STYLE INNOVATION SAFETY FIRST QUARTERLY REPORT FOR THE THREE MONTHS ENDED MARCH 31, 2014

Transcription

1 STYLE INNOVATION SAFETY FIRST QUARTERLY REPORT FOR THE THREE MONTHS ENDED MARCH 31, 2014

2 Management s Discussion and Analysis of Financial Conditions and Results of Operations For the quarter ended March 31, 2014 All figures in US dollars This Interim Management s Discussion and Analysis of Financial Conditions and Results of Operations ( MD & A ) should be read in conjunction with the unaudited condensed consolidated interim financial statements as at and for the three months ended March 31, 2014 and the audited consolidated financial statements and MD & A as at and for the year ended December 30, This MD & A is based on reported earnings prepared in accordance with International Financial Reporting Standards ( IFRS ), using the US dollar as the reporting currency. The Company s condensed consolidated interim financial statements have been prepared using the same accounting policies as described in Note 4 of the Company s audited consolidated financial statements for the year ended December 30, The condensed consolidated interim financial statements do not include all of the information required for full annual financial statements. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with IFRS were omitted or condensed where such information is not considered material to the understanding of the Company s condensed consolidated interim financial statements. Quarterly reports, the annual report and supplementary information filed with the Canadian securities regulatory authorities can be found on-line at as well as on the Company s corporate Web site at Note that there have been no significant changes with regards to the Corporate Overview, Operating Segments, Contractual Obligations, Off-Balance Sheet Arrangements, Derivative Financial Instruments, Critical Accounting Estimates or Market Risks and Uncertainties to those outlined in the Company s 2013 annual MD & A as filed with Canadian securities regulatory authorities on March 6, As such, they are not repeated herein. The information in this MD & A is current as of May 8, SIGNIFICANT EVENTS IN 2014 On January 16, 2014, the Company announced that it had purchased 100% of the shares of juvenile business Tiny Love, a global, baby products and developmental toy company headquartered in Tel Aviv, Israel, with offices located in the U.S. and China. Tiny Love is recognized as an innovator in the developmental toy category, which comprises products like activity gyms, mobiles, light gear and toys designed specifically for babies and toddlers. The purchase price was $55.8 million. The Company is presently in the process of determining the fair value of the assets acquired and the liabilities assumed. In addition, on January 16, 2014, in the Recreational/Leisure segment, the Company acquired certain assets of Sombrio Freewear Company Ltd., a designer and manufacturer of high performance apparel, outwear and streetwear, headquartered in Vancouver, Canada. The purchase price was $0.7 million. On April 3, 2014, Dorel Juvenile Brazil acquired the rights to sell Infanti branded product in the Brazilian market place for a purchase price of approximately $7.0 million. This acquisition expanded the Company s ownership of the Infanti brand, to which the Company already owns the rights in Chile, Bolivia, Peru, Argentina, Colombia, and most Central American and Caribbean countries. The entire fair value of the assets acquired consists of a trademark. DOREL INDUSTRIES INC. MANAGEMENT S DISCUSSION AND ANALYSIS for the quarter ended March 31,

3 On April 22, 2014, Caloi issued approximately $44.4 million of non-convertible unsecured debentures in Brazil. The proceeds from the issuance of the debentures will be used to replace current existing debts such as bank indebtedness and revolving bank loans which will reduce the interest paid by Caloi. The terms and the principal repayments of these debentures are disclosed in Note 14 of the March 31, 2014 condensed consolidated interim financial statements. RESULTS OF OPERATIONS (All tabular figures are in thousands except per share amounts) Overview For the first quarter of 2014, revenue increased by $53.5 million, or 9.0%, to $647.7 million. This compares to $594.2 million posted a year ago. The organic revenue increase, removing the impact of foreign exchange rate variations and new business acquisitions was approximately 5%. Pre-tax earnings increased by 20.7% to $29.8 million from $24.7 million in Net income for the quarter was $24.8 million, an increase of 11.1% from the $22.3 million recorded in On a diluted earnings per share ( EPS ) basis, this equates to $0.77 for the first quarter of 2014 compared to $0.70 in In the quarter, gross profit decreased by 30 basis points to 23.9% from 24.2% in the prior year. The gross profit decrease was in all segments and will be explained below in the segmented results section. Versus the prior year, the Company s selling expenses increased by $1.3 million, or 2.4%. Selling expenses increased by $3.3 million due to the newly acquired Caloi in the Recreational segment and Tiny Love in the Juvenile segment. Excluding the selling expenses of the acquisitions, selling expenses would have decreased by $2.0 million. General and administrative costs decreased by $2.0 million or 3.8% to represent 7.7% of revenue compared with 8.8% in the prior year. Excluding the impact of the acquired companies, general and administrative expenses would have represented 7.4% of revenue, or a decrease of approximately 11.6% compared with the previous year. Before tax, restructuring costs in the first quarter of 2014 were $0.5 million and consisted mainly of accelerated depreciation due to the revision of the estimated useful lives of long-live assets related to the ongoing initiatives to close the Bedford assembly plant in Pennsylvania and to the transition to a distributor model in Australia. Restructuring activities began in the second quarter of 2013; as a result, the first quarter of 2013 did not include any restructuring costs. Finance expenses increased by $4.8 million to $9.3 million from $4.5 million in 2013 principally as a result of the acquisition of Caloi. The interest rate on the Company s long-term borrowings in the first quarter of 2014 was 4.1% compared with 3.7% in Included in finance expenses was $2.3 million related to interest recorded on the Company s put option liabilities related to certain of its business acquisitions. This compares to $0.6 million in the first quarter of As a multi-national company, Dorel is resident in numerous countries and therefore subject to different tax rates in those various tax jurisdictions and by the interpretation and application of tax laws, as well as the application of income tax treaties between various countries. As such, significant tax rate variations can occur from year to year and between quarters within a given year. The 2014 first quarter tax rate was 16.8% versus 9.6% in the prior year. The main causes of the variations year-over-year are changes in the jurisdictions in which the Company generated its income and the increase in the fair value adjustments related to the put option liabilities which are non-deductible for tax purposes. The Company has stated that for the full year it expects its annual tax rate to be between 15% and 20%. However, variations in earnings across quarters mean that this rate may vary significantly from quarter to quarter. DOREL INDUSTRIES INC. MANAGEMENT S DISCUSSION AND ANALYSIS for the quarter ended March 31,

4 The principal changes in net income from 2013 to 2014 are summarized as follows: Juvenile increase $ 1,648 Recreational/Leisure (excluding restructuring costs) increase 7,221 Home Furnishings increase 122 Restructuring costs increase (451) Total increase in operating profit 8,540 Increase in finance expenses (4,797) Increase in income tax expense (2,638) Decrease in corporate expenses 1,379 Total increase in net income $ 2,484 The causes of these variations versus last year are discussed in more detail below. Selected Financial Information The tables below show selected financial information for the eight most recently completed quarters. Operating Results for the Quarters Ended $ $ $ $ Mar. 31, 2014 Dec. 30, 2013 Sep. 30, 2013 Jun. 30, 2013 Total revenue $647,701 $633,534 $607,298 $600,449 Net income $24,800 $11,024 $11,105 $13,224 Earnings per share: Basic $0.78 $0.35 $0.35 $0.41 Diluted $0.77 $0.34 $0.34 $0.41 Amount of restructuring costs after tax included in the quarter based on diluted earnings per share $ 0.01 $ 0.25 $ - $ 0.04 Operating Results for the Quarters Ended $ $ $ $ Mar. 31, 2013 Dec. 30, 2012 Sep. 30, 2012 Jun. 30, 2012 Total revenue $594,168 $622,604 $613,295 $633,711 Net income $22,316 $29,119 $19,986 $30,345 Earnings per share: Basic $0.70 $0.92 $0.64 $0.95 Diluted $0.70 $0.91 $0.63 $0.95 Amount of restructuring costs after tax included in the quarter based on diluted earnings per share $ - $ - $ - $ - DOREL INDUSTRIES INC. MANAGEMENT S DISCUSSION AND ANALYSIS for the quarter ended March 31,

5 Segmented Results Segmented figures are presented in Note 13 to the Company s condensed consolidated interim financial statements. Further industry segment detail is presented below: Juvenile Results as a percentage of total revenue Three months ended March Total revenue 100.0% 100.0% Cost of sales 71.6% 70.8% Gross profit 28.4% 29.2% Selling expenses 10.8% 10.8% General and administrative expenses 7.9% 9.5% Research and development expenses 2.4% 1.9% Operating profit 7.3% 7.0% Juvenile segment revenue in the first quarter of 2014 was $269.2 million, compared to $255.2 million in 2013, an increase of 5.5%. Organic revenue increased by approximately 3% after removing the effect of the Tiny Love acquisition and the impact of varying exchange rates year-over-year. Operating profit for the period was $19.6 million, an increase of 9.2% from $17.9 million in 2013 and includes a full quarter of results from Tiny Love, acquired in January Versus the prior year, Dorel Juvenile USA was the main driver of the improvement in operating profit due to slightly improved gross margins and costs that were well contained. This improvement was partly offset by a general weakness in foreign currency exchange rates versus the US dollar which had a negative impact on operating profit, particularly in Canada, Australia and Latin America. At Dorel Juvenile Europe, the Euro and the GBP held steady against the US dollar and currency was not a major driver of year over year variations in operating profit. Gross profit decreased by 80 basis points to 28.4% compared to 29.2% in 2013, primarily as a result of foreign currency exchange rate pressures in Canada, Australia and Latin America. For the segment as a whole, selling expenses increased by $1.5 million and general and administrative expenses decreased by $2.8 million. The majority of the increase in selling expenses can be attributed to the selling expenses of Tiny Love which represented more than two thirds of the increase. The balance of the increase was due to marketing spend in Europe ahead of second quarter 2014 product launches as well as increases associated with an increased number of retail locations in Chile and Peru. The majority of the decrease in general and administrative expenses is attributed to lower product liability costs. DOREL INDUSTRIES INC. MANAGEMENT S DISCUSSION AND ANALYSIS for the quarter ended March 31,

6 Recreational / Leisure Results as a percentage of total revenue Three months ended March Total revenue 100.0% 100.0% Cost of sales 74.9% 74.8% Gross profit 25.1% 25.2% Selling expenses 9.6% 11.5% General and administrative expenses 8.0% 8.2% Research and development expenses 0.6% 0.8% Restructuring costs 0.1% - Operating profit 6.8% 4.7% First quarter 2014 Recreational/Leisure revenue increased by $36.8 million, or 18.1% to $240.3 million compared to last year s $203.5 million. Organic revenue increased by approximately 8%, after removing the effect of acquisitions and excluding the impact of varying foreign exchange rates year over year. Overseas markets (especially Europe) have started the year strongly, tempered by the US where there has been a softer start to the year driven by the late spring. Adjusted operating profit, excluding restructuring costs, increased by $7.2 million, or 75.7% to $16.8 million, compared to $9.5 million in Adjusted gross profit, excluding restructuring costs, was stable compared to the prior year at 25.2% driven by favorable product mix in the independent bike dealers channel (IBD) as the majority of the quarter s shipments were comprised of model year 2014 at full margin, tempered slightly by the mass market channel, where gross profit was marginally below the prior year s levels. Selling expenses decreased by 1.8% and general and administrative expenses rose by 15.8%. Excluding the acquisition of Caloi, selling expenses would have decreased by 11.7% and general and administrative expenses would have decreased by 2.7%. These decreases are in part as a result of the restructuring plan as well as other cost-containment measures to enhance the segment s competitiveness and improve profitability. Home Furnishings Results as a percentage of total revenue Three months ended March Total revenue 100.0% 100.0% Cost of sales 86.9% 86.6% Gross profit 13.1% 13.4% Selling expenses 2.9% 2.8% General and administrative expenses 3.7% 4.1% Research and development expenses 0.7% 0.6% Operating profit 5.8% 5.9% Revenue in Home Furnishings increased by $2.7 million or 2.0%, from $135.4 million in 2013 to $138.1 million in The segment s internet and drop-ship vendor programs drove on-line-sales up compared to the previous year to represent a significant portion of total segment sales. These increases were partially offset by declines in sales to brick and mortar stores. Operating profit was $8.1 million compared to $7.9 million in the prior year, an increase of $0.2 million or 1.5%. DOREL INDUSTRIES INC. MANAGEMENT S DISCUSSION AND ANALYSIS for the quarter ended March 31,

7 Gross profit in 2014 was 13.1%, a decline of 30 basis points from the 13.4% in the prior year, driven by slightly higher distribution and operational costs at the segments RTA manufacturing plants. Operating expenses, consisting of selling, general and administrative, and research and development costs, remain well-contained and were slightly lower than the previous year at less than 8%, contributing to the operating profit increase of 1.5%. LIQUIDITY AND CAPITAL RESOURCES Statement of Financial Position Certain of the Company s working capital ratios are as follows: As at: Mar. 31, 2014 Mar. 31, 2013 Dec. 30, 2013 Debt* to equity # of days in receivables # of days in inventory # of days in payables *Debt is defined as bank indebtedness plus long-term debt Excluding the assets and liabilities acquired as part of the acquisitions of Caloi and Tiny Love, there were no significant changes in the Company s Statement of Financial Position in the quarter when compared to the above periods except as discussed below. The increase in the debt to equity ratio compared to year-end is a function of higher borrowing as at the end of the first quarter due to the acquisition of Tiny Love and to the fact that traditionally, the first quarter requires increased borrowings as the Company s cash flow generated from operating activities is weighted towards the second half of the year. Similarly, the increase in the number of days in receivables is consistent with prior years and is in line with internal expectations. Inventory as at March 31, 2014 was $574.8 million, an increase of $19.2 million or 3.5% from $555.6 million as of December 30, The increase is mainly in the Recreation/Leisure segment partially offset by decreases in Juvenile and Home Furnishings segments. As at December 30, 2013, the Company was in breach with one of its covenants. As a result of this breach, the Company reclassified the long-term portion of the related debts to the current portion of long-term debt since as at December 30, 2013, the Company had not obtained from the associated lenders the amendment to its debt agreements for this covenant. During the three months ended March 31, 2014, the Company amended certain financial covenants related to its debt agreements. As of March 31, 2014, Dorel was compliant with all of its borrowing covenant requirements and as a result the related debts are classified as long-term. The Company continuously reviews its cash management and financing strategy to optimize the use of funds and minimize its cost of borrowing. Statement of Cash Flows During the first three months of 2014, cash flow provided by operating activities was $4.2 million compared to a use of $19.3 million in The improvement in the cash flow provided by operating activities was primarily due to working capital management. Net additions to property, plant and equipment and intangible assets were $14.7 million in 2014 compared to $11.9 million in The Company disbursed net of the cash acquired $48.2 million related to acquisitions in the first quarter of In addition, the Company disbursed $9.6 million for dividends in the first quarters of 2014 in line with Included in the financing activities is a positive cash flow amount of $6.6 million for 2014 and $5.0 million for 2013 related to certain stock options being exercised under the Company s employee stock option plan. Bank indebtedness plus long-term debt less cash and cash equivalents include a combined net increase of $66.5 million for the three months ended March 31, 2014 which is mainly as a result of the acquisition of Tiny Love. DOREL INDUSTRIES INC. MANAGEMENT S DISCUSSION AND ANALYSIS for the quarter ended March 31,

8 Future Accounting Changes A number of new standards, interpretations and amendments to existing standards were issued by the International Accounting Standards Board or the International Financial Reporting Interpretations Committee ( IFRIC ) that are mandatory but not yet effective for the three months ended March 31, 2014 and have not been applied in preparing these condensed consolidated interim financial statements. The following standards and interpretations have been issued by the IASB and the IFRIC with effective dates in the future that have been determined by management to impact the consolidated financial statements: IFRS 9 Financial Instruments IFRIC Interpretation 21 Levies (IFRIC 21) Further information on these modifications can be found in Note 3 of the March 31, 2014 condensed consolidated interim financial statements. OTHER INFORMATION The designation, number and amount of each class and series of its shares outstanding as of April 30, 2014 are 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) 4,195,135 $1,771 28,095,947 $197,168 $198,939 Outstanding stock options and Deferred Share Units are disclosed in Note 9 to the Company s condensed consolidated interim financial statements. 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. Disclosure Controls and Procedures and Internal Controls over Financial Reporting During the quarter ended March 31, 2014 the Company has made no change that has materially affected or is likely to materially affect the Company s internal control over financial reporting. DOREL INDUSTRIES INC. MANAGEMENT S DISCUSSION AND ANALYSIS for the quarter ended March 31,

9 In accordance with National Instrument and with practices accepted by the Autorités des Marchés Financiers, the Company excluded Caloi from its assessment of internal control over financial reporting. Supplemental information about this acquisition is provided in the table below: Three months ended March 31, 2014 $ Total Revenue 20,480 Operating Profit (1) (3,246) As at March 31, 2014 $ Total current assets 66,679 Total non-current assets 154,170 Total current liabilities 66,764 Total non-current liabilities 80,513 (1) Includes all fair value adjustments related to the put option liabilities but excludes the accretion expense on those put option liabilities which are not presented in the recreational/leisure segment. These costs are included in the corporate expenses within the segmented income statement in Note 13 to the condensed consolidated interim financial statements. Caution Regarding Forward Looking Information Certain statements included in this MD&A may constitute forward-looking statements within the meaning of applicable Canadian securities legislation. Except as may be required by Canadian securities laws, the Company does not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Forward-looking statements, by their very nature, are subject to numerous risks and uncertainties and are based on several assumptions which give rise to the possibility that actual results could differ materially from the Company s expectations expressed in or implied by such forward-looking statements and that the objectives, plans, strategic priorities and business outlook may not be achieved. As a result, the Company cannot guarantee that any forward-looking statement will materialize. Forward-looking statements are provided in this MD&A for the purpose of giving information about Management s current expectations and plans and allowing investors and others to get a better understanding of the Company s operating environment. However, readers are cautioned that it may not be appropriate to use such forward-looking statements for any other purpose. Forward-looking statements made in this MD&A are based on a number of assumptions that the Company believed were reasonable on the day it made the forward-looking statements. Factors that could cause actual results to differ materially from the Company s expectations expressed in or implied by the forward-looking statements include: general economic conditions; changes in product costs and supply channel; foreign currency fluctuations; customer and credit risk including the concentration of revenues with few customers; costs associated with product liability; changes in income tax legislation or the interpretation or application of those rules; the continued ability to develop products and support brand names; changes in the regulatory environment; continued access to capital resources and the related costs of borrowing; changes in assumptions in the valuation of goodwill and other intangible assets and subject to dividends being declared by the Board of Directors, there can be no certainty that Dorel Industries Inc. s Dividend Policy will be maintained. These and other risk factors that could cause actual results to differ materially from expectations expressed in or implied by the forward-looking statements are discussed in the Company s annual MD&A and Annual Information Form filed with the applicable Canadian securities regulatory authorities. The risk factors outlined in the previously mentioned documents are specifically incorporated herein by reference. The Company cautions readers that the risks described above are not the only ones that could impact it. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial may also have a material adverse effect on the business, financial condition or results of operations. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. DOREL INDUSTRIES INC. MANAGEMENT S DISCUSSION AND ANALYSIS for the quarter ended March 31,

10 Except as otherwise indicated, forward-looking statements do not reflect the potential impact of any non-recurring or other unusual items or of any dispositions, mergers, acquisitions, other business combinations or other transactions that may be announced or that may occur after the date hereof. The financial impact of these transactions and nonrecurring and other unusual items can be complex and depends on the facts particular to each of them. The Company therefore cannot describe the expected impact in a meaningful way or in the same way the Company presents known risks affecting the business. DOREL INDUSTRIES INC. MANAGEMENT S DISCUSSION AND ANALYSIS for the quarter ended March 31,

11 CONDENSED CONSOLIDATED INTERIM STATEMENTS OF FINANCIAL POSITION ALL FIGURES IN THOUSANDS OF US $ ASSETS CURRENT ASSETS As at March 31, 2014 (unaudited) As at December 30, 2013 (unaudited) Cash and cash equivalents (Note 12) $ 41,666 $ 40,074 Trade and other receivables 504, ,465 Inventories 574, ,567 Other financial assets Income taxes receivable 13,912 11,626 Prepaid expenses 33,857 26,200 NON-CURRENT ASSETS 1,169,015 1,090,163 Property, plant and equipment 182, ,299 Intangible assets 544, ,381 Goodwill (Note 13) 657, ,084 Other financial assets Deferred tax assets 24,008 24,356 Other assets 7,305 6,060 LIABILITIES 1,416,947 1,349,800 $ 2,585,962 $ 2,439,963 CURRENT LIABILITIES Bank indebtedness $ 66,856 $ 72,546 Trade and other payables 420, ,311 Other financial liabilities 3,540 3,231 Income taxes payable 7,574 7,075 Long-term debt (Note 6) 19, ,374 Provisions 44,078 44, , ,107 NON-CURRENT LIABILITIES Long-term debt (Note 6) 411,497 13,183 Net pension and post-retirement defined benefit liabilities 30,951 31,701 Deferred tax liabilities 97,144 87,171 Provisions 2,013 1,993 Put option liabilities (Note 7) 96,610 92,570 Other financial liabilities 2,731 2,727 Other long-term liabilities 13,789 12,751 EQUITY 654, ,096 Share capital (Note 8) 198, ,458 Contributed surplus 25,480 26,994 Accumulated other comprehensive income 68,099 67,824 Retained earnings 1,076,662 1,061,484 1,369,180 1,346,760 $ 2,585,962 $ 2,439,963 (See accompanying notes) DOREL INDUSTRIES INC. CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS for the quarter ended March 31,

12 CONDENSED CONSOLIDATED INTERIM INCOME STATEMENTS ALL FIGURES IN THOUSANDS OF US $, EXCEPT PER SHARE AMOUNTS Three Months Ended March 31, 2014 March 31, 2013 (unaudited) (unaudited) Sales $ 643,158 $ 589,066 Licensing and commission income 4,543 5,102 TOTAL REVENUE 647, ,168 Cost of sales (Note 4) 492, ,293 GROSS PROFIT 154, ,875 Selling expenses 56,698 55,360 General and administrative expenses 50,131 52,134 Research and development expenses 8,751 7,203 Restructuring costs (Note 4) 271 OPERATING PROFIT 39,097 29,178 Finance expenses (Note 11). 9,279 4,482 INCOME BEFORE INCOME TAXES 4 29,818 24,696 Income taxes expense 5,018 2,380 NET INCOME $ 24,800 $ 22,316 EARNINGS PER SHARE Basic $ 0.78 $ 0.70 Diluted $ 0.77 $ 0.70 SHARES OUTSTANDING (Note 10) Basic weighted average 31,938,232 31,664,721 Diluted weighted average 32,272,300 32,075,575 (See accompanying notes) DOREL INDUSTRIES INC. CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS for the quarter ended March 31,

13 CONDENSED CONSOLIDATED INTERIM STATEMENTS OF COMPREHENSIVE INCOME ALL FIGURES IN THOUSANDS OF US $ Three Months Ended March 31, 2014 March 31, 2013 (unaudited) (unaudited) NET INCOME $ 24,800 $ 22,316 OTHER COMPREHENSIVE INCOME (LOSS): Items that are or may be reclassified subsequently to net income: Cumulative translation account: Net change in unrealized foreign currency gains (losses) on translation of net investments in foreign operations, net of tax of nil (332) (15,638) Net changes in cash flow hedges: Net change in unrealized gains (losses) on derivatives designated as cash flow hedges 131 4,118 Reclassification to income Reclassification to the related non-financial asset 484 (130) Deferred income taxes (298) (1,252) 607 2,988 Items that will not be reclassified to net income: Defined benefit plans: Remeasurements of the net pension and post-retirement defined benefit liabilities 8 Deferred income taxes (2) 6 TOTAL OTHER COMPREHENSIVE INCOME (LOSS) 275 (12,644) TOTAL COMPREHENSIVE INCOME $ 25,075 $ 9,672 (See accompanying notes) DOREL INDUSTRIES INC. CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS for the quarter ended March 31,

14 CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CHANGES IN EQUITY ALL FIGURES IN THOUSANDS OF US $ Attributable to equity holders of the Company Accumulated other comprehensive income Share Capital Contributed Surplus Cumulative Translation Account Cash Flow Hedges Defined Benefit Plans Retained Earnings Total Equity (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) Balance as at December 30, 2012 $ 180,856 $ 27,192 $ 66,391 $ (1,036) $ (7,736 ) $ 1,042,446 $ 1,308,113 Total comprehensive income: Net income 22,316 22,316 Other comprehensive income (loss) (15,638 ) 2,988 6 (12,644 ) $ $ $ (15,638 ) $ 2,988 $ 6 $ 22,316 $ 9,672 Issued under stock option plan 5,794 5,794 Reclassification from contributed surplus due to exercise of stock options 1,229 (1,229 ) Reclassification from contributed surplus due to settlement of deferred share units (Note 9) 33 (132 ) (99 ) Share based payments (Note 9) Dividends on common shares (9,490 ) (9,490 ) Dividends on deferred share units (Note 9) 45 (45 ) Balance as at March 31, 2013 $ 187,912 $ 26,625 $ 50,753 $ 1,952 $ (7,730 ) $ 1,055,227 $ 1,314,739 Balance as at December 30, 2013, $ 190,458 $ 26,994 $ 75,378 $ (2,154 ) $ (5,400 ) $ 1,061,484 $ 1,346,760 Total comprehensive income: Net income 24,800 24,800 Other comprehensive income (loss) (332 ) $ $ $ (332 ) $ 607 $ $ 24,800 $ 25,075 Issued under stock option plan (Note 8) 6,615 6,615 Reclassification from contributed surplus due to exercise of stock options (Note 8) 1,744 (1,744 ) Reclassification from contributed surplus due to settlement of deferred share units (Notes 8 and 9) 122 (131 ) (9 ) Share based payments (Note 9) Dividends on common shares (9,575 ) (9,575 ) Dividends on deferred share units (Note 9) 47 (47 ) Balance as at March 31, 2014 $ 198,939 $ 25,480 $ 75,046 $ (1,547) $ (5,400 ) $ 1,076,662 $ 1,369,180 (See accompanying notes) DOREL INDUSTRIES INC. CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS for the quarter ended March 31,

15 CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS ALL FIGURES IN THOUSANDS OF US $ CASH PROVIDED BY (USED IN): OPERATING ACTIVITIES Three Months Ended March 31, 2014 March 31, 2013 (unaudited) (unaudited) Net income $ 24,800 $ 22,316 Items not involving cash: Depreciation and amortization 15,020 13,123 Amortization of deferred financing costs (Note 11) Accretion expense on put option liabilities (Notes 7 and 11) 2, Unrealized (gains) losses due to foreign exchange exposure on put option liabilities (Note 7) 1, Other finance expenses (Note 11) 6,757 3,796 Restructuring costs (Note 4) 451 Income taxes expense 5,018 2,380 Share based payments (Note 9) Defined benefit pension and post-retirement costs Gain on disposal of property, plant and equipment (23) (21) 57,415 43,782 Net change in balances related to operations (Note 12) (42,340) (64,880) Income taxes paid (12,609) (5,362) Income taxes received 5,219 8,228 Interest paid (3,690) (1,518) Interest received CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 4,184 (19,254) FINANCING ACTIVITIES Bank indebtedness (8,257) 15,331 Increase of long-term debt 73,877 22,345 Repayments of long-term debt (1,427) (48) Repayments of contingent consideration (Note 7) (1,995) Financing costs (391) (5) Issuance of share capital (Note 8) 6,600 5,049 Dividends on common shares (9,575) (9,490) CASH PROVIDED BY FINANCING ACTIVITIES 60,827 31,187 INVESTING ACTIVITIES Acquisition of businesses (Notes 5 and 12) (48,161) Additions to property, plant and equipment (10,030) (6,645) Disposals of property, plant and equipment Additions to intangible assets (4,706) (5,342) CASH USED IN INVESTING ACTIVITIES (62,864) (11,928) Effect of foreign currency exchange rate changes on cash and cash equivalents (555) (795) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,592 (790) Cash and cash equivalents, beginning of period 40,074 38,311 CASH AND CASH EQUIVALENTS, END OF PERIOD $ 41,666 $ 37,521 (See accompanying notes) DOREL INDUSTRIES INC. CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS for the quarter ended March 31,

16 Notes to the Condensed Consolidated Interim Financial Statements For the Three Months Ended March 31, 2014 and 2013 All figures in thousands of US$, except per share amounts (unaudited) 1. Nature of operations Dorel Industries Inc. (the Company ) is a global consumer products company which designs, manufactures or sources, markets and distributes a diverse portfolio of powerful product brands, marketed through its Juvenile, Recreational/Leisure and Home Furnishings segments. The principal markets for the Company s products are the United States, Canada, Europe and Latin America. 2. Statement of compliance and basis of preparation and measurement The condensed consolidated interim financial statements have been prepared in accordance with IAS 34, Interim Financial Reporting as adopted by the International Accounting Standards Board ( IASB ), using the U.S. dollar as the reporting currency. The U.S. dollar is the functional currency of the Canadian parent company. All financial information is presented in U.S. dollars and has been rounded to the nearest thousand, unless otherwise indicated. These condensed consolidated interim financial statements are prepared in accordance with International Financial Reporting Standards ( IFRS ) and with the same accounting policies and methods of computation followed in the most recent audited consolidated annual financial statements as at and for the year ended December 30, The condensed consolidated interim financial statements do not include all of the information required for full consolidated annual financial statements. Certain information and footnote disclosures normally included in consolidated annual financial statements prepared in accordance with IFRS were omitted or condensed where such information is not considered material to the understanding of the Company s condensed consolidated interim financial information. These condensed consolidated interim financial statements should be read in conjunction with the Company s 2013 audited consolidated annual financial statements. The condensed consolidated interim financial statements have been prepared on a historical basis except for: derivative financial instruments which are measured at fair value; Put option liabilities which are measured at fair value; share-based compensation arrangements which are measured at fair value at grant date; identifiable assets acquired and liabilities assumed in connection with a business combination which are measured at fair value at acquisition date; the net pension and post-retirement defined benefit liabilities which are measured as the net total of plan assets measured at fair value less the discounted present value of the defined benefit obligations; and product liability which is measured at its discounted present value. These condensed consolidated interim financial statements were authorized by the Company s Board of Directors for issue on May 8, The results of operations for the interim period are not necessarily indicative of the results of operations for the full year. The Company does not expect seasonality to be a material factor in quarterly results, though operating segments within the Company may vary more significantly. DOREL INDUSTRIES INC. CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS for the quarter ended March 31,

17 3. Future Accounting Changes A number of new standards, interpretations and amendments to existing standards were issued by the IASB or the International Financial Reporting Interpretations Committee ( IFRIC ) that are mandatory but not yet effective for the three months ended March 31, 2014 and have not been applied in preparing these condensed consolidated interim financial statements. The following standards and interpretations have been issued by the IASB and the IFRIC with effective dates in the future that have been determined by management to impact the consolidated financial statements: IFRS 9 Financial Instruments As part of the initial phase to replace IAS 39, Financial Instruments: Recognition and Measurement, this standard retains but simplifies the mixed measurement model and establishes two primary measurement categories for financial assets. This first part only covers classification and measurement of financial assets and financial liabilities, with impairment of financial assets and hedge accounting being addressed in two other phases. More specifically, the standard: - Deals with classification and measurement of financial assets; - Establishes two primary measurement categories for financial assets: amortized cost and fair value; - Prescribes that classification depends on the entity s business model and the contractual cash flow characteristics of the financial asset; and - Eliminates the following existing categories of financial assets: held to maturity, available for sale, and loans and receivables. Most of the requirements in IAS 39 for classification and measurement of financial liabilities were carried forward in IFRS 9. However, certain changes were also made regarding the fair value option for financial liabilities and accounting for certain derivatives linked to unquoted equity instruments. In November 2013, the IASB released IFRS 9, Financial Instruments (2013), which introduces a new hedge accounting model, together with corresponding disclosures about risk management activities. The new hedge accounting model represents a significant change in hedge accounting requirements. It increases the scope of hedged items eligible for hedge accounting and it enables entities to better reflect their risk management activities in their financial statements. The tentative effective date of this standard is set for annual periods beginning on or after January 1, 2018, with earlier adoption permitted. The Company has not yet assessed the impact of the adoption of this standard on its consolidated financial statements. IFRIC Interpretation 21 Levies (IFRIC 21) IFRIC 21 was issued by the IASB in May IFRIC 21 provides guidance on when to recognize a liability for a levy imposed by a government both for levies that are accounted for in accordance with IAS 37, Provisions, Contingent Liabilities and Contingent Assets and those where the timing and amount of the levy is certain. A levy is an outflow of resources embodying economic benefits that is imposed by governments on entities in accordance with legislation, other than income taxes within the scope of IAS 12, Income Taxes and fines or other penalties imposed for breaches of the legislation. The Interpretation identifies the obligating event for the recognition of a liability as the activity that triggers the payment of the levy in accordance with the relevant legislation. It provides the following guidance on recognition of a liability to pay levies: (i) the liability is recognized progressively if the obligating event occurs over a period of time, and (ii) if an obligation is triggered on reaching a minimum threshold, the liability is recognized when that minimum threshold is reached. The standard is effective for annual periods beginning January 1, 2014 and the Company will not early adopt this Standard. The Company is currently assessing the impact of this new standard on its consolidated financial statements. DOREL INDUSTRIES INC. CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS for the quarter ended March 31,

18 4. Restructuring Activities For the three months ended March 31, 2014, the Company recorded total expenses of $451 (year ended December 30, 2013 $15,432) with respect to restructuring activities, of which $180 (year ended December 30, 2013 $4,075) were recorded as cost of sales and $271 (year ended December 30, 2013 $11,357) were recorded as restructuring costs. Recreational/Leisure segment In the second and fourth quarters of 2013, restructuring activities affecting the Recreational/Leisure segment were initiated. In the second quarter of 2013 the Company initiated significant cost reductions across the Recreational/Leisure segment which included a headcount reduction of some 50 positions worldwide. In the fourth quarter of 2013, the Company continued its strategy which began in the second quarter of 2013 and it was announced that toward the end of 2014, the segment will close its assembly and testing facility in Bedford, Pennsylvania and leverage the strengths and capabilities of its global resources, third party partners, and existing facilities to simplify and optimize its business model. As part of its initiative to simplify and optimize its business model, the Recreational/Leisure segment announced a new partnership in Australia with Monza Imports ( Monza ) who will become the official distributor of the brands in Australia. The operations in Australia will transition to Monza on May 1, Operations currently performed at Bedford, including manufacturing, assembly, testing, quality control and customer and technical services are expected to be redeployed by the end of In addition, the Recreational/Leisure segment will relocate its research and development facility in Bethel, Connecticut to the segment s new headquarters in Wilton, Connecticut, and will convert its former retail lab in Bethel to accommodate GURU Academy activities. The value of the former Bethel headquarters was written down in the fourth quarter of 2013 to the fair value less costs to sell of the property. These restructuring initiatives are expected to be completed by the end of 2014 and result in cumulative restructuring charges of $18,500. To date, the Company has recorded a cumulative charge of $15,883 under the plan, including $9,399 of non-cash charges related to the write-down on long-lived assets, accelerated depreciation due to the revision of the estimated useful lives of long-lived assets and inventory markdowns and $6,484 of employee severance and termination benefits. Of this $15,883 cumulative charge, $451 was recorded in the current fiscal year and $15,432 in The remaining costs associated with these restructuring activities are approximately $1,020 of employee severance and termination benefits, $1,227 of accelerated depreciation and $370 of other associated costs. The costs recognized for these restructuring activities consist of the following: Three Months Ended March 31, Employee severance and termination benefits $ (87) $ Accelerated depreciation 358 Recorded as restructuring costs 271 Inventory markdowns (in cost of sales) (257) Accelerated depreciation (in cost of sales) 437 $ 451 $ As at March 31, 2014, the related restructuring plan provision totaling $4,378 consists of employee severance and termination benefits. A summary of the Company s restructuring plan provision is as follows: Balance December 30, Provision Cash paid Effect of foreign exchange Balance March 31, 2014 Employee severance and termination benefits $ 4,982 $ (87) $ (522) $ 5 $ 4,378 DOREL INDUSTRIES INC. CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS for the quarter ended March 31,

19 5. Business acquisitions Caloi On August 22, 2013, it was announced that the Company was acquiring a 70% interest in Caloi, a major Brazilian manufacturer of bicycles and bicycle equipment. Caloi s portfolio encompasses a full range of bicycles, from highperformance to children s models, including mountain bikes, urban, recreational and road bikes. Caloi s products are distributed across Brazil through a variety of channels, from mass market to independent bicycle dealers. Caloi s manufacturing facility in Manaus, Brazil will assemble bikes for the Company s brands, such as Cannondale, Schwinn, Mongoose and GT to serve the Brazilian and export markets. As part of the acquisition, the Company entered into a put and call agreement with the non-controlling interest holder for the purchase of its 30% stake in Caloi. The preliminary allocation of the fair value of the assets acquired, the liabilities assumed and the consideration transferred includes an estimate of the put option liability of $52,433 and is recorded as a financial liability within put option liabilities. The acquisition has been accounted for using the acquisition method with the results of the operations of Caloi being included in the accompanying condensed consolidated interim financial statements since the date of acquisition. The goodwill is not deductible for tax purposes. The total goodwill amount is included in the Company s Recreational/Leisure segment as reported in Note 13. The following table summarizes the consideration transferred, the preliminary fair value of the identifiable assets acquired and liabilities assumed as at the date of acquisition: Assets Cash and cash equivalents $ 1,056 Trade and other receivables 30,079 Inventories 41,508 Prepaid expenses 489 Property, plant and equipment 18,855 Trademarks 59,320 Customer relationships 16,151 Software licenses 1,107 Deferred development costs 207 Goodwill 50,901 Other financial assets 262 Deferred tax assets 8,560 Other assets 1, ,703 Liabilities Bank indebtedness 41,034 Trade and other payables 24,252 Income taxes payable 302 Current portion of long-term debt 5,828 Provisions 153 Long-term debt 14,420 Deferred tax liabilities 14,491 Other long-term liabilities 3, ,290 Net assets acquired $ 125,413 Consideration: Cash $ 72,980 Put option liability 52,433 $ 125,413 The fair values of the trademarks, the customer relationships and the put option liability have been determined on a provisional basis pending completion of an independent valuation. The fair value, as well as, the gross amount of the trade accounts receivable amount to $26,743 of which $207 was expected to be uncollectible as at the acquisition date and $241 was assumed for anticipated credits. DOREL INDUSTRIES INC. CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS for the quarter ended March 31,

20 5. Business acquisitions (continued) Caloi (continued) The preliminary goodwill of $50,901 includes a control premium as well as the Company s ability to extend their reach into a market that has future growth potential and further solidifies its position as a global leader in the recreational industry. Acquisition-related costs of $142 for the three months ended March 31, 2014 (year ended December 30, $1,698) have been excluded from the consideration transferred and have been recognized as an expense, within general and administrative expenses in the condensed consolidated interim income statement and within the recreational/leisure segment s operating profit. Tiny Love On January , the Company announced that it had purchased 100% of the shares of juvenile business Tiny Love, a global, baby products and developmental toy company headquartered in Tel Aviv, Israel, with offices located in the U.S. and China. Tiny Love is recognized as an innovator in the developmental toy category, which comprises products like activity gyms, mobiles, light gear and toys designed specifically for babies and toddlers. The purchase price was $55,823. A balance of sale of $617 remains to be paid and is presented with the trade and other payables. The Company is presently in the process of determining the fair value of the assets acquired and the liabilities assumed. The acquisition has been accounted for using the acquisition method with the results of operations of Tiny Love being included in the accompanying condensed consolidated interim financial statements since the date of acquisition. The goodwill is not deductible for tax purposes. The total goodwill amount is included in the Company s Juvenile segment as reported in Note 13. The following table summarizes the consideration transferred, the preliminary fair value of the identifiable assets acquired and liabilities assumed as at the date of acquisition: Total assets (1) $ 80,916 Total liabilities 25,093 Net assets acquired $ 55,823 Consideration: Cash $ 55,206 Balance of sale 617 $ 55,823 (1) The total assets acquired include $7,789 of cash and cash equivalents, $19,900 of trademarks, $22,500 of customer relationships, $700 of deferred development costs and $23,070 of goodwill. The fair values of the trademarks, the customer relationships and the deferred development costs have been determined on a provisional basis pending completion of an independent valuation. The preliminary goodwill of $23,070 includes a control premium as well as the Company s ability to extend their reach into markets that have future growth potential and further solidifies its position as a global leader in the juvenile industry. Had this business combination been effected as at the beginning of the year, management estimates that the Company s consolidated revenues and net income for the three months ended March 31, 2014 would not be significantly different. Acquisition-related costs of $36 for the three months ended March 31, 2014 (year ended December 30, $518) have been excluded from the consideration transferred and have been recognized as an expense within general and administrative expenses in the condensed consolidated interim income statement and within the juvenile segment s operating profit. DOREL INDUSTRIES INC. CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS for the quarter ended March 31,