Investing in growth
Leon’s Furniture Limited
2017 Annual Report
A strong foundation for growth
After 108 years in business and still growing strong, Leon’s is the largest retailer
of furniture, mattresses, appliances and home electronics in Canada, with $2.64 billion
in annual system-wide sales, five powerful banners and a network of 304 stores from
coast to coast.
The opening of our new 432,000 square
foot facility in Delta, B.C., represents an
important milestone in the optimization
of our national distribution network.
F I N A N C I A L H I G H L I G H T S
Leon’s unrivalled store and distribution networks constitute a strong foundation for
the continued success of our core retailing business as well as the five strategic initiatives
we’re advancing to augment revenue and earnings growth in the years ahead.
Financial Highlights
($ in thousands, except per share amounts)
2017
2016
% Change
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
$ 2,212,216
131,429
96,593
156,603
33,179
$ 2,143,736
114,188
83,591
164,648
28,649
$
$
$
$
1.32
2.15
0.48
10.60
$
$
$
$
1.17
2.30
0.40
9.20
3.2%
15.1%
15.6%
(4.9%)
15.8%
12.8%
(6.5%)
20.0%
15.2%
REVENUE
NET INCOME
SHAREHOLDER’S EQUITY
$2,212,216
$96,593
$10.60
2016
2017
3.2 %
GROWTH
2016
2017
2016
2017
15.6 %
GROWTH
15.2%
GROWTH
(PER SHARE)
01
ANNUAL REPORT 2017
C H I E F E X E C U T I V E O F F I C E R ’ S M E S S A G E
Chief
Executive
Officer’s
Message
2017 was an outstanding year
for Leon’s Furniture Limited.
We posted record financial
results, achieved strong
operating performance in the
Leon’s and The Brick divisions,
and advanced our growth
strategies in five promising
areas that are complementary
to our core businesses.
RECORD FINANCIAL RESULTS
System-wide sales reached $2.64 billion including $426 million of franchise sales,
compared to $2.53 billion including $388 of franchise sales in 2016. These results
reflect a full year of sales from ten new stores opened in 2016, the effectiveness of
our marketing and merchandising campaigns at Leon’s and The Brick, and growing
contributions from our online retail channels and other businesses. Same-store sales
for the year increased 1.2 percent, as we continued to grow market share in a relatively
slow-growing economy. At the same time, we continued to increase adjusted net
income – which rose 14.1 percent to $99 million or $1.23 per diluted share – at a faster
pace. This reflected an unwavering focus on cost control, the continuing internalization
of distribution costs at The Brick, and lower financing costs as a result of continued
debt reduction.
It has been just over five years since we completed the acquisition of The Brick, a
company nearly twice the size of Leon’s at the time of the transaction. We were well
aware that integration risk posed the greatest threat to any successful union, but we
had done our homework and knew that our business opportunities were too attractive
to ignore. We also took our time with the integration, drawing upon expertise and best
practices from both organizations. Major work started with the careful development
and implementation of a system-wide information platform, the subsequent
integration of our business support functions to gain efficiencies and lower costs,
and most recently, the optimization of our national distribution network.
03
ANNUAL REPORT 2017 C H I E F E X E C U T I V E O F F I C E R ’ S M E S S A G E
Over the same time period, we were able to increase net earnings at a compound annual
growth rate of nine percent, while reducing the $400 million of medium-term bank debt
and $100 million in convertible debentures issued to fund the acquisition of The Brick to
$195 million and $48 million, respectively, by the end of last year.
While we have been careful to preserve the independence of the marketing and
merchandising teams at Leon’s and The Brick, we are also benefitting from a shared
approach to the way we conduct business that permeates both divisions and we
will continue to find new ways to leverage our combined business. Today, these
two industry-leading brands make Leon’s Furniture Limited the largest retailer
of furniture, mattresses, appliances and consumer electronics in Canada.
A STRONG FOUNDATION FOR GROWTH
Leon’s is well positioned to sustain increased profitability in our core retailing business amid
the current industry environment. At the same time, we are advancing five complementary
initiatives that will augment revenue and earnings growth as we move ahead:
1. ACQUISITIONS. As Leon’s continues to generate cash flows exceeding our
operating and capital investment requirements, we will be open to selective acquisition
opportunities. Our investment criteria include businesses with well-established brands
and leading market positions that can leverage our existing capabilities and infrastructure.
While we occupy a leading position in our market, Leon’s and The Brick together represent
less than a 20 percent share of total sales. The market remains highly fragmented in both
Canada and the United States and will thus continue to present acquisition opportunities
as it consolidates.
2. DIGITAL COMMERCE. Over the past year, we have continued to refine an omni-channel
marketing strategy that combines the strengths of our Canada-wide retail, distribution and
service networks with the endless selection of our leons.ca, thebrick.com and furniture.ca
websites. We want to make it easier and more rewarding for customers to do business
with us – no matter how, when or where they choose – whether they are comparing our
products online or visiting our stores for specialized sales information or value-added
warranty and service advice.
As part of this process, we are planning to take a larger role in the operation of leons.ca,
thebrick.com and furniture.ca to better drive innovation and more effectively advance
our efforts to create a seamless customer experience across all retail channels.
Our omni-channel marketing initiatives are built on a strong foundation. As the world’s
largest online retailers are beginning to recognize the advantages of brick and mortar
stores and dedicated distribution facilities, we already possess the valuable infrastructure
required to display, sell, distribute and service a rapidly expanding product offering almost
anywhere in Canada.
3. THIRD PARTY DISTRIBUTION. The recent opening of our state-of-the-art distribution
centre in Delta, BC represents an important step in the modernization of our national
distribution network to more efficiently meet the combined needs of our Leon’s and The
Brick store networks. Yet it also represents the beginning of a larger business opportunity.
The so-called “last mile” in product fulfillment is an expensive and sometimes cost-
prohibitive one for many traditional and online retailers. That’s why Leon’s is planning to
increase capacity, not only in its Delta distribution facility, but also at many of its other
existing warehouses by digitally integrating them to create greater efficiencies and allow
for third party distribution. We are planning to develop this business as a separate profit
centre as the optimization of our national distribution network continues.
04
LEON’S FURNITURE LIMITED C H I E F E X E C U T I V E O F F I C E R ’ S M E S S A G E
4. MAJOR APPLIANCE WARRANTY AND THIRD PARTY SERVICE. TransGlobal Service
(TGS) was created in 1980 to provide after-sales service for appliances sold by
The Brick and today fulfills installation, repair and service requirements for multiple
retailers and wholesalers of all brands of major appliances as well as electronics,
installations and home mechanical systems. Already the largest operation of its kind in
Canada, this business is benefitting from the increasing tendency of manufacturers and
retailers to outsource service and warranty work, as well as a rapidly growing direct-to-
consumer business. We expect these trends to continue and are positioning TGS, with
its unequalled scale and geographic footprint, to become an increasingly important
contributor to Leon’s revenue and earnings growth.
5. REAL ESTATE. Many of our stores in our retail network occupy company-owned
commercial real estate that are situated in the heart of Canada’s largest and fastest growing
metropolitan areas. This 4.2 million square foot real estate portfolio is carried on Leon’s
balance sheet at historical cost. Over the past year, we have been working with industry
consultants to more accurately determine the market value of our real estate, identify
the most promising development opportunities and evaluate different scenarios for
value creation.
108 YEARS YOUNG
After more than 108 years in business, Leon’s has prospered and grown through many
economic cycles. We’ve also witnessed, and sometimes initiated, continuing change in
the Canadian retailing landscape. Today, we are proud of how far we’ve come, yet in many
ways we are just getting started. We are better positioned than ever in the Canadian
marketplace with two storied and market-leading retail banners and an unrivalled store
and distribution network. This is a strong foundation for the continued growth of our
core retailing business as well as the complementary growth initiatives that will play an
increasing role in our success.
In closing, I would like to extend our appreciation to the executive leadership of Leon’s and
The Brick, their talented corporate and franchise store management teams, and the valued
associates at all of our businesses, for helping to make 2017 our best year yet. With your
continued support, we look forward to reporting on Leon’s progress in the years ahead.
“ Today, we are
proud of how far
we’ve come, yet in
many ways we are
just getting started.”
Sincerely,
“Terrence T. Leon”
Terrence T. Leon
Chief Executive Officer
07
ANNUAL REPORT 2017
AT- A - G L A N C E
Across the
country
1
35
4
1
53
6
6
11
3
2
8
2
1
71
47
3
4
16
11
A STRONG FOUNDATION FOR GROWTH
Leon’s Furniture Limited is Canada’s largest retailer of furniture,
mattresses, appliances and home electronics through five leading
retail and commercial banners. They are supported by growing,
complementary businesses that provide our divisions and third party
customers with high-quality product sourcing services, after-sales
repair and service, warranty protection and insurance.
08
N ATI O N WID E
304
S T O RE S
202 The Brick
86
Leon’s Furniture
12
The Brick Outlet
4
Appliance Canada
3
1
1
3
5
2
4
LEON’S FURNITURE LIMITED AT- A - G L A N C E
Our Executive
Leadership team
Edward F. Leon, President & COO
Leon’s Furniture Limited
Michael J. Walsh, President
Leon’s Division
David B. Freeman, President
The Brick Division
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.
Dave is a long serving Brick associate
with 38 years of retail experience.
Prior to his appointment as President
of The Brick in 2016, Dave served in
a variety of roles including Senior
Vice President of Operations and
Vice President of Sales.
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.
09
ANNUAL REPORT 2017 C O M M U N I T I E S
Strong
communities
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 healthcare 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
well-being of the communities that are home to its store network.
In 2017, this could be seen in the support of the Children’s Miracle
Network®, which raises funds and awareness for 170 member
hospitals, 12 of which are in Canada. Donations stay local to fund
critical treatments and healthcare 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 638 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.
10
2017 numbers needed
™LEON’S FURNITURE LIMITED 5-Y E A R R E V I E W
5-year review
REVENUE
$2,212,216
NET INCOME
$96,593
($ in thousands)
2,500,000
($ in thousands)
100,000
2,000,000
1,500,000
1,000,000
500,000
80,000
60,000
40,000
20,000
SHAREHOLDERS’ EQUITY (PER SHARE)
$10.60
($ per share)
12
10
8
6
4
2
13
14
15
16
17
13
14
15
16
17
13
14
15
16
17
Income Statistics
($ in thousands, except amounts per share)
2017
2016
2015
2014
2013
Revenue
Cost of sales
Gross profit
Operating expenses
Income before income taxes
Provision for income taxes
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
($ in thousands, except amounts per share)
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
$
$
$
$
$
$
$
2,212,216
1,261,112
951,104
819,675
131,429
34,836
$
$
2,143,736
1,228,499
915,237
$
2,031,718
1,145,593
886,125
$
2,008,480
1,131,651
876,829
801,049
114,188
30,597
784,706
101,419
24,790
773,695
103,134
27,610
96,593
$
83,591 $
76,629
$
75,524 $
72,904
1.32
3.2%
4.4%
$
71,696
1.17
5.5%
3.9%
71,218
70,899
$
1.08 $
1.07 $
1.2%
3.8%
16.6%
3.8%
35,136
$
28,691
$
28,501
$
28,370
$
1,721,874
959,307
762,567
669,297
93,270
24,878
68,392
70,612
0.97
152.4%
4.0%
28,247
2017
2016
2015
2014
2013
$
773,048
1,661,455
55,041
168,710
10.60
659,553
1,611,662
25,689
128,788
9.20
$
600,402 $
1,583,463
22,756
65,419
8.43
$
549,105
1,563,476
16,562
46,931
7.74
497,764
1,565,356
18,984
16,246
7.05
19.57
16.19
$
$
18.75
13.08
$
$
19.38
12.61
$
$
17.90
$
13.41 $
14.75
11.62
11
ANNUAL REPORT 2017
M A N A G E M E N T ’ S D I S C U S S I O N & A N A LY S I S
Management’s
Discussion & Analysis
For the quarters and years ended December 31, 2017
and 2016.
The following Management’s Discussion and Analysis
(“MD&A”) is prepared as at February 22, 2018 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, 2017 and for the year
ended December 31, 2017, and 2016. It should be read in
conjunction with the fiscal year 2017 consolidated financial
statements and the notes thereto. For additional detail
and information relating to the Company, readers are
referred to the fiscal 2017 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 further fluctuations of the Canadian dollar
versus the US dollar. Given these risks and uncertainties,
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 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 2017 consolidated financial statements and
MD&A were approved on February 22, 2018.
12
LEON’S FURNITURE LIMITED 1. Business overview
Leon’s Furniture Limited is the largest retailer of furniture,
mattresses, appliances and electronics in Canada. Our retail
banners include: Leon’s; The Brick; The Brick Mattress
Store; and The Brick Outlet. Finally, with the Midnorthern
Appliance banner alongside the Appliance Canada banner,
we are also the country’s largest commercial retailer of
appliances to builders, developers, hotels and property
management companies. The Company has 304 retail stores
from coast to coast in Canada under various banners. As
well, the Company operates three ecommerce sites: leons.ca,
thebrick.com and furniture.ca.
The Company’s repair service division, Trans Global Services
(“TGS”), provides household furniture, electronics and
appliance repair services to its customers. The TGS division
has contracts to support several manufacturers’ 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 customers’ outstanding financing
balances. This credit insurance coverage includes life,
dismemberment, disability, critical illness and involuntary
unemployment. 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
wholly-owned 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.
The Company has 304 retail stores from coast to coast in Canada under the various banners indicated below:
Number of Stores
as at December 31,
Number of Stores
as at December 31,
Banner
2016
Opened
Closed
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
Brick Outlet2
Total number of stores
50
36
4
114
64
24
13
305
–
–
–
–
2
1
–
3
–
–
–
–
(1)
(2)
(1)
(4)
2017
50
36
4
114
65
23
12
304
1. Includes the Midnorthern Appliance banner
2. United Furniture Warehouse “UFW” banner stores were converted to Brick Outlets in August 2017
2. Non-IFRS financial measures
The Company uses financial measures that do not have standardized meaning under IFRS and may not be comparable to
similar measures presented by other entities. The Company calculates the non-IFRS measures by adjusting certain IFRS
measures for specific items the Company believes are significant, but not reflective of underlying operations in the period, as
detailed below:
Non-IFRS Measure
IFRS Measure
Adjusted net income
Adjusted income before income taxes
Adjusted earnings per share – basic
Adjusted earnings per share – diluted
Adjusted EBITDA
Net income
Income before income taxes
Earnings per share – basic
Earnings per share – diluted
Net income
13
MANAGEMENT’S DISCUSSION & ANALYSISANNUAL REPORT 2017
Adjusted Net Income
• severance charges in the period, a non-recurring expense
Leon’s calculates comparable measures by excluding the
effect of:
• the mark-to-market adjustments included in the
Company’s selling, general and administration (“SG&A”)
income statement line item, related to the net effect of
USD-denominated forward contracts and an interest rate
swap on the Company’s term credit facility. The Company
uses forward currency contracts to manage the risk
associated with its USD-denominated purchases and an
interest rate swap to manage interest rate risk on its term
credit facility in accordance with the Company’s
corporate treasury policy;
included in the Company’s SG&A.
Management believes excluding from income the effect of
these mark-to-market valuations and changes thereto, until
settlement, better aligns the intent and financial effect of
these contracts with the underlying cash flows. Similarly,
excluding from income the effect of non-recurring expenses
better reflects Leon’s SG&A as a percentage of revenue in
the period.
The following is a reconciliation of reported net income to
adjusted net income, basic and diluted earnings per share
to adjusted basic and diluted earnings per share:
($ in thousands, except per share amounts)
2017
2016
2017
2016
Net income
34,778
37,233
96,593
83,591
For the three months
ended December 31
For the years
ended December 31
After-tax mark-to-market loss (gain) on
financial derivative instruments
After-tax severance charge
Adjusted net income
Basic earnings per share
Diluted earnings per share
Adjusted basic earnings per share
Adjusted diluted earnings per share
1,341
–
36,119
$
$
$
$
0.46
0.43
0.48
0.45
$
$
$
$
(2,488)
–
34,745
0.52
0.46
0.48
0.43
2,429
–
99,022
$
$
$
$
1.32
1.20
1.36
1.23
$
$
$
$
1,943
1,228
86,762
1.17
1.05
1.21
1.08
Adjusted EBITDA
Adjusted earnings before interest, income taxes, depreciation
and amortization, mark-to-market adjustment due to the
changes in the fair value of the Company’s financial
derivative instruments and any non-recurring charges to
income (“Adjusted EBITDA”) is a non-IFRS financial
measure used by the Company. The Company considers
Adjusted EBITDA to be an effective measure of profitability
on an operational basis and is commonly regarded as an
indirect measure of operating cash flow, a significant
indicator of success for many businesses. Adjusted EBITDA
is a non-IFRS financial measure used by the Company. The
Company’s Adjusted EBITDA may not be comparable to the
Adjusted EBITDA measure of other companies, but in
management’s view appropriately reflects Leon’s specific
financial condition. This measure is not intended to replace
net income, which, as determined in accordance with IFRS,
is an indicator of operating performance.
The following is a reconciliation of reported net income to adjusted EBITDA:
($ in thousands)
Net income
Income tax expense
Net finance costs
Depreciation and amortization
Severance charge
Mark-to-market loss (gain) on
financial derivative instruments
For the three months
ended December 31
For the years
ended December 31
2017
34,778
12,083
2,316
10,603
–
2016
37,233
13,600
3,526
10,654
–
2017
96,593
34,836
10,502
39,556
–
2016
83,591
30,597
14,481
41,235
1,700
1,820
(3,407)
3,311
2,662
Adjusted EBITDA
61,600
61,606
184,798
174,266
14
MANAGEMENT’S DISCUSSION & ANALYSISLEON’S FURNITURE LIMITED
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
fiscal 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.
15
MANAGEMENT’S DISCUSSION & ANALYSISANNUAL REPORT 2017 3. Results of operation
Summary financial highlights for the quarters ended December 31, 2017 and December 31, 2016
($ in thousands, except % and per share amounts)
2017
2016
Total system-wide sales1
Franchise sales1
Revenue
Cost of sales
Gross profit
Gross profit margin as a percentage of revenue
Selling, general and administration expenses
722,259
126,404
595,855
332,807
704,742
116,361
588,381
329,876
263,048
258,505
44.15%
43.93%
For the three months
ended December 31
$ Increase
(Decrease)
% Increase
(Decrease)
17,517
10,043
7,474
2,931
4,543
2.5%
8.6%
1.3%
0.9%
1.8%
(excluding mark-to-market impact and severance charge)1
212,051
207,554
4,497
2.2%
SG&A as a percentage of revenue
Income before net finance costs and income tax expense
Net finance costs
Income before income taxes
(excluding mark-to-market impact and severance charge)1
Income tax expense
Adjusted net income1
Adjusted net income1 as a percentage of revenue
After-tax mark-to-market loss (gain) on
financial derivative instruments1
Net income
35.59%
50,997
(2,316)
48,681
12,562
36,119
6.06%
1,341
34,778
35.28%
50,951
(3,526)
47,425
12,680
34,745
5.91%
(2,488)
37,233
Basic weighted average number of common shares
Basic earnings per share
Adjusted basic earnings per share1
Diluted weighted average number of common shares
Diluted earnings per share
Adjusted diluted earnings per share1
75,079,103
0.46
$
0.48
$
82,894,024
0.43
$
0.45
$
71,820,999
0.52
$
$
0.48
82,989,568
0.46
$
0.43
$
Common share dividends declared
Convertible, non-voting shares dividends declared
$
$
0.12
0.23
$
$
0.10
0.20
$
$
$
$
$
$
1. Non-IFRS financial measures. Refer to section 2 in this MD&A for additional information.
46
(1,210)
1,256
(118)
1,374
3,829
(2,455)
(0.06)
–
(0.03)
0.02
0.02
0.03
0.1%
(34.3%)
2.6%
(0.9%)
4.0%
153.9%
(6.6%)
(11.5%)
0.0%
(6.5%)
4.7%
20.0%
15.0%
Same Store Sales1
($ in thousands except %)
Same store sales1
2017
2016
$ Increase
% Increase
$
582,662
$
578,074
$
4,588
0.8%
For the three months
ended December 31
1. Non-IFRS financial measure. Refer to section 2 in this MD&A for additional information.
Fourth Quarter Overall Performance
G R O S S P R O F I T
R E V E N U E
For the three months ended December 31, 2017, revenue
was $595,855,000 compared to $588,381,000 in the
prior year’s fourth quarter. Revenue increased $7,474,000
or 1.3% between the comparative quarters.
S A M E S T O R E S A L E S 1
Overall, same store corporate sales increased 0.8%.
The gross profit for the fourth quarter 2017 continued to
be strong as it increased from 43.93% to 44.15% compared
to the prior year’s fourth quarter.
S E L L I N G , G E N E R A L A N D A D M I N I S T R AT I O N E X P E N S E S
( “ S G & A” )
Excluding the mark-to-market impact of the Company’s
financial derivatives, comprised of foreign exchange forwards
and a fixed interest rate swap, SG&A as a percentage of
revenue increased from 35.28% to 35.59% compared to the
prior year’s quarter. The marginal increase was due to slightly
higher occupancy costs in the quarter.
16
MANAGEMENT’S DISCUSSION & ANALYSISLEON’S FURNITURE LIMITED
A D J U S T E D N E T I N C O M E 1 A N D A D J U S T E D D I L U T E D
N E T I N C O M E A N D D I L U T E D E A R N I N G S P E R S H A R E
E A R N I N G S P E R S H A R E 1
As a result of the above and due to the Company’s
continued reduction of its term credit facility, adjusted
net income for the three month period ended December
31, 2017 was $36,119,000, $0.45 adjusted diluted earnings
per share ($34,745,000, $0.43 adjusted diluted earnings
per share in 2016), an increase of 4.7% per share.
Including the mark-to-market impact of the Company’s
financial derivatives, net income for the fourth quarter
of 2017 was $34,778,000, $0.43 diluted earnings per
share (net income of $37,233,000, $0.46 diluted earnings
per share in 2016).
Consolidated operating results for the twelve months ended December 31, 2017, 2016 and 2015
For the years
ended December 31
($ in thousands, except %
and per share amounts)
Total system-wide sales1
Franchise sales1
Revenue
Cost of sales
Gross profit
Gross profit margin as a percentage of revenue
Selling, general and administration expenses (excluding
mark-to-market impact and severance charge)1
2017
$ Increase % Increase
(Decrease)
(Decrease)
2016
2016
$ Increase % Increase
(Decrease)
(Decrease)
2015
$ 2,638,091
425,875
2,531,573
387,837
2,212,216
1,261,112
2,143,736
1,228,499
106,518
38,038
68,480
32,613
4.2%
9.8%
3.2%
2.7%
2,531,573
387,837
2,407,512
375,794
2,143,736
1,228,499
2,031,718
1,141,706
124,061
12,043
112,018
86,793
951,104
915,237
35,867
3.9%
915,237
890,012
25,225
5.2%
3.2%
5.5%
7.6%
2.8%
42.99%
42.69%
42.69%
43.81%
805,862
782,206
23,656
3.0%
782,206
771,334
10,872
1.4%
SG&A as a percentage of revenue
36.43%
36.49%
36.49%
37.96%
145,242
(10,502)
133,031
(14,481)
12,211
(3,979)
9.2%
(27.5%)
133,031
(14,481)
118,678
(17,627)
14,353
(3,146)
12.1%
(17.8%)
Income before net finance costs and income tax expense1
Net finance costs
Income before income taxes
(excluding mark-to-market impact
and severance charge)1
Income tax expense
Adjusted net income1
After-tax mark-to-market loss (gain)
on financial derivative instruments1
After-tax severance charge1
Prior period tax adjustment1
Net income
Basic weighted average number of common shares
Basic earnings per share
Adjusted basic earnings per share1
Diluted weighted average number of common shares
Diluted earnings per share
Adjusted diluted earnings per share1
Common share dividends declared
Convertible, non-voting shares dividends declared
134,740
35,718
118,550
31,788
16,190
3,930
99,022
86,762
12,260
118,550
31,788
101,051
27,313
17,499
4,475
86,762
73,738
13,024
13.7%
12.4%
14.1%
25.0%
N.M.
–
15.6%
4.05%
3.63%
1,943
1,228
–
(268)
–
(2,623)
83,591
76,629
2,429
–
–
1,943
1,228
–
96,593
83,591
486
(1,228)
–
13,002
72,904,130 71,695,955
1.32 $
1.36 $
82,912,983 83,081,832
$
$
1.17 $
1.21 $
$
$
$
$
$
1.20
1.23
0.48 $
0.23 $
1.05 $
1.08 $
0.40 $
0.20 $
0.15
0.15
0.15
0.15
0.08
0.03
71,695,955 71,217,958
12.8%
12.4%
$
$
1.17 $
1.21 $
1.08 $
1.04 $
83,081,832 82,364,539
14.3%
13.9%
20.0%
15.0%
$
$
$
$
1.05 $
1.08 $
0.40 $
0.20 $
0.97 $
0.93 $
0.40
0.20
17.3%
16.4%
17.7%
N.M.
N.M.
9.1%
8.3%
16.3%
8.2%
16.1%
–
–
2,211
1,228
2,623
6,962
0.09
0.17
0.08
0.15
–
–
Adjusted net income1 as a percentage of revenue
4.48%
4.05%
1. Non-IFRS financial measures. Refer to section 2 in this MD&A for additional information.
2. Not Meaningful – “N.M.”
Same Store Sales1
($ in thousands except %)
Same store sales1
2017
2016
$ Increase
% Increase
2,109,881
2,084,123
25,758
1.2%
For the years
ended December 31
1. Non-IFRS financial measure. Refer to section 2 in this MD&A for additional information.
R E V E N U E
G R O S S P R O F I T
For the year ended December 31, 2017, revenue was
$2,212,216,000 compared to $2,143,736,000 for the prior
year. Revenue increased $68,480,000 or 3.2% for the
comparative period.
S A M E S T O R E S A L E S 1
Overall, same store corporate sales increased 1.2%.
The gross profit for the year ended December 31, 2017
continued to be strong as it increased from 42.69% to
42.99% compared to the prior year.
17
MANAGEMENT’S DISCUSSION & ANALYSISANNUAL REPORT 2017
S E L L I N G , G E N E R A L A N D A D M I N I S T R AT I O N E X P E N S E S
A D J U S T E D N E T I N C O M E 1 A N D A D J U S T E D D I L U T E D
( “ S G & A” )
E A R N I N G S P E R S H A R E 1
Excluding severance payments and the mark-to-market
impact of the Company’s financial derivatives, comprised
of foreign exchange forwards and a fixed interest rate swap,
SG&A as a percentage of revenue decreased from 36.49%
to 36.43%. The reduction is due primarily from generating
a higher degree of operating leverage as revenues increased
3.2% for the year and by gaining additional operating
efficiencies especially relating to delivery expenses and a
reduction in retail financing charges.
As a result of the above, adjusted net income for the
year ended December 31, 2017 was $99,022,000,
$1.23 adjusted diluted earnings per share ($86,762,000,
$1.08 adjusted diluted earnings per share in 2016),
an increase of 13.9%.
N E T I N C O M E A N D D I L U T E D E A R N I N G S P E R S H A R E
Net income for the year ended December 31, 2017 was
$96,593,000, $1.20 diluted earnings per share (net income
of $83,591,000, $1.05 diluted earnings per share for the
year ended December 31, 2016).
4. Summary of consolidated quarterly results
The table below highlights the variability of quarterly results and the impact of seasonality on the Company’s results. The
Company’s profitability is typically lower in the first half of the year, since retail sales are traditionally higher in the third and
fourth quarters.
($ in thousands, except per share data)
Quarter Ended
December 31
Quarter Ended
September 30
Quarter Ended
June 30
Quarter Ended
March 31
Total system-wide sales1
Franchise sales1
Revenue
Net income
Adjusted net income1
Basic earnings(loss) per share
Fully diluted earnings(loss) per share
Adjusted basic earnings per share1
Adjusted fully diluted per share1
2017
2016
2017
2016
2017
2016
2017
2016
722,259
126,404
595,855
34,778
36,119
0.46
$
0.43
$
0.48
$
0.45
$
704,742
116,361
588,381
37,233
34,745
0.52
0.46
0.48
0.43
$
$
$
$
705,683
111,094
594,589
34,338
34,392
0.48
0.42
0.48
0.42
$
$
$
$
673,897
98,173
575,724
34,111
31,300
0.48
0.42
0.44
0.39
$
$
$
$
636,159
98,576
537,583
18,863
19,968
0.26
0.24
0.28
0.25
$
$
$
$
606,453
90,269
516,184
16,959
15,547
0.24
0.21
0.22
0.20
$
$
$
$
573,988
89,799
484,189
8,614
8,543
0.12
0.11
0.12
0.11
$
$
$
$
546,483
83,036
463,447
(4,712)
5,170
(0.07)
(0.07)
0.07
0.07
$
$
$
$
1. 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
A S S E T S
Total assets at December 31, 2017 of $1,661,455,000 were
$49,793,000 higher than the $1,611,662,000 reported at
December 31, 2016. The principal components of this net
change are the following:
• $17,648,000 increase in cash and cash equivalents,
restricted marketable securities and available-for-sale
financial assets
• $10,374,000 increase in trade receivables
• $9,113,000 increase in inventory
• $21,248,000 increase in property, plant and equipment
• $5,178,000 decrease in intangible assets
December 31, 2017
December 31, 2016 December 31, 2015
1,661,455
468,569
1,611,662
525,605
1,583,463
543,455
Cash and cash equivalents, restricted marketable securities
and available-for-sale financial assets increased due to
earnings from operations. The property, plant and equipment
increased due to the purchase of land and subsequent
construction of the new 432,000 square foot distribution
centre in Delta, British Columbia.
N O N - C U R R E N T L I A B I L I T I E S
Non-current liabilities of $468,569,000 were $57,036,000
lower than the $525,605,000 reported at December 31,
2016. The reduction is primarily the result of the repayment
of the term loan, conversion of the convertible debentures
and the change in deferred income tax liabilities.
18
MANAGEMENT’S DISCUSSION & ANALYSISLEON’S FURNITURE LIMITED
6. Liquidity and capital resources
The following table provides a summarized statement of cash flows for the quarters and years ended December 31, 2017 and
December 31 2016:
Source (Use) of Cash ($ in thousands)
Cash provided by operating activities before changes in
non-cash working capital items
Changes in non-cash working capital items
Cash provided by operating activities
Investing activities
Financing activities
For the three months
ended December 31
For the years
ended December 31
2017
$ Increase
(Decrease)
2016
2017
$ Increase
(Decrease)
2016
47,519
11,099
58,618
(12,366)
(26,717)
53,646
8,792
62,438
(12,882)
(26,514)
(6,127)
2,307
(3,820)
(516)
203
143,641
12,962
133,410
31,238
156,603
(78,023)
(86,358)
164,648
(38,307)
(90,215)
10,231
(18,276)
(8,045)
(39,716)
3,857
Increase (decrease) in cash and cash equivalents
19,535
23,042
(3,507)
(7,778)
36,126
(43,904)
Cash Used in Operating Activities
Cash Used in Financing Activities
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 2017 cash provided by operating
activities changed by $3,820,000 compared to the prior
year’s quarter. The net decrease is primarily the result of
the change in deferred income taxes.
For the year ended December 31, 2017, cash provided by
operating activities changed by $8,045,000 compared to the
comparative period. The net decrease is the result of the
net change in non-cash working capital items, primarily trade
receivables, inventories, trade and other payables, and
customer deposits offset by earnings from operations.
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 2017 cash used in investing activities
decreased by $516,000 compared to the prior year’s
quarter. This change is the net result of decreased purchases
of property, plant and equipment offset by the change in the
purchase and sale of available-for-sale financial assets.
For the year ended December 31, 2017, cash used in
investing activities changed by $39,716,000 compared
to the comparative period. The net increase is primarily
the result of the purchase of property, plant and equipment
and the purchase of available-for-sale financial assets.
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 2017 cash used in financing activities
increased by $203,000 compared to the prior year’s
quarter. The change relates to payment of dividends.
The dividend increased from $0.10 to $0.12 from the
previous comparative quarter.
For the year ended December 31, 2017, cash used in
financing activities changed by $3,857,000 compared to
the comparative period. The decrease is primarily the result
of lower interest paid and $5,000,000 reduction in the
repayment of term loan offset by the increase in dividends
paid, $0.46 per share compared to $0.40 per share for
the prior year.
Adequacy of Financial Resources
At December 31, 2017, the Company’s current assets
exceeded its current liabilities by $168,710,000 and its cash
and cash equivalents, available-for-sale financial assets and
restricted marketable securities were $117,312,000
compared to $99,664,000 at December 31, 2016. Under the
Company’s Senior Secured Credit Agreement we had unused
borrowing capacity of $49,351,000 as at December 31, 2017
($49,500,000 as at December 31, 2016). The Company
believes that its existing financing resources together with its
continuing cash flow from operations will provide a sound
liquidity and working capital position throughout the next
twelve months.
19
MANAGEMENT’S DISCUSSION & ANALYSISANNUAL REPORT 2017
Contractual Commitments
($ in thousands)
Contractual Obligations
Long term debt
Operating leases1
Trade and other payables
Finance lease liabilities
Total Contractual Obligations
Payments Due by Period
Total
259,503
453,906
234,478
12,247
Under
1 year
7,629
87,120
234,478
1,848
1–3 years
3–5 years
More than
5 years
198,371
141,161
–
3,817
3,008
103,929
–
3,853
50,495
121,696
–
2,729
960,134
331,075
343,349
110,790
174,920
1. The Company is obligated under operating leases to future minimum rental payments for various land and building sites across Canada
O U T L O O K
With the expansion of new retail locations, the completion of
the new shared distribution centre in Delta, British Columbia
and our continuing strong growth in online sales, we expect
to see continued growth in sales for 2018, to maintain gross
margins and continue to drive efficiencies.
7. Outstanding common shares
At December 31, 2017, there were 76,188,143 common
shares issued and outstanding. During the quarter ended
December 31, 2017, 112,523 series 2009 shares,
89,116 series 2012 shares, 145,577 series 2013 shares,
32,876 series 2014 shares, 7,072 series 2015 shares
and a portion of the convertible debentures with a stated
value of $49,858,000 was converted to 3,945,113 common
shares, at the holder’s option. For details on the Company’s
commitments related to its redeemable shares please refer
to Note 15 of the 2017 consolidated financial statements.
8. Related party transactions
At December 31, 2017, we had no transactions with related
parties as defined in IAS 24 – Related Party Disclosures,
except those pertaining to transactions with key management
personnel in the ordinary course of their employment.
9. Critical assumptions
U S E O F E S T I M AT E S A N D J U D G M E N T S
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.
20
C O N S O L I D AT I O N A N D C L A S S I F I C AT I O N O F
J O I N T A R R A N G E M E N T S
Assessing the Company’s ability to control or influence the
relevant financial and operating policies of another entity
may, depending on the facts and circumstances, require the
exercise of significant judgment to determine whether the
Company controls, jointly controls, or exercises significant
influence over the entity performing the work. This assessment
of control impacts how the operations of these entities are
reported in the Company’s consolidated financial statements.
The classification of these entities requires judgment by
management to analyze the various indicators that determine
whether control exists. In particular, when assessing whether
a joint arrangement should be classified as either a joint
operation or a joint venture, management considers the
contractual rights and obligations, voting shares, share of
board members and the legal structure of the joint
arrangement. Subject to reviewing and assessing all the
facts and circumstances of each joint arrangement, joint
arrangements contracted through agreements and general
partnerships would generally be classified as joint
operations whereas joint arrangements contracted through
corporations would be classified as joint ventures. The
application of different judgments when assessing control
or the classification of joint arrangements could result
in materially different presentations in the consolidated
financial statements.
E X T E N D E D W A R R A N T Y R E V E N U E R E C O G N I T I O N
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.
I N V E N T O R I E S
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.
MANAGEMENT’S DISCUSSION & ANALYSISLEON’S FURNITURE LIMITED
I M PA I R M E N T O F AVA I L A B L E - F O R - S A L E F I N A N C I A L
Recent Accounting Pronouncements
A S S E T S A N D M A R K E TA B L E S E C U R I T I E S
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.
I M PA I R M E N T O F P R O P E R T Y, P L A N T A N D E Q U I P M E N T
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.
I M PA I R M E N T O F G O O D W I L L A N D I N TA N G I B L E A S S E T S
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.
P R O V I S I O N S
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.
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.
A C C O U N T I N G S TA N D A R D S A N D A M E N D M E N T S I S S U E D
B U T N O T Y E T A D O P T E D
I F R S 9 , F I N A N C I A L I N S T R U M E N T S ( “ I F R S 9 ” )
In July 2014, the IASB issued the final amendments to
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 intends to adopt the new standard on the
required effective date.
I F R S 15 , R E V E N U E F R O M C O N T R A C T S W I T H C U S T O M E R S
( “ I F R S 15 ” )
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 (“IAS 17”); 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
nonfinancial 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.
The Company has continued the process of reviewing
contracts with customers and currently does not expect
material changes to the revenue recognition pattern for retail
sales. The Company is currently in the process of concluding
on the impact of the remaining streams of revenue and
expanded note disclosures.
21
MANAGEMENT’S DISCUSSION & ANALYSISANNUAL REPORT 2017 I F R S 16 , L E A S E S ( “ I F R S 16 ” )
A D O P T I O N O F N E W, R E V I S E D A M E N D E D
In January 2016, the IASB issued IFRS 16, which will replace
IAS 17. The new standard will be effective for fiscal years
beginning on or after January 1, 2019. Earlier application is
permitted, provided the Company also applies IFRS 15 on or
before the date it first applies IFRS 16. 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 under the existing standard, there will
be a material increase to both assets and liabilities upon
adoption of the new standard. The Company is currently
analyzing the new standard to determine its impact on the
Company’s consolidated financial statements.
I F R S 17, I N S U R A N C E C O N T R A C T S ( “ I F R S 17 ” )
IFRS 17 was issued in May 2017, which will replace IFRS 4,
Insurance Contracts. IFRS 17 establishes the principles for
the recognition, measurement, presentation and disclosure of
insurance contract liabilities. The new standard is effective
for annual periods beginning on or after January 1, 2021, to
be applied retrospectively. If full retrospective application to a
group of contracts is impractical, the modified retrospective
or fair value methods may be used. Earlier adoption is
permitted, provided the Company also applies IFRS 9 and
IFRS 15 on or before the date it first applies IFRS 17. The
Company is currently analyzing the new standard to
determine its impact on the Company’s consolidated financial
statements, particularly the insurance sales revenue stream.
IF R S IN T E RP RE TAT I O N C O M MI T T E E 2 3 , U N C E R TA IN T Y O V E R
IN C O M E TA X T RE AT M E N T S ( “IF RI C 2 3 ” )
IFRIC 23 was issued in June 2017 and is effective for years
beginning on or after January 1, 2019, to be applied
retrospectively. IFRIC 23 provides guidance on applying
the recognition and measurement requirements in IAS 12,
Income Taxes, when there is uncertainty over income
tax treatments including, but not limited to, whether
uncertain tax treatments should be considered together
or separately based on which approach better predicts
resolution of the uncertainty. The Company is currently
analyzing the impact of IFRIC 23 on the Company’s
consolidated financial statements.
A C C O U N T I N G S TA N D A R D S
The Company has adopted the amended IFRS
pronouncements listed below as at January 1, 2017,
in accordance with the transitional provisions outlined
in the respective standard.
In January 2016, the IASB issued amendments to IAS 7,
Statement of Cash Flows. The amendments require an entity
to provide disclosures that enable the users of the financial
statements to evaluate changes in liabilities arising from
financing activities, including both cash arising from cash
flows and non-cash changes. As at January 1, 2017, the
Company adopted the amendments.
10. 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, 2018
which provides information on the risk factors facing the
Company. The March 28, 2018 AIF can be found online at
www.sedar.com.
S E N S I T I V I T Y T O G E N E R A L E C O N O M I C C O N D I T I O N S
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. Weakness in sales or consumer
confidence could result in an increasingly challenging
operating environment.
22
MANAGEMENT’S DISCUSSION & ANALYSISLEON’S FURNITURE LIMITED M A I N TA I N I N G P R O F I TA B I L I T Y & M A N A G I N G G R O W T H
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
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.
F I N A N C I A L C O N D I T I O N O F C O M M E R C I A L S A L E S
C U S T O M E R S & F R A N C H I S E E S
Through its commercial sales division, the Company sells
products and extends credit to high-rise 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.
C O M P E T I T I O N
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, (iv) ecommerce entities, and (v) 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.
11. 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, 2017.
Internal Controls over Financial Reporting
Management is also responsible for establishing and
maintaining disclosure controls and procedures and internal
controls over financial reporting for the Company. The control
framework used in the design of disclosure controls and
procedures and internal control over financial reporting is
based on the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission in
Internal Control-Integrated Framework (2013).
Management, including the CEO and CFO, does not expect
that the Company’s disclosure controls or internal controls
over financial reporting will prevent or detect all errors and all
fraud or will be effective under all potential future conditions.
A control system is subject to inherent limitations and, no
matter how well designed and operated, can provide only
reasonable, not absolute, assurance that the control systems
objectives will be met.
During the year ended December 31, 2017, there have been
no changes in the Company’s internal controls over financial
reporting that have materially affected, or are reasonably
likely to materially affect, the Company’s internal controls
over financial reporting.
23
MANAGEMENT’S DISCUSSION & ANALYSISANNUAL REPORT 2017 M A N A G E M E N T ’ S R E S P O N S I B I L I T Y F O R F I N A N C I A L R E P O R T I N G
Management’s Responsibility
for Financial Reporting
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”
“Constantine Pefanis”
Terrence T. Leon
CEO
Constantine Pefanis
CFO
24
LEON’S FURNITURE LIMITED I N D E P E N D E N T A U D I T O R S ’ R E P O R T
Independent
Auditors’ Report
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, 2017 and 2016, 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, 2017 and 2016, and its financial performance
and its cash flows for the years then ended in accordance
with International Financial Reporting Standards.
“Ernst & Young LLP”
Chartered Professional Accountants
Licensed Public Accountants
Toronto, Canada
February 22, 2018
25
ANNUAL REPORT 2017 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 recoverable
Inventories (note 6)
Deferred acquisition costs (note 7)
Deferred financing costs
Prepaid expenses and other assets
Total current 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)
Other liabilities
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 (loss)
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
26
“Peter Eby”
Peter Eby
Director
As at
December 31
As at
December 31
2017
2016
$
36,207
13,778
67,327
138,516
2,042
317,914
5,841
541
6,382
$
43,985
16,600
39,079
128,142
2,042
308,801
7,643
775
8,225
$
588,548
$
555,292
14,632
336,748
17,529
306,286
390,120
7,592
13,128
315,500
17,984
311,464
390,120
8,174
$ 1,661,455
$
1,611,662
$
234,478
8,791
7,517
128,078
1,421
9,140
24,979
–
5,434
$
214,838
5,468
12,641
117,990
1,421
7,183
39,839
25,000
2,124
$
419,838
$
426,504
194,439
48,004
9,053
122,773
157
10,791
83,352
214,436
93,520
10,474
105,289
503
11,380
90,003
$
888,407
$
952,109
$
93,392
3,555
674,883
1,218
$
39,184
7,089
613,426
(146)
$
773,048
$
659,553
$ 1,661,455
$
1,611,662
CONSOLIDATED FINANCIAL STATEMENTSLEON’S FURNITURE LIMITED
Consolidated statements of income
($ in thousands, except share amounts and earnings per share)
Revenue (note 17)
Cost of sales (note 6)
Gross profit
Operating expenses
Selling, general and administration expenses (note 18)
Operating profit
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.
Year ended
December 31
Year ended
December 31
2017
2016
$ 2,212,216
1,261,112
$
2,143,736
1,228,499
$
951,104
$
915,237
809,173
141,931
(10,502)
131,429
34,836
786,568
128,669
(14,481)
114,188
30,597
$
96,593
$
83,591
72,904,130
82,912,983
71,695,955
83,081,832
$
$
$
$
1.32
1.20
0.48
0.23
$
$
$
$
1.17
1.05
0.40
0.20
27
CONSOLIDATED FINANCIAL STATEMENTSANNUAL REPORT 2017
Consolidated statements of comprehensive income
($ in thousands)
Net income for the year
Other comprehensive income, net of tax
Other comprehensive income (loss) to be reclassified to profit and 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
2017
Tax effect
Year ended
December 31
Net of tax
2017
$
96,593
$
–
$
96,593
1,776
(141)
310
(39)
1,466
(102)
arising during the year
Comprehensive income for the year
1,635
271
1,364
$
98,228
$
271
$
97,957
($ in thousands)
Net income for the year
Other comprehensive loss, net of tax
Other comprehensive income (loss) to be reclassified to profit and 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 losses on available-for-sale financial assets
2016
Tax effect
Year ended
December 31
Net of tax
2016
$
83,591
$
–
$
83,591
280
(946)
113
(235)
167
(711)
arising during the year
Comprehensive income for the year
(666)
(122)
(544)
$
82,925
$
(122)
$
83,047
The accompanying notes are an integral part of these consolidated financial statements.
28
CONSOLIDATED FINANCIAL STATEMENTSLEON’S FURNITURE LIMITED
Consolidated statements of changes in shareholders’ equity
($ in thousands)
As at December 31, 2016
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)
Convertible debentures (note 14)
Total transactions with shareholders
Equity component
of convertible
debentures
Common
shares
Accumulated other
comprehensive
income (loss)
Retained
earnings
Total
$
7,089
$
39,184
$
(146)
$ 613,426
$
659,553
–
–
–
–
–
–
–
–
–
(3,534)
(3,534)
4,350
49,858
54,208
–
96,593
96,593
1,364
1,364
–
96,593
1,364
97,957
–
–
–
–
(35,136)
(35,136)
–
–
(35,136)
4,350
46,324
15,538
As at December 31, 2017
$
3,555
$
93,392
$
1,218
$
674,883
$
773,048
($ in thousands)
As at December 31, 2015
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
Common
shares
Accumulated other
comprehensive
income (loss)
Retained
earnings
Total
$
7,089
$
34,389
$
398
$
558,526
$
600,402
–
–
–
–
–
–
–
–
–
–
4,795
4,795
–
83,591
83,591
(544)
(544)
–
83,591
(544)
83,047
–
–
–
(28,691)
(28,691)
–
(28,691)
4,795
(23,896)
As at December 31, 2016
$
7,089
$
39,184
$
(146)
$
613,426
$
659,553
The accompanying notes are an integral part of these consolidated financial statements.
29
CONSOLIDATED FINANCIAL STATEMENTSANNUAL REPORT 2017
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
Loss (gain) on sale of property, plant and equipment and intangible assets
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
Year ended
December 31
Year ended
December 31
2017
2016
$
96,593
$
83,591
33,231
6,325
(58,771)
10,502
(6,043)
286
123
82,246
12,962
61,395
$
$
33,802
7,433
(59,118)
14,481
(4,945)
(28)
(897)
74,319
31,238
59,091
Cash provided by operating activities
$
156,603
$
164,648
INVESTING ACTIVITIES
Purchase of property, plant and equipment (notes 8 and 9)
Purchase of intangible assets (note 10)
Proceeds on sale of property, plant and equipment and intangible assets
Purchase of available-for-sale financial assets
Proceeds on sale of available-for-sale financial assets
Interest received
(55,041)
(1,164)
748
(53,530)
29,639
1,325
(25,689)
(683)
145
(29,981)
16,184
1,717
Cash used in investing activities
$
(78,023)
$
(38,307)
FINANCING ACTIVITIES
Repayment of finance leases
Dividends paid
Decrease of employee loans-redeemable shares (note 15)
Repayment of term loan (note 14)
Finance costs paid
Interest paid
Cash used in financing activities
Net (decrease) increase in cash and cash equivalents during the year
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
The accompanying notes are an integral part of these consolidated financial statements.
(1,346)
(33,179)
4,004
(45,000)
(56)
(10,781)
(1,884)
(28,649)
4,418
(50,000)
(775)
(13,325)
$
(86,358)
$
(90,215)
(7,778)
43,985
36,126
7,859
$
36,207
$
43,985
30
CONSOLIDATED FINANCIAL STATEMENTSLEON’S FURNITURE LIMITED
N O T E S T O T H E C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S
Notes to the Consolidated
Financial Statements
(Amounts in thousands of Canadian dollars, except share amounts and earning per share)
1. Reporting entity
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 of the Company are
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 22, 2018.
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.
Functional and presentation currency
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 statement of financial position 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.
Consolidation and classification of joint arrangements
Assessing the Company’s ability to control or influence the
relevant financial and operating policies of another entity
may, depending on the facts and circumstances, require the
exercise of significant judgment to determine whether the
Company controls, jointly controls, or exercises significant
influence over the entity performing the work. This
assessment of control impacts how the operations of these
entities are reported in the Company’s consolidated financial
statements. The classification of these entities requires
judgment by management to analyze the various indicators
that determine whether control exists. In particular, when
31
ANNUAL REPORT 2017 assessing whether a joint arrangement should be classified
as either a joint operation or a joint venture, management
considers the contractual rights and obligations, voting
shares, share of board members and the legal structure of
the joint arrangement. Subject to reviewing and assessing all
the facts and circumstances of each joint arrangement,
joint arrangements contracted through agreements and
general partnerships would generally be classified as joint
operations whereas joint arrangements contracted through
corporations would be classified as joint ventures. The
application of different judgments when assessing control
or the classification of joint arrangements could result in
materially different presentations in the consolidated
financial statements.
Extended warranty 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 historical
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 and fixed
income 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
32
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, 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
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSLEON’S FURNITURE LIMITED costs that the Company incurs in connection with a
business combination are expensed in the period in
which they are incurred.
or liability is measured using the assumptions that market
participants would use, assuming that market participants
act in their economic best interest.
Segment reporting
Financial assets and liabilities
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 (gross margin), 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.
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 consolidated
statement of financial position 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
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 rate
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) 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;
(b) 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 that are
classified as fair value through profit or 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
33
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSANNUAL REPORT 2017 (b) Derivative instruments – financial liabilities that are
Trade receivables
classified as fair value through profit or 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.
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 statements of financial position.
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 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 rate 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
Building improvements
30 to 50 years
3 to 30 years
5 to 20 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.
34
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSLEON’S FURNITURE LIMITED 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.
Contingent rental expenses arising under operating leases
are recognized as an expense in the period in which they
are incurred.
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
selling, general and administration 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.
T H E C O M PA N Y A S L E S S E E
F I N A N C E L E A S E
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 rate 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.
O P E R AT I N G L E A S E
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.
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
G O O D W I L L
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.
I N TA N G I B L E A S S E T S
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
35
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSANNUAL REPORT 2017 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:
8 years
Customer relationships
Brand name (Appliance Canada) 10 years
Non-compete agreement
Computer software
Favourable lease agreements
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.
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
36
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 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.
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.
C U R R E N T I N C O M E TA X
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.
D E F E R R E D I N C O M E TA X
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
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSLEON’S FURNITURE LIMITED 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.
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.
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.
U N PA I D I N S U R A N C E C L A I M S
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.
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.
P R O D U C T R E T U R N S
The Company has a return policy allowing customers to
return merchandise if not satisfied within seven 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.
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.
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:
S A L E O F G O O D S A N D R E L AT E D S E R V I C E S
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.
U N PA I D W A R R A N T Y C L A I M S
F R A N C H I S E O P E R AT I O N S
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.
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.
37
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSANNUAL REPORT 2017 I N S U R A N C E C O N T R A C T S A N D R E V E N U E
D E F E R R E D W A R R A N T Y P L A N R E V E N U E
The Company issues insurance contracts through its
subsidiaries: Trans Global Insurance Company (“TGI”) and
Trans Global Life Insurance Company (“TGLI”).
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.
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.
U N E A R N E D I N S U R A N C E R E V E N U E
At each reporting period date, the insurance revenue
received by the Company in regard 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.
38
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.
D E F E R R E D A C Q U I S I T I O N C O S T S
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.
S A L E O F G I F T C A R D S
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.
R E N TA L I N C O M E O N I N V E S T M E N T P R O P E R T I E S
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.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSLEON’S FURNITURE LIMITED 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.
Joint Arrangements
Under IFRS 11, Joint Arrangements, a joint arrangement is a
contractual arrangement wherein two or more parties have
joint control. Joint control is the contractually agreed sharing
of control of an arrangement when the strategic, financial
and operating decisions relating to the arrangement require
the unanimous consent of the parties sharing control.
Investments in joint arrangements are classified as either
joint operations or joint ventures depending on the
contractual rights and obligations of each party. Refer to
note 2, Basis of presentation, for significant judgments
affecting the classification of joint arrangements as either
joint operations or joint ventures. The parties to a joint
operation have rights to the assets, and obligations for the
liabilities, relating to the arrangement whereas joint ventures
have rights to the net assets of the arrangement. In
accordance with IFRS 11, the Company accounts for joint
operations by recognizing its share of any assets held jointly
and any liabilities incurred jointly, along with its share of the
revenue from the sale of the output by the joint operation,
and its expenses, including its share of any expenses
incurred jointly. Transactions with joint operations where the
Company contributes or sells assets to a joint operation, the
Company recognizes only that portion of the gain or loss that
is attributable to the interests of the other parties. Where the
Company purchases assets from a joint operation, the
Company does not recognize its share of the profit or loss
of the joint operation from the transaction until it resells the
assets to an independent party. The Company adjusts
joint operation financial statement amounts, if required,
to reflect consistent accounting policies.
4. Adoption of accounting standards
and amendments
Accounting standards and amendments issued but not
yet adopted
I F R S 9, FI N A N C I A L I N STR U M E NTS ( “ I F R S 9 ” )
In July 2014, the IASB issued the final amendments to
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 intends to adopt the new standard on the
required effective date.
I F R S 15 , R EV E N U E F R O M C O NTR A CTS W ITH C U STO M E R S
( “ I F R S 15 ” )
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 (“IAS 17”); financial instruments and other
contractual rights or obligations within the scope of IFRS 9,
IFRS 10, Consolidated Financial Statements and IFRS 11,
Joint Arrangements. 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.
The Company has continued the process of reviewing
contracts with customers and currently does not expect
material changes to the revenue recognition pattern for retail
sales. The Company is currently in the process of concluding
on the impact of the remaining streams of revenue and
expanded note disclosures.
I F R S 16 , LEA S ES ( “ I F R S 16 ” )
In January 2016, the IASB issued IFRS 16, which will replace
IAS 17. The new standard will be effective for fiscal years
beginning on or after January 1, 2019. Earlier application is
permitted, provided the Company also applies IFRS 15 on or
before the date it first applies IFRS 16. 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
39
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSANNUAL REPORT 2017 of operating leases under the existing standard, there will be
a material increase to both assets and liabilities upon
adoption of the new standard. The Company is currently
analyzing the new standard to determine its impact on the
Company’s consolidated financial statements.
I F R S 17, I N S U R A N C E C O NTR A CTS ( “ I F R S 17 ” )
IFRS 17 was issued in May 2017, which will replace IFRS 4,
Insurance Contracts. IFRS 17 establishes the principles for
the recognition, measurement, presentation and disclosure of
insurance contract liabilities. The new standard is effective
for annual periods beginning on or after January 1, 2021, to
be applied retrospectively. If full retrospective application to a
group of contracts is impractical, the modified retrospective
or fair value methods may be used. Earlier adoption is
permitted, provided the Company also applies IFRS 9 and
IFRS 15 on or before the date it first applies IFRS 17. The
Company is currently analyzing the new standard to
determine its impact on the Company’s consolidated financial
statements, particularly the insurance sales revenue stream.
I F R S I N T E R P R E TAT I O N C O M M I T T E E 2 3 , UN CERTAINTY
OVER IN C O ME TAX TREATMENTS (“IF RI C 23”)
IFRIC 23 was issued in June 2017 and is effective for years
beginning on or after January 1, 2019, to be applied
retrospectively. IFRIC 23 provides guidance on applying the
recognition and measurement requirements in IAS 12,
Income Taxes, when there is uncertainty over income tax
treatments including, but not limited to, whether uncertain
tax treatments should be considered together or separately
based on which approach better predicts resolution of
the uncertainty. The Company is currently analyzing the
impact of IFRIC 23 on the Company’s consolidated
financial statements.
Adoption of new, revised amended accounting standards
The Company has adopted the amended IFRS
pronouncements listed below as at January 1, 2017, in
accordance with the transitional provisions outlined in the
respective standard.
In January 2016, the IASB issued amendments to IAS 7,
Statement of Cash Flows. The amendments require an entity
to provide disclosures that enable the users of the financial
statements to evaluate changes in liabilities arising from
financing activities, including both cash arising from cash
flows and non-cash changes. As at January 1, 2017, the
Company adopted the amendments. Refer to note 26 for the
additional disclosures.
5. Cash and cash equivalents
As at December 31
2017
2016
Cash at bank and on hand
$ 36,207
$
43,985
6. Inventories
The amount of inventory recognized as an expense for
the year ended December 31, 2017 was $1,212,951
(2016 – $1,186,850), which is presented within cost of
sales in the consolidated statements of income.
There was $1,171 in inventory write-downs (2016 – $550)
recognized as an expense during 2017. As at
December 31, 2017, the inventory markdown provision
totalled $9,165 (2016 – $7,993).
7. Deferred acquisition costs
Balance as at December 31, 2015
Costs of new policies sold
Policy sales costs recognized
Balance as at December 31, 2016
Cost of new policies sold
Policy sales costs recognized
$
21,422
5,360
(6,011)
20,771
6,885
(7,183)
Balance as at December 31, 2017
$ 20,473
Reported as:
Current
Non-current
Balance as at December 31, 2016
Current
Non-current
7,643
13,128
20,771
5,841
14,632
Balance as at December 31, 2017
$ 20,473
40
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSLEON’S FURNITURE LIMITED
8. Property, plant and equipment
As at December 31, 2017:
Opening net book value
Additions
Disposals
Depreciation
Closing net book value
As at December 31, 2017:
Cost
Accumulated depreciation
Net book value
As at December 31, 2016:
Opening net book value
Additions
Disposals
Depreciation
Closing net book value
As at December 31, 2016
Cost
Accumulated depreciation
Net book value
Land
Buildings
Equipment
Building
Vehicles improvements
Leased
property
Leased
equipment
Total
86,254
16,737
–
–
105,670
15,634
–
(6,140)
41,771
11,343
(1,005)
(9,314)
20,307
6,567
(12)
(4,531)
52,694
4,760
–
(11,299)
102,991
115,164
42,795
22,331
46,155
8,385
–
–
(1,131)
7,254
419
–
–
(361)
315,500
55,041
(1,017)
(32,776)
58
336,748
102,991
–
255,531
(140,367)
152,093
(109,298)
46,217
(23,886)
230,490
(184,335)
20,766
(13,512)
10,464
(10,406)
818,552
(481,804)
102,991
115,164
42,795
22,331
46,155
7,254
58
336,748
Land
Buildings
Equipment
Building
Vehicles improvements
Leased
property
Leased
equipment
Total
85,051
1,203
–
–
110,996
523
–
(5,849)
86,254
105,670
41,818
9,279
(101)
(9,225)
41,771
14,738
8,816
(14)
(3,233)
20,307
60,066
5,595
(2)
(12,965)
52,694
9,516
–
–
(1,131)
8,385
1,033
273
–
(887)
323,218
25,689
(117)
(33,290)
419
315,500
86,254
–
239,897
(134,227)
144,208
(102,437)
40,432
(20,125)
227,154
(174,460)
20,766
(12,381)
11,611
(11,192)
770,322
(454,822)
86,254
105,670
41,771
20,307
52,694
8,385
419
315,500
Included in the above balances as at December 31, 2017 are assets not being amortized with a net book value of
approximately $257 (2016 – $437) being construction in progress. Also included are fully depreciated assets still in use
with a cost of $204,951 (2016 – $178,949).
9. Investment properties
As at December 31, 2017:
Opening net book value
Additions
Depreciation
Closing net book value
As at December 31, 2017:
Cost
Accumulated depreciation
Net book value
As at December 31, 2016:
Opening net book value
Additions
Depreciation
Closing net book value
As at December 31, 2016:
Cost
Accumulated depreciation
Net book value
Land
Buildings
Building
improvements
$
$
$
10,946
–
–
10,946
10,946
–
10,946
10,946
–
–
10,946
10,946
–
$
$
$
$
$
$
6,257
–
(378)
5,879
17,333
(11,454)
5,879
6,692
–
(435)
6,257
17,333
(11,076)
$
$
$
781
–
(77)
704
1,097
(393)
704
858
–
(77)
781
1,097
(316)
Total
17,984
–
(455)
17,529
29,376
(11,847)
17,529
18,496
–
(512)
17,984
29,376
(11,392)
$
10,946
$
6,257
$
781
$
17,984
The estimated fair value of the investment properties portfolio
as at December 31, 2017 was approximately $44,800
(2016 – $44,800). This recurring fair value disclosure 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.
41
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSANNUAL REPORT 2017
10. Intangible assets
As at December 31, 2017:
Opening net book value
Additions
Disposals
Amortization
Closing net book value
As at December 31, 2017:
Cost
Accumulated amortization
Net book value
As at December 31, 2016:
Opening net book value
Additions
Amortization
Closing net book value
As at December 31, 2016:
Cost
Accumulated amortization
Customer
relationships
Brand name
and franchise
agreements
Computer software
Favourable
lease
agreements
$
$
$
$
$
$
$
$
$
2,656
–
–
(625)
2,031
$
266,250
–
–
(250)
266,000
7,000
(4,969)
268,500
(2,500)
2,031
$
266,000
3,281
–
(625)
2,656
7,000
(4,344)
$
266,500
–
(250)
266,250
268,500
(2,250)
11,120
1,164
(17)
(2,780)
9,487
17,320
(7,833)
9,487
13,957
683
(3,520)
11,120
24,002
(12,882)
Total
311,464
1,164
(17)
(6,325)
306,286
338,869
(32,583)
$
31,438
–
–
(2,670)
28,768
46,049
(17,281)
28,768
$
306,286
34,476
–
(3,038)
31,438
46,049
(14,611)
$
318,214
683
(7,433)
311,464
345,551
(34,087)
Net book value
$
2,656
$
266,250
$
11,120
$
31,438
$
311,464
Amortization of intangible assets is included within selling, general and administration expenses on the consolidated
statements of income. 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,
2017
$
245,000
21,000
$
266,000
$
$
2016
245,000
21,000
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 and without significant cost. The Company expects the franchise agreements
and franchise locations will generate cash flows over an indefinite future period. Therefore, these assets are also considered to
have indefinite useful lives.
The following table presents the details of the Company’s finite-life intangible assets:
Leon’s division brand name
Brick division customer relationships
Brick division favourable lease agreements
Computer software
As at December 31,
$
2017
–
2,031
28,767
9,488
$
$
40,286
$
2016
250
2,656
31,438
11,120
45,464
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
42
As at December 31,
2017
$
11,282
378,838
$
2016
11,282
378,838
$
390,120
$
390,120
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSLEON’S FURNITURE LIMITED
Impairment tests
The Company performed impairment tests of goodwill, brand and franchise agreements intangible as at December 31, 2017
and December 31, 2016 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, 2017
and December 31, 2016 were as follows:
Growth rate
Pre-tax discount rate
2017
2.0%
9.4%
2016
2.0%
8.9%
The impairment tests performed resulted in no impairment of the goodwill as at December 31, 2017 and December 31, 2016.
11. Trade and other payables
Trade payables
Other payables
12. Provisions
2017
$
200,568
33,910
$
234,478
As at December 31,
$
$
$
2016
185,927
28,911
214,838
Total
5,468
4,546
(1,223)
Unpaid
insurance claims
Unpaid
warranty claims
Balance as at December 31, 2016
Provisions made during the year
Provisions used during the year
$
$
1,525
1,181
(1,011)
$
279
2,017
–
Product
returns
2,025
268
(212)
$
Other
1,639
1,080
–
Balance as at December 31, 2017
$
1,695
$
2,296
$
2,081
$
2,719
$
8,791
Unpaid insurance claims
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.
Product returns
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 term 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.
43
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSANNUAL REPORT 2017
Finance lease liabilities
Finance lease liabilities are payable as follows:
2017
2016
Future
minimum
lease
payments
Present value
Future
of minimum minimum
lease
payments
lease
payments
Interest
Present value
of minimum
lease
payments
Interest
Less than one year
Between one and five years
More than five years
Reported as:
Current
Non-current
$
1,848
7,670
2,729
$
574
1,153
46
$
1,274
6,517
2,683
$
$
2,086
7,592
4,655
12,247
1,773
10,474
14,333
$
665
1,675
98
2,438
1,421
9,053
$ 10,474
1,421
5,917
4,557
11,895
1,421
10,474
$ 11,895
14. Loans and borrowings
Convertible debentures
On March 28, 2013 (the “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 (the
“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 to their contractual face value of
$50,142 through a charge to net income over their term.
This charge will be included in finance costs.
During the year ended December 31, 2017, a portion of the
convertible debentures with a stated value of $49,858,000
was converted to 3,945,113 common shares, at the holder’s
option (year ended December 31, 2016 – $nil converted to
nil common shares).
Carrying value of convertible debentures as at December 31, 2015
Accretion expense for the year ended December 31, 2016
Carrying value of convertible debentures as at December 31, 2016
Accretion expense for the year ended December 31, 2017
Conversion of convertible debentures for the year ended December 31, 2017
Carrying value of convertible debentures as at December 31, 2017
$
92,628
892
93,520
808
(46,324)
$
48,004
The effective interest rate for the convertible debentures is 4.2% and includes accretion expense and semi-annual
coupon payments.
Bank indebtedness
On January 31, 2013, a Senior Secured Credit Agreement
(“SSCA”) was obtained to fund the acquisition of The Brick.
The Company completed an amendment to the existing SSCA
on November 25, 2016. After giving effect to the amendment,
the total credit facility was reduced from $500,000 to
$300,000 with the term credit facility being reduced from
$400,000 to $250,000 and the revolving credit facility being
reduced from $100,000 to $50,000. The revolving credit
facility continues to include a swing-line of $20,000. Under
the terms of the SSCA amounts borrowed must be repaid in
full by November 25, 2019. 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
44
costs in the amount of $775 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 33-day BA with a cost of borrowing of 3.14%
that was renewed on December 29, 2017. The term credit
facility is repayable in yearly amounts of $25,000 commencing
on December 31, 2017. 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 and non-
financial covenants related to the credit facility.
As at December 31, 2017, the Company is in full compliance
of these financial and non-financial covenants.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSLEON’S FURNITURE LIMITED
15. Redeemable share liability
Authorized
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
367,565 series 2009 shares (December 31, 2016 – 480,088)
139,820 series 2012 shares (December 31, 2016 – 228,936)
948,206 series 2013 shares (December 31, 2016 – 1,093,783)
545,865 series 2014 shares (December 31, 2016 – 623,188)
735,519 series 2015 shares (December 31, 2016 – 795,000)
Less employee share purchase loans
As at December 31,
2017
2016
$
$
3,254
1,735
10,800
8,215
9,900
(33,747)
4,249
2,841
12,458
9,379
10,701
(39,125)
$
157
$
503
Under the terms of the Plan, the Company advanced non-
interest bearing loans to certain of its employees in 2009,
2012, 2013, 2014 and 2015 to allow them to acquire
convertible, non-voting series 2009 shares, series 2012
shares, series 2013 shares, 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 shares series 2009
and series 2012 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 series
2015 shares 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 2009, series 2012, series 2013, series 2014 and
series 2015 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 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 series 2015 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 $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 2009, 2012, 2013, 2014
and 2015 shares of approximately $643 (2016 – $598)
have been used to reduce the respective shareholder loans.
The preferred dividends are paid once a year during the
first quarter.
During the year ended December 31, 2017, 112,523 series
2009 shares, 89,116 series 2012 shares, 145,577 series
2013 shares, 48,507 series 2014 shares and 25,000 series
2015 shares (year ended December 31, 2016 – 138,928
series 2009 shares, nil series 2012 shares, 312,989 series
2013 shares, nil series 2014 shares and nil series 2015
shares) were converted and/or surrendered into common
shares with a stated value of approximately $995, $1,106,
$1,658, $730 and $337, respectively (year ended
December 31, 2016 – $1,229, $nil, $3,566, $nil and $nil).
During the year ended December 31, 2017, the Company
cancelled nil series 2012 shares, 28,816 series 2014 shares
and 34,481 series 2015 shares (year ended December 31,
2016 – 4,680 series 2012 shares, 116,812 series 2014
shares and 85,000 series 2015 shares), in the amount of
$nil, $434 and $464, respectively (year ended December 31,
2016 – $58, $1,758 and $1,144).
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.
45
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSANNUAL REPORT 2017
16. Common shares
Authorized – Unlimited common shares
Issued – 76,188,143 common shares (2016 – 71,855,866)
During the year ended December 31, 2017, 112,523 series
2009 shares, 89,116 series 2012 shares, 145,577 series
2013 shares, 32,876 series 2014 shares and 7,072 series
2015 shares (year ended December 31, 2016 – 138,928
series 2009 shares, nil series 2012 shares, 312,989 series
2013 shares, nil series 2014 shares and nil series 2015
shares) were converted into common shares with a stated
value of approximately $995, $1,106, $1,658, $495 and
$95, respectively (year ended December 31, 2016 – $1,229,
$nil, $3,566, $nil and $nil).
As at December 31,
2017
2016
$
93,392
$
39,184
During the year ended December 31, 2017, a portion of the
convertible debentures with a stated value of $49,858,000
was converted to 3,945,113 common shares, at the holder’s
option (year ended December 31, 2016 – $nil converted to
nil common shares).
As at December 31, 2017, the dividends payable were
$9,140 [$0.12 per share] and as at December 31, 2016
were $7,183 [$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
Salaries and benefits
Depreciation of property, plant and equipment and investment properties
Amortization of intangible assets
Operating lease payments
19. Net finance costs
Interest expense on finance lease obligations
Interest expense on term credit facility and revolving credit facility
Interest expense on convertible debentures
Finance income
Year ended December 31
2017
2016
$ 2,132,153
25,548
42,785
10,393
1,337
$ 2,060,563
23,748
47,771
10,193
1,461
$ 2,212,216
$ 2,143,736
$
$
$
$
$
Year ended December 31
2017
373,536
33,231
6,325
99,944
2016
358,505
33,802
7,433
94,044
$
$
$
$
Year ended December 31
$
2017
667
7,770
3,515
(1,450)
2016
786
12,349
3,891
(2,545)
Total
$
10,502
$
14,481
46
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSLEON’S FURNITURE LIMITED
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
2017
2016
Current income tax expense:
Based on taxable income of the current year
Deferred income tax expense:
Origination and reversal of temporary differences
Impact of change in tax rates/new tax laws
$
40,879
40,879
(6,043)
–
(6,043)
$
35,542
35,542
(4,945)
–
(4,945)
Income tax expense reported in the consolidated
statements of income
$
34,836
$
30,597
(b) Reconciliation of the effective tax rates are as follows:
Income before income taxes
2017
$
131,429
2016
$
114,189
Income tax expense based on statutory tax rate
35,105
26.71%
30,510
26.72%
Increase (decrease) in income taxes resulting from
non-taxable items or adjustments of prior year taxes:
Non-deductible items
Non-taxable portion of capital gain
Tax expense relating to deferred rate reductions
File/provided differences
Remeasurement of deferred income tax asset
for rate changes
Income exempt from tax
Other
Income tax expense reported in the
consolidated statements of income
843
(8)
79
66
49
(187)
(1,111)
0.64%
(0.01%)
0.06%
0.05%
0.04%
(0.14%)
(0.84%)
725
(7)
66
(485)
(18)
(137)
(57)
0.63%
(0.00%)
0.06%
(0.42%)
(0.02%)
(0.12%)
(0.05%)
$
34,836
26.51%
$
30,597
26.80%
(c) Deferred income tax balances and reconciliation are as follows:
(i) Deferred income tax relates to the following:
Deferred income tax assets (liabilities)
Deferred tax income assets
Deferred tax income liabilities
Total deferred income tax assets (liabilities)
December 31,
2017
$
7,592
(83,352)
$
(75,760)
December 31,
2016
$
$
8,174
(90,003)
(81,829)
47
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSANNUAL REPORT 2017
(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
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
1,781
354
962
(17,395)
(77,178)
2,125
3,170
58
6,274
576
(79,273)
(2,556)
(2,556)
$
2017
Consolidated
Balance,
end of year
849
110
57
(15,252)
(76,778)
2,050
2,806
41
10,182
1,457
(74,478)
(1,282)
(1,282)
Expense
(benefit)
(932)
(244)
(905)
2,143
400
(75)
(364)
(17)
3,882
881
4,769
1,274
1,274
$
Other
–
–
–
–
–
–
–
–
26
–
26
–
–
Total deferred income tax expense (benefit)
$
(81,829)
$
26
$
6,043
$
(75,760)
Deferred warranty plan
Deferred financing fees
Deferred acquisition costs
Property, plant and equipment
Intangible assets
Deferred rent liabilities
Finance lease liabilities
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
1,524
(80)
2,668
(18,519)
(77,584)
1,632
3,692
79
2,308
(143)
(84,423)
(2,556)
(2,556)
$
2016
Consolidated
Balance,
end of year
1,781
354
962
(17,395)
(77,178)
2,125
3,170
58
6,274
576
(79,273)
(2,556)
(2,556)
Expense
(benefit)
257
434
(1,706)
1,124
406
493
(522)
(21)
3,761
719
4,945
–
–
$
Other
–
–
–
–
–
–
–
–
205
–
205
–
–
Total deferred income tax expense (benefit)
$
(86,979)
$
205
$
4,945
$
(81,829)
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 72,904,130 for
the year ended December 31, 2017 [2016 – 71,695,955].
The following table reconciles the net income for the year
and the number of shares for the basic and diluted earnings
per share calculations:
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
48
Year ended December 31
2017
$
96,593
$
99,638
2016
83,591
86,924
72,904,130
71,695,955
10,008,853
11,385,877
82,912,983
83,081,832
$
$
1.32
1.20
$
$
1.17
1.05
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSLEON’S FURNITURE LIMITED
22. Financial instruments
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.
December 31, 2017:
Loans and receivables
Cash and cash equivalents
Trade receivables
Available-for-sale
Restricted marketable securities
Available-for-sale financial assets
Investment properties
Other financial liabilities
Trade and other payables
Provisions
Customers’ deposits
Finance lease liabilities
Loans and borrowings
Convertible debentures
Redeemable share liability
Derivative instruments
Other liabilities
December 31, 2016:
Loans and receivables
Cash and cash equivalents
Trade receivables
Available-for-sale
Restricted marketable securities
Available-for-sale financial assets
Investment properties
Other financial liabilities
Trade and other payables
Provisions
Customers’ deposits
Finance lease liabilities
Loans and borrowings
Convertible debentures
Redeemable share liability
Derivative instruments
Other liabilities
Measurement
Total carrying
amount
Fair value
Amortized cost
Fair value
Fair value
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
$
$
$
36,207
138,516
13,778
67,327
17,529
234,478
8,791
128,078
10,474
194,439
48,004
157
$
$
$
Fair value
36,207
138,516
13,778
67,327
44,800
234,478
8,791
128,078
10,474
194,439
73,453
157
Fair value
hierarchy
Level 1
Level 2
Level 1
Level 2
Level 3
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
Fair value
$
5,434
$
5,434
Level 2
Measurement
Total carrying
amount
Fair value
Amortized cost
Fair value
Fair value
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
$
$
$
43,985
128,142
16,600
39,079
17,984
214,838
5,468
117,990
11,895
239,436
93,520
503
$
$
$
Fair value
43,985
128,142
16,600
39,079
44,800
214,838
5,468
117,990
11,895
239,436
140,000
503
Fair value
hierarchy
Level 1
Level 2
Level 1
Level 2
Level 3
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
Fair value
$
2,124
$
2,124
Level 2
The fair value hierarchy of financial instruments measured at
fair value, as at December 31, 2017 includes financial assets
of $49,985, $205,843 and $44,800 for Levels 1, 2 and 3
respectively, and financial liabilities of $nil, $655,304 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.
49
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSANNUAL REPORT 2017
As at December 31, 2017, the fair value of the convertible
debentures was determined using their closing quoted
market price (not in thousands of dollars) of $146.49 per
$100.00 of face value (2016 – $140.00 per $100.00 of face
value). For the convertible debentures as at December
31, 2017, fair value is calculated based on the face value of
the convertible debentures of $50,142.
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 (2016 –
$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 a one-month BA rate. The Company also
maintains other financial derivatives which comprise of
foreign exchange forwards, with maturities that do not exceed
past the second quarter of 2019. As at December 31, 2017,
a $5,434 unrealized loss was recorded in other liabilities
(2016 – $2,124).
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 risk, 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.
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
December 31,
2017
December 31,
2016
$
36,207
13,778
67,327
138,516
$
43,985
16,600
39,079
128,142
$
255,828
$
227,806
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
50
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSLEON’S FURNITURE LIMITED
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, 2017, 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
totalled $138,516 as at December 31, 2017 [2016 –
$128,142]. 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 $3,965 as
at December 31, 2017 [2016 – $6,412]. The Company’s
provision for impairment of trade receivables, established
through ongoing monitoring of individual customer accounts,
was $2,281 as at December 31, 2017 [2016 – $2,539].
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.
L I Q U I D I T Y R I S K
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.
The following tables summarize the Company’s contractual maturity for its financial liabilities, including both principal and
interest payments:
As at December 31, 2017:
Trade and other payables
Finance lease liabilities
Loans and borrowings
Convertible debentures
Redeemable share liability
As at December 31, 2016:
Trade and other payables
Finance lease liabilities
Loans and borrowings
Convertible debentures
Redeemable share liability
Carrying Contractual
amount cash flows
Under
1 year 1–3 years 3–5 years
More than
5 years
Remaining term to maturity
$ 234,478
10,474
194,439
48,004
157
$ 234,478
12,247
201,488
58,015
157
$ 234,478
1,848
6,125
1,504
–
$
–
3,817
195,363
3,008
–
$
–
3,853
–
3,008
–
$
–
2,729
–
50,495
157
$ 487,552
$ 506,385
$ 243,955
$ 202,188
$
6,861
$ 53,381
Carrying Contractual
amount cash flows
Under
1 year
1–3 years
3–5 years
More than
5 years
Remaining term to maturity
$ 214,838
11,895
239,436
93,520
503
$ 214,838
14,333
256,782
118,707
503
$ 214,838
2,086
31,437
3,000
–
$
–
3,739
225,345
6,000
–
$
–
3,853
–
6,000
–
$
–
4,655
–
103,707
503
$ 560,192
$ 605,163
$ 251,361
$ 235,084
$
9,853
$ 108,865
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.
51
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSANNUAL REPORT 2017
Market risk
(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
(loss) 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
(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 per occurrence.
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 )
I N T E R E S T R AT E S E N S I T I V I T Y A N A LY S I S
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,
2017, the Company’s average indebtedness under the
term credit facility was $217,500 [2016 – $265,000]
and under the revolving credit facility was $3,143 [2016
– $7,500]. Accordingly, a change during the year ended
December 31, 2017 of a one percentage point increase
or decrease in the applicable interest rate would have
impacted the Company’s net income by approximately
$1,609 [2016 – $2,000].
(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.
52
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSLEON’S FURNITURE LIMITED
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 facility (note 14). As at December 31, 2017, $49,351 is
available to draw on under our $50,000 revolving credit
facility, as the borrowing capacity is reduced by ordinary
letters of credit of $649 primarily with respect to buildings
under construction or being completed (2016 – $469).
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
As at December 31,
$
2017
1,421
–
48,004
9,053
194,439
773,048
$
2016
1,421
25,000
93,520
10,474
214,436
659,553
$ 1,025,965
$ 1,004,404
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, 2017.
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. 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.
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, 2017, TGI’s
Minimum Capital Test ratio was 541% [2016 – 494%], which
is in compliance with the requirements of The Office of the
Superintendent of Insurance of Alberta and the Act. As at
December 31, 2017, TGLI’s Minimum Continuing Capital and
Surplus Requirements ratio was 656% [2016 – 655%],
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
$
87,120
245,091
121,696
$ 453,907
(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
$
1,371
3,500
3,211
$
8,082
53
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSANNUAL REPORT 2017
(c) Pursuant to a reinsurance agreement relating to the
extended warranty sales, the Company has pledged
available-for-sale financial assets amounting to
$13,778 [2016 – $16,600].
(d) 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.
26. Consolidated statements of cash flows
(a) The net change in non-cash working capital balances
related to operations consists of the following:
Year ended December 31
2017
2016
Trade receivables
Inventories
Prepaid expenses and other assets
Trade and other payables
Income taxes recoverable (payable)
Customers’ deposits
Provisions
Deferred acquisition costs
Other liabilities
Deferred rent liabilities and
$ (10,374)
(9,113)
1,843
19,597
(5,421)
10,088
3,323
298
3,310
$
(10,310)
(4,840)
(2,011)
651
9,264
125
28,169
5,544
2,124
lease inducements
(589)
2,522
$ 12,962
$ 31,238
(b) Supplemental cash flow information:
Income taxes paid
$ 48,631
$ 31,100
Year ended December 31
2017
2016
(c) Changes in liabilities arising from financing activities comprise the following:
Opening balance
Cash changes:
Long-term debt repayment
Finance lease obligation repayment
Finance costs
Non-cash changes
Conversion of debenture
Amortization
Accretion
Closing balance
Convertible
Debentures
(including
equity component)
Finance
Lease
Loans and
borrowings
$
100,609
$
11,895
$
239,436
–
–
–
(49,858)
808
–
–
(1,346)
–
–
–
(75)
(45,000)
–
3
–
–
–
$
51,559
$
10,474
$
194,439
27. Related party transactions
Key management compensation
Balances and transactions between the Company and its
subsidiaries, which are related parties of the Company, have
been eliminated on consolidation.
On January 31, 2017, the Company completed a transaction
with The Beedie Development Group (“Beedie”) to purchase
an undivided 50% ownership interest in 23.49 acres of land
in Delta, British Columbia that was developed by the
Company and Beedie, during 2017, into an approximately
432,000 square foot distribution centre that is now occupied
by the Company. The Company has accounted for this
transaction as a joint operation, “Beedie/Leon’s Delta-Link
Joint Venture.”
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
2017
2016
Salaries and other
employee benefits
$
6,953
$
6,215
54
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSLEON’S FURNITURE LIMITED
Corporate &
Shareholder Information
Officers
Mark J. Leon
Chairman of the Board
Terrence T. Leon
CEO
Edward F. Leon
President and COO
Constantine Pefanis
CFO
John A. Cooney
Vice President, Legal and
Corporate Secretary
Board of Directors
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
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Corporate Office
45 Gordon Mackay Road
Toronto, Ontario M9N 3X3
(416) 243-7880
Auditors
Ernst & Young LLP
Toronto
Registrar and Transfer Agent
AST Trust Company (Canada)
Listing
Leon’s shares are listed on the Toronto
Stock Exchange
Ticker Symbol is LNF
Annual General Meeting
Thursday, May 10, 2018, 2:00PM
Fairmont Royal York
100 Front Street West
Toronto, Ontario
M5J 1E3
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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.ca