MONTREAL – Dorel Industries expects its juvenile business will be weaker this year as it continues to face softer consumer demand and feels the financial effects of a U.S. jury award related to a 2008 accident in which a child travelling in one of its car seats was seriously injured.
The Montreal-based company (TSX:DII.B) was ordered by a Mississippi jury in September to pay half of a US$52-million judgment to the family of a child injured in a drunk driver crash in 2008.
Most of Dorel’s liability is covered by insurance, but its third-quarter results were affected by an $8.5-million ($4.9 million after-tax) provision for the lawsuit.
“Dorel spends millions annually in product development and testing to ensure that our products are of the highest quality. This has always been of up most importance to us,” president and CEO Martin Schwartz said Thursday during a conference call to discuss its third-quarter results.
The company said it has launched an appeal to the state’s Supreme Court, arguing the trial process was flawed. Based on its lawyers evaluation, Schwartz said Dorel is confident the judgment will either be overturned, the assessed liability reduced or a new trial ordered.
While the company doesn’t expect the juvenile segment, which also makes strollers and other baby products, will surpass last year’s results, it foresees a stronger performance for its recreational and leisure segment in the fourth quarter in spite of independent bike dealers being cautious about purchases for the holiday season because of last spring’s poor weather.
Most of its optimism is centred on Latin America following the acquisition in August of a 70 per cent stake in Caloi, Brazil’s largest bicycle manufacture, for US$73 million. Caloi contributed US$1.3 million in profit on US$16 million of revenue in the third quarter.
Overall, Dorel said it expects the operating profit for the fourth quarter will be higher than the third quarter, setting the stage “for an improved 2014,” Schwartz told analysts.
Dorel’s net income plummeted by almost half to US$11.1 million in the third quarter on lower revenues and charges for both core divisions — juvenile and recreational and leisure. The company also operates a home furnishings division.
Reporting in U.S. dollars, Dorel said it earned 34 cents per diluted share for the period ended Sept. 30, down from 63 cents per share or $20 million a year earlier.
The results included $9.4 million in one-time charges, including $4.5 million related to currency losses on the Caloi acquisition and the jury award provision.
Excluding these one-time costs, Dorel (TSX:DII.B) earned $20.5 million or 64 cents per share.
Revenues fell to $607.3 million from $613.3 million a year earlier as contributions from its majority stake in Caloi were more than offset by the impact of a slower retail environment for its juvenile products in some European and North American markets.
Dorel was expected to earn 59 cents per share in adjusted net income on $615.7 million of revenues, according to analysts polled by Thomson Reuters.
“These results are not acceptable,” Schwartz said, adding that the results are somewhat masked by the charges.
“Thus far it has been a challenging year in our core businesses of juvenile and bikes. We’ve been making the required adjustments which include a focus on new product development.”
After a weak second quarter, its recreation/leisure division rebounded in the third quarter with operating profits increasing 12 per cent to $14.1 million on $231.6 million of revenues.
Juvenile profits decreased to $5 million from $16.9 million a year ago on a 4.1 per cent dip in revenues to $239 million.
Home furnishings was steady, earning $5.8 million on $136.7 million in revenue.
On the Toronto Stock Exchange, Dorel’s shares were up three cents at $39.14 in afternoon trading Thursday.