable product and customer mix was also a major contributor to the reduced gross profit.
Fourth quarter
The fourth quarter increase was driven by higher sales of imported furniture items, mattresses, futons and folding furniture. Both Dorel Home Products and Cosco Home and Office performed exceedingly well. In addition, Home Furnishings continues its expansion into the Internet sales channel which now represents a significant portion of revenue, accounting for just over 20 percent of sales. The segment's drop-ship vendor channel continued to gain traction, helping to drive the growth of the Internet channel. Gross profit remained stable due mainly to effective cost controls.
Full year
2013 Home Furnishings revenues were US$523.8 million compared to US$521.5 million in the prior year. Sales decreases of metal folding furniture were offset by the sales growth of imported furniture, principally in the futon, mattress, bunk bed and upholstered item categories. The segment posted another record year of sales through the Internet sales channel which offset reductions in sales to brick and mortar stores. Operating profit was up 1.6 percent for the year.
Other
In 2013, the Company's effective tax rate was 8.0 percent as compared to 16.3 percent in 2012. The main causes of the variations are changes in the jurisdictions in which the Company generated its income and the recognition of a tax benefit pertaining to an adjustment of tax balances following a foreign reorganization.
Statement of Financial Position and Cash Flow
For the year, cash flow provided by operating activities was US$144.3 million compared to US$107.2 million recorded in 2012, an increase of US$37.1 million. This was despite lower year-over-year after-tax earnings and was due to improved working capital management.
Outlook
"Now two months into 2014, we are seeing an encouraging start to the year. In Recreational/Leisure, the restructuring and cost-cutting initiatives underway, coupled with an expected rebound in all markets and a full year of Caloi in Brazil, provide for confidence for the year ahead. Weather is always a variable that we cannot control, but if last spring's record rain and cold in both North America and Europe are not repeated, we are definitely well positioned to return to much higher levels of profitability. Earnings for the first quarter should improve by at least 20 percent to 25 percent over last year.
"In Juvenile, we expect most markets to improve their earnings in 2014. This along with the contribution of Tiny Love acquired in January should translate into earnings growth of at least 10 percent for the year. Note that this expectation excludes the negative impact of the costs of the one-time U.S. legal case that we recorded 2013. As we start the year, currency challenges in Canada, Australia and Latin America should result in the first quarter being slightly below last year, but this does not dampen our enthusiasm for the full year.
"In Home Furnishings, we expect moderate growth in sales and earnings as we continue to capitalize on our Omni-channel distribution through both traditional and on-line retailers," concluded Schwartz.
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