brands that drive growth · 2013-01-04 · the audited consolidated financial statements and md...

Brands ThaT drive GrowTh

dorel indusTries inc. | second QuarTerly reporT for The six MonThs ended June 30, 2011

Management’s Discussion and Analysis of Financial Conditions and Results of Operations

For the quarter and six months ended June 30, 2011 All figures in US dollars

DOREL INDUSTRIES INC. – MANAGEMENT’S DISCUSSION AND ANALYSIS for the second quarter and six months ended June 30, 2011 1

SIGNIFICANT EVENTS IN 2011

On March 31, 2011, the Company announced that it intended to make a normal course issuer bid (NCIB). The Board of Directors of Dorel considers that the underlying value of Dorel may not be reflected in the market price of its Class B Subordinate Voting Shares at certain times during the term of the normal course issuer bid. The Board has therefore concluded that the repurchase of shares at certain market prices may constitute an appropriate use of financial resources and be beneficial to Dorel and its shareholders.

This 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 for the six months ended June 30, 2011 and the audited consolidated financial statements and MD & A for the year ended December 30, 2010. 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.

Effective the first day of fiscal 2011, the Company adopted IFRS as the Company’s basis of financial reporting, using December 31, 2009 as the transition date. As such, the Company’s second quarter 2011 unaudited condensed consolidated interim financial statements and the accompanying notes form part of the first annual audited consolidated financial statements to be prepared in accordance with IFRS for the year ending December 30, 2011 and have been prepared in accordance with International Accounting Standard (“IAS”) 34, “Interim Financial Reporting” as issued by the International Accounting Standards Board (“IASB”) and using the accounting policies described in Note 3 of the Company’s unaudited condensed consolidated financial statements as filed with the Canadian regulatory authorities on May 18, 2011. Except where otherwise noted, all prior period comparative figures have been restated for IFRS.

The unaudited condensed consolidated interim financial statements do not contain all disclosures required by IFRS for annual financial statements and, accordingly, should also be read in conjunction with the most recently prepared annual audited consolidated financial statements for the year ended December 30, 2010, which have been prepared in accordance with Canadian generally accepted accounting principles (“GAAP”). The Company regularly monitors new accounting standards and reports on those adopted subsequent to the end of the most recently completed financial year. Quarterly reports, the annual report and supplementary information filed with the Canadian securities regulatory authorities can be found on-line at www.sedar.com, as well as on the Company’s corporate Web site at www.dorel.com. 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“, or “Market Risks and Uncertainties” to those outlined in the Company’s 2010 annual MD & A as filed with Canadian securities regulatory authorities on March 14, 2011. As such, they are not repeated herein. The information in this MD & A is current as of August 9th, 2011.


Under the NCIB, Dorel is entitled to repurchase for cancellation up to 700,000 Class B Subordinate Voting Shares over a twelve-month period commencing April 4, 2011 and ending April 3, 2012, representing 2.46% of Dorel’s issued and outstanding Class B Subordinate Voting Shares. The purchases by Dorel are being effected through the facilities of the Toronto Stock Exchange and are at the market price of the Class B Subordinate Voting Shares at the time of the purchase. Under the policies of the Toronto Stock Exchange Dorel has the right to repurchase during any one trading day a maximum of 11,828 Class B Subordinate Voting Shares, representing 25% of the average daily trading volume. In addition, Dorel may make, once per calendar week, a block purchase (as such term is defined in the TSX Company Manual) of Class B Subordinate Voting Shares not directly or indirectly owned by insiders of Dorel, in accordance with the policies of the Toronto Stock Exchange.

RESULTS OF OPERATIONS

(All tabular figures are in thousands except per share amounts) Overview Revenues for the second quarter ended June 30, 2011 increased by $11.3 million, or 1.9%, to $619.0 million. This compares to $607.7 million posted a year ago. After-tax earnings decreased by $9.9 million to $23.0 million from $32.9 million in 2010. Diluted earnings per share (EPS) were $0.70 in 2011 compared to $0.99 in 2010. For the six months ended June 30, 2011 revenues increased by $22.8 million, or 1.9%, to $1.227 billion from $1.204 billion the year before. Year-to-date, after-tax earnings decreased by 23.9% to $54.2 million from $71.1 million in 2010. Diluted EPS were $1.65 in 2011 compared to $2.14 in 2010. After removing the impact of varying exchange rates, the organic revenue decline in the quarter was approximately 2%, whereas for the year it was less than 1%. In the second quarter of 2011, gross margins declined to 22.3%, as compared to the 23.2% recorded in the prior year. Year-to-date gross margins have declined by 150 basis points to 22.6%. The margin decline was in the Juvenile and Home Furnishings segments where a less profitable sales mix, higher input costs and unfavourable foreign exchange rates have increased input costs. The ability to pass on these higher costs to customers has been limited, particularly in the U.S. where retailers are attempting to stimulate consumer spending through lower retail pricing. This has been most acute within the Juvenile segment’s U.S. business, driving the majority of the Company’s overall margin decline. Versus the prior year, the Company’s selling, general and administrative costs (S,G & A) have increased by a combined $6.8 million in the second quarter of 2011 and $7.9 million year-to-date. The principal causes of the increase were greater spending in the Recreational / Leisure segment due to greater advertising costs and higher infrastructure costs. Within that segment these costs as a percentage of revenues have actually declined as sales have increased by over 15%. The Company’s year-to-date finance expenses were $11.6 million in 2011 compared to $7.8 million in the prior year. The year-to-date interest rate on its long-term borrowings was approximately 4.5% compared to the average of 3.1% in 2010. Included in these amounts are a year-to-date amount of $0.5 million (2010 - $0.5 million) in connection with the Company’s use of interest rate swaps used to reduce its exposure to the variability of interest rates, as well as $1.1 million (2010 - $0.9 million) related to interest recorded on the Company’s contingent consideration and put option liabilities. The Company’s tax rate is governed by current domestic tax laws in which the Company operates and by the application of income tax treaties between various countries. The tax rate in the quarter was 28.1% and year-to-date is 20.5%, in line with expectations. This compares to 25.4% for the quarter and 23.4% year-to-date in 2010. The main cause of the variations year over year is variations in the jurisdictions in which the Company generated its income year over year. Based on current expectations, the Company anticipates that the annual tax rate will be in the range of 15% to 20%. However, variations in earnings across quarters mean that this rate may vary significantly from quarter to quarter.


The principal changes in earnings from 2010 to 2011 are summarized as follows:

Operating profit by Segment: Quarter Year-to-

Date Juvenile decrease ($11,115) ($20,574)Recreational/Leisure increase 4,265 6,965 Home Furnishings decrease (5,002) (7,955)Total decrease in operating profit (11,852) (21,564)Increase in finance expenses (1,142) (3,742)Decrease in income taxes 2,205 7,849 Other 857 483 Total decrease in after-tax earnings ($9,932) ($16,974)

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

Sept. 30, 2010 Dec. 30, 2010 Mar. 31, 2011 June 30, 2011 Revenues $569,455 $539,523 $607,783 $ 619,010 Net income $30,649 $25,947 $31,164 $ 22,993 Earnings per share

Basic $0.93 $0.79 $0.95 $ 0.70 Diluted $0.92 $0.79 $0.94 $ 0.70

Sept. 30, 2009(1) Dec. 30, 2009(1) Mar. 31, 2010 June 30, 2010 Revenues $518,458 $545,303 $596,313 $607,695 Net income $30,230 $24,211 $38,206 $32,925 Earnings per share

Basic $0.91 $0.73 $1.16 $1.00 Diluted $0.91 $0.73 $1.15 $0.99

(1) - Quarterly financial information for 2009 has been prepared in accordance with Canadian GAAP Segmented Results Segmented figures are presented in Note 9 to the interim financial statements. Further industry segment detail is presented below:

Juvenile

Expenses as a percentage of revenues Second quarter ended

June 30 Six months ended

June 30 2011 2010 2011 2010 Revenues 100.0% 100.0% 100.0% 100.0%Cost of Sales 74.7% 73.3% 74.0% 72.0%Gross Margin 25.3% 26.7% 26.0% 28.0%Selling expenses 8.4% 7.5% 8.0% 7.2%General and administrative expenses 8.3% 7.2% 8.0% 7.8%Research and development costs 2.5% 2.0% 2.5% 2.2%Operating profit 6.1% 10.0% 7.5% 10.8%


Second quarter Juvenile revenue decreased 6.1%, or $15.8 million, to $244.0 million compared to $259.8 million during the same period a year ago. After removing the impact of varying exchange rates, the organic revenue decline was approximately 12%. Operating profit was $14.9 million, a decrease of 42.8% from $26.0 million in 2010. Year-to-date revenues were $513.6 million, a decrease of $32.0 million, or 5.9%. Organically, revenues declined by approximately 9%. Operating profit for the first half was $38.5 million in 2011 versus $59.1 million in 2010. For the quarter, in local currency, the majority of the segment’s business experienced revenue declines. The most significant decline was in the U.S. where the retail environment remains difficult. This was compounded by a less favourable product mix. In addition, the Company is no longer selling cribs and this had the impact of decreasing sales year over year. In Europe, sales in Euro were down just over 4%, however upon conversion to the U.S. dollar, recorded sales increased by 8.5%. The declines in Europe were in several markets and were the most pronounced in Southern Europe. The reasons for the year-to-date revenue decrease of $32.0 million are similar to those of the quarter. Gross margins in the quarter were 25.3% a decrease of 140 basis points from 26.7% in 2010. As described above, the largest factor in the decline is lower margins at DJG USA where the majority of higher input costs, principally resin, have not been passed on to customers. Traditionally in weaker economies, commodity prices decline which allows for sustained profitability even in an environment of poor demand. However the first half of 2011 experienced both higher costs and weakened demand, thus limiting the scope of price increases. Europe was also negatively impacted by higher costs, though the impact was less significant. Despite the lower revenue levels, for the segment as a whole, SG & A costs for the quarter increased by $2.3 million. However this was caused by exchange rate variations year over year. If exchange rates were constant year over year, SG & A costs would have been consistent with the prior year. Note that total product liability costs in the quarter were $1.7 million in 2011 as compared to $2.0 million in the prior year. Year-to-date these costs are $5.7 million in 2011 as compared to $6.3 million in 2010.

Recreational / Leisure




Second quarter Recreational / Leisure revenue increased by $34.2 million, or 15.9%, to $249.1 million compared to last year’s $214.9 million. Year-to-date revenues are up $53.0 million, or 13.4% to $449.5 million from $396.6 million in the prior year. For the quarter the sales increase was driven by strong sales to the IBD channel of road bikes in North America and mountain bikes in Europe. The sales success of the segment’s high-end bicycles can be attributed to successful new product introductions and increased promotional spending which is improving brand awareness. Despite similar challenges to Juvenile in the mass merchant distribution channel, sales to these major customers improved slightly over last year. Excluding the impact of foreign exchange variations on the segment’s non-US based businesses, the segment’s organic revenue increase was approximately 12% for the quarter and 11% year-to-date. Operating profit for the quarter improved by $4.3 million, or 25.1%, to $21.3 million, compared to $17.0 million in 2010. For the first six months of the year, operating profit was $39.0 million, up $6.9 million or 21.7% from $32.1 million in the prior year. Gross margin improvements for the quarter and year-to-date were 30 and 20 basis points respectively, as improved margins on sales of higher end bicycles were mostly offset by lower margins on sales to mass merchant customers. While also being hampered by higher input costs, the impact on the segment was lessened by the ability to price a larger portion of these increases into its product offering. Profitability at the segment’s apparel business remains


below acceptable levels and segment management continues to focus on changes to improve the business. However, the overall impact on the segment is lessened by the relative size of that division. For the quarter, SG & A expenses increased by $4.8 million or 14.1% to $38.5 million compared to last year’s $33.7 million. Strategic spending in promotion and brand support are driving the increase in this category. Despite the higher spending, as a percentage of revenue, these expenses declined by 20 basis points to 15.5% of revenues. As was announced last year, the Company is now a co-sponsor of the newly renamed “Liquigas-Cannondale” race team which competes in numerous racing events, such as the recently completed Tour de France. For principally the same reason as the quarterly increase, for the first half, SG & A costs increased by 10.5% to $70.8 million from $64.1 million. Home Furnishings




For the quarter, Home Furnishings revenues decreased by 5.3%, to $126.0 million from $133.0 million in the prior year. For the first half, revenues increased by 0.7% to $263.7 million from $261.9 million the year before. In the quarter, one of the principal drivers of the sales decline was the decision to exit unprofitable product SKUs sold by the Cosco Home & Office division as it became strategically advantageous to no longer sell these items. This was also the case for year-to-date sales, but increases in other furniture lines, mainly upholstered furniture and futons, more than offset the decrease. Gross margins for the quarter in 2011 were 12.4%, a decline of 270 basis points from the 15.1% recorded in the prior year. Operating profit for the quarter was $6.3 million in 2011, a decrease of 44.4% from the prior year. Similar to the Juvenile segment, cost increases on steel, textiles, as well as other inputs are affecting margins. This issue is compounded by the strength of the Canadian dollar which is increasing costs for two of the segments plants that are based in Canada and ship the majority of its product to the United States. For the first half, gross margins were 12.4%, a decrease of 280 basis points from the 15.2% recorded in 2010. Operating profit for the first half was $14.0 million versus $22.0 million in 2010, a decrease of 36.2%. As for the quarter, 2011 year-to-date earnings reflect the negative impact of higher costs and adverse foreign exchange rates. Operating expenses, consisting of selling, administrative and research and development costs remain well-contained and were relatively constant year over year at less than 7.5% of revenues.

LIQUIDITY AND CAPITAL RESOURCES

Statement of Financial Position As at the 2010 year-end, the Company had experienced a significant increase in inventory levels as sales fell short of expectations in the fourth quarter of 2010 and inventories rose above normal levels. Therefore, as was expected, in the first quarter of 2011 inventories declined from $510.1 million as at December 30, 2010 to $493.0 million as at quarter end. In the second quarter, inventories rose within the Home Furnishings segment as a strong third quarter shipping of futons is anticipated. All other divisions maintained similar inventory levels. Therefore inventories rose to $504.0 million as of June 30, 2011. The impact of the weaker US dollar was to increase the June balance by $11 million versus year end, therefore for the first half inventory reductions generated approximately $17 million in cash flow. As has been stated in the past, the Company estimates the appropriate level of inventory to support the business to be from $450 to $470 million and this remains the expectation for the second half of the year.


Certain of the Company’s working capital ratios are:

As at: June 30, 2011 Mar. 31, 2011 Dec. 30, 2010 Debt to equity 0.29 0.33 0.31 # of days in receivables(1) 67 73 56 # of days in inventory(2) 101 100 105 (1) – calculated as ending accounts receivable divided by average daily sales (2) – calculated as ending inventory divided by average daily cost of sales

The decrease in the value of the US dollar versus most currencies since year end has had the impact of increasing most balance sheet values, with a corresponding increase in the value of Accumulated Other Comprehensive Income (AOCI) grouped in Shareholders’ Equity, which increased from $64.6 million at year end, to $101.1 million as at June 30, 2011. As such, readers are reminded to review the Consolidated Statement of Cash Flows for a more accurate representation of changes from December 30, 2010 year end values. Dorel was compliant with all of its borrowing covenant requirements and expects to be so going forward. The Company continuously reviews its cash management and financing strategy to optimize the use of funds and minimize its cost of borrowing.

Cash Flow

During the first half of 2011, cash flow provided by operating activities was $40.9 million compared to $81.1 million recorded in 2010. The main reasons for the year over year decrease of $40.2 million were lower after-tax earnings of $17.0 million as well the following variations in significant working capital balances:

Source (use) of cash 2011 2010 Change

Trade and other receivables $ (63,088) $ (60,387) $ (2,701) Inventories 17,322 (57,756) 75,078 Trade and other payables 8,814 98,510 (89,696) Total $ (36,952) $ (19,633) $ (17,319)

Cash used in investing activities in 2011 was $24.8 million in 2011 consistent with the $25.4 million recorded in 2010. After an increase in borrowings in the first quarter of 2011 and after the payment of dividends of $9.8 million to its shareholders, the Company was able to return its debt to year end levels.

Critical Accounting Estimates

The condensed consolidated interim financial statements have been prepared in accordance with IAS 34. The preparation of these financial statements requires estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. A complete list of all relevant accounting policies is listed in Note 3 to the March 31, 2011 unaudited condensed consolidated interim financial statements as filed with Canadian securities regulatory authorities on May 18, 2011.

The Company believes the following are the most critical accounting policies and related required estimates that affect Dorel’s results as presented herein and that would have the most material effect on the financial statements should these accounting estimates change materially or should these policies change or be applied in a different manner:

Goodwill and certain other indefinite life intangible assets: Goodwill is tested for impairment annually (as at October 31) and when circumstances indicate that the carrying value may be impaired. Impairment is determined for goodwill by assessing the recoverable amount of each cash-generating units (CGU) (or group of CGUs) to which the goodwill relates. The Company defines its CGUs based on the way it internally monitors and derives economic benefits from the acquired goodwill. Indefinite life intangible assets are those for which there is no foreseeable limit to their useful economic life as they arise from contractual or other legal rights that can be renewed without significant cost and are the


subject of continuous marketing support. Trademarks with indefinite useful lives are tested for impairment at the CGU level annually (as at October 31) and when circumstances indicate that the carrying value may be impaired. If any indication of impairment exists, or when annual impairment testing for an asset is required, the Company estimates the asset’s recoverable amount which requires the use of judgment. An asset’s recoverable amount is the higher of an asset’s or CGU’s fair value less costs to sell and its value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. The recoverable amount is most sensitive to the discount rate used for the discounted cash flow model as well as the expected future cash inflows and the growth rate used for extrapolation purposes. Product liability: The Company insures itself to mitigate its product liability exposure. The estimated product liability exposure is calculated by an independent actuary based on historical sales volumes, past claims history and management and actuarial assumptions. The estimated exposure includes incidents that have occurred, as well as incidents anticipated to occur on units sold prior to the reporting date. Significant assumptions used in the actuarial model include management’s estimates for pending claims, product life cycle, discount rates, and the frequency and severity of product incidents. Pension plans and post retirement benefits: The costs of pension and other post-retirement benefits are calculated based on assumptions determined by management, with the assistance of independent actuarial firms and consultants. Management’s assumptions consist mainly of best estimate of the discount rate, the expected long-term rate of return on plan assets, the rate of compensation increase, retirement rates, termination rates, mortality rates and expected growth rate of health care costs. Annually, the Company evaluates the significant assumptions to be used to value its pension and post-retirement plan assets and liabilities based on current market conditions and expectations of future costs. Income taxes: The Company follows the asset and liability method of accounting for income taxes. Under this method, deferred income taxes relate to the expected future tax consequences of differences between the carrying amount of financial assets and liabilities for financial reporting purposes and their corresponding tax values using the enacted or substantively enacted income tax rate, which will be in effect for the year in which the differences are expected to reverse. A valuation allowance is recorded to reduce the carrying amount of deferred tax assets to the extent that, in the opinion of management, it is not probable that the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and tax planning strategies. Deferred income tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enacted or substantive enactment. Deferred tax is provided on temporary differences arising on investments in subsidiaries, except where the timing on the reversal of the temporary difference is controlled by the Company and it is probable that the temporary difference will not reverse in the foreseeable future.

The Company’s income tax provision is based on tax rules and regulations that are subject to interpretation and require estimates and assumptions that may be challenged by taxation authorities. The Company’s estimates of income tax assets and liabilities are periodically reviewed and adjusted as circumstances warrant, such as changes to tax laws and administrative guidance, and the resolution of uncertainties through either the conclusion of tax audits or expiration of prescribed time limits within the relevant statutes. The final results of government tax audits and other events may vary materially compared to estimates and assumptions used by management in determining the provision for income taxes and in valuing income tax assets and liabilities. Allowances for sales returns and other customer programs: At the time revenue is recognized the Company records estimated reductions to revenue for customer programs and incentive offerings, including special pricing agreements, promotions, advertising allowances and other volume-based incentives. Provisions for customer incentives and provisions for sales and return allowances are made at the time of product shipment. Product warranties: A provision for warranty cost is recorded in cost of sales when the revenue for the related product is recognized. The cost is estimated based on a number of factors, including the historical warranty claims and cost experience, the type and duration of warranty, the nature of product sold and in service, counter-warranty coverage available from the Company’s suppliers and product recalls. The Company reviews periodically its recorded product warranty provisions and any adjustment is recorded in


cost of sales. Contingent consideration and put option liabilities: Contingent consideration and put option liabilities resulting from business combinations, are valued at fair value at the acquisition date as part of the business combination. Where the contingent consideration meets the definition of a derivative and thus financial liability, it is subsequently re-measured to fair value at each reporting date with the fluctuation going to general and administrative expenses. The determination of the fair value is based on discounted cash flows. Included in the key assumptions, the probability of meeting the performance targets is taken into consideration. The increase in the provision due to the passage of time is recognized as finance expenses.

IFRS On February 13, 2008, the Accounting Standards Board of Canada confirmed the date of the changeover from Canadian GAAP to International Financial Reporting Standards. Canadian publicly accountable enterprises must adapt IFRS to their interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011, with early adoption allowed. The Company has chosen for an early adoption of IFRS and the first annual IFRS financial statements will be for the year ending December 30, 2011 and will include the comparative period of 2010. Starting with the first quarterly report of 2011, the Company has provided unaudited condensed consolidated interim financial information in accordance with IAS 34 including comparative figures for 2010. In the Company’s MD & A for the year ended December 30, 2010, it was stated that the Company had identified and calculated the impact of the differences between IFRS and Canadian GAAP on its opening balance sheet and that there was no expected material impact on the Company’s 2010 financial reporting results based on the information collected to date. Detailed information was also provided in the report within the 2010 year-end MD & A. Upon finalization of the Company’s 2010 financial statements as prepared under IFRS, it has been concluded that the required changes were not material. Please refer to Note 10 of the condensed consolidated interim financial statements for the six months ended June 30, 2011 for a summary of the differences between the financial statements previously prepared under Canadian GAAP and to those prepared under IFRS as at December 31, 2009, for the six months ended June 30, 2010, and for the year ended December 30, 2010. Future Accounting Changes

IFRS 9 – Financial Instruments

This standard is issued but not yet effective at the date of issuance of the Company’s condensed consolidated interim financial statements. The standard will be effective for annual periods beginning on or after January 1, 2013, with earlier adoption permitted.

As part of the project 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. 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 entity’s business model and the contractual cash flow characteristics of

the financial asset; - Eliminates the existing categories: held to maturity, available for sales, and loans and receivables.

Certain changes were also made regarding the fair value option for financial liabilities and accounting for certain derivatives linked to unquoted equity instruments.

The Company is currently assessing what the impact of adopting this standard will be on its consolidated financial statements.


IAS 19 – Employee benefits

In June 2011, amendments to IAS 19, Employee Benefits, were issued. The revised standard requires immediate recognition of actuarial gains and losses in other comprehensive income, eliminating the previous options that were available, and enhances the guidance concerning the measurement of plan assets and defined benefit obligations, streamlining the presentation of changes in assets and liabilities arising from defined benefit plans and introduction of enhanced disclosures for defined benefit plans Retrospective application of this standard will be effective for annual periods beginning on or after January 1, 2013, with earlier adoption permitted. The Company is currently assessing the impact of the amendments on its consolidated financial statements.

OTHER INFORMATION The designation, number and amount of each class and series of its shares outstanding as of August 5th, 2011 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) 4,229,510 $1,792 28,368,952 $176,992 $178,784

Outstanding stock options and Deferred Share Units values are disclosed in Note 5 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. 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 its 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. 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 non-recurring 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. - CONSOLIDATED FINANCIAL STATEMENTS for the second quarter and six months ended June 30, 2011 11

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION ALL FIGURES IN THOUSANDS OF US $

As at

June 30, 2011 As at

December 30, 2010 (unaudited) (unaudited)ASSETS CURRENT ASSETS

Cash and cash equivalents (Note 8) $ 24,578 $ 15,748

Trade and other receivables 430,402 356,507

Inventories 503,993 510,068

Other financial assets 625 2,554

Income taxes receivable 15,046 14,096

Prepaid expenses 19,288 17,823

993,932 916,796NON-CURRENT ASSETS

Property, plant and equipment 162,336 158,752

Intangible assets 404,305 396,354

Goodwill (Note 9) 572,447 554,528

Deferred tax assets 64,528 65,690

Other assets 1,630 2,215

1,205,246 1,177,539

$ 2,199,178 $ 2,094,335

LIABILITIES

CURRENT LIABILITIES

Bank indebtedness $ 30,153 $ 30,515

Trade and other payables 340,639 323,588

Other financial liabilities 5,002 4,203

Income taxes payable 5,774 13,154

Long-term debt 10,880 10,667

Provisions 40,712 43,232

433,160 425,359

NON-CURRENT LIABILITIES

Long-term debt 328,210 319,281

Pension and post-retirement benefit obligations 32,493 32,056

Deferred tax liabilities 114,047 109,789

Provisions 1,986 1,780

Other financial liabilities 32,844 31,253

Other long-term liabilities 4,258 2,966

513,838 497,125

EQUITY

SHARE CAPITAL (Note 4) 178,769 178,816

CONTRIBUTED SURPLUS 25,342 23,776

ACCUMULATED OTHER COMPREHENSIVE INCOME 101,119 64,626

RETAINED EARNINGS 946,950 904,633

1,252,180 1,171,851

$ 2,199,178 $ 2,094,335

(See accompanying notes)


CONSOLIDATED INCOME STATEMENTS ALL FIGURES IN THOUSANDS OF US $, EXCEPT PER SHARE AMOUNTS

Second Quarters Ended Six Months Ended June 30, 2011 June 30, 2010 June 30, 2011 June 30, 2010 (unaudited) (unaudited) (unaudited) (unaudited) Sales $ 615,710 $ 604,174 $ 1,220,127 $ 1,197,870 Licensing and commission income 3,300 3,521 6,666 6,138TOTAL REVENUE 619,010 607,695 1,226,793 1,204,008 Cost of sales 481,079 466,618 949,061 913,885GROSS PROFIT 137,931 141,077 277,732 290,123

Selling expenses 48,019 44,193 92,462 85,923General and administrative expenses 44,482 41,480 90,260 88,947Research and development expenses 7,740 6,719 15,330 14,492OPERATING PROFIT 37,690 48,685 79,680 100,761 Finance expenses (Note 7) 5,709 4,567 11,587 7,845INCOME BEFORE INCOME TAXES 31,981 44,118 68,093 92,916 Income taxes expense 8,988 11,193 13,936 21,785NET INCOME $ 22,993 $ 32,925 $ 54,157 $ 71,131 EARNINGS PER SHARE

Basic $ 0.70 $ 1.00 $ 1.66 $ 2.16Diluted $ 0.70 $ 0.99 $ 1.65 $ 2.14

SHARES OUTSTANDING (Note 6)

Basic – weighted average 32,624,000 32,952,376 32,641,723 32,943,021Diluted – weighted average 32,828,089 33,316,586 32,862,173 33,292,611



CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME ALL FIGURES IN THOUSANDS OF US $

Second Quarters Ended Six Months Ended June 30, 2011 June 30, 2010 June 30, 2011 June 30, 2010 (unaudited) (unaudited) (unaudited) (unaudited) NET INCOME $ 22,993 $ 32,925 $ 54,157 $ 71,131 OTHER COMPREHENSIVE 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 12,297 (39,493) 38,699 (67,273)

Net changes in cash flow hedges:

Net change in unrealized gains (losses) on derivatives designated as cash flow hedges (682) (2,094) (3,888) (1,345)

Reclassification to income (958) (277) (2,408) (67) Reclassification to the related

non financial asset 1,875 (242) 3,355 (614) Deferred income taxes 167 1,121 911 1,327 402 (1,492) (2,030) (699)

Defined benefit plans: Actuarial gains (losses) on

defined benefit plans (36) (840) (122) (1,747) Deferred income taxes (76) 309 (54) 635 (112) (531) (176) (1,112)

TOTAL OTHER COMPREHENSIVE INCOME (LOSS) 12,587 (41,516) 36,493 (69,084)

TOTAL COMPREHENSIVE INCOME (LOSS) $ 35,580 $ (8,591) $ 90,650 $ 2,047



CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY ALL FIGURES IN THOUSANDS OF US $

Attributable to equity holders of the Company

Share

Capital Contributed

Surplus

CumulativeTranslation

Account*Cash Flow

Hedges*

Defined Benefit Plans*

RetainedEarnings

TotalEquity

(unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited)Balance as at December 31, 2009 $ 174,816 $ 20,311 $ 96,840 $ 895 $ – $ 809,976 $ 1,102,838Total comprehensive income

(loss) – – (67,273) (699) (1,112 ) 71,131 2,047Issued under stock option plan 3,654 – – – – – 3,654Reclassification from

contributed surplus due to exercise of stock options 884 (884) – – – – –

Repurchase and cancellation of shares (1,199 ) – – – – – (1,199)

Premium paid on share repurchase – – – – – (5,495) (5,495)

Share − based payments (Note 5) – 2,485 – – – – 2,485

Dividends on common shares – – – – – (9,065) (9,065) Dividends on deferred share

units (Note 5) – 24 – – – (24 ) –Balance as at June 30, 2010 $ 178,155 $ 21,936 $ 29,567 $ 196 $ (1,112 ) $ 866,523 $ 1,095,265

Balance as at December 31, 2010 $ 178,816 $ 23,776 $ 67,970 $ (1,032 ) $ (2,312 ) $ 904,633 $ 1,171,851Total comprehensive income

(loss) – – 38,699 (2,030) $ (176 ) $ 54,157 $ 90,650Issued under stock option plan

(Note 4) 402 – – – – – 402Reclassification from

contributed surplus due to exercise of stock options (Note 4) 82 (82 ) – – – – –

Repurchase and cancellation of shares (Note 4) (531 ) – – – – – (531)

Premium paid on share repurchase (Note 4) – – – – – (2,026) (2,026)

Share − based payments (Note 5) – 1,614 – – – – 1,614

Dividends on common shares – – – – – (9,780) (9,780) Dividends on deferred share

units (Note 5) – 34 – – – (34 ) –Balance as at June 30, 2011 $ 178,769 $ 25,342 $ 106,669 $ (3,062) $ (2,488 ) $ 946,950 $ 1,252,180

*Accumulated other comprehensive income (See accompanying notes)


CONSOLIDATED STATEMENTS OF CASH FLOWS ALL FIGURES IN THOUSANDS OF US $

Second Quarters Ended Six Months Ended June 30, 2011 June 30, 2010 June 30, 2011 June 30, 2010

(unaudited) (unaudited) (unaudited) (unaudited)CASH PROVIDED BY (USED IN):

OPERATING ACTIVITIES Net income $ 22,993 $ 32,925 $ 54,157 $ $71,131 Items not involving cash:

Depreciation and amortization 14,428 12,431 27,612 25,183 Amortization of deferred financing costs 277 50 646 79 Accretion expense on contingent

consideration and put option liabilities (Note 7) 556 466 1,087 941

Other finance expenses (Note 7) 5,153 4,101 10,500 6,904 Income taxes expense 8,988 11,193 13,936 21,785 Share-based payments (Note 5) 584 1,160 1,395 2,148 Pension and post-retirement defined

benefit plans (Note 7) 834 711 1,692 1,632 (Gain) loss on disposal of property, plant

and equipment (41 ) (4 ) (59 ) 2 53,772 63,033 110,966 129,805

Net changes in non-cash balances related to operations (Note 8) 28,033 10,655 (41,204 ) (23,193 )

Income taxes paid (13,563 ) (21,158 ) (19,203 ) (23,637 ) Income taxes received 386 972 490 3,692 Interest paid (6,933 ) (996 ) (10,110 ) (5,513 ) CASH PROVIDED BY OPERATING

ACTIVITIES 61,695 52,506 40,939 81,154

FINANCING ACTIVITIES Bank indebtedness (14,623 ) (12,440 ) (1,782 ) 655 Increase of long-term debt – 149,431 8,121 200,000 Repayments of long-term debt (26,017 ) (165,122 ) – (220,122 ) Share repurchase (Note 4) (1,588 ) (5,294 ) (2,557 ) (6,694 ) Issuance of share capital (Note 4) 220 2,895 402 3,654 Dividends on common shares (4,866 ) (4,947 ) (9,780 ) (9,065 )

CASH USED IN FINANCING ACTIVITIES (46,874 ) (35,477 ) (5,596 ) (31,572 )

INVESTING ACTIVITIES Additions to property, plant and

equipment (8,341 ) (10,467 ) (14,951 ) (16,095 ) Additions to intangible assets (5,210 ) (4,560 ) (9,825 ) (9,297 )

CASH USED IN INVESTING ACTIVITIES (13,551 ) (15,027 ) (24,776 ) (25,392 )

Effect of exchange rate changes on cash and cash equivalents (1,385 ) (5,410 ) (1,737 ) (10,050 )

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (115 ) (3,408 ) 8,830 14,140

Cash and cash equivalents, beginning of period 24,693 37,395 15,748 19,847

CASH AND CASH EQUIVALENTS, END OF PERIOD $ 24,578 $ 33,987 $ 24,578 $ 33,987



Notes to the Consolidated Financial Statements

For the periods ended June 30, 2011 and 2010 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 and Europe. 2. 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 Accounting Standards Board of Canada, 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 presented in U.S. dollars has been rounded to the nearest thousand. These are the Company’s second condensed consolidated interim financial statements prepared in accordance with International Financial Reporting Standards (“IFRS”) and IFRS 1 First-time Adoption of International Financial Reporting Standards has been applied and with the accounting policies the Company expects to adopt on its first annual IFRS December 30, 2011 financial statements. Those accounting policies are based on the IFRS and International Financial Reporting Interpretations Committee (“IFRIC”) that the Company expects to be applicable at that time. 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 interim financial information. An explanation of how the transition to IFRS has affected the reported financial position, financial performance and cash flows of the Company is provided in Note 10 which includes a reconciliation of equity and income statement for the comparative period reported under Canadian Generally Accepted Accounting Principles (“GAAP”) to those reported for that period under IFRS. The condensed consolidated interim financial statements have been prepared on a historical basis except for derivative financial instruments, contingent consideration and put options liabilities, liabilities for share-based compensation arrangements and defined benefit plan assets that have been measured at fair value. The defined pension and post-retirement obligations are measured as the net total of plan assets plus unrecognized past service costs less the discounted present value of the defined benefit obligations. Product liability is measured at its discounted present value. The accounting policies set out below have been applied consistently in the preparation of the interim period consolidated financial statements of all periods presented, including the opening consolidated statement of financial position as at December 31, 2009 except for certain mandatory exceptions and optional exemptions taken pursuant to IFRS 1 as described in Note 10. These condensed consolidated interim financial statements were authorized by the Company’s Board of Directors for issue on August 9th, 2011. 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.


3. Significant accounting policies

These condensed consolidated interim financial statements should be read in conjunction with the Company’s 2010 annual financial statements as well as the condensed consolidated interim financial statements which have been prepared using the same accounting policies as described in Note 3 of the Company’s condensed consolidated interim financial statements for the quarter ended March 31, 2011. The accounting policies have been applied consistently to all periods presented of the condensed consolidated interim financial statements and in preparing the opening consolidated statement of financial position as at December 31, 2009 for the purposes of the transition to IFRS, unless otherwise indicated. Future Accounting Changes

IFRS 9 – Financial Instruments

This standard is issued but not yet effective at the date of issuance of the Company’s condensed consolidated interim financial statements. The standard will be effective for annual periods beginning on or after January 1, 2013, with earlier adoption permitted.

As part of the project 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. 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 entity’s business model and the contractual cash flow characteristics

of the financial asset; - Eliminates the existing categories: held to maturity, available for sales, and loans and receivables.

Certain changes were also made regarding the fair value option for financial liabilities and accounting for certain derivatives linked to unquoted equity instruments.

The Company is currently assessing what the impact of adopting this standard will be on its consolidated financial statements.

IAS 19 – Employee benefits

In June 2011, amendments to IAS 19, Employee Benefits, were issued. The revised standard requires immediate recognition of actuarial gains and losses in other comprehensive income, eliminating the previous options that were available, and enhances the guidance concerning the measurement of plan assets and defined benefit obligations, streamlining the presentation of changes in assets and liabilities arising from defined benefit plans and the introduction of enhanced disclosures for defined benefit plans Retrospective application of this standard will be effective for annual periods beginning on or after January 1, 2013, with earlier adoption permitted. The Company is currently assessing the impact of the amendments on its consolidated financial statements.


4. Share capital

Issued and outstanding

Details of the issued and outstanding shares are as follows:

Six Months Ended

June 30, 2011 Year Ended

December 30, 2010

Number Amount Number Amount Class “A” Multiple Voting Shares Balance, beginning and end of period 4,229,510 $ 1,792 4,229,510 $ 1,792 Class “B” Subordinate Voting Shares Balance, beginning of period 28,435,577 $ 177,024 28,739,802 $ 173,024Issued under stock option plan (1) 18,000 402 214,375 5,755Reclassification from contributed surplus

due to exercise of stock options – 82 –

1,402Repurchase and cancellation of shares (2) (85,250) (531) (518,600 ) (3,157) Balance, end of period 28,368,327 $ 176,977 28,435,577 $ 177,024 TOTAL SHARE CAPITAL $ 178,769 $ 178,816

(1) During the six-months period ended June 30, 2011, the Company realized tax benefits amounting to

$44 (2010 − $302) as a result of stock option transactions. The benefit has been credited to share capital and is therefore not reflected in the current income tax provision.

(2) In March 2011, the Company filed a notice with the Toronto Stock Exchange (TSX) to make a normal course issuer bid to repurchase for cancellation outstanding Class “B” Subordinate Voting Shares on the open market. As approved by the TSX, the Company is authorized to purchase up to 700,000 Class “B” Subordinate Voting Shares (representing 2.46% of its issued and outstanding Class “B” Subordinate Voting Shares at the time of the bid) during the period of April 4, 2011 to April 3, 2012, or until such earlier time as the bid is completed or terminated at the option of the Company. Any shares the Company purchases under this bid will be purchased on the open market plus brokerage fees through the facilities of the TSX at the prevailing market price at the time of the transaction. Shares acquired under this bid will be cancelled. In accordance with this normal course issuer bid, the Company repurchased during the three-months period ended June 30, 2011 a total of 53,500 Class “B” Subordinate Voting Shares for a cash consideration of $1,588. The excess of the shares’ repurchase value over their carrying amount of $1,255 was charged to retained earnings as share repurchase premiums.

During the three-months ended March 31, 2011, the Company repurchased with its previous normal course issuer bid which ended on March 31, 2011 a total of 31,750 Class “B” Subordinate Voting Shares for a cash consideration of $969. The excess of the shares’ repurchase value over their carrying amount of $771 was charged to retained earnings as share repurchase premiums.


5. Share-based payments

Stock options plan

The Company may grant stock options on the Class "B" Subordinate Voting Shares at the discretion of the Board of Directors, to senior executives and certain key employees. The exercise price is the market price of the securities at the date the options are granted. Options granted vest according to a graded schedule of 25% per year commencing a day after the end of the first year, and expire no later than the year 2016. All options are to be settled by physical delivery of shares. The changes in outstanding stock options are as follows:

Six Months Ended

June 30, 2011 Year Ended

December 30, 2010

Options Weighted Average

Exercise Price Options Weighted Average

Exercise Price Options outstanding, beginning

of period 2,216,750 $ 26.71 2,539,000 $ 26.27 Granted (1) 10,000 29.67 88,500 34.80 Exercised (2) (18,000) 19.92 (214,375 ) 25.46 Expired – – (125,000 ) 34.49 Forfeited (45,875) 28.33 (71,375 ) 26.50 Options outstanding, end of period 2,162,875 $ 27.05 2,216,750 $ 26.71 Total exercisable, end of period 1,553,125 $ 28.49 1,001,375 $ 29.31

(1) The weighted average fair value of options granted during the six-months ended June 30, 2011 was $8.57 (2010 − $10.78).

(2) The weighted average share price at the date of exercise for the share options exercised during the six-months ended June 30, 2011 was $29.53 (2010 − $34.54).

A summary of options outstanding as of June 30, 2011 is as follows:

Total Outstanding Total Exercisable

Range of Exercise Prices Options

WeightedAverage Exercise

Price

Weighted Average

Remaining Contractual

Life Options

Weighted Average

Exercise Price

$17.42 - $23.59 847,500 $ 20.20 2.75 373,500 $ 20.22$30.33 - $38.58 1,315,375 31.47 1.37 1,179,625 31.11

2,162,875 $ 27.05 1.91 1,553,125 $ 28.49

Total compensation cost recognized in income for employee stock options for the quarter and six months ended June 30, 2011 amounts to $441 and $1,117 respectively (2010 − $1,058 and $1,954 respectively), and was credited to contributed surplus.


5. Share-based payments (continued)

Directors’ Deferred Share Unit Plan The Company has a Deferred Share Unit plan under which an external director of the Company may elect annually to have his or her director’s fees and fees for attending meetings of the Board of Directors or committees thereof paid in the form of deferred share units (“DSU’s”). A plan participant may also receive dividend equivalents paid in the form of DSU’s. During the second quarters ended June 30, 2011 and 2010, 4,642 and 2,859 DSU’s were issued respectively for fees forfeited and $129 (2010 − $94) was expensed and credited to contributed surplus. During the second quarters ended June 30, 2011 and 2010, 364 and 241 DSU’s were issued respectively for dividend equivalents and $11 (2010 – $9) was charged to retained earnings and credited to contributed surplus. During the six months periods ended June 30, 2011 and 2010, 8,460 and 5,609 DSU’s were issued respectively for fees forfeited and $251 (2010 − $181) was expensed and credited to contributed surplus. During the six months periods ended June 30, 2011 and 2010, 677 and 459 DSU’s were issued respectively for dividend equivalents and $21 (2010 – $15) was charged to retained earnings and credited to contributed surplus. At June 30, 2011, there were 76,878 DSU’s outstanding with related contributed surplus amounting to $2,152. Executive Deferred Share Unit Plan The Company has an Executive Deferred Share Unit plan under which executive officers of the Company may elect annually to have a portion of his or her annual salary and bonus paid in the form of deferred share units (“DSU’s”). A plan participant may also receive dividend equivalents paid in the form of DSU’s. During the second quarters ended June 30, 2011 and 2010, 7,381 and 10,634 DSU’s were issued respectively for bonus and salary paid and $233 (2010 − $345) was credited to contributed surplus. During the second quarters ended June 30, 2011 and 2010, 235 and 163 DSU’s were issued respectively for dividend equivalents and $7 (2010 – $6) was charged to retained earnings and credited to contributed surplus. During the six-months periods ended June 30, 2011 and 2010, 7,786 and 10,792 DSU’s were issued respectively for bonus and salary paid and $246 (2010 – $350) was credited to contributed surplus. During the six months periods ended June 30, 2011 and 2010, 415 and 274 DSU’s were issued respectively for dividend equivalents and $13 (2010 − $9) was charged to retained earnings and credited to contributed surplus. At June 30, 2011, there were 46,879 DSU’s outstanding with related contributed surplus amounting to $1,083.

6. Earnings per share

The following table provides a reconciliation between the number of basic and fully diluted shares outstanding:

Second Quarters Ended

June 30, Six Months Ended

June 30,

2011 2010 2011 2010 Weighted daily average number of

Class “A” Multiple and Class “B” Subordinate Voting Shares 32,624,000 32,952,376 32,641,723 32,943,021

Dilutive effect of stock options 191,549 16,525 203,778 16,624Dilutive effect of deferred share units 12,540 347,685 16,672 332,966Weighted average number of diluted

shares 32,828,089 33,316,586 32,862,173 33,292,611Number of anti-dilutive stock options

and deferred share units excluded from fully diluted earnings per share calculation 1,237,124 1,174,853 1,202,321 1,175,153


7. Finance expenses and other information

a) Finance expenses

Finance expenses consist of the following:



June 30, 2011 2010 2011 2010 Interest on long-term debt –

including effect of cash flow hedge related to the interest rate swaps $ 4,816 $ 3,546 $ 9,506 $ 6,145

Accretion expense on contingent consideration and put option liabilities 556 466 1,087 941

Other interest 337 555 994 759 $ 5,709 $ 4,567 $ 11,587 $ 7,845

b) Cost of inventories and write-down of inventories included in the consolidated income statements:



June 30, 2011 2010 2011 2010 Included in cost of sales: Cost of inventories recognized

as an expense $ 466,222 $ 450,614 $ 918,713 $ 877,831Write down of inventories as a

result of net realizable value being lower than cost $ 4,438 $ 2,501 $ 6,418 $ 6,014

c) Employee benefits expenses



June 30, 2011 2010 2011 2010 Wages and salaries $ 63,334 $ 61,356 $ 128,554 $ 124,615Social security costs $ 11,137 $ 10,627 $ 23,098 $ 21,770Contributions to defined

contribution plans $ 501 $ 473 $ 935 $ 880Expenses related to defined benefit

plans $ 584 $ 461 $ 1,191 $ 1,131Expenses related to post-retirement

benefit plans $ 250 $ 250 $ 501 $ 501Shared-based payments $ 584 $ 1,160 $ 1,395 $ 2,148Total $ 76,390 $ 74,327 $ 155,674 $ 151,045


8. Statement of cash flows

Acquiring a long-lived asset by incurring a liability does not result in a cash outflow for the Company until the liability is paid. As such, the consolidated statement of cash flows excludes the following non-cash transactions:

June 30,

2011 2010 Acquisition of property, plant and equipment financed by trade and other

payables $ 1,560 $ 1,205Acquisition of intangible assets financed by trade and other payables $ 188 $ 85

Net changes in non-cash balances related to operations are as follows:



June 30, 2011 2010 2011 2010 Trade and other receivables $ 40,569 $ 24,887 $ (63,088 ) $ (60,387) Inventories (6,726) (80,192) 17,322 (57,756) Prepaid expenses 848 105 (1,536 ) (2,431) Trade and other payables (4,042) 67,088 8,814 98,510Pension and post-retirement benefit

obligations (787) (569) (2,099 ) (1,423) Provisions, other financial liabilities

and other long-term liabilities (1,829) (664) (617 ) 294

Total $ 28,033 $ 10,655 $ (41,204 ) $ (23,193)

The components of cash and cash equivalents are:

June 30,

2011 December 30,

2010

Cash $ 24,497 $ 15,673Short-term investments 81 75

Cash and cash equivalents $ 24,578 $ 15,748


9. Segmented information Geographic Segments – Origin of Revenues



June 30, 2011 2010 2011 2010 Canada $ 64,873 $ 68,202 $ 143,516 $ 147,564United States 353,421 354,787 681,073 691,198Europe 168,815 151,707 340,835 305,258Other foreign countries 31,901 32,999 61,369 59,988

Total $ 619,010 $ 607,695 $ 1,226,793 $ 1,204,008

Second Quarters Ended June 30,

Total Juvenile Recreational / Leisure Home Furnishings 2011 2010 2011 2010 2011 2010 2011 2010 Total Revenue $ 619,010 $ 607,695 $ 243,965 $ 259,791 $ 249,094 $ 214,888 $ 125,951 $ 133,016Cost of sales 481,079 466,618 182,229 190,302 188,502 163,369 110,348 112,947Gross profit 137,931 141,077 61,736 69,489 60,592 51,519 15,603 20,069Selling expenses 47,512 43,735 20,528 19,566 22,709 20,041 4,275 4,128General and

administrative expenses 40,283 36,375 20,133 18,778 15,803 13,705 4,347 3,892

Research and development expenses 7,740 6,719 6,220 5,175 806 764 714 780

Operating profit 42,396 54,248 14,855 25,970 21,274 17,009 6,267 11,269

Finance expenses 5,709 4,567Corporate

expenses 4,706 5,563Income taxes 8,988 11,193Net income

$ 22,993 $ 32,925Depreciation and

amortization included in operating profit $ 14,372 $ 12,394 $ 10,533 $ 8,782 $ 2,364 $ 2,272 $ 1,475 $ 1,340


9. Segmented information (continued) Six Months Ended June 30,

Total Juvenile Recreational / Leisure Home Furnishings 2011 2010 2011 2010 2011 2010 2011 2010 Total Revenue $ 1,226,793 $ 1,204,008 $ 513,585 $ 545,584 $ 449,521 $ 396,565 $ 263,687 $ 261,859Cost of sales 949,061 913,885 380,229 392,996 337,934 298,923 230,898 221,966Gross profit 277,732 290,123 133,356 152,588 111,587 97,642 32,789 39,893Selling expenses 91,391 84,889 41,255 39,514 41,676 37,447 8,460 7,928General and

administrative expenses 79,422 77,589 41,272 42,381 29,166 26,678 8,984 8,530

Research and development expenses 15,330 14,492 12,302 11,592 1,700 1,437 1,328 1,463

Operating profit 91,589 113,153 38,527 59,101 39,045 32,080 14,017 21,972

Finance expenses 11,587 7,845Corporate

expenses 11,909 12,392Income taxes 13,936 21,785Net income

$ 54,157 $ 71,131Depreciation and

amortization included in operating profit $ 27,522 $ 25,111 $ 20,155 $ 17,995 $ 4,556 $ 4,394 $ 2,811 $ 2,722

The continuity of goodwill by industry segment is as follows as at:

Total Juvenile Recreational / Leisure Home Furnishings

June 30,

2011 Dec. 30, 2010 June 30, 2011 Dec. 30, 2010 June 30, 2011 Dec. 30, 2010 June 30, 2011 Dec. 30, 2010Balance, beginning of

period $ 554,528 $ 569,824 $ 352,336 $ 365,118 $ 171,020 $ 173,534 $ 31,172 $ 31,172Additions (1) – (7,378) – - – (7,378 ) – –Contingent

consideration and put option liabilities (1) – 4,366 – (558 ) – 4,924 – –

Foreign exchange 17,919 (12,284) 17,788 (12,224 ) 131 (60 ) – –Balance, end of period $ 572,447 $ 554,528 $ 370,124 $ 352,336 $ 171,151 $ 171,020 $ 31,172 $ 31,172

(1) The 2010 adjustment relates to the finalization of the purchase price allocation of Hot Wheels and Circle

Bikes which resulted in a reallocation from goodwill to intangible assets.


10. Transition to IFRS

Effective the first day of fiscal year 2011, the Company early adopted IFRS which were adopted by the Accounting Standards Board of Canada. The condensed consolidated interim financial statements, for the second quarter and six-months ended June 30, 2011, are the second consolidated financial statements the Company has prepared in accordance with IFRS. Accordingly, the accounting policies set out in Note 3 have been applied in preparing the consolidated interim financial statements for the second quarter and six-months ended June 30, 2011, the comparative information presented in these consolidated interim financial statements for the second quarter and six-months ended June 30, 2010, the preparation of a statement of financial position as at December 30, 2010 and the preparation of an opening IFRS statement of financial position as at December 31, 2009 (the Company’s date of transition). On the adoption of IFRS, the Company is required to determine its IFRS accounting policies and apply these retrospectively to determine its opening statement of financial position under IFRS. However, IFRS 1 First-time Adoption (“FTA”) of International Financial Reporting Standards, allows a number of exemptions and prescribes mandatory exceptions to this general principle upon adoption of IFRS at the date of transition, December 31, 2009. The exemptions applicable to the Company are described below. - Business Combinations

The Company has elected not to apply retrospectively the provisions of IFRS 3 Business Combinations to business combinations that occurred prior to December 31, 2009. At the date of transition, the carrying amount of goodwill in the Canadian GAAP statement of financial position as at December 30, 2009 has accordingly been brought forward without any adjustment relating to business combinations.

- Employee Benefits

The Company has elected to recognize on the transition date all cumulative unamortized actuarial gains and losses for all pension and post-retirement defined benefit plans which were previously deferred under Canadian GAAP in its opening retained earnings. Also, the Company elected to prospectively disclose required benefit plans amounts under IAS 19 Employee Benefits as the amounts are determined for each accounting period from December 31, 2009 instead of the current annual period and previous four annual periods.

- Estimates Estimates made in accordance with IFRS at transition date, and in the comparative period of the first annual IFRS financial statements, shall remain consistent with those determined under Canadian GAAP with adjustments made only to reflect any differences in accounting policies. Under IFRS 1, the use of hindsight is not permitted to adjust estimates made in the past under Canadian GAAP that were based on the information that was available at the time the estimate was determined. Any additional estimates that are required under IFRS, that were not required under Canadian GAAP, are based on the information and conditions that exist at the transition date and in the comparative period of the first audited annual IFRS financial statements.

- Hedge Accounting The designation of a hedging relationship cannot be made retrospectively. In order for a hedging relationship to qualify for hedge accounting at the transition date, the relationship must have been fully designated and documented as effective at the transaction date in accordance with Canadian GAAP, and that designation and documentation must be updated in accordance with IAS 39 at the transition date to IFRS. The Company’s hedging relationships were fully documented and designated at the transaction dates under Canadian GAAP and satisfied the hedge accounting criteria under IFRS at the transition date.

- Designation of financial assets and financial liabilities

The Company elected to re-designate cash and cash equivalents from the held-for-trading category to loans and receivables.

In preparing its opening IFRS statement of financial position, the Company has adjusted amounts reported previously in its consolidated financial statements prepared in accordance with Canadian GAAP. An explanation of how the transition from previous GAAP to IFRS has affected the Company’s financial position as at June 30, 2010 and its previously published consolidated financial statements for the second quarter and six-months ended June 30, 2010 is set out in the following tables and notes that accompany the tables.


10. Transition to IFRS (continued)

Reconciliation of equity as at June 30, 2010

Notes Canadian GAAP

June 30, 2010FTA

reclassifications FTA

adjustments IFRS

June 30, 2010 ASSETS CURRENT ASSETS

Cash and cash equivalents $ 33,987 $ – $ – $ 33,987 Trade and other receivables G 397,880 (2,238 ) – 395,642 Inventories 446,438 – – 446,438 Other financial assets G – 2,238 – 2,238 Income taxes receivable 14,029 – – 14,029 Prepaid expenses 18,908 – – 18,908 Deferred tax assets G 41,774 (41,774 ) – – 953,016 (41,774 ) – 911,242

NON-CURRENT ASSETS Property, plant and equipment B 146,272 – 935 147,207 Intangible assets 381,357 – – 381,357 Goodwill E 537,578 – – 537,578 Deferred tax assets A,D,F,G – 66,723 3,115 69,838 Other assets A,G 34,433 (24,398 ) (7,616 ) 2,419

1,099,640 42,325 (3,566 ) 1,138,399 TOTAL ASSETS $ 2,052,656 $ 551 $ (3,566 ) $ 2,049,641 LIABILITIES CURRENT LIABILITIES

Bank indebtedness $ 2,519 $ – $ – $ 2,519 Trade and other payables G 425,341 (46,883 ) – 378,458 Other financial liabilities G – 1,329 – 1,329 Income taxes payable F 27,755 – 312 28,067 Deferred tax liabilities G 140 (140 ) – – Long-term debt G 10,506 92,000 – 102,506 Provisions D,G – 45,554 410 45,964 466,261 91,860 722 558,843

NON-CURRENT LIABILITIES Long-term debt G 318,806 (92,000 ) – 226,806 Pension and post-retirement benefit obligations A 20,179 – 9,106 29,285 Deferred tax liabilities A,B,F,G 119,508 140 (4,848 ) 114,800 Provisions G – 1,529 – 1,529 Other financial liabilities G – 21,798 – 21,798 Other long-term liabilities G 24,091 (22,776 ) – 1,315

482,584 (91,309 ) 4,258 395,533 EQUITY SHARE CAPITAL 178,155 – – 178,155 CONTRIBUTED SURPLUS 21,936 – – 21,936 ACCUMULATED OTHER COMPREHENSIVE

INCOME A,C 27,099 – 1,552 28,651 RETAINED EARNINGS 876,621 – (10,098 ) 866,523 1,103,811 – (8,546 ) 1,095,265 TOTAL LIABILITIES AND EQUITY $ 2,052,656 $ 551 $ (3,566 ) $ 2,049,641



Reconciliation of the consolidated income statement for the second quarter ended June 30, 2010

Notes Canadian GAAP

June 30, 2010FTA


adjustments IFRS

June 30, 2010 Sales $ 604,174 $ – $ – $ 604,174 Licensing and commission income 3,521 – – 3,521 TOTAL REVENUE 607,695 – – 607,695 Cost of sales A,B 466,935 – (317 ) 466,618 GROSS PROFIT 140,760 – 317 141,077 Selling, general and administrative expenses G 82,217 (82,217 ) – – Selling expenses G – 44,193 – 44,193 General and administrative expenses A,D,G – 41,405 75 41,480 Depreciation and amortization G 7,247 (7,247 ) – – Research and development expenses G 2,853 3,866 – 6,719 OPERATING PROFIT 48,443 – 242 48,685 Finance expenses 4,567 – – 4,567 INCOME BEFORE INCOME TAXES 43,876 – 242 44,118

Income taxes expense A,B,D,F 8,745 – 2,448 11,193

NET INCOME $ 35,131 $ – $ (2,206 ) $ 32,925 EARNINGS PER SHARE

Basic $ 1.07 $ – $ (0.07 ) $ 1.00 Diluted $ 1.05 $ – $ (0.06 ) $ 0.99

Reconciliation of the consolidated income statement for the six-months ended June 30, 2010

Notes Canadian GAAP

June 30, 2010FTA


adjustments IFRS

June 30, 2010 Sales $ 1,197,870 $ – $ – $ 1,197,870 Licensing and commission income 6,138 – – 6,138 TOTAL REVENUE 1,204,008 – – 1,204,008 Cost of sales A,B 914,519 – (634 ) 913,885 GROSS PROFIT 289,489 – 634 290,123 Selling, general and administrative expenses G 167,774 (167,774 ) – – Selling expenses G – 85,923 – 85,923 General and administrative expenses A,D,G – 88,862 85 88,947 Depreciation and amortization G 14,723 (14,723 ) – – Research and development expenses G 6,780 7,712 – 14,492 OPERATING PROFIT 100,212 – 549 100,761 Finance expenses 7,845 – – 7,845 INCOME BEFORE INCOME TAXES 92,367 – 549 92,916

Income taxes expense A,B,D,F 19,869 – 1,916 21,785

NET INCOME $ 72,498 $ – $ (1,367 ) $ 71,131 EARNINGS PER SHARE

Basic $ 2.20 $ – $ (0.04 ) $ 2.16 Diluted $ 2.18 $ – $ (0.04 ) $ 2.14



Notes to the reconciliation of equity and the consolidated income statement A. Employee benefits

For the transition from Canadian GAAP to IFRS, the Company has elected to apply the exemption of IFRS 1 where all the cumulative actuarial gains and losses at the date of transition have been recognized immediately in retained earnings. Under Canadian GAAP, the Company expensed unamortized actuarial gains and losses over the estimated average service life of active employees remaining in the plans. In addition, under IFRS, all unrecognized past service costs that were vested were recognized in retained earnings at the date of transition whereas under Canadian GAAP past service costs were deferred and amortized on a straight-line basis over the remaining service period of active employees at the date of the employee benefit plan amendments. The impact arising from the changes are summarised as follows: Consolidated statement of financial position:

Increase (Decrease) June 30,

2010

Deferred tax assets $ 817Other assets $ (7,616) Pension and post-retirement benefit obligations $ 9,106Deferred tax liabilities $ (5,850) Accumulated other comprehensive income $ (818) Retained earnings $ (9,237)

Consolidated income statement:

Increase (Decrease)

Six Months Ended

June 30, 2010

Second Quarter

Ended June 30, 2010

Cost of sales $ (682 ) $ (341) General and administrative expenses (20 ) (9) Income taxes expense 293 146

Net income $ 409 $ 204

B. Impairment of assets At the transition date, the Company reviewed its tangible and intangible assets with definite useful lives to determine whether there were any indications that these assets were impaired or whether there were any indications that the previously recognized impairments losses may no longer exist or may have decreased. Under Canadian GAAP, no such reversal of impairment is allowed. The Company also completed its required impairment testing of goodwill and non-amortizable intangible assets. The methodology used to assess the impairment is described in Note 3 of the first quarter ended March 31, 2011 condensed consolidated interim financial statements. The application of IFRS on the transition date resulted in the identification of indications that the previously recognized impairment losses have decreased. There was no impairment loss required to be recorded on the transition date.



Notes to the reconciliation of equity and the consolidated income statement (continued) B. Impairment of assets (continued)

The impact arising from the change is summarised as follows:

Consolidated statement of financial position:


2010

Property, plant and equipment $ 935Deferred tax liabilities $ 346Retained earnings $ 589


Increase (Decrease)

Six Months Ended

June 30, 2010

Second Quarter

Ended June 30, 2010

Cost of sales $ 48 $ 24Income taxes expense 15 (9)

Net income $ (63 ) $ (15)

C. Foreign exchange

The Company has retroactively analyzed all instances where it has recognized cumulative translation adjustment (“CTA”) in the consolidated income statement resulting from an intercompany loan reimbursement that did not resulted in the loss of control of its subsidiaries. Under IFRS, the reimbursement of an intercompany loan considered as a permanent investment (between companies with different functional currencies) does not necessarily trigger the recycling of a portion of the CTA in the income statements.

The impact arising from the change is summarised as follows: Consolidated statement of financial position:


2010

Retained earnings $ (2,370) Accumulated other comprehensive income $ 2,370



Notes to the reconciliation of equity and the consolidated income statement (continued) D. Provisions

There are differences in terminology, recognition requirements and basis of measurement in the guidance related to the recognition of provisions under IFRS as compared to Canadian GAAP. Accordingly, an adjustment related to the recognition requirements was recognized on transition. The impact arising from the change is summarised as follows: Consolidated statement of financial position:


2010

Deferred tax assets $ 160Provisions 410Retained earnings $ (250)


Increase (Decrease)

Six Months Ended

June 30, 2010

Second Quarter

Ended June 30, 2010

General and administrative expenses $ 105 $ 84Income taxes expense (41 ) (34)

Net income $ (64 ) $ (50)

E. Contingent consideration and put option liabilities

The Company elected not to restate any business combinations that occurred prior to December 31, 2009. As the best estimates of the amounts required to settle the contingent consideration and put options liabilities under Canadian GAAP were consistent with the fair value of the obligations under IFRS, there was no adjustment required at the transition date to opening retained earnings or goodwill. Subsequent to the transition date, at each reporting date, the contingent consideration and put options liabilities are remeasured at fair value through the income statement within general and administrative expenses in accordance with IAS 39 as opposed to Canadian GAAP that required changes in measurement of contingent consideration and put option liabilities to be adjusted through the purchase consideration. There was no impact arising from this change to the consolidated statement of financial position as at June 30, 2010 and to the consolidated income statement for the quarter and six months ended June 30, 2010 as no re-measurements were required.



Notes to the reconciliation of equity and the consolidated income statement (continued) F. Income taxes

Unlike IFRS, under Canadian GAAP a deferred tax asset or liability is not recognized for a temporary difference arising from the difference between the historical exchange rate and the current exchange rate translations of the cost of non-monetary assets and liabilities of foreign operations. The Company has calculated an opening adjustment as at December 31, 2009 to decrease deferred tax liabilities and increase retained earnings by $2,514. In June 2010, the Company elected to change its functional currency for tax purposes in order to be the same as the one used in the preparation of its financial statements for which income of $2,514 was recognized in the Canadian GAAP results for the second quarter and six-months ended June 30, 2010. Due to the transition from Canadian GAAP to IFRS, this adjustment was reversed in the income statement of 2010 since it was recognized as an adjustment as at the transition date. There was no impact to the consolidated statement of financial position as at June 30, 2010 as the functional currency for both tax and accounting purposes was consistent under IFRS and Canadian GAAP.

The impact arising from this change is summarised as follows: Consolidated income statement:

Increase (Decrease)

Six Months Ended

June 30, 2010

Second Quarter

Ended June 30, 2010

Income taxes expense $ 2,514 $ 2,514

Net income $ (2,514 ) $ (2,514)

Under IFRS, a deferred tax asset is recorded for deductible share-based payments based on the intrinsic value of the option at the statement of financial position date, being the difference between the share price and the exercise price at the reporting date of the vested share options. This deferred tax asset is adjusted every period to reflect the tax deduction that the Company would receive based on the current market price of the shares. Under Canadian GAAP, a deferred tax asset was recognized based on the vested portion of the share options fair value. The impact arising from this change is summarised as follows: Consolidated statement of financial position:


2010

Deferred tax liabilities $ 656Retained earnings $ (656)



Notes to the reconciliation of equity and the consolidated income statement (continued) F. Income taxes (continued)


Increase (Decrease)

Six Months Ended

June 30, 2010

Second Quarter

Ended June 30, 2010

Income taxes expense $ (479 ) $ 106

Net income $ 479 $ (106)

Under IFRS, the difference between the new tax basis and the carrying value in the consolidated financial statements of assets transferred between a consolidated group are recognized as deferred tax assets at the buyer’s tax rate. Canadian GAAP requires that taxes paid by the seller on intercompany profits are to be deferred and prohibits the recognition of a deferred tax asset for the difference resulting from difference between the tax base and the carrying value on the consolidated financial statements. The impact arising from this change is summarised as follows: Consolidated statement of financial position:


2010

Deferred tax assets $ 2,138Income tax payable $ 312Retained earnings $ 1,826


Increase (Decrease)

Six Months Ended

June 30, 2010

Second Quarter

Ended June 30, 2010

Income taxes expense $ (386 ) $ (275)

Net income $ 386 $ 275

The tax effect of changes in temporary differences resulting from the various IFRS FTA adjustments were calculated using the Company’s income taxes accounting policies as described in Note 3.



Notes to the reconciliation of equity and the consolidated income statement (continued) G. Reclassifications

Certain comparative figures have been reclassified on the consolidated statements of financial position and on the consolidated income statement to conform to the new presentation under IFRS. The most significant reclassifications on the consolidated statement of financial position related to a portion of long-term debt being classified as a current liability as the completion of the extension of the revolving bank loans was effective after the statement of financial position date, deferred taxes being classified as a non-current asset or liability and the presentation of provisions as a separate caption on the statement of financial position. The most significant reclassifications on the consolidated income statement relate to selling, general and administrative expenses being allocated to selling expenses and general and administrative expenses in order for the consolidated income statement to conform with a presentation by function of expense.

H. Consolidated statement of comprehensive income

The transition from Canadian GAAP to IFRS has not had a material impact on the consolidated statement of comprehensive income except for the inclusion of actuarial gains (losses) on the defined benefit plans and the related deferred income taxes implications.

I. Consolidated statement of cash flows

The transition from Canadian GAAP to IFRS has not had a material impact on the consolidated statement of cash flows except for the inclusion of income taxes paid, income taxes received and interest paid, in cash provided by operating activities in the consolidated statement of cash flows.

11. Subsequent Event

Effective July 15, 2011, the Company amended its revolving bank loans in order to extend the maturity from July 1, 2013 to July 1, 2014.

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