What’s in store
2015 Annual Report
Leon’s Furniture Limited
106 Ye ars
Yo u n g
For more than a century, we have remained true to the
conviction of founder Ablan Leon that business is won
through fairness, integrity and trust.
Over the past 106 years, Leon’s storied
history has been one of continuous
innovation and success. From the opening
of the A. Leon Company’s first store in
Welland, Ontario in 1909, we have grown
into one of Canada’s largest and most
successful retailers, building a network
of 301 stores across the country and
introducing many industry firsts along the
way. These have included the extension
of credit to new immigrants in the early
1900s, the introduction of “big box”
retailing to Canada in 1973, and the
creation of Canada’s largest furniture,
appliance and home electronics retailer
with the acquisition of The Brick in 2013.
We believe this spirit of change and
innovation will serve us well as we look
forward to our future.
20 15 Fi nan c iaL
H i g H Li g Hts
For an extensive look
at our 5-Year Review
please see page 11.
2015
2014
2015
2014
2015
2014
Revenue
Net Income
Shareholders’ Equity
1.2%
GROW TH
1.5%
GROW TH
8.9%
GROW TH
(per share)
($ in thousands, except per share amounts)
Revenue
Income before income taxes
Net income
Cash generated from operations
Dividends paid
Per common share
Net income
Cash flow generated from operations
Dividends declared
Shareholders’ equity at year end
2015
2014
% Change
$ 2,031,718
101,419
76,629
58,483
28,465
$ 2,008,480
103,134
75,524
151,988
28,328
$
$
$
$
1.08 $
0.82 $
0.40 $
8.43 $
1.07
2.14
0.40
7.74
1.2%
(1.7%)
1.5%
(61.5%)
0.5%
0.9%
(61.7%)
—
8.9%
cover image by sabrina smelko
an d M o re .
Leon’s is Canada’s largest retailer of furniture,
appliances and home electronics with $2.032 billion
in annual sales, six leading banners and 301 stores from
coast to coast. In 2015, we continued to strengthen this
unmatched foundation while expanding our presence in
online retailing, and building complementary businesses
to augment growth. This year’s annual report takes a
look at our progress.
3
Leon’s Furniture Limited | 2015 Annual Report Bright
future.
4
Leon’s Furniture Limited | 2015 Annual Report Chief Executive Officer’s Message
2015 was a year of continued progress for the
Leon Group of Companies as we strengthened
the market-leading positions of our retail
banners, completed the implementation of our
new system-wide IT platform and continued to
develop the complementary businesses that will
help drive our growth in the years ahead.
2015
2014
We also managed to post record financial results in a challenging retail marketplace.
System-wide sales reached $2.41 billion including $376 million of franchise sales,
compared to $2.38 billion including $375 million of franchise sales in 2014. Same-store
sales remained positive, increasing by 1.2 percent despite slow growth in the economy
and persistent weakness in consumer spending, as we continued to grow market share.
Leon’s also achieved record net income of $76.6 million or $1.08 per share. Meanwhile,
we continued to strengthen the balance sheet, retiring $30 million in long-term debt
associated with the acquisition of The Brick and we remain on track with our debt
reduction schedule.
2015 in review
Among the year’s most significant accomplishments was the completion in October 2015
of our new enterprise-wide information management platform. Two years in planning and
execution, this highly complex project involved the migration of five legacy information
systems from The Brick along with important upgrades to the functionality of our existing
network. That we were able to complete this project without major disruption to our
business is a testament to the skill and dedication of the entire IT integration team.
As a result of this work, we now have a unified perspective on every aspect of the
combined business and the foundation required to fully realize the operating synergies
between the two divisions. This process has already started with the launch of a
combined point-of-sale system for Leon’s and The Brick and the planned combination
of core business functions such as procurement, finance, human resources, warranty
and service. There is also significant potential to reduce cost and improve efficiencies
in the optimization of our national distribution system.
During the past year, we announced key changes to the senior management team that
have helped strengthen our leadership for Leon’s next stage of growth. These included
the appointment of Edward Leon, former Vice President of Merchandising, as President
and Chief Operating Officer of the Leon’s Group of Companies where he has assumed
responsibility for day-to-day operation of the Company and allowed me to spend more
time on the strategic development of the Company. We were also very pleased to hire
Mike Walsh, former Vice President of Canadian Tire, as President of the Leon’s Furniture
division. In conjunction with Brick President Jim Caldwell, we now have seasoned
industry veterans from outside the Leon family driving division-level performance
for the first time in the organization’s history. This structure has advanced our efforts
to differentiate the market position of our primary banners and allowed senior
management more time to concentrate on the growth opportunities within our
portfolio of complementary businesses.
What’s in store, and more
Leon’s is the largest retailer of furniture, appliances and home electronics in Canada.
Yet together, our Leon’s and Brick divisions command only an estimated 17 percent
of the total market share. Ours is still a highly fragmented industry that is likely to
present market share growth opportunities as it consolidates over the next few years.
We also have significant room to grow within our existing geographic footprint thanks
to a distribution network that extends from coast to coast to coast. This includes the
expansion of Leon’s in British Columbia and The Brick in Atlantic Canada.
5
Revenue
1.2%
GROW TH
CEO Terrence Leon
(Opposite Page)
At the same time we continue to invest in the value of these storied Canadian brands.
Leon’s has adopted an increasingly aspirational positioning, as evidenced by its growing
presence on social media and sponsorship of lifestyle television programming. We are
also investing in the powerful Brick brand with reinvigorated advertising and a new tagline
— saving you more — that reinforces the division’s promotional strengths.
We also continue to expand our online retailing presence through the leons.ca and
thebrick.com websites. They are part of an omni-channel marketing strategy aimed at
serving customers, whenever and wherever they wish to deal with us. This combination
of online and in-store retailing, with the support of the country’s largest distribution and
service networks, represents a powerful competitive advantage in today’s marketplace.
In 2016, we are also very excited as we are ready to launch furniture.com. Our newest
online store offers everything available in our retail stores and so much more, including
a wider range of price points in each category and a growing assortment of home décor
and lighting products.
We are also pleased by the performance and prospects of several less well-known
but profitable businesses that complement our retail network. These include:
› Appliance Canada and Midnorthern Appliance, which together are the largest provider
of appliances to the builder, developer, property management and hotel industries.
› TransGlobal Service, which was founded to service appliances sold by The Brick, is
now providing factory service for many major manufacturers as well as a growing
number of retail clients including the Leon’s division. Prospects for this business
remain strong as manufacturers outsource service and the industry consolidates.
› Trans Global Insurance, a major provider of life, disability and income protection
insurance for credit customers.
› King & State, which offers extended warranty protection for products sold through
our retail channels including our stores.
› First Oceans Trading Corporation, which sources furniture directly from East Asian
manufacturers on behalf of both retail divisions from offices in China and Vietnam.
There is significant
potential to reduce
costs and improve
efficiencies in the
optimization of our
national distribution
system, a process that
is now underway.
s
n
i
k
a
y
c
u
L
6
Leon’s Furniture Limited | 2015 Annual Report
Chief Executive Officer’s Message
Canada’s Number One
Commercial Appliance
Retailer
together, appliance
canada and Midnorthern
appliance are the country’s
largest commercial retailer
of conventional and luxury
appliances for the builder,
development, property
management and
hotel industries.
o
k
l
e
m
s
a
n
i
r
b
a
s
7
We’ll continue to do what
we have done throughout
other economic cycles
by delivering the best
All of these businesses are well positioned in their respective industries with the potential
to make growing contributions to the Company’s earnings in the years ahead. Through our
corporate entities including our subsidiaries Murlee Holdings Limited and Leon Holdings
(1967) Limited, we also own a 4.2 million square foot portfolio of commercial real estate,
much of it in prime urban locations, with unrealized value and development potential for
adjacent properties.
combination of service,
The year ahead
selection and value in
the business.
Canada’s economy sputtered between positive and negative territory in 2015 in the
midst of declining oil prices, uncertain financial markets and weak consumer spending
growth. These conditions are likely to persist throughout the year ahead. In response, we’ll
continue to do what we have done throughout other economic cycles by delivering the
best combination of service, selection and value in the business. By doing this well — in
our stores and online — we will continue to outperform the industry while finding more
ways to reduce the cost of doing business. In 2016, this will include the optimization of
our distribution system and back office services, which should enable our earnings to
show significant top line growth.
In closing, I would like to thank our dedicated executives, corporate and franchise store
management teams and all of the associates throughout our businesses for their valued
contributions during another challenging but rewarding year.
Sincerely,
“Terrence T. Leon”
Terrence T. Leon
Chief Executive Officer
8
Leon’s Furniture Limited | 2015 Annual Report
Chief Executive Officer’s Message
n
o
s
n
e
h
p
e
t
s
y
a
s
d
n
i
L
Making a great brand
even better
the increasingly aspirational
positioning of the Leon’s
brand can be seen in
our growing presence
on social media and
through the sponsorship
of popular lifestyle
television programming.
9
Leon’s Furniture Limited | 2015 Annual Report
1
35
1
1
ac ros s tH e c o u ntrY
54
6
6
1
11
3
3
7
2
1
1
16
11
69
45
4
3
NaTiONW ide
301
sTOR es
3
1
1
3
4
3
5
201
The Brick
106 Years of History
1909 The A. Leon Co. opens for business on
King Street in Welland, Ontario.
1973 Leon’s introduces “big-box” retailing to
2011 Leon’s opens four new corporate stores,
and two new franchise locations, including
our first franchise store in Québec.
80 Leon’s
Furniture
Canada with the opening of our first
warehouse showroom in Weston, Ontario.
2012 Leon’s secures sites for four new corporate
stores, three of which opened in 2013.
1974 The opening of our 10th store in
Laval, Québec marks Leon’s expansion
beyond Ontario.
1983 Leon’s extends its presence to smaller
centres with the introduction of the first
franchise store in Kingston, Ontario.
1985 Leon’s opens its first store in Atlantic
Canada in Saint John, New Brunswick.
2013 Leon’s acquires The Brick creating Canada’s
largest home furnishing, appliance and
electronics retailer, with a network of over
300 stores from coast to coast.
2014 Leon’s acquires minority interest in online
commerce provider, Blueport Investors LLC,
with exclusive rights to the tradename and
URL furniture.com in Canada.
14
United Furniture
Warehouse/Brick
Clearance Centres
3
3
United Furniture
Warehouse
Appliance
Canada
10
Leon’s Furniture Limited | 2015 Annual Report The Leon’s Group
of Companies
Leon’s is canada’s largest
retailer of furniture, appliances
and home electronics through
six leading retail and commercial
banners. they are supported
by several complementary
businesses that provide our
divisions and third-party
customers high-quality product
sourcing services, after-sales
repair and service, warranty
protection, and credit insurance.
At-A-Glance
We are ready to build
upon Leon’s heritage
of success with veteran
retail industry leaders
from inside and outside
the Company.
re adY to
g row
Edward Leon, President & COO,
Leon’s Furniture Limited
Eddy is a third generation Leon who began
working in the family business as a young
man. Since 1976, he has held a number of
management positions in store operations,
human resources, and buying. In February
2001, Eddy was appointed a Director of
the Company and in May 2002, became
Vice President of Merchandising, a position
he held until he assumed the position of
President and Chief Operating Officer of
Leon’s Furniture Limited in June 2015.
Michael J. Walsh, President,
Leon’s Furniture
Jim Caldwell, President,
The Brick
Mike is a seasoned executive with over 25
years of retail experience. He has been a
catalyst for positive change since his arrival
at Leon’s in June 2015. Prior to joining the
Company, Mike served as Vice President of
Operations at Canadian Tire Corporation.
Jim became President of The Brick in 2013
after serving as Senior Vice President of
Store Operations for three years and prior
to that held senior management positions
at other leading retailers. Jim is Vice
Chairman, Breakfast For Learning Canada.
11
Leon’s Furniture Limited | 2015 Annual Report
stro n g
co M M u n iti es
Leon’s has always believed in giving something back
to the Canadian communities that have welcomed
our stores and continue to make us a prosperous and
growing company.
Our Leon’s and Brick divisions share a long-standing tradition of supporting the
communities that are home to our operations, both corporately, and through the
volunteer efforts, resources and financial contributions of our stores and associates
across the country.
The largest recipients of Leon’s support are health care facilities. Leon’s believes there
are no better causes than the physical and mental welfare of our customers, friends and
families. In this regard, several of the country’s outstanding hospitals receive significant
contributions annually. Along with the hospitals, there are a number of health associations,
children’s charities, societies and foundations that are supported. Leon’s also assists the
local communities served by its store network with financial contributions, as well as the
volunteer efforts of our associates who contribute hundreds of hours of service across
this country each year.
The Brick division shares a similar focus on improving the health and wellbeing of the
communities that are home to its store network. This can be seen in the support of the
Children’s Miracle Network®, which raises funds and awareness for 170 member hospitals,
14 of which are in Canada. Donations stay local to fund critical treatments and health
care services, paediatric medical equipment and research. We are also proud to sponsor
Breakfast for Learning, which works with schools across Canada to help them start and
operate programs that have provided more than 500 million meals to more than three
million Canadian children since the program started in 1992. You can learn more about
our support for these and other important causes at leons.ca and thebrick.com.
Lending our financial
and voluntary support
our Leon’s and the Brick
divisions both focus their
support on organizations
that improve the health
and wellbeing of the
communities that are
home to our retail stores.
12
Leon’s Furniture Limited | 2015 Annual Report Leon’s results include
operations of The Brick Ltd.
from March 28, 2013.
5 -Ye ar r e vi e w
$2,031,718
Revenue
$76,629
Net Income
$8.43
Shareholders’ Equity (per share)
($ in thousands)
($ in thousands)
2,250,000
2,000,000
1,750,000
1,500,000
1,250,000
1,000,000
750,000
500,000
250,000
0
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
($ per share)
9
8
7
6
5
4
3
2
1
0
11
12
13
14
15
11
12
13
14
15
11
12
13
14
15
Income Statistics
($ in thousands, except amounts per share)
2015
2014
2013
2012
2011
Revenue
Cost of sales
Gross profit
Operating expenses
Income before income taxes
Income tax expense
Net income
Common shares outstanding (‘000s)
Earnings per common share
Percent annual change in sales
Net income as a percentage of sales
Dividend declared
Balance Sheet Statistics
$ 2,031,718
1,145,593
2,008,480
1,131,651
1,721,874
959,307
682,163
398,704
682,836
394,099
886,125
876,829
762,567
283,459
288,737
784,706
101,419
24,790
$
76,629
$
71,218
1.08
1.2%
3.8%
$
28,501
773,695
103,134
27,610
75,524
70,899
1.07
16.6%
3.8%
28,370
669,297
93,270
24,878
68,392
70,612
0.97
152.4%
4.0%
28,247
219,776
63,683
16,901
46,782
70,033
0.67
(0.1%)
6.9%
28,047
209,889
78,848
22,182
56,666
69,969
0.81
(3.9%)
8.3%
36,371
($ in thousands, except amounts per share)
2015
2014
2013
2012
2011
Shareholders’ equity
Total assets
Purchase of capital assets
Working capital
Shareholders’ equity per common share
Common share price range on the
Toronto Stock Exchange
High
Low
600,402 $
549,105 $
497,764 $
$
1,583,463
22,756
65,419
8.43
1,563,476
16,562
46,931
7.74
1,565,356
18,984
16,246
7.05
452,187 $
588,178
17,897
226,208
6.46
425,461
584,411
24,999
204,649
6.08
$
$
19.38 $
12.61 $
17.90 $
13.41 $
14.75 $
11.62 $
13.47 $
10.55 $
15.65
10.56
13
Leon’s Furniture Limited | 2015 Annual Report
In more than 300 stores from coast to
coast, and through a rapidly growing
online presence, Leon’s Furniture Limited
offers an unbeatable combination of service,
selection and value to Canadian customers,
no matter how, when or where they wish
to find us.
o
k
l
e
m
s
a
n
i
r
b
a
s
y
b
s
o
t
o
h
P
14
Leon’s Furniture Limited | 2015 Annual Report
Manag eM ent’s
D isc u s sio n & a nalys is
For the quarters and years ended December 31, 2015
and 2014.
The following Management’s Discussion and Analysis
(“MD&A”) is prepared as at February 25, 2016 and is based
on the consolidated financial position and operating
results of Leon’s Furniture Limited/Meubles Leon Ltée
(the “Company”) as of December 31, 2015 and for the
year ended December 31, 2015. It should be read in
conjunction with the fiscal year 2015 consolidated
financial statements and the notes thereto. For additional
detail and information relating to the Company, readers are
referred to the fiscal 2015 quarterly financial statements
and corresponding MD&As which are published separately
and available at www.sedar.com.
Cautionary Statement Regarding
Forward-Looking Statements
This MD&A is intended to provide readers with the
information that management believes is required to gain
an understanding of Leon’s Furniture Limited’s current
results and to assess the Company’s future prospects.
This MD&A, and in particular the section under heading
“Outlook”, includes forward-looking statements, which are
based on certain assumptions and reflect Leon’s Furniture
Limited’s current plans and expectations. These forward-
looking statements are subject to a number of risks and
uncertainties that could cause actual results and future
prospects to differ materially from current expectations.
Some of the factors that can cause actual results to differ
materially from current expectations are: a further drop
in consumer confidence; dependency on product from
third party suppliers; further changes to the Canadian bank
lending rates; and a further weakening of the Canadian
dollar vs. the US dollar. Given these risks, uncertainties and
the integration risk associated with the acquisition of The
Brick Ltd. (“The Brick”), investors should not place undue
reliance on forward-looking statements as a prediction of
actual results. Readers of this report are cautioned that
actual events and results may vary.
Financial Statements Governance Practice
The consolidated financial statements of the Company
have been prepared in accordance with the International
Financial Reporting Standards (“IFRS”) as issued by
the International Accounting Standards Board (“IASB”).
The amounts expressed are in Canadian dollars. Per
share amounts are calculated using the weighted
average number of shares outstanding before and after
considering the potential dilutive effects of the convertible
debentures and the management share purchase plan for
the applicable period.
The Audit Committee of the Board of Directors of Leon’s
Furniture Limited reviewed the MD&A and the consolidated
financial statements, and recommended that the Board of
Directors approve them. Following review by the full Board,
the fiscal year 2015 consolidated financial statements and
MD&A were approved on February 25, 2016.
13
1. BUSINESS OVERVIEW
2. NON-IFRS FINANCIAL MEASURES
Same Store Sales
Same store sales are defined as sales generated by
stores that have been open or closed for more than
12 months on a yearly basis. Same store sales is not an
earnings measure recognized by IFRS, and does not have
a standardized meaning prescribed by IFRS, but it is a key
indicator used by the Company to measure performance
against prior period results. Same store sales as discussed
in this MD&A may not be comparable to similar measures
presented by other issuers, however this measure is
commonly used in the retail industry. We believe that
disclosing this measure is meaningful to investors because
it enables them to better understand the level of growth of
our business.
Total System Wide Sales
Total system wide sales refer to the aggregation of revenue
recognized in the Company’s consolidated financial
statements plus the franchise sales occurring at franchise
stores to their customers which are not included in the
revenue figure presented in the Company’s consolidated
financial statements. Total system wide sales is not
a measure recognized by IFRS, and does not have a
standardized meaning prescribed by IFRS, but it is a key
indicator used by the Company to measure performance
against prior period results. Therefore, total system wide
sales as discussed in this MD&A may not be comparable
to similar measures presented by other issuers. We believe
that disclosing this measure is meaningful to investors
because it serves as an indicator of the strength of the
Company’s overall store network, which ultimately impacts
financial performance.
Franchise Sales
Franchise sales figures refer to sales occurring at franchise
stores to their customers which are not included in the
revenue figures presented in the Company’s consolidated
financial statements, or in the same store sales figures in
this MD&A. Franchise sales is not a measure recognized
by IFRS, and does not have a standardized meaning
prescribed by IFRS, but it is a key indicator used by the
Company to measure performance against prior period
results. Therefore, franchise sales as discussed in this
MD&A may not be comparable to similar measures
presented by other issuers. Once again we believe that
disclosing this measure is meaningful to investors because
it serves as an indicator of the strength of the Company’s
brands, which ultimately impacts financial performance.
Leon’s Furniture Limited is the largest network of home
furniture, appliances and electronics, and mattress stores
in Canada. Our retail banners include: Leon’s; The Brick; The
Brick Mattress Store; The Brick Clearance Centre; and United
Furniture Warehouse (“UFW”). Finally, the addition of The
Brick’s Midnorthern Appliance banner alongside with the
Appliance Canada banner, makes the Company the country’s
largest commercial retailer of appliances to builders,
developers, hotels and property management companies.
The Company’s repair service division, Trans Global
Services, provides household furniture, electronics
and appliance repair services to its customers. The
repair services division has contracts to support several
manufacturer’s warranty service work in addition to
servicing a number of individual programs offered by other
dealers. This division also performs work for products sold
with extended warranties and is an integral part of the
retail offering. These extended warranties, underwritten by
the Company’s wholly-owned subsidiaries are offered on
appliances, electronics and furniture to provide coverage
that extends beyond the manufacturer’s warranty period
by up to five years. The warranty contracts provide both
repair and replacement service depending upon the
nature of the warranty claim.
The Company’s wholly-owned subsidiaries Trans Global
Insurance Company (“TGI”) and its sister company, Trans
Global Life Insurance Company (“TGLI”) also offer credit
insurance on the customer’s outstanding financing
balances. This credit insurance coverage includes life,
dismemberment, disability, critical illness, involuntary
unemployment, property, and family leave of absence.
These credit insurance policies are underwritten by TGI
and TGLI as they are licensed as insurance companies in
all Canadian provinces and territories.
The Company has foreign operations in Asia, through
its subsidiary First Oceans Trading Corporation. These
operations relate to the Company’s import and quality
control program for sourcing products from Asia for resale
in Canada through its retail operations.
Leon’s has 301 retail stores from coast to coast in Canada
under the various banners indicated below which also
includes over 100 franchise locations.
Banner
Number of Stores
Leon’s banner corporate stores
Leon’s banner franchise stores
Appliance Canada banner stores
The Brick banner corporate stores1
The Brick banner franchise stores2
The Brick Mattress Store banner locations
UFW banner stores
UFW and The Brick Clearance Centre banner stores
Total number of stores
1 Includes the Midnorthern Appliance banner
2 Includes one UFW franchise
44
36
3
113
67
22
2
14
301
14
Leon’s Furniture Limited | 2015 Annual Report
3. RESULTS OF OPERATION
Consolidated operating results for the quarters ended December 31, 2015 and December 31, 2014
($ in thousands, except % and per share amounts)
2015
2014
$ Increase
(Decrease)
% Increase
(Decrease)
For the three months ended December 31
$
670,357 $
110,128
Total system wide sales1
Franchise sales1
Revenue
Cost of sales
Gross profit
Gross profit margin as a percentage of revenue
Selling, general and administrative expenses
SG&A as a percentage of revenue
Income before net finance costs and
income tax expense
Net finance costs
Income before income taxes
Income tax expense
Net income
Net income as a percentage of revenue
5.39%
$
30,187 $
560,229
311,428
248,801
44.41%
207,098
36.97%
41,703
4,243
37,460
7,273
660,120
108,065
552,055
308,158
243,897
44.18%
198,351
35.93%
45,546
3,836
41,710
11,796
29,914
5.42%
10,237
2,063
8,174
3,270
4,904
8,747
(3,843)
407
(4,250)
(4,523)
273
1.6%
1.9%
1.5%
1.1%
2.0%
4.4%
(8.4%)
10.6%
(10.2%)
(38.3%)
0.9%
Basic weighted average number
of common shares
Basic earnings per share
Diluted weighted average number
of common shares
Diluted earnings per share
71,215,941
$
0.42 $
71,040,021
0.42
82,363,520
$
0.38 $
82,332,550
0.38
Common share dividends declared
$
Convertible, non-voting shares dividends declared $
0.10 $
0.20 $
0.10
0.20
1 Non-IFRS financial measures. Refer to section 2 in this MD&A for additional information.
Same Store Sales1
($ in thousands, except %)
Same store sales1
For the three months ended December 31
2015
2014
$ Increase
% Increase
$
558,672
$
549,655
$
9,017
1.6%
1 Non-IFRS financial measure. Refer to section 2 in this MD&A for additional information.
Fourth Quarter Overall Performance
Revenue
For the three months ended December 31, 2015, revenue
was $560,229,000 compared to $552,055,000 in the
prior year’s fourth quarter. Revenue increased $8,174,000
or 1.5% between the comparative quarters as we
continued to see growth in most product categories.
saMe s toRe s ales
Overall, same store corporate sales increased 1.6%.
gRoss PRofit
The gross margin for the fourth quarter 2015 increased
slightly from 44.18% to 44.41% compared to the prior
year’s fourth quarter.
selling, geneRal anD aDMinistRative exPenses
Selling, general and administrative expenses of
$207,098,000 increased $8,747,000 for the fourth
quarter 2015 compared to the fourth quarter of 2014.
Compared to the prior year quarter, the change is due to
an increase in advertising expenditures in order to further
promote our brands and increase sales, the net change
of the impact of annual salary increases offset by delivery
expense efficiencies and primarily due to an approximately
$4,000,000 non-cash decrease in the unrealized value of
the Company’s financial derivatives, comprised of foreign
exchange forward contracts and a fixed interest rate swap.
incoMe tax exPense
Due to the adjustments in prior year periods, the income
tax expense decreased by approximately $3,000,000.
net incoMe anD eaRnings PeR shaRe
As a result of the above, net income for the fourth quarter
of 2015 was $30,187,000, $0.42 per common share
($29,914,000, $0.42 per common share in 2014).
15
Management’s Discussion & Analysis
Consolidated operating results for the year ended December 31, 2015, 2014 and 2013
For the year ended December 31
($ in thousands, except %
and per share amounts)
2015
2014
$ Increase % Increase
(Decrease)
(Decrease)
2014
(Restated)
2013
$ Increase % Increase
(Decrease)
(Decrease)
Total system wide sales1
Franchise sales1
$ 2,407,512 $ 2,383,324
374,844
375,794
Revenue2
Cost of sales2
Gross profit2
Gross profit margin as a
2,031,718
1,145,593
2,008,480
1,131,651
886,125
876,829
24,188
950
23,238
13,942
9,296
1.0% $ 2,383,324 $ 2,066,659
344,785
0.3%
374,844
2,008,480
1,131,651
1,721,874
959,307
316,665
30,059
286,606
172,344
876,829
762,567
114,262
1.2%
1.2%
1.1%
15.3%
8.7%
16.6%
18.0%
15.0%
percentage of revenue
43.61%
43.66%
43.66%
44.29%
Selling, general and
administrative expenses2
767,079
756,936
10,143
1.3%
756,936
654,993
101,943
15.6%
SG&A as a percentage
of revenue
Income before net finance costs
and income tax expense2
Net finance costs2
Income before income taxes2
Income tax expense2
37.76%
37.69%
37.69%
38.04%
119,046
17,627
101,419
24,790
119,893
16,759
103,134
27,610
(847)
868
(1,715)
(2,820)
1,105
(0.7%)
5.2%
(1.7%)
(10.2%)
119,893
16,759
103,134
27,610
107,574
14,304
93,270
24,878
1.5% $
75,524 $
68,392
12,319
2,455
9,864
2,732
7,132
11.5%
10.6%
11.0%
10.4%
Net income2
$
76,629 $
75,524
Net income as a percentage
of revenue
3.77%
3.76%
3.76%
3.97%
Basic weighted average
number of common shares
Basic earnings per share2
Diluted weighted average
71,217,958 70,898,590
1.07
$
1.08 $
number of common shares
Diluted earnings per share2
82,364,539 82,177,519
0.96
$
0.97 $
Common share
0.01
0.01
70,898,590 70,612,407
0.97
1.07 $
0.9% $
82,177,519 79,818,914
0.89
0.96 $
1.0% $
0.10
10.3%
0.07
7.9%
dividends declared
$
0.40 $
0.40
$
0.40 $
0.40
1 Non-IFRS financial measures. Refer to section 2 in this MD&A for additional information.
2 The Company’s results for the year ended December 31, 2013 include the results of The Brick as of the date of acquisition on March 28, 2013.
Same Store Sales1
($ in thousands, except %)
Same store sales1
2015
2014
$ Increase
% Increase
For the year ended December 31
$ 2,011,251
$ 1,988,241
$
23,010
1.2%
1 Non-IFRS financial measure. Refer to section 2 in this MD&A for additional information.
Year to Date Overall Performance
Revenue
For the year ended December 31, 2015, revenue was
$2,031,718,000 compared to $2,008,480,000 for the
prior year. Revenue increased $23,238,000 or 1.2% for
the comparative year.
saMe s toRe s ales
Overall, same store corporate sales increased 1.2%.
gRoss PRofit
The gross margin for the year ended December 31, 2015
decreased slightly from 43.66% to 43.61% compared to
the prior year. Since the beginning of the fiscal year there
has been a significant weakening of the Canadian dollar.
Currency hedging helped to minimize the effect of this on
our gross profit margin.
selling, geneRal anD aDMinistRative exPenses
For the year, selling, general and administrative expenses
of $767,079,000 were up $10,143,000 or 1.3% as
compared to 2014. The increase was mainly the result
of incremental selling costs as SG&A expenses as a
percentage of revenue in 2015 were 37.76% as compared
to 37.69% in the prior year. Additional marketing dollars
were also spent in an attempt to generate higher
consumer traffic into our stores.
net incoMe anD eaRnings PeR shaRe
As a result of the above, net income for the year was
$76,629,000, $1.08 per common share ($75,524,000,
$1.07 per common share in 2014), an increase of
$0.01 per common share.
16
Leon’s Furniture Limited | 2015 Annual Report
4. SUMMARY OF CONSOLIDATED QUARTERLY RESULTS
The table below highlights the variability of quarterly results and the impact of seasonality on the Company’s results.
The Company’s profitability is typically lower in the first half of the year, since retail sales are traditionally higher in the
third and fourth quarters.
($ in thousands, except
per share amounts)
Quarter Ended
December 31
Quarter Ended
September 30
Quarter Ended
June 30
Quarter Ended
March 31
2015
2014
2015
20141
2015
20141
2015
20141
Total system wide sales2
Franchise sales2
Revenue
Net income
Net income per share
Fully diluted per share
108,065
552,055
$ 670,357 $ 660,120 $ 635,347 $ 629,152 $ 572,113 $ 561,438 $ 503,653 $ 508,400
82,391
110,128
426,009
560,229
1,336
$ 30,187 $ 29,914 $ 27,340 $ 27,287 $ 14,996 $ 16,987 $
0.02
0.24 $
$
0.02
0.21 $
$
4,106 $
0.06 $
0.06 $
80,616
423,037
97,217
538,130
87,832
484,281
97,467
531,685
86,921
474,517
0.38 $
0.34 $
0.21 $
0.19 $
0.42 $
0.38 $
0.42 $
0.38 $
0.38 $
0.34 $
1 Restated net income and earnings per share
2 Non-IFRS financial measure. Refer to section 2 in this MD&A for additional information.
5. FINANCIAL POSITION
($ in thousands)
Total assets
Total non-current liabilities
1 Restated
December 31,
December 31,
December 31,
2015
2014
20131
$ 1,583,463
543,455
$
$ 1,563,476
590,055
$
$ 1,565,356
628,114
$
assets
Total assets at December 31, 2015 of $1,583,463,000
were $19,987,000 higher than the $1,563,476,000
reported at December 31, 2014. The principal
components of this net change are the following:
› $38,041,000 decrease in cash and cash equivalents
› $5,661,000 increase in trade receivables
› $24,920,000 increase in income taxes receivable
› $37,333,000 increase in inventory
› $10,834,000 decrease in property, plant and equipment
The increase is primarily the result of the net change in cash
and non-cash working capital of income taxes receivable
and inventory. As well, there was the decrease in property,
plant and equipment as a result of the depreciation being
greater than the purchases of fixed assets.
non-cuRRent liabilities
Non-current liabilities of $543,455,000 were $46,600,000
lower than the $590,055,000 reported at December 31,
2014. The reduction is primarily tied to the Company further
reducing its loans and borrowings by an equivalent amount.
6. LIQUIDITY AND CAPITAL RESOURCES
The following table provides a summarized statement of cash flows for the quarters and years ended December 31, 2015
and December 31, 2014.
Source (Use) of Cash
($ in thousands)
Cash provided by
operating activities
before changes in
non-cash working
capital items
Changes in non-cash
For the three months ended December 31
For the year ended December 31
2015
2014
$ Increase
(Decrease)
2015
2014
$ Increase
(Decrease)
$ 47,275
$ 46,029
$
1,246
$ 132,909
$ 132,808
$
101
working capital items
(20,600)
4,589
(25,189)
(74,426)
19,180
(93,606)
Cash provided by
operating activities
Investing activities
Financing activities
Increase (decrease) in cash
26,675
(9,508)
(36,492)
50,618
(10,313)
(32,090)
(23,943)
805
(4,402)
58,483
(24,509)
(72,015)
151,988
(19,963)
(119,916)
(93,505)
(4,546)
47,901
and cash equivalents
$
(19,325) $
8,215 $
(27,540) $
(38,041) $ 12,109
$
(50,150)
17
Management’s Discussion & Analysis
cash flow (useD in) financing activities
Financing Activities consist primarily of cash used to pay
dividends and the loans and borrowings used to acquire
The Brick.
In the fourth quarter of 2015 financing activities changed
by $4,402,000 compared to the prior year’s quarter. The
change relates to the reduction of the Company’s loans
and borrowings.
In fiscal 2014, cash used in financing activities of
$72,015,000 decreased $47,901,000 from fiscal 2014.
The change relates to the repayment of the $15,000,000
debenture in 2014 and the accelerated principal
repayments of the term loan in 2014.
aDequacy of financial ResouR ces
At December 31, 2015, the Company’s current assets
exceeded its current liabilities by $65,419,000 and its
cash and cash equivalents and available-for-sale financial
assets were $30,819,000 compared to $68,258,000 at
December 31, 2014. Under the Company’s Senior Secured
Credit Agreement we had unused borrowing capacity of
$99.5 million as at the end of both reporting periods of
December 31, 2015 and 2014. The Company believes
that its financing resources together with its continuing
profitable results from operations will provide a sound
liquidity and working capital position throughout the next
twelve months.
cash flow fR oM oPeRating a ctivities
Cash from operating activities consist primarily of net
income adjusted for certain non-cash items, including
depreciation and amortization and the effect of changes
in non-cash working capital items, primarily receivables,
inventories, deferred acquisition costs, accounts payable,
income taxes payable, customer deposits and deferred
rent liabilities and lease inducements.
In the fourth quarter of 2015 cash flow from operating
activities decreased $23,943,000 compared to the
prior year’s quarter. The decrease is the result of the
change in non-cash working capital, primarily as a result
of the changes in trade receivables, inventories and
customer deposits.
In fiscal 2015 cash provided by operating activities
decreased $93,505,000 from fiscal 2014. The decrease
is the result of the change in non-cash working capital,
primarily as a result of the changes in inventories, income
taxes receivable and income taxes payable.
cash useD in investing activities
Investing Activities relate primarily to capital
expenditures and the purchase and sale of available-
for-sale financial assets.
In the fourth quarter of 2015 investing activities decreased
$805,000 compared to the prior year’s quarter. The
decrease is the result of the net of decreased purchases of
fixed assets and intangibles and proceeds from the sale of
marketable securities.
In fiscal 2015 cash used in investing activities increased by
$4,546,000 from fiscal 2014. The change is primarily the
result of increased purchases of fixed assets in the amount
of $6,194,000, increased purchases of intangibles in the
amount of $1,202,000 and the offset of the increase of
$4,240,000 from the proceeds of the sale of fixed assets.
contRactual coMMitMents
($ in thousands)
Payments Due by Period
Contractual Obligations
Total
Under
1 year
1–3 years
3–5 years
Long term debt
Operating leases1
Trade and other payables
Finance lease liabilities
$
422,016 $
501,868
206,076
17,061
61,480 $
85,192
206,076
2,729
247,830 $
154,382
—
3,933
6,000 $
107,035
—
3,818
More than
5 years
106,706
155,259
—
6,581
Total Contractual Obligations
$ 1,147,021 $
355,477 $
406,145 $
116,853 $
268,546
1 The Company is obligated under operating leases to future minimum rental payments for various land and building sites across Canada
18
Leon’s Furniture Limited | 2015 Annual Report
7. OUTLOOK
Even though the economy remains soft, we expect
to see a continuation of consistent profits in 2016, by
improving same store sales, enhancing e-commerce
sales, maintaining gross margins and continuing to drive
efficiencies that will result from the continued integration
of The Brick.
8. OUTSTANDING COMMON SHARES
At December 31, 2015, there were 71,403,949 common
shares issued and outstanding. During the year ended
December 31, 2015, 251,080 convertible, non-voting
series 2005 shares and 95,984 convertible non-voting
series 2009 shares were converted into common shares.
For details on the Company’s commitments related to its
redeemable shares please refer to note 15 of the 2015
consolidated financial statements.
9. RELATED PARTY TRANSACTIONS
At December 31, 2015, we had no transactions with
related parties as defined in IAS24 – Related Party
Disclosures, except those pertaining to transactions
with key management personnel in the ordinary course
of their employment.
10. CRITICAL ASSUMPTIONS
Use of Estimates and Judgments
Management has exercised judgment in the process
of applying the Company’s accounting policies. The
preparation of consolidated financial statements in
accordance with IFRS requires management to make
estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the consolidated
balance sheet dates and the reported amounts of revenue
and expenses during the reporting period. Estimates and
other judgments are continuously evaluated and are based
on management’s experience and other factors, including
expectations about future events that are believed to be
reasonable under the circumstances. Actual results could
differ from those estimates. The following discusses the
most significant accounting judgments and estimates
that the Company has made in the preparation of the
consolidated financial statements.
Revenue Recognition
The Company offers extended warranties on certain
merchandise. Management has applied judgment in
determining the basis upon and period over which to
recognize deferred warranty revenue.
inventoRies
The Company estimates the net realizable value as the
amount at which inventories are expected to be sold
by taking into account fluctuations of retail prices due
to prevailing market conditions. If required, inventories
are written down to net realizable value when the cost
of inventories is estimated to not be recoverable due to
obsolescence, damage or declining sales prices.
Reserves for slow moving and damaged inventory are
deducted in the Company’s valuation of inventories.
Management has estimated the amount of reserve for
slow moving inventory based on the Company’s historic
retail experience.
iMPaiRMent of available-foR -sale financial
assets anD MaRketable secuRities
The Company exercises judgment in the determination
of whether there are objective indicators of impairment
with respect to its available-for-sale financial assets and
marketable securities. This includes making judgments as
to whether a potential impairment is either significant or
prolonged with respect to equity securities held.
iMPaiRMent of PR oPeR ty, Plant anD equiPMent
The Company exercises judgment in the determination of
cash-generating units (“CGUs”) for purposes of assessing
any impairment of property, plant and equipment, as
well as in determining whether there are indicators of
impairment present. Should indicators of impairment be
present, management estimates the recoverable amount
of the relevant CGU. This estimation requires assumptions
about future cash flows, margins and discount rates.
iMPaiRMent of gooD will anD intangible assets
The Company tests goodwill and indefinite life intangible
assets at least annually and reviews other long-lived
intangible assets for any indication that the asset might
be impaired. Significant judgments are required in
determining the CGUs or groups of CGUs for purposes
of assessing impairment. Significant judgments are also
required in determining whether to allocate goodwill to
CGUs or groups of CGUs. When performing impairment
tests, the Company estimates the recoverable amount
of the CGUs or groups of CGUs to which goodwill and
indefinite life intangible assets have been allocated using
a discounted cash flow model that requires assumptions
about future cash flows, margins and discount rates.
PRovisions
The Company exercises judgment in the determination
of recognizing a provision. The Company recognizes
a provision when it has a present legal or constructive
obligation as a result of a past event and a reliable
estimate of the obligation can be made. Significant
judgments are required to be made in determining what
the probable outflow of resources will be required to settle
the obligation.
19
Management’s Discussion & Analysis Materiality
In preparing this MD&A and the information contained
herein, management considers the likelihood that a
reasonable investor would be influenced to buy or not
buy, or to sell or hold securities of the Company if such
information were omitted or misstated. This concept of
materiality is consistent with the notion of materiality
applied to financial statements and contained in IFRS.
Recent Accounting Pronouncements
accounting stanDaRDs anD aMenDMents issueD
but not yet aDoPteD
In July 2014, the IASB issued the final amendments to
IFRS 9, Financial Instruments (“IFRS 9”), which provides
guidance on the classification and measurement of
financial assets and liabilities, impairment of financial
assets, and general hedge accounting. The classification
and measurement portion of the standard determines
how financial assets and financial liabilities are accounted
for in financial statements and, in particular, how they
are measured on an ongoing basis. The amended IFRS 9
introduced a new, expected-loss impairment model
that will require more timely recognition of expected
credit losses. In addition, the amended IFRS 9 includes a
substantially-reformed model for hedge accounting, with
enhanced disclosures about risk management activity. The
new standard is effective for annual periods beginning on
or after January 1, 2018, with earlier adoption permitted.
The Company is in the process of evaluating the impact
of adopting these amendments on the Company’s
consolidated financial statements.
IFRS 15, Revenue from Contracts with Customers
(“IFRS 15”), was issued in May 2014, which will replace
IAS 11, Construction Contracts, IAS 18, Revenue
Recognition, IFRIC 13, Customer Loyalty Programmes,
IFRIC 15, Agreements for the Construction of Real Estate,
IFRIC 18, Transfers of Assets from Customers, and SIC-31,
Revenue – Barter Transactions Involving Advertising
Services. IFRS 15 provides a single, principles based five-
step model that will apply to all contracts with customers
with limited exceptions, including, but not limited to,
leases within the scope of IAS 17, Leases; financial
instruments and other contractual rights or obligations
within the scope of IFRS 9, IFRS 10, Consolidated Financial
Statements and IFRS 11, Joint Arrangements (“IFRS 11”).
In addition to the five-step model, the standard specifies
how to account for the incremental costs of obtaining
a contract and the costs directly related to fulfilling a
contract. The incremental costs of obtaining a contract
must be recognized as an asset if the entity expects to
recover these costs. The standard’s requirements will
also apply to the recognition and measurement of gains
and losses on the sale of some non-financial assets
that are not an output of the entity’s ordinary activities.
IFRS 15 is required for annual periods beginning on or
after January 1, 2018. Earlier adoption is permitted. The
Company is in the process of assessing the impact of
IFRS 15 on its consolidated financial statements.
In May 2014, the IASB issued amendments to IFRS 11
to address the accounting for acquisitions of interests
in joint operations. The amendments address how a
joint operator should account for the acquisition of an
interest in a joint operation in which the activity of the joint
operation constitutes a business. IFRS 11, as amended,
now requires that such transactions shall be accounted
for using the principles related to business combinations
accounting as outlined in IFRS 3, Business Combinations.
The amendments are to be applied prospectively and
are effective for annual periods beginning on or after
January 1, 2016, with earlier application permitted. The
Company is in the process of evaluating the impact of
adopting this amendment may have on the Company’s
consolidated financial statements.
In May 2014, the IASB issued amendments to IAS 16,
Property, Plant and Equipment (“IAS 16”) and IAS 38,
Intangible Assets (“IAS 38”) to clarify acceptable methods
of depreciation and amortization. The amended IAS 16
eliminates the use of a revenue-based depreciation
method for items of property, plant and equipment.
Similarly, amendments to IAS 38 eliminate the use of a
revenue-based amortization model for intangible assets
except in certain specific circumstances. The amendments
are to be applied prospectively and are effective for annual
periods beginning on or after January 1, 2016, with earlier
application permitted. The Company is in the process of
evaluating the impact of adopting these amendments on
the Company’s consolidated financial statements.
IAS 1, Presentation of Financial Statements, was amended
in December 2014 to clarify guidance on materiality and
aggregation, the presentation of subtotals, the structure
of financial statements and the disclosure of accounting
policies. The Amendment is effective for years beginning
on or after January 1, 2016. The Company is analyzing
the new standard to determine its impact, if any, on the
Company’s consolidated financial statements.
In January 2016, the IASB issued IFRS 16, Leases, which will
replace IAS 17, Leases. The new standard will be effective
for fiscal years beginning on or after January 1, 2019.
Earlier application is permitted. Under the new standard, all
leases will be on the balance sheet of lessees, except those
that meet limited exception criteria. As the Company has
significant contractual obligations in the form of operating
leases (note 25) under the existing standard, there
will be a material increase to both assets and liabilities
upon adoption of the new standard. The Company is
analyzing the new standard to determine its impact on the
Company’s consolidated financial statements.
aDoPtion of new, ReviseD oR aMenDeD
accounting stanDaRDs
The Company has adopted the amended International
Financial Reporting Standards pronouncement listed
below as at January 1, 2015, in accordance with the
transitional provisions outlined in the respective standard.
20
Leon’s Furniture Limited | 2015 Annual Report Operating Segments
The Annual Improvements to IFRSs 2010–2012 included
amendments to IFRS 8, Operating Segments. This
standard has been amended to require (1) disclosure
of judgments made by a company’s management in
aggregating segments, and (ii) a reconciliation of segment
assets to the entity’s assets when a measure of segment
is reported to the Chief Operating Decision Maker. These
amendments are effective for annual periods beginning on
or after July 1, 2014. As at January 1, 2015, the Company
adopted this pronouncement and there was no impact on
the Company’s consolidated financial statements.
through its retail stores, (v) the effectiveness of the
Company’s marketing programs, (vi) the Company’s
ability to successfully identify and respond to changes
in fashion trends and consumer tastes in the household
furniture, mattress, appliance and home electronics
retailing industry, (vii) the Company’s ability to maintain
cost effective delivery of its products, (viii) the Company’s
ability to hire, train, manage and retain qualified retail
store management and sales professionals, (ix) the
Company’s ability to continuously improve its service
to achieve new and enhanced customer benefits and
better quality, and (x) general economic conditions and
consumer confidence.
11. RISKS AND UNCERTAINTIES
Careful consideration should be given to the following risk
factors. These descriptions of risks are not the only ones
facing the Company. Additional risks and uncertainties
not presently known to Leon’s, or that the Company
deems immaterial, may also impair the operations of the
Company. If any of such risks actually occur, the business,
financial condition, liquidity, and results of operations of
the Company could be materially adversely affected.
Readers of this MD&A are also encouraged to refer to
Leon’s Annual Information Form (“AIF”) dated March 28,
2016 which provides information on the risk factors facing
the Company. The March 28, 2016 AIF can be found online
at www.sedar.com.
Financial Condition of Commercial Sales
Customers & Franchisees
Through its commercial sales division, the Company sells
products and extends credit to highrise and condominium
builders who purchase large quantities of products. The
Company also sells products and extends credit to its
franchisees. Negative changes in the financial condition
of a significant commercial sales customer or a franchisee
could impact on the Company’s receivables and ultimately
result in the Company having to take a bad-debt write-off
in excess of allowance for bad debts. The occurrence of
such an event could have a material adverse effect on
the Company’s business, financial condition, liquidity and
results of operations.
Sensitivity to General Economic Conditions
Competition
The household furniture, mattress, appliance and home
electronics retailing industry in Canada has historically
been subject to cyclical variations in the general economy
and to uncertainty regarding future economic prospects.
The Company’s sales are impacted by the health of
the economy in Canada as a whole, and in the regional
markets in which the Company operates.
The Company’s sales and financial results are subject to
numerous uncertainties, due to the last global economic
crisis in 2008. Although the economy responded positively
with a modest recovery in 2010 through to 2014, at
present, the outlook for the retailing industry continues
to remain uncertain, and weakness in sales or consumer
confidence could continue resulting in an increasingly
challenging operating environment.
Maintaining Profitability & Managing Growth
There can be no assurance that the Company’s business
and growth strategy will enable it to sustain profitability
in future periods. The Company’s future operating results
will depend on a number of factors, including (i) the
Company’s ability to continue to successfully execute
its strategic initiatives, (ii) the level of competition in
the household furniture, mattress, appliance and home
electronics retailing industry in the markets in which the
Company operates, (iii) the Company’s ability to remain
a low-cost retailer, (iv) the Company’s ability to realize
increased sales and greater levels of profitability
The household furniture, mattress, appliance and home
electronics retailing industry is highly competitive and
highly fragmented. The Company faces competition in
all regions in which its operations are located by existing
stores that sell similar products and also by stores that may
be opened in the future by existing or new competitors
in such markets. The Company competes directly with
many different types of retail stores that sell many of the
products sold by the Company. Such competitors include
(i) department stores, (ii) specialty stores (such as specialty
electronics, appliance, or mattress retailers), (iii) other
national or regional chains offering household furniture,
mattresses, appliances and home electronics, and (iv)
other independent retailers, particularly those associated
with larger buying groups. The highly competitive nature
of the industry means the Company is constantly subject
to the risk of losing market share to its competitors. As
a result, the Company may not be able to maintain or to
raise the prices of its products in response to competitive
pressures. In addition, the entrance of additional
competitors to the markets in which the Company
operates, particularly large furniture, appliance or
electronics retailers from the United States could increase
the competitive pressure on the Company and have a
material adverse effect on the Company’s market share.
The actions and strategies of the Company’s current and
potential competitors could have a material adverse effect
on the Company’s business, financial condition, liquidity
and results of operations.
21
Management’s Discussion & Analysis 12. CONTROLS AND PROCEDURES
Disclosure Controls & Procedures
Management is responsible for establishing and
maintaining a system of disclosure controls and
procedures to provide reasonable assurance that all
material information relating to the Company is gathered
and reported on a timely basis to senior management,
including the Chief Executive Officer and Chief Financial
Officer so that appropriate decisions can be made by
them regarding public disclosure. Based on the evaluation
of disclosure controls and procedures, the CEO and CFO
have concluded that the Company’s disclosure controls
and procedures were effective as at December 31, 2015.
Internal Controls over Financial Reporting
Management is also responsible for establishing and
maintaining adequate internal control over financial
reporting to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
consolidated financial statements for external purposes
in accordance with IFRS. The Company’s internal control
over financial reporting may not prevent or detect
all misstatements because of inherent limitations. As
required by National Instrument 52-109 (“NI 52-109”),
management, including the CEO and CFO, evaluated the
design and operation of the Company’s internal control
over financial reporting as defined in NI 52-109 as at
December 31, 2015. In making this assessment, the
Company used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission in
Internal Control-Integrated Framework (2013).
Based on this assessment, the CEO and the CFO concluded
that the Company maintained effective internal control
over financial reporting as of December 31, 2015.
Changes in Internal Controls over Financial Reporting
Management has also evaluated whether there were
changes in the Company’s internal control over financial
reporting that occurred during the period beginning
on January 1, 2015 and ended on December 31, 2015
that have materially affected, or are reasonably likely to
materially affect, the Company’s internal control over
financial reporting. The Company has determined that no
material changes in internal controls have occurred during
this period.
22
Leon’s Furniture Limited | 2015 Annual Report Manag eM ent’s res p o n si b i lit y
fo r fi nan c ial rep o rti n g
The accompanying consolidated financial statements
are the responsibility of management and have been
approved by the Board of Directors.
The accompanying consolidated financial statements
have been prepared by management in accordance with
International Financial Reporting Standards. Financial
statements are not precise since they include certain
amounts based upon estimates and judgments. When
alternative methods exist, management has chosen those
it deems to be the most appropriate in the circumstances.
Leon’s Furniture Limited/Meubles Leon Ltée (“Leon’s” or
the “Company”) maintains systems of internal accounting
and administrative controls, consistent with reasonable
costs. Such systems are designed to provide reasonable
assurance that the financial information is relevant and
reliable and that Leon’s assets are appropriately accounted
for and adequately safeguarded.
The Board of Directors is responsible for ensuring that
management fulfils its responsibilities for financial
reporting and is ultimately responsible for reviewing
and approving the financial statements. The Board carries
out this responsibility through its Audit Committee.
The Audit Committee is appointed by the Board and
reviews these consolidated financial statements; considers
the report of the external auditors; assesses the adequacy
of the internal controls of the Company; examines the
fees and expenses for audit services; and recommends
to the Board the independent auditors for appointment
by the shareholders. The Committee reports its findings
to the Board of Directors for consideration when approving
these consolidated financial statements for issuance to
the shareholders.
These consolidated financial statements have been
audited by Ernst & Young, the external auditors, in
accordance with Canadian generally accepted auditing
standards on behalf of the shareholders. Ernst & Young
has full and free access to the Audit Committee.
“Terrence T. Leon”
“Dominic Scarangella”
Terrence T. Leon
CEO
Dominic Scarangella
Executive Vice President and CFO
23
i n d epen d ent
au d ito rs ’ rep o rt
To the Shareholders of
Leon’s Furniture Limited/Meubles Leon Ltée
We have audited the accompanying consolidated financial
statements of leon’s furniture limited/Meubles leon ltée,
which comprise the consolidated statements of financial
position as at December 31, 2015 and 2014, and the
consolidated statements of income, comprehensive
income, changes in shareholders’ equity and cash flows
for the years then ended, and a summary of significant
accounting policies and other explanatory information.
ManageMent’s responsibility for the
consolidated financial stateMents
Management is responsible for the preparation and fair
presentation of these consolidated financial statements
in accordance with International Financial Reporting
Standards, and for such internal control as management
determines is necessary to enable the preparation of
consolidated financial statements that are free from
material misstatement, whether due to fraud or error.
auditors’ responsibility
Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with Canadian
generally accepted auditing standards. Those standards
require that we comply with ethical requirements and plan
and perform the audit to obtain reasonable assurance
about whether the consolidated financial statements are
free from material misstatement.
An audit involves performing procedures to obtain
audit evidence about the amounts and disclosures in
the consolidated financial statements. The procedures
selected depend on the auditors’ judgment, including the
assessment of the risks of material misstatement of the
consolidated financial statements, whether due
to fraud or error. In making those risk assessments, the
auditors consider internal control relevant to the entity’s
preparation and fair presentation of the consolidated
financial statements in order to design audit procedures
that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness
of the entity’s internal control. An audit also includes
evaluating the appropriateness of accounting policies
used and the reasonableness of accounting estimates
made by management, as well as evaluating the overall
presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in
our audits is sufficient and appropriate to provide a basis
for our audit opinion.
opinion
In our opinion, the consolidated financial statements
present fairly, in all material respects, the financial
position of leon’s furniture limited/Meubles leon ltée
as at December 31, 2015 and 2014, and its financial
performance and its cash flows for the years then ended
in accordance with International Financial Reporting
Standards as issued by the International Accounting
Standards Board.
“Ernst & Young LLP”
Chartered Professional Accountants
Licensed Public Accountants
Toronto, Canada
February 25, 2016
24
As at
December 31
As at
December 31
2015
2014
$
$
7,859
18,691
22,960
117,832
24,920
303,961
8,329
473
45,900
18,310
22,358
112,171
—
266,628
4,957
923
$
505,025
$
471,247
6,214
13,093
323,218
18,496
318,214
390,120
9,083
6,192
11,093
334,052
21,992
321,302
390,120
7,478
$ 1,583,463
$ 1,563,476
$
206,076
5,343
7,266
112,446
1,954
7,141
49,380
50,000
$
197,044
4,576
34,773
97,705
2,002
7,105
51,111
30,000
$
439,606
$
424,316
237,357
92,628
11,895
95,775
880
8,858
96,062
285,363
91,773
13,849
92,254
401
6,794
99,621
$
983,061
$ 1,014,371
$
$
34,389
7,089
558,526
398
31,169
7,089
510,398
449
$
600,402
$
549,105
$ 1,583,463
$ 1,563,476
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
($ in thousands)
ASSETS
Current assets
Cash and cash equivalents [nOTES 5 AnD 22]
Restricted marketable securities [nOTE 22]
Available-for-sale financial assets [nOTE 22]
Trade receivables [nOTE 22]
Income taxes receivable
Inventories [nOTE 6]
Deferred acquisition costs [nOTE 7]
Deferred financing costs
Total current assets
Other assets
Deferred acquisition costs [nOTE 7]
Property, plant and equipment [nOTE 8]
Investment properties [nOTE 9]
Intangible assets [nOTE 10]
Goodwill [nOTE 10]
Deferred income tax assets [nOTE 20]
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
current liabilities
Trade and other payables [nOTE 11]
Provisions [nOTE 12]
Income taxes payable
Customers’ deposits
Finance lease liabilities [nOTE 13]
Dividends payable [nOTE 16]
Deferred warranty plan revenue
Loans and borrowings [nOTE 14]
Total current liabilities
Loans and borrowings [nOTE 14]
Convertible debentures [nOTE 14]
Finance lease liabilities [nOTE 13]
Deferred warranty plan revenue
Redeemable share liability [nOTE 15]
Deferred rent liabilities and lease inducements
Deferred income tax liabilities [nOTE 20]
Total liabilities
Shareholders’ equity attributable to the shareholders of the Company
Common shares [nOTE 16]
Equity component of convertible debentures [nOTE 14]
Retained earnings
Accumulated other comprehensive income
Total shareholders’ equity
Total liabilities and shareholders’ equity
The accompanying notes are an integral part of these consolidated financial statements.
On behalf of the Board:
“Mark J. Leon”
Mark J. Leon
Director
“Peter Eby”
Peter Eby
Director
25
CONSOLIDATED STATEMENTS OF INCOME
($ in thousands)
Revenue [nOTE 17]
Cost of sales [nOTE 6]
Gross profit
Selling, general and administrative expenses [nOTE 18]
net finance costs [nOTE 19]
Net income before income tax
Income tax expense [nOTE 20]
Net income
Weighted average number of common shares outstanding
Basic
Diluted
Earnings per share [nOTE 21]
Basic
Diluted
Dividends declared per share
Common
Convertible, non-voting
The accompanying notes are an integral part of these consolidated financial statements.
Years ended December 31
2015
2014
$ 2,031,718
1,145,593
$ 2,008,480
1,131,651
$
$
$
$
886,125
767,079
119,046
(17,627)
101,419
24,790
876,829
756,936
119,893
(16,759)
103,134
27,610
$
76,629
$
75,524
71,217,958
82,364,539
70,898,590
82,177,519
$
$
$
$
1.08
0.97
0.40
0.20
$
$
$
$
1.07
0.96
0.40
0.20
26
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($ in thousands)
Years ended December 31
2015
Tax effect
Net of tax
2015
Net income for the year
$
76,629
$
—
$
76,629
Other comprehensive income, net of tax
Other comprehensive income to be reclassified
to profit or loss in subsequent years:
Unrealized losses on available-for-sale
financial assets arising during the year
Reclassification adjustment for net gains
included in profit for the year
Change in unrealized losses on available-for-sale
financial assets arising during the year
(77)
5
(72)
(22)
1
(21)
(55)
4
(51)
Comprehensive income for the year
$
76,557
$
(21) $
76,578
($ in thousands)
Years ended December 31
2014
Tax effect
net of tax
2014
Net income for the year
$
75,524
$
—
$
75,524
Other comprehensive income, net of tax
Other comprehensive income to be reclassified
to profit or loss in subsequent years:
Unrealized gains on available-for-sale
financial assets arising during the year
Reclassification adjustment for net losses
included in profit for the year
Change in unrealized gains on available-for-sale
financial assets arising during the year
908
(453)
455
Comprehensive income for the year
$
75,979
$
The accompanying notes are an integral part of these consolidated financial statements.
175
(90)
85
85
733
(363)
370
$
75,894
27
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
($ in thousands)
As at December 31, 2014
Comprehensive income
net income for the year
Change in unrealized losses
on available-for-sale financial
assets arising during the year
Total comprehensive income
Transactions with shareholders
Dividends declared
Management share
purchase plan [nOTE 15]
Total transactions
with shareholders
Equity
component
of convertible
debentures
Accumulated
other
Common comprehensive
income (loss)
shares
Retained
earnings
Total
$
7,089
$
31,169
$
449
$
510,398
$
549,105
—
—
—
—
—
—
—
—
—
—
3,220
3,220
—
76,629
76,629
(51)
(51)
—
(51)
76,629
76,578
—
—
—
(28,501)
(28,501)
—
3,220
(28,501)
(25,281)
As at December 31, 2015
$
7,089
$
34,389
$
398
$
558,526
$
600,402
($ in thousands)
As at December 31, 2013
Comprehensive income
net income for the year
Change in unrealized gains
on available-for-sale financial
assets arising during the year
Total comprehensive income
Transactions with shareholders
Dividends declared
Management share
purchase plan [nOTE 15]
Total transactions
with shareholders
Equity
component
of convertible
debentures
Accumulated
other
comprehensive
income (loss)
Common
shares
Retained
earnings
Total
$
7,089
$
27,352
$
79
$
463,244
$
497,764
—
—
—
—
—
—
—
—
—
—
3,817
3,817
—
75,524
75,524
370
370
—
75,524
370
75,894
—
—
—
(28,370)
(28,370)
—
3,817
(28,370)
(24,553)
As at December 31, 2014
$
7,089
$
31,169
$
449
$
510,398
$
549,105
The accompanying notes are an integral part of these consolidated financial statements.
28
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
OPERATING ACTIVITIES
net income for the year
Add (deduct) items not involving an outlay of cash
Depreciation of property, plant and equipment and investment properties
Amortization of intangible assets
Amortization of deferred warranty plan revenue
net finance costs
Deferred income taxes
Gain on sale of property, plant and equipment and investment properties
Loss (gain) on sale of available-for-sale financial assets
net change in non-cash working capital balances related to operations [nOTE 26]
Cash received on warranty plan sales
Years ended December 31
2015
2014
$
76,629
$
75,524
33,694
8,044
(55,180)
17,627
(5,317)
(1,072)
1,514
75,939
(74,426)
56,970
$
35,431
7,289
(61,974)
16,759
(5,513)
(126)
(399)
66,991
19,180
65,817
$
Cash provided by operating activities
$
58,483
$
151,988
INVESTING ACTIVITIES
Purchase of property, plant and equipment and investment properties [nOTES 8 AnD 9]
Purchase of intangible assets [nOTE 10]
Proceeds on sale of property, plant and equipment and investment properties
Purchase of available-for-sale financial assets
Proceeds on sale of available-for-sale financial assets
Interest received
(22,756)
(4,956)
4,464
(8,093)
5,524
1,308
(16,562)
(3,754)
224
(12,801)
10,429
2,501
Cash used in investing activities
$
(24,509) $
(19,963)
FINANCING ACTIVITIES
Repayment of finance leases
Dividends paid
Decrease of employee loans-redeemable shares [nOTE 15]
Repayment of debenture [nOTE 14]
Repayment of term loan [nOTE 14]
Interest paid
(1,936)
(28,465)
3,699
—
(30,000)
(15,313)
(1,949)
(28,328)
3,358
(15,000)
(60,000)
(17,997)
Cash used in financing activities
$
(72,015) $
(119,916)
Net (decrease) increase in cash and cash equivalents
(bank overdraft) during the year
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
(38,041)
45,900
12,109
33,791
$
7,859
$
45,900
The accompanying notes are an integral part of these consolidated financial statements.
29
n otes to th e c o n so li dated
fi nan c ial s tateM ents
[Amounts in thousands of Canadian dollars, except share amounts and earnings per share]
For the years ended December 31, 2015 and 2014
1. REPORTING ENTITY
Functional and presentation currency
Leon’s Furniture Limited (“Leon’s” or the “Company”)
was incorporated by Articles of Incorporation under the
Business Corporations Act on February 28, 1969. Leon’s
is a retailer of home furnishings, mattresses, appliances
and electronics across Canada. Leon’s is a public company
listed on the Toronto Stock Exchange (TSX – LnF, LnF.DB)
and is incorporated and domiciled in Canada. The address
of the Company’s head office and registered office is
45 Gordon Mackay Road, Toronto, Ontario, M9n 3X3.
The Company’s business is seasonal in nature. Retail sales
are traditionally higher in the third and fourth quarters.
2. BASIS OF PRESENTATION
Statement of compliance
These consolidated financial statements have been
prepared in accordance with International Financial
Reporting Standards (“IFRS”) as issued by the International
Accounting Standards Board (“IASB”).
These consolidated financial statements were approved by
the Board of Directors for issuance on February 25, 2016.
Basis of measurement
The consolidated financial statements have been prepared
under the historical cost convention, except for available-
for-sale financial assets and derivative instruments and
the initial recognition of assets acquired and liabilities
assumed in business combinations, which are measured
at fair value.
Items included in the consolidated financial statements
are measured using the currency of the primary economic
environment in which the Company operates (the functional
currency). These consolidated financial statements are
presented in Canadian dollars, which is the Company’s
functional and presentation currency and is also the
functional currency of each of the Company’s subsidiaries.
Use of estimates and judgments
Management has exercised judgment in the process
of applying the Company’s accounting policies. The
preparation of consolidated financial statements in
accordance with IFRS requires management to make
estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the consolidated
balance sheet dates and the reported amounts of revenue
and expenses during the reporting period. Estimates and
other judgments are continuously evaluated and are based
on management’s experience and other factors, including
expectations about future events that are believed to be
reasonable under the circumstances. Actual results could
differ from those estimates. The following discusses the
most significant accounting judgments and estimates
that the Company has made in the preparation of the
consolidated financial statements.
Revenue recognition
The Company offers extended warranties on certain
merchandise. Management has applied judgment in
determining the basis upon and period over which to
recognize deferred warranty revenue.
30
Inventories
The Company estimates the net realizable value as the
amount at which inventories are expected to be sold
by taking into account fluctuations of retail prices due
to prevailing market conditions. If required, inventories
are written down to net realizable value when the cost
of inventories is estimated to not be recoverable due
to obsolescence, damage or declining sales prices.
Reserves for slow moving and damaged inventory are
deducted in the Company’s valuation of inventories.
Management has estimated the amount of reserve for
slow moving inventory based on the Company’s historic
retail experience.
Impairment of marketable securities
The Company exercises judgment in the determination
of whether there are objective indicators of impairment
with respect to its marketable securities. This includes
making judgments as to whether a potential impairment
is either significant or prolonged with respect to equity
securities held.
Impairment of property, plant and equipment
The Company exercises judgment in the determination of
cash-generating units (“CGUs”) for purposes of assessing
any impairment of property, plant and equipment, as
well as in determining whether there are indicators of
impairment present. Should indicators of impairment be
present, management estimates the recoverable amount
of the relevant CGU. This estimation requires assumptions
about future cash flows, margins and discount rates.
Impairment of goodwill and intangible assets
The Company tests goodwill and indefinite life intangible
assets at least annually and reviews other long-lived
intangible assets for any indication that the asset might
be impaired. Significant judgments are required in
determining the CGUs or groups of CGUs for purposes
of assessing impairment. Significant judgments are also
required in determining whether to allocate goodwill to
CGUs or groups of CGUs. When performing impairment
tests, the Company estimates the recoverable amount
of the CGUs or groups of CGUs to which goodwill and
indefinite life intangible assets have been allocated using
a discounted cash flow model that requires assumptions
about future cash flows, margins and discount rates.
Provisions
The Company exercises judgment in the determination
of recognizing a provision. The Company recognizes
a provision when it has a present legal or constructive
obligation as a result of a past event and a reliable
estimate of the obligation can be made. Significant
judgments are required to be made in determining what
the probable outflow of resources will be required to
settle the obligation.
3. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
The significant accounting policies used in the preparation
of these consolidated financial statements are as follows:
Basis of consolidation
The financial statements consolidate the accounts of
Leon’s Furniture Limited and its wholly owned subsidiaries:
Murlee Holdings Limited, Leon Holdings (1967) Limited,
King and State Limited, Ablan Insurance Corporation,
The Brick Ltd., The Brick Warehouse LP, United Furniture
Warehouse LP, First Oceans Trading Corporation, and
Trans Global Warranty Corporation. Subsidiaries are
all those entities over which the Company has control.
Control is achieved when the Company is exposed, or
has rights, to variable returns from its involvement with the
investee and has the ability to affect those returns through
its power over the investee. The existence and effect
of potential voting rights that are currently exercisable
or convertible and rights arising from other contractual
arrangements are considered when assessing whether
the Company controls another entity. Subsidiaries are fully
consolidated from the date on which control is transferred
to the Company and de-consolidated from the date
that control ceases. The Company reassesses whether
or not it controls an investee if facts and circumstances
indicate that there are changes to one or more of the three
elements of control. All inter-company transactions and
balances have been appropriately eliminated.
Business combinations
The Company applies the acquisition method in
accounting for business combinations. The cost of
an acquisition is measured as the aggregate of the
consideration transferred measured at the acquisition
date fair value. Transaction costs that the Company
incurs in connection with a business combination are
expensed in the period in which they are incurred.
Segment reporting
The Company has two operating segments, Leon’s
and The Brick, both in the business of the sale of home
furnishings, mattresses, appliances and electronics
in Canada. The Company’s chief operating decision-
maker, identified as the Chief Executive Officer, monitors
the results of operating segments for the purpose of
allocating resources and assessing performance.
Leon’s and The Brick operating segments are aggregated
into a single reportable segment because they show
a similar long-term economic performance, have
comparable products, customers and distribution
channels, operate in the same regulatory environment,
and are steered and monitored together.
Accordingly, there is no reportable segment information
to provide in these consolidated financial statements.
31
Notes to the Consolidated Financial Statements Foreign currency translation
Foreign currency transactions are translated into
the respective functional currency of the Company’s
subsidiaries using the exchange rate at the dates of
the transactions. Merchandise imported from the
United States and Southeast Asia, paid for in U.S. dollars,
is recorded at its equivalent Canadian dollar value upon
receipt. U.S. dollar trade payables are translated at the
year-end exchange rate. The Company is subject to gains
and losses due to fluctuations in the U.S. dollar. Foreign
exchange gains and losses resulting from translation
of U.S. dollar accounts payable are included in the
consolidated statements of income within cost of sales.
Any foreign exchange gains and losses on monetary
available-for-sale financial assets are recognized in
the consolidated statements of income, and other
changes in the carrying amounts are recognized in other
comprehensive income. For available-for-sale assets that
are not monetary items, the gain or loss that is recognized
in other comprehensive income includes any related
foreign exchange component.
Fair value measurement
The Company measures certain financial instruments
at fair value upon initial recognition, and at each
balance sheet date. Fair value is the price that would be
received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the
measurement date. The fair value measurement is based
on the presumption that the transaction to sell the asset
or transfer the liability takes place either in the principal
market for the asset or liability; or, in the absence of a
principal market, in the most advantageous market for the
asset or liability that is accessible. The fair value of an asset
or liability is measured using the assumptions that market
participants would use, assuming that market participants
act in their economic best interest.
Financial assets and liabilities
A financial asset or liability is recognized if the Company
becomes a party to the contractual provisions of the
asset or liability. A financial asset or liability is recognized
initially (at trade date) at its fair value plus, in the case of
a financial asset or liability not at fair value through profit
or loss, transaction costs that are directly attributable to
the acquisition or issue of the instrument. Financial assets
and liabilities carried at fair value through profit or loss are
initially recognized at fair value and transaction costs are
expensed in the consolidated statements of income.
After initial recognition, financial assets are measured at
their fair values except for loans and receivables, which
are measured at amortized cost using the effective interest
method. After initial recognition, financial liabilities are
measured at amortized cost.
The Company classifies its financial assets and liabilities
according to their characteristics and management’s
choices and intentions related thereto for the purposes
of ongoing measurement.
Classifications that the Company has used for financial
assets include:
a)
b)
available-for-sale – financial assets that are non-
derivatives that are either designated in this category
or not classified in any other category and include
marketable securities, which consist primarily of
quoted bonds, equities and debentures. These assets
are measured at fair value with the changes in fair
value recognized in other comprehensive income
for the current year until realized through disposal
or impairment;
loans and receivables – non-derivative financial
assets with fixed or determinable payments that are
not quoted in an active market. Loans and receivables
include trade receivables and are recorded at
amortized cost with gains and losses recognized in the
consolidated statements of income in the period that
the asset is no longer recognized or impaired; and
c)
derivative instruments – financial assets which are
classified as fair value through profit and loss.
Classifications that the Company has used for financial
liabilities include:
a)
other financial liabilities – measured at amortized
cost with gains and losses recognized in the
consolidated statements of income in the period that
the liability is no longer recognized; and
b)
derivative instruments – financial liabilities which are
classified as fair value through profit and loss.
Financial assets are derecognized if the Company’s
contractual rights to the cash flows from the financial
asset expire or if the Company transfers the financial asset
to another party without retaining control or substantially
all of the risks and rewards of ownership of the asset.
Financial liabilities are derecognized if the Company’s
obligations specified in the contract expire or are
discharged or cancelled.
Impairment of financial assets
The Company assesses at the end of each reporting period
whether there is objective evidence that a financial asset
or group of financial assets is impaired. A financial asset
or group of financial assets is impaired and impairment
losses are incurred only if there is objective evidence of
impairment as a result of one or more events that have
occurred after the initial recognition of the asset (a loss
event) and that loss event has an impact on the estimated
future cash flows of the financial asset or group of financial
assets that can be reliably estimated.
32
Leon’s Furniture Limited | 2015 Annual Report The amount of the loss is measured as the difference
between the asset’s carrying amount and the present
value of estimated future cash flows discounted at the
financial asset’s original effective interest rate. The asset’s
carrying amount is reduced and the amount of the loss
is recognized in the consolidated statements of income.
If, in a subsequent period, the amount of the impairment
loss decreases and the decrease can be related
objectively to an event occurring after the impairment
was recognized, the reversal of the previously recognized
impairment is recognized in the consolidated statements
of income.
Derivative instruments
Financial derivative instruments in the form of interest
rate swaps and foreign exchange forwards are recorded
at fair value on the consolidated balance sheets. Fair
values are based on quoted market prices where available
from active markets, otherwise fair values are estimated
using valuation methodologies, primarily discounted cash
flows taking into account external market inputs. Derivative
instruments are recorded in current or non-current assets
and liabilities based on their remaining terms to maturity.
All changes in fair value of the derivative instruments are
recorded in net income.
Cash and cash equivalents
Cash and cash equivalents include cash on hand, balances
with banks and short-term market investments with a
remaining term to maturity of less than 90 days from the
date of purchase.
Trade receivables
Trade receivables are amounts due for goods sold in
the ordinary course of business. If collection is expected
in one year or less, they are classified as current assets.
If not, they are presented as non-current assets.
Trade receivables are initially recognized at fair value
and subsequently measured at amortized cost using the
effective interest method, less provision for impairment.
Inventories
Inventories are valued at the lower of cost, determined on
a first-in, first-out basis, and net realizable value.
The Company receives vendor rebates on certain products
based on the volume of purchases made during specified
periods. The rebates are deducted from the inventory
value of goods received and are recognized as a reduction
of cost of sales upon sale of the goods. Incentives
received for a direct reimbursement of costs incurred
to sell the vendor’s products, such as marketing and
advertising funds, are recorded as a reduction of those
related costs in the consolidated statements of income,
provided certain conditions are met.
Property, plant and equipment
Property, plant and equipment are initially recorded at
cost. Historical cost includes expenditures that are directly
attributable to the acquisition of items. Subsequent costs
are included in the asset’s carrying amount or recognized
as a separate asset, as appropriate, only when it is
probable that future economic benefits associated with
the asset will flow to the Company and the cost can be
measured reliably. When significant parts of an item of
property, plant and equipment are required to be replaced
at intervals, the Company derecognizes the replaced part
and recognizes the new part with its own associated useful
life and depreciation. normal repair and maintenance
expenditures are expensed as incurred.
Land and construction in progress are not depreciated.
Depreciation on other assets is provided over the
estimated useful lives of the assets using the following
annual rates:
Buildings
Equipment
Vehicles
Computer hardware
Building improvements
30 to 50 years
3 to 30 years
5 to 20 years
5 years
Over the remaining lease term
Leased assets are depreciated over the shorter of the lease
term and their useful lives unless it is reasonably certain
that the Company will obtain ownership by the end of the
lease term.
The Company allocates the amount initially recognized
in respect of an item of property, plant and equipment
to its significant parts and depreciates separately each
such part. Residual values, method of depreciation and
useful lives of items of property, plant and equipment
are reviewed annually by the Company and adjusted,
if appropriate.
Gains and losses on disposal of property, plant and
equipment are determined by comparing the proceeds
with the carrying amount of the asset and are included
as part of other expenses in the consolidated statements
of income.
Leases
Leases that transfer substantially all of the risks and
rewards of ownership to the lessee are classified as finance
leases. All other leases are classified as operating leases.
In determining whether a lease should be classified as an
operating or finance lease, management must consider
specific criteria. The inputs to these classification criteria
require judgment in the following areas: assessing whether
an option to purchase exists and if that option will be
exercised, determining the economic life of the leased
asset, and determining whether the present value of
minimum lease payments amounts to at least substantially
all of the fair value of the leased asset. This assessment is
subject to a significant degree of judgment.
33
Notes to the Consolidated Financial Statements the coMpany as lessee
finance lease
Assets held under finance leases are initially recognized as
assets of the Company at the commencement of the lease
at the lower of their fair value or the present value of the
minimum lease payments. Subsequent to initial recognition,
the asset is accounted for in accordance with the accounting
policy applicable to that asset. A corresponding liability to the
lessor is included in the consolidated statements of financial
position as a finance lease liability.
Minimum lease payments made under finance leases are
apportioned between the finance costs and the reduction
of the outstanding finance lease liability using the effective
interest method. The finance cost, net of lease inducements,
is allocated to each period during the lease term so as
to produce a constant periodic rate of interest on the
remaining balance of the finance lease liability. Contingent
lease payments arising under finance leases are recognized
as an expense in the period in which they are incurred.
operating lease
For real estate operating leases, any related rent
escalations are factored into the determination of rent
expense to be recognized over the lease term.
The total operating lease payments to be made over the
lease term are recognized in income on a straight-line
basis over the lease term. Lease incentives received are
recognized as an integral part of the total lease expense
over the lease term.
Contingent rental expenses arising under operating leases
are recognized as an expense in the period in which they
are incurred.
Investment properties
Assets that are held for long-term rental yields or for
capital appreciation or both, and that are not occupied
by either the Company or any of its subsidiaries, are
classified as investment properties. Investment properties
are measured initially at cost, including related transaction
costs. Subsequent to initial recognition, investment
properties are carried at cost and depreciated over the
estimated useful lives of the properties:
Buildings
Building improvements
30 to 50 years
Over the remaining lease term
Land held by the Company and classified as investment
property is not depreciated.
Subsequent expenditures on investment properties are
capitalized to the properties’ carrying amount only when it
is probable that future economic benefits associated with
the expenditures will flow to the Company and the cost
of the item can be measured reliably. All other repairs and
maintenance costs are expensed when incurred. When
part of an investment property is replaced, the carrying
amount of the replaced part is derecognized.
If an investment property becomes owner occupied, it is
reclassified as property, plant and equipment.
Goodwill and intangible assets
goodwill
Goodwill is the residual amount that results when the
purchase price of an acquired business exceeds the sum of
the amounts allocated to the tangible and intangible assets
acquired, less liabilities assumed, based on their fair value.
Goodwill is assigned at the date of the business acquisition.
The Company assesses at least annually, or at any time if
an indicator of impairment exists, whether there has been
an impairment loss in the carrying value of goodwill and
it is carried at cost less accumulated impairment losses.
Impairment losses on goodwill are not reversed.
Goodwill is allocated to CGUs or groups of CGUs that
are expected to benefit from the business combination
for the purpose of impairment testing. A group of CGUs
represents the lowest level within the Company at which
goodwill is monitored for internal management purposes.
intangible assets
Intangible assets acquired separately are measured on
initial recognition at cost. The cost of intangible assets
acquired in a business combination is their fair value
at the date of acquisition. Following initial recognition,
intangible assets are carried at cost less any accumulated
amortization and accumulated impairment losses.
Internally generated intangibles, excluding capitalized
development costs, are not capitalized and the related
expenditure is reflected in profit or loss in the period in
which the expenditure is incurred. The useful lives of
intangible assets are assessed as either finite or indefinite.
Intangible assets with finite useful lives are amortized
on a straight-line basis over their estimated useful lives
as follows:
Customer relationships
Brand name (Appliance Canada)
non-compete agreement
Computer software
Favourable lease agreements
8 years
10 years
8 years
3 to 7 years
Over the lease
term including
renewal options
Impairment of non-financial assets
The Company considers at each reporting date whether
there is an indication that an asset may be impaired. If
impairment indicators are found to be present, or when
annual impairment testing for an asset is required, the non-
financial assets are assessed for impairment.
Impairment losses are recognized immediately in income
to the extent an asset’s carrying amount exceeds its
recoverable amount. The recoverable amount is the higher
of an asset’s fair value less costs to sell and value in use.
In assessing value in use, 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 for which
the estimates of future cash flows have not been adjusted.
34
Leon’s Furniture Limited | 2015 Annual Report Goodwill and indefinite life intangible assets are tested
annually in the fourth quarter of the year, or when
circumstances indicate that the carrying value may be
impaired. The assessment of recoverable amount for
goodwill and indefinite life intangible assets involves
assumptions about future conditions for the economy,
capital markets, and specifically, the retail sector. As
such, the assessment is subject to a significant degree
of measurement uncertainty.
For the purpose of impairment testing, assets that cannot
be tested individually are grouped together into the smallest
group of assets that generate cash inflows from continuing
use that are largely independent of the cash inflows of other
assets or groups of assets. For the Company, store-related
CGUs are defined as individual stores or regional groups of
stores within a geographic market.
For the Company’s corporate assets that do not generate
separate cash inflows, the recoverable amount is
determined for the CGU to which the corporate asset
belongs. Where a reasonable and consistent basis of
allocation can be identified, corporate assets are allocated
to an individual CGU; otherwise, they are allocated to
the smallest group of CGUs for which a reasonable and
consistent allocation basis can be identified. Impairment
losses recognized in respect of CGUs are allocated to
reduce the carrying amounts of the assets in the CGUs
on a pro rata basis.
Impairment losses recognized in prior periods are assessed
at each reporting date for any indication that the loss
has decreased or no longer exists. An impairment loss is
reversed if there has been a change in the estimates used
to determine the recoverable amount and the reversal
is recognized in income. An impairment loss is reversed
only to the extent that the asset’s carrying amount does
not exceed the carrying amount that would have been
determined, net of depreciation or amortization, if no
impairment loss had been recognized.
Income tax expense for the period comprises current
and deferred income tax. Income tax is recognized in the
consolidated statements of income except to the extent
it relates to items recognized in other comprehensive
income or directly in equity, in which case the related tax is
recognized in equity. Levies other than income taxes, such
as taxes on real estate, are included in occupancy expenses.
current incoMe tax
Current income tax expense is based on the results of
the year as adjusted for items that are not taxable or not
deductible. Current income tax is calculated using tax rates
and laws that were substantively enacted at the end of
the reporting period. Management periodically evaluates
positions taken in tax returns with respect to situations in
which applicable tax regulation is subject to interpretation.
It establishes provisions where appropriate on the basis of
amounts expected to be paid to the tax authorities.
deferred incoMe tax
Deferred income tax is recognized, using the liability
method, on temporary differences arising between the tax
bases of assets and liabilities and their carrying amounts in
the consolidated statements of financial position. Deferred
income tax is determined using tax rates and laws that have
been enacted or substantively enacted by the consolidated
statement of financial position dates and are expected to
apply when the related deferred income tax asset is realized
or the deferred income tax liability is settled.
Deferred income tax assets are recognized only to the
extent that it is probable that future taxable profit will
be available against which the temporary differences can
be utilized.
Deferred income tax assets and liabilities are offset when
there is a legally enforceable right to offset current income
tax assets against current income tax liabilities and when
the deferred income tax assets and liabilities relate to
income taxes levied by the same taxation authority where
there is an intention to settle the balances on a net basis.
Income taxes
The Company computes an income tax expense.
However, actual amounts of income tax expense only
become final upon filing and acceptance of the tax
return by the relevant taxation authorities, which occur
subsequent to the issuance of the annual consolidated
financial statements. Additionally estimation of income
taxes includes evaluating the recoverability of deferred
income tax assets based on an assessment of the ability
to use the underlying future tax deductions before they
expire against future taxable income. The assessment is
based on existing tax laws and estimates of future taxable
income. To the extent estimates differ from the final tax
return, income would be affected in a subsequent period.
Trade and other payables
Trade and other payables are obligations to pay for goods
or services that have been acquired in the ordinary course
of business from suppliers. Trade and other payables are
classified as current liabilities if payment is due within one
year or less.
Provisions
Provisions are recognized only in those circumstances where
the Company has a present legal or constructive obligation
as a result of a past event, when it is probable that an outflow
of resources will be required to settle the obligation and a
reliable estimate of the amount can be made.
35
Notes to the Consolidated Financial Statements Provisions are measured at the present value of the
expenditures expected to be required to settle the
obligation using a pre-tax discount rate that reflects
current market assessments of the time value of money
and the risks specific to the obligation.
Share capital
Common shares are classified as equity. Incremental costs
directly attributable to the issuance of new shares are
shown in equity as a deduction, net of income tax, from
the proceeds.
unpaid insurance claiMs
The provision for unpaid claims includes adjustment
expenses and an estimate of the future settlement of
claims, both reported and unreported, that have occurred
on or before the reporting date on the insurance contracts
the Company has underwritten. The provision is actuarially
determined on an annual basis using assumptions of
loss emergence, payment rates, interest, and expected
expenses associated with the adjustment and payment
of such claims. The provision includes appropriate charges
for risk and uncertainty and is measured on a discounted
basis. As this provision is an estimate, the amount of
actual claims may differ from the recorded amount. The
provisions are derecognized when the obligation to pay
a claim no longer exists.
unpaid warranty claiMs
Warranty repairs related to warranty plans sold separately
are recorded as claims expense at the time the customer
reports a claim. For these warranties, a provision for unpaid
warranty claims is established for unpaid reported claims.
The provision for unpaid claims is based on estimates, and
may differ from actual claims paid.
The Company also provides a standard warranty for certain
products. For these warranties, a provision for warranty
claims is recognized when the underlying products are sold.
The amount of the provision is estimated using historical
experience and may differ from actual claims paid.
product returns
The Company has a return policy allowing customers
to return merchandise if not satisfied within 7 days. The
provision for product returns is based on sales recognized
prior to the year end. The amount of the provision
is estimated using historical experience and actual
experience subsequent to the year end and may differ
from the actual returns made.
Loans and borrowings
Long-term debt is classified as current when the Company
expects to settle the debt in its normal operating cycle or
the debt is due to be settled within 12 months after the
date of the consolidated statement of financial position.
Revenue recognition
Revenue comprises the fair value of consideration
received or receivable for the sale of goods and services
in the ordinary course of the Company’s activities.
Revenue is shown net of sales tax and financing charges.
The Company recognizes revenue when the amount of
revenue can be reliably measured and it is probable that
future economic benefits will flow to the Company.
In addition to the above general principles, the Company
applies the following specific revenue recognition policies:
sale of goods and related services
Revenue from the sale of goods and related services
is recognized either when the customer picks up the
merchandise ordered or when merchandise is delivered to
the customer’s home. Any payments received in advance of
delivery are deferred and recorded as customers’ deposits.
The Company records a provision for sales returns and
price guarantees based on historical experience and
actual experience subsequent to the year-end.
franchise operations
Leon’s franchisees operate principally as independent
owners. The Company charges each franchisee a royalty
fee based on a percentage of the franchisee’s gross
revenue. The Company supplies inventory for amounts
representing landed cost plus a mark-up. The royalty
income and sales to franchises, net of costs, is recorded
by the Company on an accrual basis and presented
within revenue.
insurance contracts and revenue
The Company issues insurance contracts through its
subsidiaries: Trans Global Insurance Company and Trans
Global Life Insurance Company.
The Company provides credit insurance on balances that
arise from customers’ use of their private label financing
card. The Company provides group coverage for losses as
discussed in note 23, thereby providing protection to many
customers who do not carry other similar insurance policies.
Insurance contracts are contracts where the Company
(the “insurer”) has accepted significant insurance risk
from another party (the “policyholders”) by agreeing to
compensate the policyholders if a specified uncertain
future event (the “insured event”) adversely affects the
policyholders. As a general guideline, the Company
determines whether it has significant insurance risk by
comparing benefits paid with benefits payable if the
insured event did not occur.
36
Leon’s Furniture Limited | 2015 Annual Report Once a contract has been classified as an insurance
contract, it remains an insurance contract for the remainder
of its term, even if the insurance risk reduces significantly
during this period, unless all rights and obligations are
extinguished or expire. Investment contracts can, however,
be reclassified as insurance contracts after inception if
insurance risk becomes significant.
Premiums on insurance contracts are recognized as
revenue over the term of the policies in accordance
with the pattern of insurance service provided under
the contract.
unearned insurance revenue
At each reporting period date, the insurance revenue
received by the Company in regards to the unexpired
portion of policies in force is deferred as unearned
insurance revenue. Any amount of unearned insurance
revenue is included in the consolidated statements of
financial position within deferred warranty plan revenue.
The Company performs an unearned insurance revenue
adequacy test on an annual basis to determine whether
the carrying amount of the unearned insurance
revenue needs to be adjusted (or the carrying amount
of deferred acquisition costs adjusted), based upon
a review of the expected future cash flows. If these
estimates show that the carrying amount of the
unearned insurance revenue (less related deferred
acquisition costs) is inadequate, the deficiency is
recognized in net income by setting up a provision
for insurance revenue deficiency.
Unearned insurance revenue is calculated based
on assumptions of loss emergence, payment rates,
interest, and expected expenses associated with the
adjustment and payment of claims. Unearned insurance
revenue is derecognized when the obligation to pay no
longer exists.
deferred warranty plan revenue
Warranties, underwritten by the Company’s wholly
owned subsidiaries, are offered on all products sold by
the Company and franchisees to provide coverage that
extends beyond the manufacturer’s warranty period
by up to five years. Warranties are sold to customers
when they make their original purchase and take effect
immediately. The warranty contracts provide both repair
and replacement services depending upon the nature
of the warranty claim.
The Company’s extended warranty plan revenues are
deferred at the time of sale and are recognized as revenue
over the term of the warranty plan in a pattern matching
the estimated future claims expense.
deferred acquisition costs
Acquisition costs are comprised of commissions, premium
taxes and other expenses that relate directly to the
writing or renewing of warranty and insurance contracts.
These costs are deferred only to the extent that they
are expected to be recovered from unearned premiums
and are amortized over the period in which the revenue
from the policies is earned. All other acquisition costs are
recognized as an expense when incurred.
Costs incurred on warranty plan sales, including sales
commissions and premium taxes, are recorded as
deferred acquisition costs. These costs are amortized
to income in the same pattern as revenue from warranty
plan sales is recognized.
Changes in the expected pattern of consumption are
accounted for by changing the amortization period
and are treated as a change in an accounting estimate.
Deferred acquisition costs are derecognized when the
related contracts are either settled or disposed of.
sale of gift cards
Revenue from the sale of gift cards is recognized when
the gift cards are redeemed (the customer purchases
merchandise). Revenue from unredeemed gift cards is
deferred and included in trade and other payables.
rental incoMe on investMent properties
Rental income arising on investment properties is
accounted for on a straight-line basis over the lease term
and is presented within revenue.
Store pre-opening costs
Store pre-opening costs are expensed as incurred.
Borrowing costs
Borrowing costs are expensed in the period in which they
occur. Borrowing costs consist of interest and other costs
that the Company incurs in connection with the borrowing
of funds.
Earnings per share
Basic earnings per share have been calculated using the
weighted average number of common shares outstanding
during the year. Diluted earnings per share are calculated
using the “if converted” method. The dividends declared
on the redeemable share liability under the Company’s
Management Share Purchase Plan (the “Plan”) are included
in net income for the year. The redeemable shares
convertible under the Plan are included in the calculation
of diluted number of common shares to the extent the
redemption price was less than the average annual market
price of the Company’s common shares.
37
Notes to the Consolidated Financial Statements 4. ADOPTION OF ACCOUNTING STANDARDS
AND AMENDMENTS
Accounting standards and amendments issued
but not yet adopted
In July 2014, the IASB issued the final amendments to
IFRS 9, Financial Instruments (“IFRS 9”), which provides
guidance on the classification and measurement of
financial assets and liabilities, impairment of financial
assets, and general hedge accounting. The classification
and measurement portion of the standard determines
how financial assets and financial liabilities are accounted
for in financial statements and, in particular, how they
are measured on an ongoing basis. The amended IFRS 9
introduced a new, expected-loss impairment model
that will require more timely recognition of expected
credit losses. In addition, the amended IFRS 9 includes a
substantially-reformed model for hedge accounting, with
enhanced disclosures about risk management activity. The
new standard is effective for annual periods beginning on
or after January 1, 2018, with earlier adoption permitted.
The Company is in the process of evaluating the impact
of adopting these amendments on the Company’s
consolidated financial statements.
IFRS 15, Revenue from Contracts with Customers
(“IFRS 15”), was issued in May 2014, which will replace
IAS 11, Construction Contracts, IAS 18, Revenue
Recognition, IFRIC 13, Customer Loyalty Programmes,
IFRIC 15, Agreements for the Construction of Real Estate,
IFRIC 18, Transfers of Assets from Customers, and SIC-31,
Revenue – Barter Transactions Involving Advertising
Services. IFRS 15 provides a single, principles based five-
step model that will apply to all contracts with customers
with limited exceptions, including, but not limited to,
leases within the scope of IAS 17, Leases; financial
instruments and other contractual rights or obligations
within the scope of IFRS 9, IFRS 10, Consolidated Financial
Statements and IFRS 11, Joint Arrangements (“IFRS 11”).
In addition to the five-step model, the standard specifies
how to account for the incremental costs of obtaining
a contract and the costs directly related to fulfilling a
contract. The incremental costs of obtaining a contract
must be recognized as an asset if the entity expects to
recover these costs. The standard’s requirements will
also apply to the recognition and measurement of gains
and losses on the sale of some non-financial assets
that are not an output of the entity’s ordinary activities.
IFRS 15 is required for annual periods beginning on or
after January 1, 2018. Earlier adoption is permitted. The
Company is in the process of assessing the impact of
IFRS 15 on its consolidated financial statements.
In May 2014, the IASB issued amendments to IFRS 11
to address the accounting for acquisitions of interests
in joint operations. The amendments address how a
joint operator should account for the acquisition of an
interest in a joint operation in which the activity of the joint
operation constitutes a business. IFRS 11, as amended,
now requires that such transactions shall be accounted
for using the principles related to business combinations
accounting as outlined in IFRS 3, Business Combinations.
The amendments are to be applied prospectively and
are effective for annual periods beginning on or after
January 1, 2016, with earlier application permitted. The
Company is in the process of evaluating the impact of
adopting this amendment may have on the Company’s
consolidated financial statements.
In May 2014, the IASB issued amendments to IAS 16,
Property, Plant and Equipment (“IAS 16”) and IAS 38,
Intangible Assets (“IAS 38”) to clarify acceptable methods
of depreciation and amortization. The amended IAS 16
eliminates the use of a revenue-based depreciation
method for items of property, plant and equipment.
Similarly, amendments to IAS 38 eliminate the use of a
revenue-based amortization model for intangible assets
except in certain specific circumstances. The amendments
are to be applied prospectively and are effective for annual
periods beginning on or after January 1, 2016, with earlier
application permitted. The Company is in the process of
evaluating the impact of adopting these amendments on
the Company’s consolidated financial statements.
IAS 1, Presentation of Financial Statements, was amended
in December 2014 to clarify guidance on materiality and
aggregation, the presentation of subtotals, the structure
of financial statements and the disclosure of accounting
policies. The Amendment is effective for years beginning
on or after January 1, 2016. The Company is analyzing
the new standard to determine its impact, if any, on the
Company’s consolidated financial statements.
In January 2016, the IASB issued IFRS 16, Leases, which will
replace IAS 17, Leases. The new standard will be effective
for fiscal years beginning on or after January 1, 2019.
Earlier application is permitted. Under the new standard,
all leases will be on the balance sheet of lessees, except
those that meet limited exception criteria. As the Company
has significant contractual obligations in the form of
operating leases (note 25) under the existing standard,
there will be a material increase to both assets and liabilities
upon adoption of the new standard. The Company is
analyzing the new standard to determine its impact on
the Company’s consolidated financial statements.
Adoption of new, revised or amended
accounting standards
The Company has adopted the amended International
Financial Reporting Standards pronouncement listed
below as at January 1, 2015, in accordance with the
transitional provisions outlined in the respective standard.
operating segMents
The Annual Improvements to IFRSs 2010–2012 included
amendments to IFRS 8, Operating Segments. This
standard has been amended to require (i) disclosure
of judgments made by a company’s management in
aggregating segments, and (ii) a reconciliation of segment
assets to the entity’s assets when a measure of segment
is reported to the Chief Operating Decision Maker. These
amendments are effective for annual periods beginning on
or after July 1, 2014. As at January 1, 2015, the Company
adopted this pronouncement and there was no impact on
the consolidated financial statements.
38
Leon’s Furniture Limited | 2015 Annual Report 5. CASH AND CASH EQUIVALENTS
7. DEFERRED ACQUISITION COSTS
Cash at bank
As at December 31
2015
2014
Balance at December 31, 2013
Costs of new policies sold
Policy sales costs recognized
$
8,909
9,042
(1,901)
and on hand
$
7,859
$
45,900
Balance at December 31, 2014
$
16,050
Cost of new policies sold
Policy sales costs recognized
10,070
(4,698)
Balance at December 31, 2015
$
21,422
Reported as:
Current
non-current
Balance at December 31, 2014
Current
non-current
Balance at December 31, 2015
$
$
$
$
4,957
11,093
16,050
8,329
13,093
21,422
6. INVENTORIES
The amount of inventory recognized as an expense for
the year ended December 31, 2015 was $1,107,166
[2014 – $1,100,145], which is presented within cost of
sales in the consolidated statements of income. There were
no inventory write-downs [2014 – $717] recognized as an
expense during 2015. There were $2,396 of inventory write-
downs recognized in prior periods reversed [2014 – nil].
As at December 31, 2015, the inventory mark-down
provision totalled $7,443 [2014 – $9,839].
8. PROPERTY, PLANT AND EQUIPMENT
Land
Buildings
Equipment
Vehicles
Building
Improvements
Leased
Property
Leased
Equipment
Total
As at December 31, 2015:
Opening net book value
Additions
Disposals
Depreciation
$ 84,133 $ 116,722 $ 41,904 $
944
(26)
—
416
(2)
(6,140)
9,055
(41)
(9,100)
8,379 $ 70,370 $ 10,647 $
8,591
(62)
(2,170)
3,440
—
(13,744)
—
—
(1,131)
1,897 $ 334,052
22,446
(131)
(33,149)
—
—
(864)
Closing net book value
85,051
110,996
41,818
14,738
60,066
9,516
1,033
323,218
As at December 31, 2015:
Cost
Accumulated depreciation
85,051
—
228,864
(117,868)
103,640
(61,822)
36,663
(21,925)
142,776
(82,710)
12,626
(3,110)
2,954
(1,921)
612,574
(289,356)
Net book value
$ 85,051 $ 110,996 $ 41,818 $ 14,738 $ 60,066 $
9,516 $
1,033 $ 323,218
Land
Buildings
Equipment
Vehicles
Building
Improvements
Leased
Property
Leased
Equipment
Total
As at December 31, 2014:
Opening net book value
Additions
Disposals
Depreciation
$ 83,987 $ 122,077 $ 41,399 $
146
—
—
662
—
(6,017)
8,612
(63)
(8,044)
4,288 $ 86,295 $ 11,778 $
5,453
1,477
—
—
(1,131)
2,883 $ 352,707
16,350
(98)
(34,907)
—
—
(986)
(31)
(1,331)
(4)
(17,398)
Closing net book value
84,133
116,722
41,904
8,379
70,370
10,647
1,897
334,052
As at December 31, 2014:
Cost
Accumulated depreciation
84,133
—
228,452
(111,730)
95,026
(53,122)
29,565
(21,186)
139,779
(69,409)
12,626
(1,979)
2,954
592,535
(1,057) (258,483)
Net book value
$ 84,133 $ 116,722 $ 41,904 $
8,379 $ 70,370 $ 10,647 $
1,897 $ 334,052
Included in the above balances as at December 31, 2015
are assets not being amortized with a net book value of
approximately $1,464 [2014 – $5,741], being construction
in progress. Also included are fully depreciated assets still
in use with a cost of $167,033 [2014 – $152,285].
39
Notes to the Consolidated Financial Statements
9. INVESTMENT PROPERTIES
As at December 31, 2015:
Opening net book value
Additions
Disposal
Depreciation
Closing net book value
As at December 31, 2015:
Cost
Accumulated depreciation
net book value
As at December 31, 2014:
Opening net book value
Additions due to acquisition
Depreciation
Closing net book value
As at December 31, 2014:
Cost
Accumulated depreciation
net book value
Land
Buildings
Building
Improvements
Total
$
$
12,519
—
(1,573)
—
10,946
$
8,798
—
(1,625)
(481)
6,692
$
675
310
(63)
(64)
858
21,992
310
(3,261)
(545)
18,496
10,946
—
17,333
(10,641)
2,554
(1,696)
30,833
(12,337)
$
10,946
$
6,692
$
858
$
18,496
$
$
12,519
—
—
12,519
$
9,273
—
(475)
8,798
$
512
212
(49)
675
22,304
212
(524)
21,992
12,519
—
19,773
(10,975)
2,344
(1,669)
34,636
(12,644)
$
12,519
$
8,798
$
675
$
21,992
The estimated fair value of the investment properties
portfolio as at December 31, 2015 was approximately
$44,800 [2014 – $47,696]. This recurring fair value
measurement is categorized within Level 3 of the fair value
hierarchy (note 22 for definition of levels). The Company
used an independent valuation specialist to determine
the fair value of The Brick division’s investment properties
of $11,200. The remaining disclosed fair value of $33,600
was compiled internally by management based on
available market evidence.
10. INTANGIBLE ASSETS AND GOODWILL
Brand name
Customer
relationships
and franchise non-compete
agreement
agreements
Computer
software
Favourable
lease
agreements
Total
As at December 31, 2015:
Opening net book value
Additions
Amortization
$
4,156
—
(875)
$ 266,750
—
(250)
$
125
—
(125)
$ 11,946
4,956
(2,945)
$ 38,325
—
(3,849)
$ 321,302
4,956
(8,044)
Closing net book value
3,281
266,500
—
13,957
34,476
318,214
As at December 31, 2015:
Cost
Accumulated amortization
7,000
(3,719)
268,500
(2,000)
1,012
(1,012)
23,319
(9,362)
46,049
(11,573)
345,880
(27,666)
net book value
$
3,281
$ 266,500
$
—
$ 13,957
$ 34,476
$ 318,214
As at December 31, 2014:
Opening net book value
Additions
Amortization
$
5,031
—
(875)
$ 267,000
—
(250)
$
Closing net book value
4,156
266,750
251
—
(126)
125
$
9,996
3,754
(1,804)
$ 42,559
—
(4,234)
$ 324,837
3,754
(7,289)
11,946
38,325
321,302
As at December 31, 2014:
Cost
Accumulated amortization
7,000
(2,844)
268,500
(1,750)
1,012
(887)
18,363
(6,417)
46,049
(7,724)
340,924
(19,622)
net book value
$
4,156
$ 266,750
$
125
$ 11,946
$ 38,325
$ 321,302
Amortization of intangible assets is included within selling, general and administrative expenses on the consolidated
statements of income.
40
Leon’s Furniture Limited | 2015 Annual Report
The following table presents the details of the Company’s indefinite-life intangible assets:
The Brick brand name (allocated to Brick division)
The Brick franchise agreements (allocated to Brick division)
As at December 31
2015
2014
$
245,000
21,000
$
245,000
21,000
$
266,000
$
266,000
The Company currently has no plans to change The
Brick store banners and expects these assets to generate
cash flows over an indefinite future period. Therefore,
these intangible assets are considered to have indefinite
useful lives for accounting purposes. The Brick franchise
agreements have expiry dates with options to renew.
The Company’s intention is to renew these agreements at
each renewal date indefinitely. The Company expects the
franchise agreements and franchise locations will generate
cash flows over an indefinite future period. Therefore, this
asset is also considered to have an indefinite useful life.
The following table presents the details of the Company’s finite-life intangible assets:
Leon’s division customer relationships
Leon’s division brand name
Leon’s division non-compete agreement
Brick division customer relationships
Brick division favourable lease agreements
Computer software
$
As at December 31
2015
2014
$
—
500
—
3,281
34,476
13,957
250
750
125
3,906
38,325
11,946
$
52,214
$
55,302
For the purpose of the annual impairment testing, goodwill is allocated to the following CGU groups, which are the
groups expected to benefit from the synergies of the business combinations and to which the goodwill is monitored
by the Company:
Appliance Canada (included within the Leon’s division)
Brick division
Total goodwill
Impairment tests
As at December 31
2015
2014
$
11,282
378,838
$
11,282
378,838
$
390,120
$
390,120
The Company performed impairment tests of
goodwill, brand and franchise agreements intangible
as at December 31, 2015 and December 31, 2014 in
accordance with the accounting policy as described
in note 3. The recoverable amount of the CGUs was
determined based on value-in-use calculations.
These calculations used cash flow projections based
on financial budgets approved by management covering
a one-year period. Cash flows beyond the one-year period
are extrapolated using the estimated growth rates stated
below. The key assumptions used for the value-in-use
calculation as at December 31, 2015 and December 31,
2014 were as follows:
Growth rate
Pre-tax discount rate
2015
2.0%
9.3%
2014
2.0%
9.5%
The impairment tests performed resulted in no impairment of the goodwill as at December 31, 2015 and December 31, 2014.
41
Notes to the Consolidated Financial Statements
11. TRADE AND OTHER PAYABLES
Trade payables
Other payables
12. PROVISIONS
As at December 31
2015
2014
$
175,933
30,143
$
117,666
79,378
$
206,076
$
197,044
Unpaid
insurance
claims
Unpaid
warranty
claims
Balance as at December 31, 2014
Provisions made during the year
Provisions used during the year
$
1,662
217
(183)
$
Balance as at December 31, 2015
$
1,696
$
101
99
—
200
$
Product
returns
2,228
270
(590)
$
Other
585
961
(7)
$
Total
4,576
1,547
(780)
$
1,908
$
1,539
$
5,343
Unpaid insurance claims
Product returns
The provision for unpaid insurance claims represents the
estimated amounts necessary to settle all outstanding
claims, as well as claims that are incurred but not
reported, as of the reporting date. Unpaid claims are
determined using generally accepted actuarial practices,
according to the standards established by the Canadian
Institute of Actuaries. The establishment of the provision
for unpaid claims, measured on a discounted basis,
relies on the judgment and estimates of the Company
based on historical precedent and trends, on prevailing
legal, economic, social and regulatory trends and on
expectations as to future developments. The process of
determining the provisions necessarily involves risks that
the actual results will deviate, perhaps materially, from the
best estimates made.
Unpaid warranty claims
The provision for unpaid warranty claims represents the
estimated amounts necessary to settle unpaid reported
claims for warranty plans sold and all outstanding claims
for certain products where the Company provides a
standard warranty. The estimates are necessarily subject
to uncertainty and are selected from a range of possible
outcomes. The provisions are increased or decreased as
additional information affecting the estimates becomes
known during the course of claims settlement. All changes
in estimates are recorded in cost of sales in the current year.
The provision for product returns represents the
Company’s estimate of amounts the Company expects
to incur regarding its product return policies. The estimate
is based on sales recognized prior to the end of the
reporting period, historical information, management
judgment and actual experience subsequent to the end
of the reporting period.
13. FINANCE LEASE LIABILITIES
Leasing arrangements
The Company leases a distribution centre and vehicles
under a number of finance lease agreements. The lease
terms on the distribution centre and vehicles do not
exceed 20 years and 8 years, respectively. The Company’s
obligations under finance leases are secured by the
leased assets. The Company’s distribution centre lease
has renewal and escalation clauses as part of the general
lease conditions. The escalation clauses expected to
occur have been included in the determination of this
finance lease liability.
42
Leon’s Furniture Limited | 2015 Annual Report
Finance lease liabilities
Finance lease liabilities are payable as follows:
Future
minimum
lease
payments
2,729
7,751
6,581
17,061
$
Interest
775
2,083
354
3,212
2015
Present
value of
minimum
lease
payments
Future
minimum
lease
payments
$
$
1,954
5,668
6,227
$
2,893
8,552
8,508
13,849
19,953
$
Interest
891
2,488
723
4,102
1,954
11,895
$ 13,849
2014
Present
value of
minimum
lease
payments
2,002
6,064
7,785
15,851
2,002
13,849
$ 15,851
Less than one year
Between one and five years
More than five years
$
Reported as:
Current
non-current
14. LOANS AND BORROWINGS
Convertible debentures
On March 28, 2013 (“Issuance Date”), the Company
closed an offering in which the shareholders of The Brick
purchased $100,000 principal amount of 3% convertible
unsecured debentures due on March 28, 2023 (“Maturity
Date”). Interest is due semi-annually in arrears on June 30
and December 31 in each year. The convertible debentures
are convertible, at the option of the holder, at any time
during the period between the ninetieth day prior to the
fourth anniversary of the Issuance Date and the third
business day prior to the Maturity Date in whole or in
multiples of one thousand dollars, into fully paid common
shares of the Company at the conversion rate of 79.12707
common shares per one thousand dollars principal amount
of debentures subject to certain adjustments. The Company
has the right to settle the convertible debentures in cash or
shares during any time subsequent to the fourth anniversary
of the Issuance Date and on the Maturity Date. There
are additional conversion options available to debenture
holders in the event of an increase in the Company’s
dividend rate or in the event of a change in control of
the Company. The convertible debentures are unsecured
obligations of the Company and are subordinated in right
of payment to all of the Company’s senior indebtedness.
The Company will accrete the carrying value of the
convertible debentures of $92,628 to their contractual
face value of $100,000 through a charge to net
income over their term. This charge will be included
in finance costs.
Carrying value of convertible debentures as at December 31, 2013
Accretion expense for the year ended December 31, 2014
Carrying value of convertible debentures as at December 31, 2014
Accretion expense for the year ended December 31, 2015
Carrying value of convertible debentures as at December 31, 2015
$
90,952
821
91,773
855
$
92,628
The effective interest rate for the convertible debentures is 4.2% and includes accretion expense and semi-annual
coupon payments.
43
Notes to the Consolidated Financial Statements
Bank indebtedness
On January 31, 2013, a Senior Secured Credit Agreement
(“SSCA”) was obtained to fund the acquisition of The Brick.
The SSCA includes a credit facility, with a syndicate of
banks, with a term credit facility limit of $400,000 and
revolving credit facility limit of $100,000, which includes
a swing-line of $20,000. Under the terms of the SSCA
amounts borrowed must be repaid in full by March 28,
2017. Bank indebtedness bears interest based on
Canadian prime, London Interbank Offered Rate (“LIBOR”)
and Bankers’ Acceptance (“BA”) rates plus an applicable
standby fee on undrawn amounts. Transaction costs in
the amount of $5,193 have been deferred and are being
amortized. The Company has the ability to choose the type
of advance required. Interest is based on the market rate
plus an applicable margin. Currently, the Company has
entered into a 30-day Bankers’ Acceptance with a cost of
borrowing of 3.17% that was renewed on December 31,
2015. The term credit facility is repayable in quarterly
amounts ranging from $10,000 to $15,000. The Company
can prepay without penalty amounts outstanding under
the facilities at any time. The agreement includes a general
security agreement which constitutes a lien on all personal
property of the Company. In addition to this, there are
financial covenants related to the credit facility.
As at December 31, 2015 the Company is in full
compliance of these financial and non-financial covenants.
15. REDEEMABLE SHARE LIABILITY
Authorized
806,000 convertible, non-voting, series 2005 shares
1,224,000 convertible, non-voting, series 2009 shares
306,500 convertible, non-voting, series 2012 shares
1,485,000 convertible, non-voting, series 2013 shares
740,000 convertible, non-voting, series 2014 shares
880,000 convertible, non-voting, series 2015 shares
Issued and fully paid
nil series 2005 shares [December 31, 2014 – 251,080]
619,016 series 2009 shares [December 31, 2014 – 715,000]
233,616 series 2012 shares [December 31, 2014 – 247,896]
1,406,772 series 2013 shares [December 31, 2014 – 1,406,772]
740,000 series 2014 shares [December 31, 2014 – 740,000]
880,000 series 2015 shares [December 31, 2014 – nil]
Less employee share purchase loans
As at December 31
2015
2014
$
$
—
5,478
2,899
16,024
11,137
11,845
(46,503)
2,371
6,328
3,076
16,024
11,137
—
(38,535)
$
880
$
401
Under the terms of the Plan, the Company advanced
non-interest bearing loans to certain of its employees in
2005, 2009, 2012, 2013, 2014 and 2015 to allow them
to acquire convertible, non-voting series 2005 shares,
series 2009 shares, series 2012 shares, series 2013,
series 2014 shares and series 2015 shares, respectively,
of the Company. These loans are repayable through the
application against the loans of any dividends on the
shares with any remaining balance repayable on the date
the shares are converted to common shares. Each issued
and fully paid for series 2005, series 2009 and series 2012
share may be converted into one common share at any
time after the fifth anniversary date of the issue of these
shares and prior to the tenth anniversary of such issue.
Each issued and fully paid for series 2013, series 2014 and
2015 series share may be converted into one common
share at any time after the third anniversary date of the
issue of these shares and prior to the tenth anniversary
of such issue. The series 2005, series 2009, series 2012,
series 2013, series 2014 and 2015 series shares are
redeemable at the option of the holder for a period of
one business day following the date of issue of such
shares. The Company has the option to redeem the series
2005, series 2009 and series 2012 shares at any time after
the fifth anniversary date of the issue of these shares and
must redeem them prior to the tenth anniversary of such
issue. The Company has the option to redeem the series
2013, series 2014 and 2015 series shares at any time after
the third anniversary date of the issue of these shares and
must redeem them prior to the tenth anniversary of such
issue. The redemption price is equal to the original issue
price of the shares adjusted for subsequent subdivisions
of shares plus accrued and unpaid dividends. The
purchase prices of the shares are $9.44 per series 2005
share, $8.85 per series 2009 share, $12.41 per series
2012 share, $11.39 per series 2013 share, $15.05 per
series 2014 share and $13.46 per series 2015 share.
Dividends paid to holders of series 2005, 2009, 2012,
2013 and 2014 shares of approximately $676 [2014 –
$624] have been used to reduce the respective shareholder
loans. The preferred dividends are paid once a year during
the first quarter.
44
Leon’s Furniture Limited | 2015 Annual Report
During the year ended December 31, 2015, 251,080 series
2005 shares [2014 – 135,433] and 95,984 series 2009
shares [2014 – 286,743] were converted into common
shares with a stated value of approximately $2,371
[2014 – $1,279] and $850 [2014 – $2,538], respectively.
During the year ended December 31, 2015, the Company
cancelled nil series 2009 shares [2014 – 6,722], 14,280
series 2012 shares [2014 – 20,812] and nil series 2013
shares [2014 – 43,228] in the amount of $nil [2014 – $59],
$177 [2014 – $258] and $nil [2014 – $492], respectively.
Employee share purchase loans have been netted against
the redeemable share liability, as the Company has the
legally enforceable right of set-off and the positive intent
to settle on a net basis.
During the year ended December 31, 2015, the Company
issued 880,000 series 2015 shares for proceeds of
$11,845. In addition, the Company advanced non-interest
bearing loans in the amount of $11,845 to certain of its
employees to acquire these shares.
16. COMMON SHARES
Authorized
Unlimited common shares
Issued
71,403,949 common shares [2014 – 71,056,885]
As at December 31
2015
2014
34,389
31,169
During the year ended December 31, 2015, 251,080 series 2005 shares [2014 – 135,433] and 95,984 series
2009 shares [2014 – 286,743] were converted into common shares with a stated value of approximately $2,371
[2014 – $1,279] and $850 [2014 – $2,538], respectively.
As at December 31, 2015, the dividends payable were $7,140 [$0.10 per share] and as at December 31, 2014 were
$7,105 [$0.10 per share].
17. REVENUE
Sale of goods by corporate stores
Income from franchise operations
Extended warranty revenue
Insurance sales revenue
Rental income from investment property
Total
18. EXPENSES BY NATURE
Year ended December 31
2015
2014
$ 1,955,264
20,233
43,335
11,461
1,425
$ 1,935,092
17,323
42,071
12,338
1,656
$ 2,031,718
$ 2,008,480
Year ended December 31
2015
2014
Depreciation of property, plant and equipment and investment properties
Amortization of intangible assets
Operating lease payments
$
$
$
33,694
8,044
91,945
$
$
$
35,431
7,289
90,420
45
Notes to the Consolidated Financial Statements
19. NET FINANCE COSTS
Interest expense on finance lease obligations
Interest expense on term credit facilities and revolving credit facilities
Interest expense on convertible debentures
Finance income
Total
Year ended December 31
2015
2014
$
$
925
14,247
3,855
(1,400)
1,017
13,387
4,443
(2,088)
$
17,627
$
16,759
20. INCOME TAX EXPENSE
(a) The major components of income tax expense for the years ended December 31 are as follows:
Consolidated statements of income
2015
2014
Current income tax expense:
Based on taxable income of the current year
$
30,107
$
31,899
Deferred income tax expense:
Origination and reversal of temporary differences
Impact of change in tax rates/new tax laws
(5,317)
—
(5,317)
(3,702)
(587)
(4,289)
Income tax expense reported in the
consolidated statements of income
$
24,790
$
27,610
(b) Reconciliation of the effective tax rates are as follows:
Income before income taxes
$
101,420
$
103,134
2015
2014
Income tax expense based on statutory tax rate
Increase (decrease) in income taxes
resulting from non-taxable items or
adjustments of prior year taxes:
non-deductible items
Tax expense relating to deferred rate reductions
File/provided differences
Remeasurement of deferred
tax asset for rate changes
Other
Income tax expense reported in the
26,998
26.62%
27,331
26.50%
115
577
(620)
104
(2,384)
0.11%
0.57%
(0.61%)
0.11%
(2.35%)
437
—
—
(587)
429
0.42%
—
—
(0.57%)
0.42%
consolidated statements of income
$
24,790
24.45%
$
27,610
26.77%
(c) Deferred income tax balances and reconciliation are as follows:
(i) deferred income tax relates to the following:
December 31
2015
December 31
2014
Deferred income tax assets (liabilities)
Deferred tax assets
Deferred tax liabilities
$
9,083
(96,062)
Total deferred income tax assets (liabilities)
$
(86,979)
$
7,478
(99,621)
$
(92,143)
46
Leon’s Furniture Limited | 2015 Annual Report
(ii) deferred income tax movements are as follows:
Deferred warranty plan
Deferred financing fees
Deferred acquisition costs
Property, plant and equipment
Intangible assets
Deferred rent liabilities
Finance lease liabilities
Transition for partnership deferral
Unused tax losses
Other
Mark to market
Net deferred income tax expense –
Statements of income
Movement in convertible debenture
Net deferred income tax
expense (benefit) – Equity
$
$
Balance,
beginning
of year
1,285
(397)
4,528
(22,825)
(74,506)
1,095
4,110
(5,387)
104
2,451
(45)
(89,587)
(2,556)
(2,556)
2015
Expense
(benefit)
Consolidated
Balance,
end of year
$
Other
—
—
—
—
—
—
—
—
—
(154)
—
$
239
317
(1,860)
4,306
(3,078)
537
(418)
5,387
(25)
11
(98)
(154)
5,318
—
—
—
—
1,524
(80)
2,668
(18,519)
(77,584)
1,632
3,692
—
79
2,308
(143)
(84,423)
(2,556)
(2,556)
Total deferred income tax expense (benefit)
$
(92,143) $
(154) $
5,318
$
(86,979)
Deferred warranty plan
Deferred financing fees
Deferred acquisition costs
Property, plant and equipment
Intangible assets
Deferred rent liabilities
Finance lease liabilities
Transition for partnership deferral
Unused tax losses
Other
Mark to market
Net deferred income tax expense –
Statements of income
Movement in convertible debenture
Net deferred income tax
expense (benefit) – Equity
Balance,
beginning
of year
$
(484) $
(93)
6,727
(25,410)
(74,933)
505
4,796
(7,470)
120
1,191
—
(95,051)
(2,556)
(2,556)
$
Other
—
—
—
—
—
—
—
—
—
1,175
—
Expense
(benefit)
1,769
(304)
(2,199)
2,585
427
590
(686)
2,083
(16)
85
(45)
1,175
4,289
—
—
—
—
2014
Consolidated
Balance,
end of year
$
1,285
(397)
4,528
(22,825)
(74,506)
1,095
4,110
(5,387)
104
2,451
(45)
(89,587)
(2,556)
(2,556)
Total deferred income tax expense (benefit)
$
(97,607) $
1,175
$
4,289
$
(92,143)
47
Notes to the Consolidated Financial Statements
21. EARNINGS PER SHARE
Earnings per share are calculated using the weighted
average number of common shares outstanding. The
weighted average number of common shares used in
the basic earnings per share calculations amounted
to 71,217,958 for the year ended December 31, 2015
[2014 – 70,898,590]. The following table reconciles the
net income for the year and the number of shares for the
basic and diluted earnings per share calculations:
Year ended December 31
2015
2014
$
76,629 $
79,899
75,524
79,007
71,217,958
70,898,590
11,146,581
11,278,929
82,364,539
82,177,519
1.08
0.97
1.07
0.96
net income for the year for basic earnings per share
net income for the year for diluted earnings per share
Weighted average number of common shares outstanding
Dilutive effect
Diluted weighted average number of common shares outstanding
Basic earnings per share
Diluted earnings per share
22. FINANCIAL INSTRUMENTS AND
FINANCIAL RISK MANAGEMENT
Classification of financial instruments and fair value
The classification of the Company’s financial instruments, as well as their carrying amounts and fair values, are disclosed
in the tables below.
As at December 31, 2015:
Measurement
Total Carrying
Amount
Fair Value
Fair Value
Hierarchy
Loans and receivables
Cash and cash equivalents
Trade receivables
Available-for-sale
Restricted marketable securities
Available-for-sale financial assets
Investment properties
Derivative instruments
Other assets
Other financial liabilities
Trade and other payables
Provisions
Finance lease liabilities
Loans and borrowings
Convertible debentures
Redeemable share liability
As at December 31, 2014:
Loans and receivables
Cash and cash equivalents
Trade receivables
Available-for-sale
Restricted marketable securities
Available-for-sale financial assets
Investment properties
Derivative instruments
Other assets
Other financial liabilities
Trade and other payables
Provisions
Finance lease liabilities
Loans and borrowings
Convertible debentures
Redeemable share liability
Fair value
Amortized cost
Fair value
Fair value
Amortized cost
$
$
$
$
7,859
117,832
18,691
22,960
18,496
7,859
117,832
18,691
22,960
44,800
Level 1
Level 2
Level 1
Level 2
Level 3
Fair value
539
539
Level 2
$
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
206,076
5,343
13,849
287,357
92,628
880
Measurement
Total Carrying
Amount
Fair value
Amortized cost
Fair value
Fair value
Amortized cost
$
$
45,900
112,171
18,310
22,358
21,992
$
$
$
206,076
5,343
13,849
287,357
125,000
880
Fair Value
45,900
112,171
18,310
22,358
47,696
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
Fair Value
Hierarchy
Level 1
Level 2
Level 1
Level 2
Level 3
Fair value
171
171
Level 2
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
$
197,044
4,576
15,851
315,363
91,773
401
$
197,044
4,576
15,851
315,363
138,000
401
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
48
Leon’s Furniture Limited | 2015 Annual Report
The fair value hierarchy of financial instruments measured
at fair value, as at December 31, 2015, includes financial
assets of $26,550, $141,331 and $44,800 for Levels 1, 2
and 3 respectively, and financial liabilities of nil, $638,505
and nil for Levels 1, 2 and 3, respectively.
The carrying amounts of the Company’s trade receivables
and trade and other payables approximate their fair values
due to their short-term nature.
The carrying amounts of the Company’s finance lease
liabilities approximate their fair values because the
interest rate applied to measure their carrying amount
approximates current market interest rates.
The carrying amounts of the Company’s loans and
borrowings approximate their fair values since they bear
interest at rates comparable to market rates at the end
of the reporting period.
The fair values of available-for-sale financial assets and
restricted marketable securities that are traded in active
markets are determined by reference to their quoted
closing price or dealer price quotations at the reporting
date. For financial instruments that are not traded in
active markets, the Company determines fair values
using a combination of discounted cash flow models
and comparison to similar instruments for which market
observable prices exist.
As at December 31, 2015, the fair value of the convertible
debentures was determined using their closing quoted
market price (not in thousands of dollars) of $125.00
per $100.00 of face value [2014 – $138.00 per $100.00
of face value]. For the convertible debentures at
December 31, 2015, fair value is calculated based on the
face value of the convertible debentures of $100,000.
The fair values of derivative assets and liabilities are
estimated using industry standard valuation models.
Where applicable, these models project future cash flows
and discount the future amounts to a present value using
market based observable inputs including interest rate
curves, foreign exchange rates and forward and spot
prices for currencies.
The Company maintains a notional $100,000 [2014 –
$100,000] in interest rate swaps that mature by the fourth
quarter of 2019 on which it pays a fixed rate of 1.895%
and currently receives 1 month BA rate. The Company
also maintains other financial derivatives which comprise
of foreign exchange contracts, with maturities that do not
exceed past the fourth quarter of 2017. At December 31,
2015, a $539 [2014 – $171] unrealized receivable was
recorded in other assets.
Fair values of financial instruments reflect the credit risk
of the Company and counterparties when appropriate.
Fair value hierarchy
The Company uses a fair value hierarchy to categorize the
inputs used to measure the fair value of financial assets
and financial liabilities, the levels of which are as follows:
level 1:
Quoted prices (unadjusted) in active markets for
identical assets or liabilities.
level 2:
Inputs other than quoted prices included
within Level 1 that are observable for the asset
or liability, either directly (that is, as prices) or
indirectly (that is, derived from prices).
level 3:
Inputs for the asset or liability that are not
based on observable market data (that is,
unobservable inputs).
Financial risk management
The Company’s activities expose it to a variety of financial
risks: credit risk, liquidity risk and market risk (including
interest rate risks, currency risk and other price risk). Risk
management is carried out by the Company by identifying
and evaluating the financial risks inherent within its
operations. The Company’s overall risk management
activities seek to minimize potential adverse effects on
the Company’s financial performance.
credit risk
Credit risk is the risk of financial loss to the Company if a
customer or counterparty to a financial instrument fails to
meet its contractual obligations.
49
Notes to the Consolidated Financial Statements The following table summarizes the Company’s maximum exposure to credit risk related to financial instruments.
The maximum credit exposure is the carrying value of the asset, net of any allowances for impairment.
Cash and cash equivalents
Restricted marketable securities
Available-for-sale financial assets
Trade receivables
Carrying Amount
2015
2014
$
$
7,859
18,691
22,960
117,832
45,900
18,310
22,358
112,171
$
167,342
$
198,739
Generally, the carrying amount on the consolidated
statements of financial position of the Company’s financial
assets exposed to credit risk represents the Company’s
maximum exposure to credit risk. no additional credit risk
disclosure is provided, unless the maximum potential loss
exposure to credit risk for certain financial assets differs
significantly from their carrying amount. The Company’s
main credit risk exposure is from its trade receivables. For
the Company, trade receivables are comprised principally
of amounts related to its commercial sales, to its franchise
operations, and to vendor rebate programs.
For commercial trade and other receivables, credit risk
is mitigated through customer agreements specifying
payment terms and credit limits. For franchise trade
receivables, personal guarantees are obtained. As well,
liens are placed against the goods and the Company
may repossess goods for non-payment. Credit risk is also
limited due to the large number of customers and their
dispersion across geographic areas and market sectors
(i.e. retail, commercial, and franchise). Accordingly, the
Company believes it has no significant concentrations
of credit risk related to trade receivables. In addition,
trade receivables are managed and analyzed on an
ongoing basis to control the Company’s exposure to
bad debts. The Company assesses the adequacy of the
allowance for impairment quarterly, taking into account
historical experience, current collection trends, the
age of receivables, and when warranted and available,
the financial condition of specific counterparties. The
Company focuses on receivables outstanding for greater
than 90 days in assessing the Company’s credit risk and
records a reserve, when required, to mitigate that risk.
When collection efforts have been exhausted, specific
balances are written off.
As at December 31, 2015, there are no financial assets
that the Company deems to be impaired or that are past
due according to their terms and conditions, for which
allowances have not been recorded. The Company’s trade
receivables totaled $117,832 as at December 31, 2015
[2014 – $112,171]. The amount of trade receivables that
the Company has determined to be past due [which is
defined as a balance that is more than 90 days past due]
is $4,827 as at December 31, 2015 [2014 – $2,950]. The
Company’s provision for impairment of trade receivables,
established through ongoing monitoring of individual
customer accounts, was $1,959 as at December 31, 2015
[2014 – $1,969].
The majority of the Company’s retail sales are funded
through cash, traditional credit cards and private label
credit cards carried on a non-recourse basis by third
parties. Accordingly, fluctuations in the availability and cost
of credit may have an impact on the Company’s retail sales
and profitability.
The Company manages credit risk for its cash and cash
equivalents by maintaining bank accounts with major
Canadian banks and investing only in highly rated
Canadian and U.S. securities that are traded on active
markets and are capable of prompt liquidation.
liquidity risk
Liquidity risk is the risk that an entity will encounter
difficulty in meeting obligations associated with financial
liabilities. The purpose of liquidity risk management is to
maintain sufficient amounts of cash and cash equivalents,
and authorized credit facilities, to fulfill obligations
associated with financial liabilities. To manage liquidity
risk, the Company prepares budgets and cash forecasts,
and monitors its performance against these. Management
also monitors cash and working capital efficiency
given current sales levels and seasonal variability. The
Company measures and monitors liquidity risk by regularly
evaluating its cash inflows and outflows under expected
conditions through cash flow reporting such that it
anticipates certain funding mismatches and ensures the
cash management of the business within certain tolerable
levels. These cash flow forecasts are reviewed on a weekly
basis by management. The Company mitigates liquidity
risk through continuous monitoring of its credit facilities
and the diversification of its funding sources, both in the
short term as well as the long term.
50
Leon’s Furniture Limited | 2015 Annual Report
The following tables summarize the Company’s contractual maturity for its financial liabilities, including both principal
and interest payments:
Carrying
Amount
Contractual
Cash Flows
Under
1 Year
1–3 Years
3–5 Years
More than
5 Years
Remaining term to maturity
As at December 31, 2015:
Trade and other payables
Finance lease liabilities
Loans and borrowings
Convertible debentures
Redeemable share liability
$ 206,076
13,849
287,357
92,628
880
$ 206,076
17,061
300,311
121,707
880
$ 206,076
2,729
58,480
3,000
—
$
—
3,933
241,831
6,000
—
$
—
3,818
—
6,000
—
$
—
6,581
—
106,707
880
$ 600,790
$ 646,035
$ 270,285
$ 251,764
$
9,818
$ 114,168
Carrying
Amount
Contractual
Cash Flows
Under
1 Year
1–3 Years
3–5 Years
More than
5 Years
Remaining term to maturity
As at December 31, 2014:
Trade and other payables
Finance lease liabilities
Loans and borrowings
Convertible debentures
Redeemable share liability
$ 197,044
15,851
315,363
91,773
401
$ 197,044
19,953
341,247
124,707
401
$ 197,044
2,893
60,591
3,000
—
$
—
4,814
280,656
6,000
—
$
—
3,738
—
6,000
—
$
—
8,508
—
109,707
401
$ 620,432
$ 683,352
$ 263,528
$ 291,470
$
9,738
$ 118,616
The contractual cash flows have been included in the
tables above based on the contractual arrangements
that exist at the reporting date and do not factor in
any assumptions for early repayment. The amount and
timing of actual payments may be materially different.
Contractual cash flows presented in the above maturity
analysis table for finance lease liabilities, loans and
borrowings and convertible debentures include principal
repayments, interest payments, and other related cash
payments. As the carrying amounts of these liabilities are
measured at amortized cost, the future contractual cash
flows do not agree to the carrying amounts.
The Company’s credit facilities and convertible debentures
are further discussed in note 14.
The Company’s future obligations under operating leases
are discussed in note 25.
Market risk
Market risk is the risk that the fair value or future cash flows
of a financial instrument will fluctuate because of changes
in market prices. Market risk is comprised of three types of
risk: interest rate risk, currency risk, and other price risk.
(a)
interest rate risk
Interest rate risk is the risk that the fair value or future
cash flows of a financial instrument will fluctuate
because of changes in market interest rates.
The Company is exposed to cash flow risk on the
term credit facility and the revolving credit facility,
and to fair value risk on the finance lease liabilities
and convertible debentures due to fluctuations in
interest rates. Fair value risk related to the finance
lease liabilities and convertible debentures impacts
disclosure only as these items are carried at
amortized cost on the consolidated statements
of financial position.
As well, the Company’s revenues depend, in part,
on supplying financing alternatives to its customers
through third party credit providers. The terms of
these financing alternatives are affected by changes
in interest rates. Therefore, interest rate fluctuations
may impact the Company’s financing costs for retail
sales financed using these alternatives, and may also
impact the Company’s revenues where customers’
buying decisions are impacted by their ability or
desire to use these financing alternatives.
(i) interest rate sensitivity analysis
The Company’s net income is sensitive to the
impact of a change in interest rates on the average
indebtedness under the term credit facility and the
revolving credit facility during the year. For the year
ended December 31, 2015, the Company’s average
indebtedness under the term credit facility was
$305,000 [2014 – $350,000] and under the revolving
credit facility was $10,500 [2014 – nil]. Accordingly,
a change during the year ended December 31, 2015
of a one percentage point increase or decrease in
the applicable interest rate would have impacted
the Company’s net income by approximately $2,385
[2014 – $2,573].
(b) currency risk
The Company is exposed to foreign currency
fluctuations since certain merchandise is paid for
in U.S. dollars. This risk is offset to the extent that
foreign currency costs are included in product costs
when setting retail prices. Accordingly, the Company
does not believe it has significant foreign currency
risk with respect to its inventory purchases made in
U.S. dollars.
51
Notes to the Consolidated Financial Statements
(c) other price risk
The Company is exposed to fluctuations in the market
prices of its portfolio of restricted marketable securities
that are classified as available-for-sale financial assets.
Changes in the fair value of these financial assets
are recorded, net of income taxes, in accumulated
other comprehensive income as it relates to
unrecognized gains and losses. The risk is managed
by the Company and its investment managers
by ensuring a conservative asset allocation.
23. INSURANCE CONTRACT RISK
Certain subsidiaries of the Company are responsible for
the insurance business and monitoring and managing
the financial risks related to the Company’s insurance
operations. This is done through internal risk assessment
reporting and by compliance with regulatory requirements.
Trans Global Life Insurance Company (“TGLI”) provides
group insurance coverage for life, accident and sickness
covering personal credit card debt; and group coverage
for life, accident and sickness covering other personal
short-term debt. Trans Global Insurance Company (“TGI”)
provides group coverage for loss of income and property
covering personal credit card debt; group coverage for loss
of income and property covering other personal short-term
debt; and four and five-year term commercial property
coverage. The principal risks faced under insurance
contracts are that (i) the actual claims and benefit
payments or the timing thereof, differ from expectations.
This risk is influenced by the frequency of claims,
severity of claims, actual benefits paid and subsequent
development of claims; (ii) the risk of loss arising from
expense experience being different than expected; and
Current portion of finance lease liabilities
Current portion of loans and borrowings
Convertible debentures
Finance lease liabilities
Loans and borrowings
Total shareholders’ equity
Total capital under management
(iii) the risk arising due to policyholder experiences (lapses)
being different than expected. The Company’s objective
with respect to this risk is to ensure that sufficient reserves
are available to cover these liabilities.
The overall risk of the insurance operations is managed
by diversifying across a large portfolio of insurance
contracts and limiting the benefits that the policyholder
stands to receive. The Company, therefore, has a defined
maximum exposure which enables it to effectively manage
the overall risk. These maximum benefits are limited to
$25,000 per occurrence.
24. CAPITAL MANAGEMENT
The Company’s objectives when managing capital are to:
›
ensure sufficient liquidity to support its financial
obligations and execute its operating and strategic
plans; and
utilize working capital to negotiate favourable supplier
agreements both in respect of early payment discounts
and overall payment terms.
›
The capital structure of the Company has not changed
from the prior fiscal year. The capital structure currently
includes finance lease liabilities, convertible debentures,
term credit facility and borrowing capacity available under
the revolving credit facilities (note 14). As at December 31,
2015, $99,514 is available to draw on under our $100,000
revolving credit facility, as the borrowing capacity is
reduced by ordinary letters of credit of $486 primarily
with respect to buildings under construction or being
completed [2014 – $525].
$
2015
2014
$
1,954
50,000
92,628
11,895
237,357
600,402
2,002
30,000
91,773
13,849
285,363
549,105
$
994,236
$
972,092
Under the Senior Secured Credit Agreement, the financial
and non-financial covenants are reviewed on an ongoing
basis by management to monitor compliance with the
agreement. The Company was in compliance with these
key covenants as at December 31, 2015.
The Board of Directors reviews and approves any
material transactions out of the ordinary course of
business, including proposals on acquisitions or other
major investments or divestitures, as well as capital and
operating budgets. Based on current funds available and
expected cash flow from operating activities, management
believes that the Company has sufficient funds available
to meet its liquidity requirements at any point in time.
However, if cash from operating activities is lower than
expected or capital costs for projects exceed current
estimates, or if the Company incurs major unanticipated
expenses, it may be required to seek additional capital.
The Company is not subject to any externally imposed
capital requirements, other than with respect to its
insurance subsidiaries.
Restriction on the distribution of capital from Trans
Global Insurance Company and Trans Global Life
Insurance Company
For purposes of regulatory requirements for TGI and TGLI,
capital is considered to be equivalent to their respective
statement of financial position equity. Regulatory
requirements stipulate that TGI must maintain minimum
capital of at least $3,000 and TGLI must maintain
minimum capital of at least $5,000.
52
Leon’s Furniture Limited | 2015 Annual Report
26. CONSOLIDATED STATEMENTS
OF CASH FLOWS
The net change in non-cash working capital balances
related to operations consists of the following:
Year ended December 31
2015
2014
$
(5,661) $
(37,333)
(22)
(8,528)
11,028
(1,222)
Trade receivables
Inventories
Other assets
Deferred
acquisition costs
(5,372)
(7,141)
Trade and
other payables
Provisions
Income taxes
payable/receivable
Customers’ deposits
Deferred rent
liabilities and
lease inducements
8,643
767
(52,253)
14,741
(3,603)
(193)
22,601
4,096
2,064
2,142
$
(74,426) $
19,180
27. RELATED PARTY TRANSACTIONS
Balances and transactions between the Company and its
subsidiaries, which are related parties of the Company,
have been eliminated on consolidation.
Key management compensation
Key management includes the Directors and the five senior
executives of the Company. The compensation expense
paid to key management for employee services during
each year is shown below:
Year ended December 31
2015
2014
Salaries and other
short-term
employee benefits
$
5,665
$
5,280
28. COMPARATIVE FINANCIAL STATEMENTS
The comparative consolidated financial statements have
been reclassified from statements previously presented
to conform to the presentation of the 2015 consolidated
financial statements.
In addition, the Company is subject to the regulatory
capital requirements defined by The Office of the
Superintendent of Insurance of Alberta and the Insurance
Act of Alberta (the “Act”). notwithstanding that a company
may meet the supervisory target standard; The Office of
the Superintendent of Insurance of Alberta may direct
a company to increase its capital under the Act. As at
December 31, 2015, TGI’s Minimum Capital Test ratio
was 472% [2014 – 634%], which is in compliance with
the requirements of The Office of the Superintendent
of Insurance of Alberta and the Act. As at December 31,
2015, TGLI’s Minimum Continuing Capital and Surplus
Requirements ratio was 501% [2014 – 579%], which is in
compliance with the requirements of The Office of the
Superintendent of Insurance of Alberta and the Act.
25. COMMITMENTS AND CONTINGENCIES
(a)
The Company leases a number of retail stores and
trucks under operating leases. Generally, the retail
store leases have rent escalation terms and renewal
options to extend. The Company is obligated under
these operating leases for future minimum annual
rental payments as follows:
no later than 1 year
Later than 1 year and
no later than 5 years
Later than 5 years
$
85,192
261,417
155,259
$
501,868
(b)
The future minimum lease payments receivable
under non-cancellable operating leases for certain
land and buildings classified as investment property
are as follows:
no later than 1 year
Later than 1 year and
no later than 5 years
Later than 5 years
$
2,384
3,705
3,489
9,578
$
(c)
(d)
Pursuant to a reinsurance agreement relating to the
extended warranty sales, the Company has pledged
available-for-sale financial assets amounting to
$18,691 [2014 – $18,310].
In the normal course of operations, the Company
is party to a number of lawsuits, claims and
contingencies. Accruals are made in instances where
it is probable that liabilities have been incurred and
where such liabilities can be reasonably estimated.
Although it is possible that liabilities may be incurred
in instances for which no accruals have been made,
the Company does not believe that the ultimate
outcome of these matters will have a material impact
on its financial position.
53
Notes to the Consolidated Financial Statements
c o rp o r ate & s hareh o ld er
i n fo rMati o n
Board of Directors
Officers
Mark J. Leon
Chairman of the Board
Terrence T. Leon
CEO
Edward F. Leon
President and COO
Dominic Scarangella
Executive Vice President and CFO
John A. Cooney
Vice President, Legal and
Corporate Secretary
Mark J. Leon
Toronto
Terrence T. Leon
Toronto
Edward F. Leon
King City
Joseph M. Leon II
Mississauga
Peter B. Eby
Private Investor, Toronto
Alan J. Lenczner
Barrister, Partner in
Lenczner Slaght, Toronto
Mary Ann Leon
Financial Executive, Toronto
Frank Gagliano
Vice Chairman,
St. Joseph Communications, Toronto
Corporate Office
45 Gordon Mackay Road
Toronto, Ontario M9n 3X3
(416) 243-7880
Auditors
Ernst & Young LLP
Toronto
Registrar and Transfer Agent
CST Trust Company
Listing
Leon’s shares are listed on the
Toronto Stock Exchange
Ticker Symbol is LnF
Annual General Meeting
May 12, 2016 2:00 PM
St. Andrew’s Club & Conference Centre
150 King St. W.
27th Floor
Toronto, Ontario
54
Our customers can find everything we offer
at our stores and more, including the same
high standards for delivery, service and
guaranteed pricing, through our growing
online stores.
leons.ca
|
thebrick.com
|
furniture.com