Young at Heart
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Our customers can find everything that we have to 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
LEON'S FURNITURE LIMITED ("LFL GROUP")
2018 ANNUAL REPORT
Corporate &
Shareholder Information
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
OFFICERS
Mark J. Leon
CORPORATE OFFICE
45 Gordon Mackay Road
Chairman of the Board
Toronto, Ontario M9N 3X3
Terrence T. Leon
Vice Chairman
Edward F. Leon
President and CEO
Constantine Pefanis
CFO
John A. Cooney
(416) 243-7880
AUDITORS
Ernst & Young LLP Toronto
REGISTRAR AND
TRANSFER AGENT
AST Trust Company (Canada)
Vice President, Legal and
LISTING
Corporate Secretary
Leon’s common shares are listed
on the Toronto Stock Exchange
Ticker Symbol is LNF
ANNUAL GENERAL MEETING
Wednesday, April 17, 2019, 2:00PM
Fairmont Royal York
100 Front Street West
Toronto, Ontario
M5J 1E3
After 109 years in business, Canada's largest retailer of furniture,
mattresses, appliances and home electronics is still very much
young at heart. This year's report describes some of the innovative
initiatives underway to stay close to our customers and create more
value in the years ahead.
FINANCIAL HIGHLIGHTS
Revenue
Net Income
Shareholder’s Equity
1.2%
14.9%
10.9%
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
2018
$ 2,241,437,000
150,590,000
111,030,000
182,074,000
38,166,000
2017
$ 2,215,379,000
131,429,000
96,593,000
156,603,000
33,179,000
$
$
1.45
2.38
0.52
11.23
1.32
2.15
0.48
10.60
%
Change
1.2%
14.6%
14.9%
16.3%
15.0%
9.8%
10.7%
8.3%
5.9%
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YO UNG AT HE ART
LFL Group’s unrivalled store and distribution networks provide a
strong foundation for five strategic growth opportunities that will
augment revenue and earnings growth.
1
EDWARD F. LEON
2018 was another year of progress for LFL Group. We posted
record financial results in a challenging economic environment and
continued to advance our growth strategies in five promising areas
that are complementary to our core business.
2
LEON’S FURNITURE LIMITED ANNUAL REPORT 2018 CHIE F EXECUTIVE O FF ICER 'S M ESSAGE
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
RECORD FINANCIAL RESULTS
System-wide sales reached $2.68 billion including $443 million of franchise sales, compared
to $2.64 billion including $426 million of franchised sales in 2017. These results reflect a
solid operating performance at Leon’s and The Brick despite subdued consumer spending
throughout the year, as well as growing contributions from our online retail channels
and other complementary businesses. Within this environment, we also continued to grow
adjusted net income — which increased 8% to a record $107 million or $1.31 adjusted diluted
earnings per share — at a faster pace. This performance was the result of a traditional focus
on expense control, continued synergies from the optimization of our store and distribution
networks, an increasing contribution from our fast-growing eCommerce business and
lower financing costs as a result of debt reduction.
As the political and economic volatility of the past year reminds us, the performance of our
business depends on many external factors, including the pace of economic and population
growth, and the degree of consumer confidence, in the country. Over the past 109 years,
the environmental conditions in which we operate have always been changing, yet we have
consistently managed to outperform our industry peers. We have done so by giving our
customers the best combination of selection, service and value in the marketplace, and by
constantly embracing change and innovation. As we look ahead, this formula for success
will continue to guide our efforts as we leverage our retailing and distribution networks to
create more value for everyone touched by our business.
DIGITAL COMMERCE
Over the past year, we continued to advance a multichannel marketing strategy aimed at
optimizing the combined potential of our traditional store network and our fast-growing
furniture.ca, leons.ca and thebrick.com eCommerce sites. In October, we completed the
seamless transfer of our underlying eCommerce platform to a new third-party specialist
(Shopify Plus), a move that has and will continue to deliver better performance at significantly
lower cost. Equally important, this change has allowed us to focus our time and money on
the development of a talented team of in-house eCommerce experts. They are focused
on creating new applications to elevate the online customer experience and better align our
in-store and online sales and marketing efforts. We can expect to see many new innovations
in the months and years ahead, such as virtual reality tools that allow customers to see
exactly how our products will look in their homes, prior to purchase.
3
3
These initiatives rest on a solid foundation. Over the past 10 years, we have increased our
eCommerce revenue at a compound annual growth rate of more than 45 percent. What’s
more, it is profitable in the present; EBITDA margins in our eCommerce business were
more than double those achieved in our conventional retail network in 2018. An important
source of revenue growth in its own right, our eCommerce businesses also continue to
drive traffic into our stores. In conjunction with our distribution and service networks,
they give LFL Group an unmatched ability to display, sell, distribute and service a rapidly
expanding product line of furniture, home furnishings, mattresses, appliances and home
electronics almost anywhere in Canada.
EXPANSION AND ACQUISITION
With 303 stores from coast to coast, we have an unequalled geographic presence in
Canada. Yet we still see opportunity to grow our retail network through both expansion and
acquisition. One of the attractions of combining Leon’s and The Brick was the complementary
footprint of their respective operations. While debt reduction has taken priority during the
past years, we have and will continue to build out the Leon’s network, especially in British
Columbia where the banner is under-represented, and by the same token, we have and will
continue to expand our network of Brick stores in eastern Canada.
We will also continue to assess other expansion and acquisition opportunities as our
industry — which is still highly fragmented — continues to consolidate. This process of
consolidation will continue to be driven by the impact of eCommerce and the growing
strength of full-service, multichannel competitors such as LFL Group.
THIRD PARTY DISTRIBUTION
Just over a year ago, we opened an advanced distribution centre in Delta, British Columbia
to serve the combined needs of our Brick and Leon’s divisions. In addition, this facility has
been designed to provide cost-effective fulfillment to unrelated online retailers without their
own distribution capabilities.
4
LEON’S FURNITURE LIMITED ANNUAL REPORT 2018 CHIE F EXECUTIVE O FF ICER 'S M ESSAGE
While the operating efficiency of the Delta distribution centre has validated our expectations,
it has also been designed to support the build out of a new generation of stores that reflect
our emerging multichannel strategy. In the years ahead, we see smaller scale showrooms
that rely on new technologies to dramatically expand customer choice and provide a more
fluid experience between our in-store and online sales channels. We also envision a more
efficient and capable distribution network with growing capacity to track and manage ship-
to-home distribution from our suppliers.
Our experience in the Delta facility has given us confidence to extend this distribution
model to eastern Canada where a new facility in Halifax is expected to meet the needs of
established Leon’s stores, as well as the build out of The Brick banner, starting in 2021.
AFTER-SALES SERVICE
Through TransGlobal Service (TGS), LFL Group is the largest provider of after-sales service
for major appliances in Canada. TGS fulfils the installation, repair and service requirements
for Leon’s and The Brick, as well as a growing number of independent retail and wholesale
businesses. The growth of this business continues to be fuelled by a growing trend for
manufacturers and retailers to outsource warranty work as well as the rapid growth of
direct-to-customer sales though eCommerce.
With its unmatched scale, geographic presence and industry-leading technology, TGS is
positioned for strong growth in its existing business, yet we see enormous potential to
expand its breadth of capabilities. One of the effects of the rapid growth of eCommerce has
been a corresponding decline in the availability of after-sales service through traditional
retailers. At the same time, time-pressed consumers are unsure of their options when
something goes wrong with the growing range of large ticket items purchased online. We
believe that the TGS model is well suited to provide installation and repair services for a
wide range of additional home products and systems and continue to assess attractive
growth opportunities in this area.
5
SENIOR MANAGEMENT TEAM
We continued to build upon an experienced and energetic senior
management team during the past year to help strengthen the
industry leading position of our retail banners and advance key
growth initiatives. Recent additions have significantly enhanced the
LFL Group's expertise in multichannel marketing, digital application
development and analytics.
Pictured: David B. Freeman, Divisional President of The Brick; Constantine Pefanis, CFO of LFL Group;
Edward F. Leon, President and CEO of LFL Group; Michael J. Walsh, Divisional President of Leon's
6
LEON’S FURNITURE LIMITED ANNUAL REPORT 2018 CHIE F EXECUTIVE O FF ICER 'S M ESSAGE
REAL ESTATE
At the end of 2018, LFL Group owned a commercial real estate portfolio of 4.2 million square
feet, most of it located in the heart of Canada’s largest and fastest growing communities.
While this portfolio is carried on Leon’s balance sheet at historical cost, we are fully aware
that it represents billions of dollars in potential residential and mixed-use development.
Over the past year, we have continued to assess properties for their potential and explore
opportunities with prospective development and investment partners to monetize the value
of our real estate portfolio. One such property, the 40-acre site that is home to our head
office and showroom in west Toronto, has been an obvious focal point in our considerations.
This is a deliberate process with many facets, including necessary approvals, but we look
forward to sharing any news on this front when the time is appropriate.
THE YEAR AHEAD
The difficult market conditions encountered in 2018 may well continue into the year
ahead. System-wide revenue growth is expected to be modest given the recent slowdown
in Canada’s economy, high levels of household debt and growing consumer uncertainty.
Amid this environment, we will continue to focus on efficiently executing our marketing
and merchandising programs to maximize market share, generating cost efficiency in our
operations and reducing debt. As we have throughout our history, we will also continue
to invest in and advance the strategic initiatives that will ensure sustainable growth in the
years ahead. LFL Group has built an enviable position in the Canadian retailing landscape,
with unmatched retail and distribution networks and abundant opportunity for growth in five
key areas complementary to our business. After more than a century in business, we have
successfully grown and adapted through many economic environments. I am confident this
process will continue and that the best days of this storied organization are yet to come.
In closing, I wish to extend my appreciation to the executive leadership of Leon’s and The
Brick, their talented corporate and franchised management teams, and the valued associates
at all of our businesses for helping to make 2018 another record year for the company. On
behalf of the entire executive leadership team, I would also like to thank Terry Leon, who
retired in October as CEO after 16 years at the helm, a period of unprecedented growth. Terry
has been instrumental in ensuring a smooth transition in leadership over the past year and
continues to serve as Vice Chairman of the Board of Directors.
With your continued support, I look forward to reporting on our progress in the year ahead.
Sincerely,
"Edward F. Leon"
Edward F. Leon
President and Chief Executive Officer
LFL Group
7
LEON’S FUR NI TURE L IM ITED A NNUA L R EPO RT 2 01 8
LFL Group 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.
8
AT-A-GL ANCE
Across the Country
With 303 stores nationwide, three leading eCommerce properties,
unmatched distribution facilities and a growing range of
after-sales services, LFL Group offers everything our customers
need, whenever and however they wish to shop with us.
1
1
35
4
51
6
4
202
86
10
5
The Brick
Leon’s
The Brick Outlet
Appliance Canada
11
3
2
7
2
1
15
11
74
47
3
5
3
1
1
3
4
3
5
303 STORES NATIONWIDE
3 ECOMMERCE PROPERTIES
thebrick.com | leons.ca | furniture.ca
9
STRONG COMMUNITIES
Strong
Communities
Strong, thriving communities start from the ground up. LFL Group, which includes our
Leon’s and Brick divisions, has a long history of giving back to the communities in which
we work and live.
Through the years, LFL Group has proudly supported a variety of local and national health
associations, children’s charities, societies and foundations to continue to do the good work
that they do for all of us across the country. As a responsible corporate citizen, it gives
us immense pleasure to be able to give back with financial contributions and resources
because the wellbeing of our customers, friends and families helps every community, town,
village and city to thrive and flourish.
One of the children’s charities that is supported by our Brick division is the Children’s
Miracle Network®, which raises funds and awareness for 170 member hospitals, 12 of which
are in Canada and include BC Children’s Hospital and SickKids® in Toronto. Their mission
is to save and improve the lives of as many children as possible. It’s a mission we truly
believe in.
LFL Group also takes great pride in the efforts of our employees and associates who
volunteer their personal time to support worthwhile causes in their communities across
the country each year. We encourage our associates to participate in their communities as
individuals and with their families. Community involvement assists in building character and
is an excellent way to make positive connections that can last a lifetime.
You can learn more about our support for these and other important causes at leons.ca
and thebrick.com.
10
5-YEA R R EV IEW
5-Year Review
REVENUE
$2,241,437
NET INCOME
$111,030
SHAREHOLDER'S EQUITY
$11.23
(PER SHARE)
($ in thousands)
($ in thousands)
($ per share)
2,500,000
2,000,000
1,500,000
1,000,000
500,000
120,000
100,000
80,000
60,000
40,000
20,000
12
10
8
6
4
2
14
15
16
17
18
14
15
16
17
18
14
15
16
17
18
INCOME STATISTICS
($ in thousands, except amounts per share)
2018
2017
2016
2015
2014
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 percentage of sales
$ 2,241,437
1,264,561
976,876
826,286
150,590
39,560
$ 111,030
76,368
1.45
1.2%
5.0%
$ 2,215,379
1,261,112
954,267
822,838
131,429
34,836
96,593
72,904
1.32
3.3%
4.5%
$
$ 2,143,736
1,228,499
915,237
801,049
114,188
30,597
83,591
71,696
1.17
5.5%
3.9%
$
$ 2,031,718
1,145,593
886,125
784,706
101,419
24,790
76,629
71,218
1.08
1.2%
3.8%
$
$ 2,008,480
1,131,651
876,829
773,695
103,134
27,610
75,524
70,899
1.07
16.6%
3.8%
$
Dividend declared
$
39,716
$
35,136
$
28,691
$
28,501
$
28,370
($ in thousands, except amounts per share)
Shareholders’ equity
Total assets
Purchase of capital assets
Working capital(1)
Shareholders’ equity per common share
Common share price range on the
Toronto Stock Exchange
High
Low
BALANCE SHEET STATISTICS
2018
$
857,362
1,723,572
19,650
198,445
11.23
$
2017
773,048
1,661,455
55,041
168,710
10.60
$
2016
659,553
1,611,662
25,689
128,788
9.20
$
2015
600,402
1,583,463
22,756
65,419
8.43
$
2014
549,105
1,563,476
16,562
46,931
7.74
$
$
19.50
14.70
$
$
19.57
16.19
$
$
18.75
13.08
$
$
19.38
12.61
$
$
17.90
13.41
(1) 2018 excludes the amount of $144,712 comprised of loans and borrowings due to the classification from non-current liabilities to current liabilities
as at December 31, 2018.
11
MA NAGEM ENT' S D ISCUSSI O N & A NA LYSI S
Management’s
Discussion & Analysis
For the quarters and years ended December 31, 2018 and 2017.
The following Management’s Discussion and Analysis (“MD&A”) is prepared as
at February 27, 2019 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, 2018 and for the years ended December 31, 2018, and 2017. It
should be read in conjunction with the fiscal year 2018 consolidated financial statements
and the notes thereto. For additional detail and information relating to the Company,
readers are referred to the fiscal 2018 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 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 2018
consolidated financial statements and MD&A were approved on February 27, 2019.
LEON’S FUR NITURE LIM ITED A NNUA L R E PO RT 201 8
12
MA NAGEM ENT' S D ISCUSSI O N & A NA LYSI S
1. Business Overview
Leon’s Furniture Limited is the largest network of home furniture, appliances, electronics, and mattress stores in Canada. Our retail
banners include: Leon’s; The Brick; Brick Outlet and The Brick Mattress Store. As well, The Brick’s Midnorthern Appliance banner
alongside with the Appliance Canada banner, makes the Company the country’s largest commercial retailer of appliances to builders,
developers, hotels and property management companies. Finally, 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. TGS has contracts to support several manufacturer’s warranty service work in addition to servicing a number
of individual programs offered by other dealers. This division also performs work for products sold with extended warranties and is an
integral part of the retail offering. These extended warranties, underwritten by the Company’s wholly-owned subsidiaries are offered on
appliances, electronics and furniture to provide coverage that extends beyond the manufacturer’s warranty period by up to five years.
The warranty contracts provide both repair and replacement service depending upon the nature of the warranty claim.
The Company’s wholly-owned subsidiaries Trans Global Insurance Company (“TGI”) and its sister company, Trans Global Life Insurance
Company (“TGLI”) also offer credit insurance on the customer’s outstanding financing balances and third party customer 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 303 retail stores from coast to coast in Canada under the various banners indicated below:
Banner
Leon's banner corporate stores
Leon's banner franchise stores
Appliance Canada banner stores
The Brick banner corporate stores (1)
The Brick banner franchise stores
The Brick Mattress Store banner locations
Brick Outlet
Total number of stores
(1) Includes the Midnorthern Appliance banner.
Number of Stores
as at December 31,
Number of Stores
as at December 31,
2017
50
36
4
114
65
23
12
304
Opened
Closed
–
–
1
–
–
3
–
4
–
–
–
(1)
(1)
(1)
(2)
(5)
2018
50
36
5
113
64
25
10
303
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
Adjusted net income
Adjusted income before income taxes
Adjusted earnings per share – basic
Adjusted earnings per share – diluted
Adjusted EBITDA
IFRS Measure
Net income
Income before income taxes
Earnings per share – basic
Earnings per share – diluted
Net income
LEON’S FUR NITURE LIM ITED A NNUA L R E PO RT 201 8
13
ADJUSTED NET INCOME
Leon’s calculates comparable measures by excluding the effect of the mark-to-market adjustments, 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.
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.
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)
Net Income
After-tax mark-to-market (gain)/loss on
financial derivative instruments
Adjusted net income
Basic earnings per share
Diluted earnings per share
Adjusted basic earnings per share
Adjusted diluted earnings per share
ADJUSTED EBITDA
For the three months ended
December 31
For the year ended
December 31
2018
38,785
(496)
38,289
0.51
0.48
0.50
0.47
$
$
$
$
2017
34,778
1,341
36,119
0.46
0.43
0.48
0.45
$
$
$
$
2018
111,030
(4,339)
106,691
1.45
1.36
1.40
1.31
$
$
$
$
2017
96,593
2,429
99,022
1.32
1.20
1.36
1.23
$
$
$
$
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
Mark-to-market (gain)/loss on financial
derivative instruments
Adjusted EBITDA
SAME STORE SALES
For the three months ended
December 31
For the year ended
December 31
2018
38,785
13,995
1,545
8,719
(682)
62,362
2017
34,778
12,083
2,316
10,603
1,820
61,600
2018
111,030
39,560
6,928
37,156
(5,918)
188,756
2017
96,593
34,836
10,502
39,556
3,311
184,798
Same store sales are defined as sales generated by stores that have been open 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.
14
MANAGEMENT'S DISCUSSION & ANALYSISLEON’S FURNITURE LIMITED ANNUAL REPORT 2018 MA NAGEM ENT' S D ISCUSSI O N & A NA LYSI S
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.
3. Results of Operations
SUMMARY FINANCIAL HIGHLIGHTS FOR THE QUARTERS ENDED DECEMBER 31, 2018 AND DECEMBER 31, 2017
($ in thousands except % and per share amounts)
Total system-wide sales (1)
Franchise sales (1)
Revenue (2)
Cost of sales
Gross profit
Gross profit margin as a percentage of revenue
Selling, general and administrative expenses (2)
SG&A as a percentage of revenue
Income before net finance costs and income tax expense
Net finance costs
Income before income taxes
Income tax expense
Adjusted net income (1)
Adjusted net income as a percentage of revenue (1)
After-tax mark-to-market (gain)/loss on financial
derivative instruments (1)
Net income
Basic weighted average number of common shares
Basic earnings per share
Adjusted basic earnings per share (1)
Diluted weighted average number of common shares
Diluted earnings per share
Adjusted diluted earnings per share (1)
Common share dividends declared
Convertible, non-voting shares dividends declared
2018
726,547
124,887
601,660
333,282
268,378
44.61%
214,734
35.69%
53,644
(1,545)
52,099
13,810
38,289
6.36%
(496)
38,785
76,303,135
0.51
0.50
82,327,481
0.48
0.47
0.14
0.25
$
$
$
$
$
$
For the three months
ended December 31
$ Increase
(Decrease)
% Increase
(Decrease)
3,292
(1,517)
4,809
475
4,334
1,687
2,647
(771)
3,418
1,248
2,170
0.5%
(1.2%)
0.8%
0.1%
1.6%
0.8%
5.2%
(33.3%)
7.0%
9.9%
6.0%
2017
723,255
126,404
596,851
332,807
264,044
44.24%
213,047
35.70%
50,997
(2,316)
48,681
12,562
36,119
6.06%
1,341
34,778
75,079,103
0.46
0.48
82,894,024
0.43
0.45
0.12
0.23
$
$
$
$
$
$
$
$
$
$
$
$
(1,837)
4,007
(137.0%)
11.5%
0.05
0.02
0.05
0.02
0.02
0.02
10.9%
4.2%
11.6%
4.4%
16.7%
8.7%
(1) Non-IFRS financial measures. Refer to section 2 in this MD&A for additional information.
(2) Reclassified comparative results to conform to the presentation of the three months ended December 31, 2018
SAME STORE SALES (1)
($ in thousands except %)
Same store sales (1)
2018
587,800
2017
588,398
$ Decrease
% Decrease
(598)
(0.10%)
(1) Non-IFRS financial measure. Refer to section 2 in this MD&A for additional information.
For the three months
ended December 31
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MA NAGEM ENT' S D ISCUSSI O N & A NA LYSI S
FOURTH QUARTER OVERALL PERFORMANCE
Revenue
For the three months ended December 31, 2018, revenue was $601,660,000 compared to $596,851,000 in the prior year’s fourth
quarter. Revenue increased by 0.8% as compared to the prior quarter mainly due to increases in mattress sales and commercial sales.
Same Store Sales (1)
Overall, same store corporate sales decreased 0.1%.
Gross Profit
The gross profit margin for the fourth quarter 2018 increased from 44.24% to 44.61% compared to the prior year’s fourth quarter as
a result of a favourable product mix of both mattress and furniture sales.
Selling, general and administrative expenses
SG&A as a percentage of revenue in the current quarter was down marginally as compared to the prior year’s fourth quarter. This was
due to effectively managing overall SG&A expenses throughout the quarter while at the same time increasing advertising spend in the
current quarter to drive traffic to both the retail stores and to the Company’s websites.
Adjusted Net Income (1) and Adjusted Diluted Earnings Per Share(1)
As we continue to pay down debt, we have reduced our net debt finance charges by $771,000 between the comparative quarters. As
a result of the factors above, adjusted net income for the fourth quarter of 2018 was $38,289,000. This resulted in an adjusted diluted
earnings per share of $0.47 in the quarter (adjusted net income $36,119,000 and $0.45 adjusted diluted earnings per share in 2017), an
increase of 4.4% as compared to the prior year’s fourth quarter.
Net Income and Diluted Earnings Per Share
Including the mark-to-market impact of the Company’s financial derivatives, net income for the fourth quarter of 2018 was $38,785,000,
$0.48 per diluted earnings per share (net income $34,778,000 and $0.43 per diluted earnings per share in 2017).
(1) Non-IFRS financial measure. Refer to section 2 in this MD&A for additional information.
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MA NAGEM ENT' S D ISCUSSI O N & A NA LYSI S
Consolidated operating results for the year ended December 31, 2018, 2017 and 2016
($ in thousands except % and
per share amounts)
Total system-wide sales (1)
Franchise sales (1)
Revenue (2)
Cost of sales
Gross profit
Gross profit margin as a percentage
$ Increase
% Increase
For the year
ended December 31
$ Increase
% Increase
2018
2017
(Decrease)
(Decrease)
2017
2016
(Decrease)
(Decrease)
2,684,759
443,322
2,641,254
425,875
2,241,437
1,264,561
2,215,379
1,261,112
43,505
17,447
26,058
3,449
1.6% 2,641,254
425,875
4.1%
2,531,573
387,837
1.2% 2,215,379
0.3% 1,261,112
2,143,736
1,228,499
109,681
38,038
71,643
32,613
976,876
954,267
22,609
2.4%
954,267
915,237
39,030
4.3%
9.8%
3.3%
2.7%
4.3%
of revenue
43.58%
43.07%
43.07%
42.69%
Selling, general and administrative
expenses (2)
825,276
809,025
16,251
2.0%
809,025
782,206
26,819
3.4%
SG&A as a percentage of revenue
36.82%
36.52%
36.52%
36.49%
Income before net finance costs and
income tax expense
Net finance costs
Income before income taxes
Income tax expense
Adjusted net income (1)
Adjusted net income as a percentage of
151,600
(6,928)
144,672
37,981
145,242
(10,502)
134,740
35,718
106,691
99,022
6,358
(3,574)
9,932
2,263
7,669
4.4%
(34.0%)
7.4%
6.3%
145,242
(10,502)
134,740
35,718
133,031
(14,481)
118,550
31,788
12,211
(3,979)
16,190
3,930
9.2%
(27.5%)
13.7%
12.4%
7.7%
99,022
86,762
12,260
14.1%
revenue (1)
4.76%
4.48%
4.48%
4.05%
After-tax mark-to-market (gain)/loss on
financial derivative instruments (1)
After-tax severance charge (1)
(4,339)
–
2,429
–
(6,768)
–
(278.6%)
–
2,429
–
1,943
1,228
486
(1,228)
25.0%
–
Net income
111,030
96,593
14,437
14.9%
96,593
83,591
13,002
15.6%
Basic weighted average number of
common shares
Basic earnings per share
Adjusted basic earnings per share (1)
Diluted weighted average number of
common shares
Diluted earnings per share
Adjusted diluted earnings per share (1)
Common share dividends declared
Convertible, non-voting shares
dividends declared
76,368,088 72,904,130
1.32
1.36
1.45
1.40
$
$
$
$
82,891,640
1.36
1.31
$
$
82,912,983
1.20
1.23
$
$
$
$
0.52
0.25
$
$
0.48
0.23
$
$
$
$
$
$
0.13
0.04
0.16
0.08
0.04
0.02
72,904,130
1.32
1.36
9.8% $
2.9% $
71,695,955
1.17
1.21
$
$
82,912,983 83,081,832
1.05
1.08
1.20
1.23
$
$
13.3% $
6.5% $
8.3% $
0.48
8.7% $
0.23
$
$
0.40
0.20
(1) Non-IFRS financial measures. Refer to section 2 in this MD&A for additional information.
(2) Reclassified comparative results to conform to the presentation of the year ended December 31, 2018.
Same Store Sales (1)
$
$
$
$
$
$
0.15
0.15
0.15
0.15
0.08
12.8%
12.4%
14.3%
13.9%
20.0%
0.03
15.0%
For the year
ended December 31
($ in thousands except %)
Same store sales (1)
2018
2,196,767
2017
2,190,664
$ Increase
% Increase
6,103
0.28%
(1) Non-IFRS financial measure. Refer to section 2 in this MD&A for additional information.
REVENUE
For the year ended December 31, 2018, revenue was $2,241,437,000 compared to $2,215,379,000 for the prior year. Revenue increased
$26,058,000 or 1.2% for the comparative period mainly due to increases in overall mattress sales.
SAME STORE SALES (1)
Overall, same store corporate sales increased $6,103,000 or 0.28%.
GROSS PROFIT
The gross profit margin for the year ended December 31, 2018 increased from 43.07% to 43.58% compared to the prior year.
The gross margin increased as a result of targeted promotions that were designed to alter the sales mix to enhance profitability
in our product categories.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A as a percentage of revenue was higher at 36.82%, an increase of 30 basis points over the prior year, due to increases in minimum
hourly wages, advertising expenditures and increases to finance charges related to financed sales.
ADJUSTED NET INCOME (1) AND ADJUSTED DILUTED EARNINGS PER SHARE (1)
As we continue to reduce our debt this has enabled us to reduce our net debt finance charges by $3,574,000 between comparative
periods. As a result of the factors above, adjusted net income for the year ended December 31, 2018 was $106,691,000. This resulted in
an adjusted diluted earnings per share of $1.31 (adjusted net income $99,022,000 and $1.23 adjusted diluted earnings per share in 2017),
an increase of 6.5%.
NET INCOME AND DILUTED EARNINGS PER SHARE
Including the mark-to-market impact of the Company’s financial derivatives, net income for the year ended December 31, 2018 was
$111,030,000, $1.36 diluted earnings per share (net income of $96,593,000 and $1.20 diluted earnings per share for the year ended
December 31, 2017).
(1) Non-IFRS financial measure. Refer to section 2 in this MD&A for additional information.
4. Summary of Consolidated Quarterly Results
The table below highlights the variability of quarterly results and the impact of seasonality on the Company’s results. The Company’s
profitability is typically lower in the first half of the year, since retail sales are traditionally higher in the third and fourth quarters.
($ in thousands, except per share data)
Total system wide sales (1)
Franchise sales (1)
Revenue (2)
Net income
Adjusted net income (1)
Basic earnings per share
Diluted earnings per share
Adjusted basic earnings per share (1)
Adjusted diluted earnings per share (1)
Quarter ended
December 31
Quarter ended
September 30
Quarter ended
June 30
Quarter ended
March 31
2018
2017
2018
2017
2018
2017
2018
2017
726,547
124,887
601,660
38,785
38,289
0.51
0.48
0.50
0.47
$
$
$
$
723,255
126,404
596,851
34,778
36,119
0.46
0.43
0.48
0.45
$
$
$
$
707,058
114,729
592,329
33,744
34,262
0.44
0.41
0.45
0.42
$
$
$
$
706,534
111,094
595,440
34,338
34,392
0.48
0.42
0.48
0.42
$
$
$
$
650,012
103,283
546,729
23,975
22,595
0.31
0.29
0.30
0.28
$
$
$
$
637,475
98,576
538,899
18,863
19,968
0.26
0.24
0.28
0.25
$
$
$
$
601,142
100,423
500,719
14,526
11,545
0.19
0.18
0.15
0.14
$
$
$
$
573,988
89,799
484,189
8,614
8,543
0.12
0.11
0.12
0.11
$
$
$
$
(1) Non-IFRS financial measure. Refer to section 2 in this MD&A for additional information.
(2) Reclassified comparative results to conform to the presentation for the period December 31, 2018.
5. Financial Position
($ in thousands)
Total assets
Total non-current liabilities
ASSETS
December 31, 2018
December 31, 2017
December 31, 2016
1,723,572
258,690
1,661,455
468,569
1,611,662
525,605
Total assets at December 31, 2018 of $1,723,572,000 were $62,117,000 higher than the $1,661,455,000 reported at December 31, 2017.
The majority of change was driven by an increase to cash, debt instruments and equity instruments of approximately $68,000,000
which was offset by a decrease in intangibles.
NON-CURRENT LIABILITIES
Non-current liabilities of $258,690,000 were $209,879,000 lower than the $468,569,000 reported at December 31, 2017. This decrease
is a result of the term loan being reclassified as a current liability for the year end December 31, 2018.
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6. Liquidity and Capital Resources
The following table provides a summarized statement of cash flows for the three months and year ended December 31, 2018 and
December 31, 2017:
For the three months
ended December 31
For the year
ended December 31
Source (Use) of Cash ($ in thousands)
2018
2017
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
Cash used in investing activities
Cash used in financing activities
49,640
45,594
95,234
(10,189)
(36,170)
47,519
11,099
58,618
(12,366)
(26,717)
Increase/(decrease) in cash and cash equivalents
48,875
19,535
$ Increase
(Decrease)
2018
2017
$ Increase
(Decrease)
2,121
34,495
36,616
2,177
(9,453)
29,340
153,936
28,138
182,074
(30,141)
(97,873)
143,641
12,962
156,603
(78,023)
(86,358)
10,295
15,176
25,471
47,882
(11,515)
54,060
(7,778)
61,838
Cash Provided by Operating 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 2018, cash provided by operating activities changed by $36,616,000 compared to the prior year’s quarter.
The majority of the net increase is due to the change in trade and other payables of $36,864,000.
For the year ended December 31, 2018, cash provided by operating activities changed by $25,471,000 compared to the comparative
period. The net increase is the result of the change primarily in trade receivables.
Cash Used in Investing Activities
Investing activities relate primarily to capital expenditures and the purchase and sale of debt and equity instruments.
In the fourth quarter of 2018, cash used in investing activities increased by $2,177,000 compared to the prior year’s quarter. This
change is the increase in purchases of property, plant and equipment, of $2,226,000, which is offset by the decrease in debt and equity
instruments of $3,766,000 and interest received of $485,000.
For the year ended December 31, 2018, cash used in investing activities changed by $47,882,000 compared to the comparative period.
The net increase was the result of a reduction in the purchase of both property, plant and equipment and debt and equity instruments of
approximately $46,300,000.
Cash Used in Financing Activities
Financing activities consist primarily of cash used to pay dividends and the loans and borrowings used to acquire The Brick.
In the fourth quarter of 2018, cash used in financing activities changed by $9,453,000 compared to the prior year’s quarter. The change
relates to the increased repayment of the term loan in the current quarter of $5,000,000, the addition of the share repurchase plan
in 2018 of $2,991,000 and also an increase in the dividends paid of $2,023,000 which was offset by a reduction of interest paid of
$699,000.
For the year ended December 31, 2017, cash used in financing activities changed by $11,515,000, compared to the comparative period.
The change relates to the increased repayment of the term loan in the current year of $5,000,000, the addition of the share repurchase
plan in 2018 of $3,058,000 and also an increase in the dividends paid of $4,987,000, ($0.52 per share versus $0.48 in the prior year),
which was offset by a reduction of interest paid of $2,174,000 due to the reduction of convertible debenture interest.
Adequacy of Financial Resources
At December 31, 2018, the Company’s current assets exceeded its current liabilities by $53,733,000 and its cash and cash equivalents,
restricted marketable securities, and debt and equity instruments were $184,882,000 compared to $117,312,000 at December 31, 2017.
Under the Company’s Senior Secured Credit Agreement, we had unused borrowing capacity of $49,351,000 as at December 31, 2018
($49,351,000 as at December 31, 2017). The Company believes that its existing financing resources together with its continuing profitable
results from operations will provide a sound liquidity and working capital position throughout the next twelve months.
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Contractual Commitments
($ in thousands)
Contractual Obligations
Long-term debt
Operating leases (1)
Trade and other payables
Finance lease liabilities
Total Contractual Obligations
Under
1 year
151,855
85,381
247,136
1,892
Payments Due by Period
1–3 years
3–5 years
3,012
136,969
–
3,852
52,008
128,459
–
3,852
More than
5 years
–
111,772
–
803
486,264
143,833
184,319
112,575
Total
206,875
462,581
247,136
10,399
926,991
(1) The Company is obligated under operating leases to future minimum rental payments for various land and building sites across Canada.
7. Outlook
Despite the uncertainty over certain key economic indicators, we believe that the overall economy remains relatively strong, as we were
still able to increase sales and profitability in 2018. Although it is difficult to gauge future consumer confidence and what impact it may
have on retail, we remain confident our sales and profitability will increase. Given the Company’s strong financial position, our principal
objective is to increase market share and profitability. We remain focused on our commitment to continuously invest in digital innovation
that will drive more customers to both our online eCommerce presence and our 303 physical locations across Canada.
8. Outstanding Common Shares
At December 31, 2018, there were 77,490,893 common shares issued and outstanding. During the year ended December 31, 2018, 71,363
series 2009 shares, 14,463 series 2012 shares, 124,361 series 2013 shares, 49,480 series 2014 and 23,975 series 2015 shares were
converted into common shares. For details on the Company’s commitments related to its redeemable shares please refer to note 15.2 of
the 2018 consolidated financial statements.
9. Related Party Transactions
As at December 31, 2018, 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.
10. Critical Assumptions
USE OF ESTIMATES AND JUDGMENTS
Management has exercised judgment in the process of applying the Company’s accounting policies. The preparation of consolidated
financial statements in accordance with IFRS requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the consolidated balance sheet dates and the reported
amounts of revenue and expenses during the reporting period. Estimates and other judgments are continuously evaluated and are based
on management’s experience and other factors, including expectations about future events that are believed to be reasonable under the
circumstances. Actual results could differ from those estimates. The following discusses the most significant accounting judgments and
estimates that the Company has made in the preparation of the consolidated financial statements.
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 historic retail experience.
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.
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IMPAIRMENT OF GOODWILL AND INTANGIBLE ASSETS
The Company tests goodwill and indefinite life intangible assets at least annually and reviews other long-lived intangible assets for any
indication that the asset might be impaired. Significant judgments are required in determining the CGUs or groups of CGUs for purposes
of assessing impairment. Significant judgments are also required in determining whether to allocate goodwill to CGUs or groups of
CGUs. When performing impairment tests, the Company estimates the recoverable amount of the CGUs or groups of CGUs to which
goodwill and indefinite life intangible assets have been allocated using a discounted cash flow model that requires assumptions about
future cash flows, margins and discount rates.
PROVISIONS
The Company exercises judgment in the determination of recognizing a provision. The Company recognizes a provision when it has
a present legal or constructive obligation as a result of a past event and a reliable estimate of the obligation can be made. Significant
judgments are required to be made in determining what the probable outflow of resources will be required to settle the obligation.
MATERIALITY
In preparing this MD&A and the information contained herein, management considers the likelihood that a reasonable investor would be
influenced to buy or not buy, or to sell or hold securities of the Company if such information were omitted or misstated. This concept of
materiality is consistent with the notion of materiality applied to financial statements and contained in IFRS.
RECENT ACCOUNTING PRONOUNCEMENTS
Accounting standards and amendments issued but not yet adopted
IFRS 16, Leases (“IFRS 16”)
In January 2016, the IASB issued IFRS 16, which will replace IAS 17, Leases (“IAS 17”). IFRS 16 sets out the principles for the
recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases under a single on-balance
sheet model similar to the accounting for finance leases under IAS 17. The new standard will be effective for fiscal years beginning on or
after January 1, 2019.
At the commencement date of a lease, a lessee will recognize a liability to make lease payments (i.e., the lease liability) and an asset
representing the right to use the underlying asset during the lease term (i.e., the right-of-use asset). Lessees will be required to
separately recognize the interest expense on the lease liability and the depreciation expense on the right-of-use asset. The standard
includes two recognition exemptions for lessees – leases of ‘low-value’ assets (e.g., laptop computers) and short-term leases (i.e., leases
with a lease term of 12 months or less). The Company will apply these exemptions where applicable.
Under IFRS 16, the lessor’s accounting for operating and finance leases will remain substantially unchanged.
The Company expects the following changes:
•
•
The amount of total assets and total liabilities will increase due to the recognition of right-of-use assets and financial liabilities for
future payment obligations from leases previously classified as operating leases;
Operating lease payments which are currently included in selling, general and administrative expenses on the Consolidated Statement
of Income will be replaced with depreciation, (included in selling, general and administrative expenses), from the right-of-use asset
and interest expense, (included under net finance costs), from the lease liability.
As the Company has significant contractual obligations in the form of real estate operating leases, Management have decided to
apply this standard using the Modified Retrospective Approach. Under this approach the Company will not be restating comparative
information and has elected to use the following practical expedients on adoption of the standard on January 1, 2019:
•
the Company has not reassessed, under IFRS 16, contracts that were identified as leases under the previous standard (IAS 17);
•
the Company will use a single discount rate to a portfolio of leases with reasonably similar underlying characteristics;
•
the Company has used hindsight in determining the lease term where the lease contracts contains options to extend or terminate
the lease.
IFRS 16 is expected to have a material impact on the Company’s consolidated statements of financial position. The Company expects
to recognize right-of-use assets in the range of $405 million to $425 million and related lease liabilities in the range of $392 million to
$412 million. The difference between these amounts reflects the derecognition of certain intangible assets relating to favourable lease
agreements, and adjustments relating to deferred rent liabilities and lease inducements.
IFRS 17, Insurance Contracts (“IFRS 17”)
In May 2017, the IASB issued IFRS 17 – Insurance Contracts (“IFRS 17”), which replaces IFRS 4 – Insurance Contracts (“IFRS 4”).
IFRS 17 establishes new principles for the recognition, measurement, presentation and disclosure of insurance contracts. IFRS 17
applies to all types of insurance contracts regardless of the type of entities that issue them, as well as to certain guarantees and
LEON’S FUR NITURE LIM ITED A NNUA L R E PO RT 201 8
21
MA NAGEM ENT' S D ISCUSSI O N & A NA LYSI S
financial instruments with discretionary participation features. IFRS 17 provides a comprehensive model for insurance contracts,
covering all relevant accounting aspects. The core of IFRS 17 is the general model, supplemented by:
• A specific adaptation for contracts with direct participation features (the variable fee approach)
• A simplified approach (the premium allocation approach) mainly for short-duration contracts
IFRS 17 is effective for annual periods beginning on or after January 1, 2021. Retrospective application is required. The Company
plans to adopt the new standard on the effective date. The IASB has tentatively decided to defer the effective date of IFRS 17 to annual
periods beginning on or after January 1, 2022. The Company is currently analyzing the impact these standards will have on its financial
statements.
IFRS Interpretation Committee Interpretation 23, Uncertainty over Income Tax Treatments (“IFRIC 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 does not expect any material impact on the consolidated
financial statements.
ADOPTION OF NEW OR REVISED AMENDED ACCOUNTING STANDARDS
The Company has adopted the IFRS pronouncements listed below as at January 1, 2018, in accordance with the transitional provisions
outlined in the respective standard.
IFRS 15, Revenue from Contracts with Customers (“IFRS 15”)
IFRS 15, Revenue from Contracts with Customers, was issued in May 2014, which replaces IAS 11, Construction Contracts, IAS 18,
Revenue Recognition, and related Interpretations. 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; financial instruments
and other contractual rights or obligations within the scope of IFRS 9, IFRS 10, Consolidated Financial Statements and IFRS 11, Joint
Arrangements. Under IFRS 15, revenue is recognized at an amount that reflects the consideration to which an entity expects to be
entitled in exchange for transferring goods or services to a customer.
The standard requires entities to exercise judgment, taking into consideration all of the relevant facts and circumstances when applying
each step of the model to contracts with their customers. The standard also specifies the accounting for the incremental costs of
obtaining a contract and the costs directly related to fulfilling a contract.
The Company has performed a detailed impact assessment, identifying all current sources of revenue and analyzing the accounting
requirements for each under IFRS 15. The Company adopted IFRS 15 using the full retrospective method and has concluded that there
is no impact in relation to IFRS 15 because the Company’s analysis of contracts relating to sale of goods by corporate stores and income
from franchise operations under the new revenue recognition standard supports the current process of recognition at a point in time
when control is transferred to the customer. Extended warranty revenue will be deferred and subsequently recognized over time which
is consistent with the current revenue model. The impact to consolidated financial statements is limited to additional disclosure on the
disaggregation of the Company’s revenue streams and contract liabilities, as included in note 17 of the consolidated financial statements.
IFRS 9, Financial Instruments (“IFRS 9”)
IFRS 9 was issued on July 24, 2014 and the new standard must be applied retrospectively with some exemptions. The core areas
addressed within IFRS 9 are classification and measurement of financial assets and liabilities, impairment of financial assets and hedge
accounting. The Company has applied IFRS 9 retrospectively, with the initial application date of January 1, 2018. Consistent with the
transitional provisions in IFRS 9 paragraph 7.2.15, comparative information has not been restated.
Classification and measurement
Under IFRS 9, existing IAS 39 classification and measurement categories for financial assets are being replaced with fair value through
profit and loss (“FVTPL”), fair value through other comprehensive income (“FVOCI”) and amortized cost.
The details of changes are disclosed below:
• The Company reclassified financial assets from loans and receivables to amortized cost.
•
Equity instruments at FVOCI – represent securities that the Company intends to hold for the long-term for strategic purposes. As
permitted by IFRS 9, these investments have been designated at the date of initial application as measured at FVOCI. Unlike IAS 39,
there will be no reclassification to profit or loss on derecognition and these securities are not subject to an impairment assessment.
Interest income and dividend income will continue to be recognized in net income. Under IAS 39, the Company’s equity instruments
were classified as available-for-sale.
LEON’S FUR NITURE LIM ITED A NNUA L R E PO RT 201 8
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MA NAGEM ENT' S D ISCUSSI O N & A NA LYSI S
•
•
Debt instruments at FVOCI – represent securities the Company holds to collect contractual cash flows and to sell. Upon
derecognition, gains and losses will be reclassified to the profit or loss. Under IAS 39, the Company’s debt instruments at FVOCI
were classified under restricted marketable securities and available-for-sale financial assets.
Debt instruments at FVTPL – represent securities the Company has concluded that are neither held to collect contractual cash flows,
nor managed under an objective that results in both collecting the contractual cash flows and selling the investment. Under IAS 39,
the Company’s debt instruments at FVTPL were classified under restricted marketable securities.
Impairment of financial assets
IFRS 9 replaces the incurred loss model from IAS 39 by introducing a new ‘expected credit loss’ model (“ECL”) for calculating
impairment of financial assets. IFRS 9 specifies different approaches for measuring and recognizing expected credit losses, by
considering only defaults in the next 12 months and/or the full remaining life of the financial asset. The expected credit loss model
requires a credit loss to be reflected in profit and loss immediately after an asset is acquired and subsequent changes in expected credit
losses at each reporting date reflecting the change in credit risk. Due to the terms offered to customers and the Company’s policy on
providing for expected credit losses, the Company concludes that there is no impact on its allowance for doubtful accounts.
IFRS 9 provides a low credit risk simplified approach for certain trade receivables and IFRS 15 contract assets. The simplified approach
does not require the tracking of changes in credit risk, but instead requires the recognition of lifetime ECL at all times. Based on the
Company’s portfolio, historical trends and future looking analyst predictions, it was concluded that the low credit risk simplification
could be used as the trade receivables and investments have a low risk of default and the Company has a strong capacity to meet its
contractual cash flow obligations in the near future.
11. Risks and Uncertainties
Careful consideration should be given to the following risk factors. These descriptions of risks are not the only ones facing the Company.
Additional risks and uncertainties not presently known to Leon’s, or that the Company deems immaterial, may also impair the operations
of the Company. If any of such risks actually occur, the business, financial condition, liquidity, and results of operations of the Company
could be materially adversely affected.
Readers of this MD&A are also encouraged to refer to Leon’s Annual Information Form (“AIF”) dated February 28, 2019, which provides
information on the risk factors facing the Company. The February 28, 2019 AIF can be found online at www.sedar.com.
SENSITIVITY TO GENERAL ECONOMIC CONDITIONS
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.
MAINTAINING PROFITABILITY & MANAGING GROWTH
There can be no assurance that the Company’s business and growth strategy will enable it to sustain profitability in future periods.
The Company’s future operating results will depend on a number of factors, including (i) the Company’s ability to continue to
successfully execute its strategic initiatives, (ii) the level of competition in the household furniture, mattress, appliance and home
electronics retailing industry in the markets in which the Company operates, (iii) the Company’s ability to remain a low-cost retailer,
(iv) the Company’s ability to realize increased sales and greater levels of profitability 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.
FINANCIAL CONDITION OF COMMERCIAL SALES CUSTOMERS & FRANCHISEES
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.
LEON’S FUR NITURE LIM ITED A NNUA L R E PO RT 201 8
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MA NAGEM ENT' S D ISCUSSI O N & A NA LYSI S
COMPETITION
The household furniture, mattress, appliance and home electronics retailing industry is highly competitive and highly fragmented.
The Company faces competition in all regions in which its operations are located by existing stores that sell similar products and also
by stores that may be opened in the future by existing or new competitors in such markets. The Company competes directly with many
different types of retail stores that sell many of the products sold by the Company. Such competitors include (i) department stores, (ii)
specialty stores (such as specialty electronics, appliance, or mattress retailers), (iii) other national or regional chains offering household
furniture, mattresses, appliances and home electronics, and (iv) other independent retailers, particularly those associated with larger
buying groups. The highly competitive nature of the industry means the Company is constantly subject to the risk of losing market share
to its competitors. As a result, the Company may not be able to maintain or to raise the prices of its products in response to competitive
pressures. In addition, the entrance of additional competitors to the markets in which the Company operates, particularly large furniture,
appliance or electronics retailers from the United States could increase the competitive pressure on the Company and have a material
adverse effect on the Company’s market share. The actions and strategies of the Company’s current and potential competitors could
have a material adverse effect on the Company’s business, financial condition, liquidity and results of operations.
12. Controls and Procedures
DISCLOSURE CONTROLS & PROCEDURES
Management is responsible for establishing and maintaining a system of disclosure controls and procedures to provide reasonable
assurance that all material information relating to the Company is gathered and reported on a timely basis to senior management,
including the Chief Executive Officer and Chief Financial Officer so that appropriate decisions can be made by them regarding public
disclosure. Based on the evaluation of disclosure controls and procedures, the CEO and CFO have concluded that the Company’s
disclosure controls and procedures were effective as at December 31, 2018.
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, 2018, 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.
LEON’S FUR NITURE LIM ITED A NNUA L R E PO RT 201 8
24
MA NAGEMENT’S RES PO NSI BI LIT Y FO R F INA NCIA L R EPORT ING
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.
"Edward F. Leon"
"Constantine Pefanis"
Edward F. Leon
President and CEO
Constantine Pefanis
CFO
LEON’S FUR NITURE LIM ITED A NNUA L R E PO RT 201 8
25
INDE PENDE NT AUDITO R ’S R EPO RT
Independent
Auditor’s Report
To the Shareholders of LEON’S FURNITURE LIMITED/
MEUBLES LEON LTÉE
OPINION
We have audited the consolidated financial statements of Leon’s Furniture Limited/
Meubles Leon Ltée (the Group) which comprise the consolidated statements of financial
position as at December 31, 2018 and 2017, and the consolidated statements of
comprehensive income, consolidated statements of changes in equity and consolidated
statements of cash flows for the years then ended, and notes to the consolidated financial
statements, including a summary of significant accounting policies.
In our opinion, the accompanying consolidated financial statements present fairly, in all
material respects, the consolidated financial position of the Group as at December 31,
2018 and 2017, and its consolidated financial performance and its consolidated cash
flows for the years then ended in accordance with International Financial Reporting
Standards (IFRSs).
BASIS FOR OPINION
We conducted our audit in accordance with Canadian generally accepted auditing
standards. Our responsibilities under those standards are further described in the
Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our
report. We are independent of the Group in accordance with the ethical requirements
that are relevant to our audit of the consolidated financial statements in Canada, and we
have fulfilled our other ethical responsibilities in accordance with these requirements. We
believe that the audit evidence we have obtained is sufficient and appropriate to provide
a basis for our opinion.
OTHER INFORMATION
Management is responsible for the other information. The other information comprises:
• Management’s Discussion and Analysis
•
The information, other than the consolidated financial statements and our auditor’s
report thereon, in the Annual Report
Our opinion on the consolidated financial statements does not cover the other information
and we do not express any form of assurance conclusion thereon.
In connection with our audit of the consolidated financial statements, our responsibility
is to read the other information, and in doing so, consider whether the other information
is materially inconsistent with the consolidated financial statements or our knowledge
obtained in the audit or otherwise appears to be materially misstated.
We obtained Management’s Discussion & Analysis prior to the date of this auditor’s
report. If, based on the work we have performed, we conclude that there is a material
misstatement of this other information, we are required to report that fact in this auditor’s
report. We have nothing to report in this regard.
The Annual Report is expected to be made available to us after the date of the auditor’s
report. If based on the work we will perform on this other information, we conclude there
is a material misstatement of other information, we are required to report that fact to
those charged with governance.
LEON’S FUR NITURE LIM ITED A NNUA L R E PO RT 201 8
26
IND EPENDE NT AUDITO R ’S R EPO RT
RESPONSIBILITIES OF MANAGEMENT AND THOSE CHARGED WITH GOVERNANCE FOR THE CONSOLIDATED
FINANCIAL STATEMENTS
Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRSs,
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.
In preparing the consolidated financial statements, management is responsible for assessing the Group’s ability to continue as a going
concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management
either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Group’s financial reporting process.
AUDITOR’S RESPONSIBILITIES FOR THE AUDIT OF THE CONSOLIDATED FINANCIAL STATEMENTS
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high
level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards
will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if,
individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of
these consolidated financial statements.
As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain
professional skepticism throughout the audit. We also:
•
•
•
•
•
•
Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design
and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis
for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as
fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
Obtain an understanding of internal control relevant to the audit 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 Group’s internal control.
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures
made by management.
Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence
obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability
to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s
report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion.
Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions
may cause the Group to cease to continue as a going concern.
Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether
the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group
to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of
the group audit. We remain solely responsible for our audit opinion.
We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and
significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding
independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our
independence, and where applicable, related safeguards.
The engagement partner on the audit resulting in this independent auditor’s report is Massimo Marinelli.
"Ernst & Young LLP"
Chartered Professional Accountants
Licensed Public Accountants
Toronto, Ontario
February 27, 2019
LEON’S FUR NITURE LIM ITED A NNUA L R E PO RT 201 8
27
As at December 31
As at December 31
2018
2017
$
$
$
$
$
$
$
$
$
90,267
5,994
54,759
33,862
122,131
8,413
329,317
7,899
276
8,335
661,253
484
11,751
13,191
321,597
17,072
300,896
390,120
7,208
$
36,207
13,778
41,128
26,199
138,516
2,042
317,914
5,841
541
6,382
$
588,548
–
14,632
–
336,748
17,529
306,286
390,120
7,592
1,723,572
$
1,661,455
247,136
11,687
7,338
146,362
1,415
10,690
38,180
144,712
–
607,520
–
48,435
7,784
110,126
13
11,021
81,311
866,210
111,956
3,546
743,399
(1,539)
857,362
1,723,572
$
234,478
8,791
7,517
128,078
1,421
9,140
24,979
–
5,434
$
419,838
194,439
48,004
9,053
122,773
157
10,791
83,352
888,407
93,392
3,555
674,883
1,218
773,048
1,661,455
$
$
$
$
CONSO LIDATED F I NANCI AL STAT EM E NTS
Consolidated Statements of Financial Position
($ in thousands)
ASSETS
Current assets
Cash and cash equivalents [note 5]
Restricted marketable securities
Debt securities
Equity securities
Trade receivables
Income taxes receivable
Inventories [note 6]
Deferred acquisition costs [note 7]
Deferred financing costs
Prepaid expenses and other assets
Total current assets
Other assets
Deferred acquisition costs [note 7]
Loan receivable [note 15.1]
Property, plant and equipment [note 8]
Investment properties [note 9]
Intangibles [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 [note 17]
Finance lease liability [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 liability [note 13]
Deferred warranty plan revenue
Redeemable share liability [note 15.2]
Deferred rent liabilities and lease inducements
Deferred income tax liabilities [note 20]
Total liabilities
Shareholders' equity attributable to the shareholders of the Company
Common shares [note 16]
Equity component of convertible debentures [note 14]
Retained earnings
Accumulated other comprehensive income
Total shareholders' equity
Total liabilities and shareholders' equity
The accompanying notes are an integral part of these consolidated financial statements.
On behalf of the Board:
"Mark J. Leon"
"Peter Eby"
Mark J. Leon
Director
Peter Eby
Director
LEON’S FURNITUR E LI MIT ED ANNUA L R EPORT 20 1 8
28
CON SO LIDATED F I NANCI AL STAT EM E NTS
Consolidated Statements of Income
($ in thousands except shares outstanding and earnings per share)
Revenue [note 17]
Cost of sales [note 6]
Gross profit
Operating expenses
Selling, general and administrative expenses [note 18]
Operating profit
Finance costs [note 19]
Finance income [note 19]
Change in fair value of derivative instruments
Net income before income tax
Income tax expense [note 20]
Net income for the year
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
2018
$
$
2,241,437
1,264,561
976,876
Year ended
December 31
2017
2,215,379
1,261,112
954,267
$
$
825,276
151,600
(9,396)
2,468
5,918
150,590
39,560
809,025
145,242
(11,952)
1,450
(3,311)
131,429
34,836
$
111,030
$
96,593
76,368,088
82,891,640
72,904,130
82,912,983
$
$
$
$
1.45
1.36
0.52
0.25
$
$
$
$
1.32
1.20
0.48
0.23
LEON’S FUR NITURE LIM ITED A NNUA L R E PO RT 201 8
29
Consolidated Statements of Comprehensive Income
($ in thousands)
Net income for the year
Other comprehensive income, net of tax
Items that may be reclassified subsequently to profit or loss:
Losses on debt instruments
Items that will not be reclassified to profit or loss:
Losses on equity instruments
Change in losses on debt and equity instruments arising during the year
Comprehensive income for the year
Net income for the year
Other comprehensive income, net of tax
Other comprehensive income to be reclassified to profit or loss in subsequent years:
Unrealized gains on available-for-sale financial assets arising during the year
Reclassification adjustment for net losses included in profit for the year
Change in unrealized losses on available-for-sale financial assets arising during the year
Comprehensive income for the year
The accompanying notes are an integral part of these consolidated financial statements.
Year ended
December 31
Net of tax
2018
2018
Tax effect
$ 111,030
$
–
$ 111,030
(306)
(2,951)
(3,257)
(27)
(473)
(500)
(279)
(2,478)
(2,757)
$ 107,773
$
(500)
$ 108,273
Year ended
December 31
Net of tax
2017
2017
Tax effect
$
96,593
$
–
$
96,593
1,776
(141)
1,635
310
(39)
271
1,466
(102)
1,364
$
98,228
$
271
$ 97,957
30
CONSOLIDATED FINANCIAL STATEMENTSLEON’S FURNITURE LIMITED ANNUAL REPORT 2018 CON SO LIDATED F I NANCI AL STAT EM E NTS
Consolidated Statements of Changes in Shareholders' Equity
($ in thousands)
As at December 31, 2017
Comprehensive income
Net income for the year
Change in losses on debt and
equity instruments
Total comprehensive income
Transactions with shareholders
Dividends declared
Management share purchase plan [note 15]
Convertible debentures [note 14]
Treasury shares [note 16]
Repurchase of common shares [note 16]
Total transactions with shareholders
Equity component
of convertible
debentures
Common
shares
Accumulated other
comprehensive
income (loss)
Retained
earnings
Total
$
3,555
$
93,392
$
1,218
$
674,883
$
773,048
–
–
–
–
–
(9)
–
–
(9)
–
–
–
–
18,801
17
(39)
(215)
18,564
–
111,030
111,030
(2,757)
(2,757)
–
111,030
(2,757)
108,273
–
–
–
–
–
–
(39,710)
–
–
(423)
(2,381)
(42,514)
(39,710)
18,801
8
(462)
(2,596)
(23,959)
As at December 31, 2018
$
3,546
$
111,956
$
(1,539)
$
743,399
$
857,362
($ in thousands)
As at December 31, 2016
Comprehensive income
Net income for the year
Change in unrealized gains on
available-for-sale financial assets
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
1,364
1,364
–
–
–
–
–
96,593
(35,136)
–
–
(35,136)
96,593
1,364
97,957
(35,136)
4,350
46,324
15,538
As at December 31, 2017
$
3,555
$
93,392
$
1,218
$
674,883
$
773,048
The accompanying notes are an integral part of these consolidated financial statements.
LEON’S FUR NITURE LIM ITED A NNUA L R E PO RT 201 8
31
CONSO LIDATED F I NANCI AL STAT EM E NTS
Consolidated Statements of Cash Flows
($ in thousands)
OPERATING ACTIVITIES
Net income for the year
Add (deduct) items not involving an outlay of cash
Depreciation of property, plant and equipment and investment properties
Amortization of intangible assets
Amortization of deferred warranty plan revenue
Net finance costs
Deferred income taxes
(Gain) loss on sale of property, plant and equipment and investment properties
Gain on sale of debt and equity instruments
Net change in non-cash working capital balances related to operations [note 26]
Cash received on warranty plan sales
Cash provided by operating activities
INVESTING ACTIVITIES
Purchase of property, plant and equipment and investment properties [notes 8 & 9]
Purchase of intangible assets [note 10]
Proceeds on sale of property, plant and equipment and investment properties
Purchase of debt and equity instruments
Proceeds on sale of debt and equity instruments
Interest received
Year ended
December 31
2018
Year ended
December 31
2017
$
111,030
$
96,593
30,628
6,528
(64,376)
7,122
(1,611)
(315)
–
89,006
28,138
64,930
$
33,231
6,325
(58,771)
10,502
(6,043)
286
123
82,246
12,962
61,395
$
$
182,074
$
156,603
(19,650)
(1,138)
4,950
(42,614)
25,843
2,468
(55,041)
(1,164)
748
(53,530)
29,639
1,325
Cash used in investing activities
$
(30,141)
$
(78,023)
FINANCING ACTIVITIES
Repayment of finance leases
Dividends paid
Decrease of employee loans-redeemable shares [note 15.2]
Repurchase of common shares [note 16]
Repayment of term loan [note 14]
Finance costs paid
Interest paid
Cash used in financing activities
Net increase (decrease) 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.
(1,193)
(38,166)
3,151
(3,058)
(50,000)
–
(8,607)
(97,873)
54,060
36,207
90,267
$
$
(1,346)
(33,179)
4,004
–
(45,000)
(56)
(10,781)
$
(86,358)
(7,778)
43,985
$
36,207
LEON’S FURNITUR E LI MIT ED ANNUA L R EPORT 20 1 8
32
NOTES TO THE CO NSO L IDATE D F I NA NCI AL STATE M ENTS
Notes to the Consolidated
Financial Statements
(Amounts in thousands of Canadian dollars, except share amounts and earnings 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 27, 2019.
BASIS OF MEASUREMENT
The consolidated financial statements have been prepared under the historical cost
convention, except for debt and equity instruments [available-for-sale financial assets
under IAS 39] 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.
LEON’S FUR NITURE LIM ITED A NNUA L R E PO RT 201 8
33
NOTES TO TH E CO NSO L IDATE D F I NA NCI AL STATE M ENTS
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 (i.e., full consolidation, equity investment or proportional share).
The classification of these entities as a subsidiary, joint operation, joint venture, associate or financial instrument 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.
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 DEBT INSTRUMENTS
The Company exercises judgment in the determination of whether there are objective indicators of impairment with respect to its debt
instruments. The Company’s review is based on an expected credit loss (“ECL”) approach that employs an analysis of historical data,
economic indicators and any past or future events which may influence the recoverability of the debt instruments held.
IMPAIRMENT OF PROPERTY, PLANT AND EQUIPMENT
The Company exercises judgment in the determination of cash-generating units (“CGUs”) for purposes of assessing any impairment
of property, plant and equipment, as well as in determining whether there are indicators of impairment present. Should indicators of
impairment be present, management estimates the recoverable amount of the relevant CGU. This estimation requires assumptions about
future cash flows, margins and discount rates.
IMPAIRMENT OF GOODWILL AND INTANGIBLE ASSETS
The Company tests goodwill and indefinite-life intangible assets at least annually and reviews other long-lived intangible assets for any
indication that the asset might be impaired. Significant judgments are required in determining the CGUs or groups of CGUs for purposes
of assessing impairment. Significant judgments are also required in determining whether to allocate goodwill to CGUs or groups of
CGUs. When performing impairment tests, the Company estimates the recoverable amount of the CGUs or groups of CGUs to which
goodwill and indefinite-life intangible assets have been allocated using a discounted cash flow model that requires assumptions about
future cash flows, margins and discount rates.
PROVISIONS
The Company exercises judgment in the determination of recognizing a provision. The Company recognizes a provision when it has
a present legal or constructive obligation as a result of a past event and a reliable estimate of the obligation can be made. Significant
judgments are required to be made in determining what the probable outflow of resources will be required to settle the obligation.
3. Summary of Significant Accounting Policies
The significant accounting policies used in the preparation of these consolidated financial statements are summarized below. These
accounting policies conform, in all material aspects, to IFRS.
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,
The Brick GP Ltd., United Furniture Warehouse LP, United Furniture GP Ltd., First Oceans Trading Corporation, First Oceans Hong Kong
Limited, First Oceans Shanghai Limited, Trans Global Warranty Corporation, Trans Global Life Insurance Company and Trans Global
LEON’S FURNITUR E LI MI TE D A NNUAL R E PO RT 20 1 8
34
NOTES TO THE CO NSO L IDATE D F I NA NCI AL STATE M ENTS
Insurance Company. Subsidiaries are all those entities over which the Company has control. Control is achieved when the Company
is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through
its power over the investee. The existence and effect of potential voting rights that are currently exercisable or convertible and rights
arising from other contractual arrangements are considered when assessing whether the Company controls another entity. Subsidiaries
are fully consolidated from the date on which control is transferred to the Company and de-consolidated from the date that control
ceases. The Company reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to
one or more of the three elements of control. All inter-company transactions and balances have been appropriately eliminated.
BUSINESS COMBINATIONS
The Company applies the acquisition method in accounting for business combinations. The cost of an acquisition is measured as the
aggregate of the consideration transferred measured at the acquisition date fair value. Transaction costs that the Company incurs in
connection with a business combination are expensed in the period in which they are incurred.
SEGMENT REPORTING
The Company has two operating segments, Leon’s and The Brick, both in the business of the sale of home furnishings, mattresses,
appliances and electronics in Canada. The Company’s chief operating decision-maker, identified as the Chief Executive Officer, monitors
the results of operating segments for the purpose of allocating resources and assessing performance.
Leon’s and The Brick operating segments are aggregated into a single reportable segment because they show a similar long-term
economic performance (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 debt and equity instruments are recognized in the consolidated statements of
income, and other changes in the carrying amounts are recognized in other comprehensive income. For debt and equity instruments
that are not monetary items, the gain or loss that is recognized in other comprehensive income includes any related foreign exchange
component.
FINANCIAL INSTRUMENTS
The Company applied IFRS 9, Financial Instruments ("IFRS 9"), retrospectively, with an initial application date of January 1, 2018.
Consistent with the transitional provisions in IFRS 9 the Company has not restated the comparative information, which continues to
be reported under IAS 39, Financial Instruments: Recognition and Measurement ("IAS 39"). IFRS 9 replaces IAS 39. The core areas
addressed within IFRS 9 are classification and measurement of financial assets and liabilities, impairment of financial assets and hedge
accounting [see note 4 & 22].
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 or liability is measured
using the assumptions that market participants would use, assuming that market participants act in their economic best interest.
Financial assets and liabilities – policy applicable from January 1, 2018
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 settlement 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 amortized cost or fair value. Where assets are measured at fair value, gains
and losses are either recognized entirely in profit or loss (“FVTPL”) or recognized in other comprehensive income (“FVOCI”).
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.
LEON’S FUR NITURE LIM ITED A NNUA L R E PO RT 201 8
35
NOTES TO TH E CO NSO L IDATE D F I NA NCI AL STATE M ENTS
Classifications that the Company has used for financial assets include:
(a) FVOCI – non-derivative financial assets 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, and specifically for equity instruments, with no
reclassification of gains or losses to profit and loss on derecognition;
(b) Amortized Cost – non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. This
includes trade receivables, and these are recorded at amortized cost with gains and losses recognized in net income in the period
that the asset is no longer recognized or becomes impaired; and
(c) FVTPL – financial assets which are classified as fair value through profit and loss.
Classifications that the Company has used for financial liabilities include:
(a) Amortized cost – non-derivative financial liabilities measured at amortized cost with gains and losses recognized in net income in the
period that the liability is no longer recognized; and
(b) FVTPL – financial liabilities which are classified as fair value through profit and loss.
Financial assets are derecognized if the Company’s contractual rights to the cash flows from the financial asset expire or if the Company
transfers the financial asset to another party without retaining control or substantially all of the risks and rewards of ownership of
the asset. Financial liabilities are derecognized once it is extinguished i.e., when the obligation in the contract is either discharged or
cancelled or expires.
Impairment of financial assets
In accordance with IFRS 9 the Company applies the “expected credit loss” model. The impairment model applies to debt instruments
measured at amortized cost or at FVOCI, as well as trade receivables, lease receivables, contracts assets (as defined in IFRS 15,
Revenue from Contracts with Customers ("IFRS 15")), and loan commitments and financial guarantee contracts that are not at FVTPL. It
requires a credit loss to be reflected in profit and loss immediately after an asset or receivable is acquired and subsequent changes in
expected credit losses at each reporting date reflecting the change in credit risk. The Company applies the simplified approach for trade
receivables and calculates expected credit losses based on lifetime expected credit losses.
Financial assets and liabilities – policy applicable prior to January 1, 2018
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
(b) Derivative instruments – financial liabilities that are 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.
LEON’S FURNITUR E LI MI TE D A NNUAL R E PO RT 20 1 8
36
NOTES TO THE CO NSO L IDATE D F I NA NCI AL STATE M ENTS
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 profit or loss.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, balances with banks and short-term market investments with a remaining term to
maturity of less than 90 days from the date of purchase.
TRADE RECEIVABLES
Trade receivables are amounts due for goods sold in the ordinary course of business. If collection is expected in one year or less, they
are classified as current assets. If not, they are presented as non-current assets.
Trade receivables are initially recognized at fair value and subsequently measured at amortized cost using the effective interest 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. 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.
LEON’S FUR NITURE LIM ITED A NNUA L R E PO RT 201 8
37
NOTES TO TH E CO NSO L IDATE D F I NA NCI AL STATE M ENTS
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, in which a significant portion of the risks and rewards of ownership are retained by the lessor, 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 a review 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.
The Company as lessee
Finance lease
Assets held under finance leases are initially recognized as assets of the Company at the commencement of the lease at the lower of
their fair value or the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in
accordance with the accounting policy applicable to that asset. A corresponding liability to the lessor is included in the consolidated
statements of financial position as a finance lease liability.
Minimum lease payments made under finance leases are apportioned between the finance costs and the reduction of the outstanding
finance lease liability using the effective interest 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.
Operating lease
For real estate operating leases, any related rent escalations are factored into the determination of rent expense to be recognized over
the lease term.
The total operating lease payments to be made over the lease term are recognized in income on a straight-line basis over the lease term.
Lease incentives received are recognized as an integral part of the total lease expense over the lease term.
Contingent rental expenses arising under operating leases are recognized as an expense in the period in which they are incurred.
INVESTMENT PROPERTIES
Assets that are held for long-term rental yields or for capital appreciation or both, and that are not occupied by either the Company or
any of its subsidiaries, are classified as investment properties. Investment properties are measured initially at cost, including related
transaction costs. Subsequent to initial recognition, investment properties are carried at cost and depreciated over the estimated useful
lives of the properties:
Buildings
Building improvements
30 to 50 years
Over the remaining lease term
Land held by the Company and classified as investment property is not depreciated.
Subsequent expenditures on investment properties are capitalized to the properties’ carrying amount only when it is probable that future
economic benefits associated with the expenditures will flow to the Company and the cost of the item can be measured reliably. All other
repairs and maintenance costs are expensed when incurred. When part of an investment property is replaced, the carrying amount of
the replaced part is derecognized.
If an investment property becomes owner occupied, it is reclassified as property, plant and equipment.
GOODWILL AND INTANGIBLE ASSETS
Goodwill
Goodwill is the residual amount that results when the purchase price of an acquired business exceeds the sum of the amounts allocated
to the tangible and intangible assets acquired, less liabilities assumed, based on their fair value. Goodwill is assigned at the date of the
business acquisition. The Company assesses at least annually, or at any time if an indicator of impairment exists, whether there has
been an impairment loss in the carrying value of goodwill and it is carried at cost less accumulated impairment losses. Impairment
losses on goodwill are not reversed.
Goodwill is allocated to CGUs or groups of CGUs that are expected to benefit from the business combination for the purpose of
impairment testing. A group of CGUs represents the lowest level within the Company at which goodwill is monitored for internal
management purposes.
LEON’S FURNITUR E LI MI TE D A NNUAL R E PO RT 20 1 8
38
NOTES TO THE CO NSO L IDATE D F I NA NCI AL STATE M ENTS
Intangible assets
Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business
combination is their fair value at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any
accumulated amortization and accumulated impairment losses. Internally generated intangibles, excluding capitalized development costs,
are not capitalized and the related expenditure is reflected in profit or loss in the period in which the expenditure is incurred. The useful
lives of intangible assets are assessed as either finite or indefinite.
Intangible assets with finite useful lives are amortized on a straight-line basis over their estimated useful lives as follows:
Customer relationships
Brand name (Appliance Canada)
Non-compete agreement
Computer software
Favourable lease agreements
8 years
10 years
8 years
3 to 7 years
Over the lease term including renewal options
IMPAIRMENT OF NON-FINANCIAL ASSETS
The Company considers at each reporting date whether there is an indication that an asset may be impaired. If impairment indicators are
found to be present, or when annual impairment testing for an asset is required, the non-financial assets are assessed for impairment.
Impairment losses are recognized immediately in income to the extent an asset’s carrying amount exceeds its recoverable amount.
The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. In assessing value-in-use, estimated
future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the
time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.
Goodwill and indefinite-life intangible assets are tested annually in the fourth quarter of the year, or when circumstances indicate that
the carrying value may be impaired. The assessment of recoverable amount for goodwill and indefinite-life intangible assets involves
assumptions about future conditions for the economy, capital markets, and specifically, the retail sector. As such, the assessment is
subject to a significant degree of measurement uncertainty.
For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets
that generate cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets.
For the Company, store-related CGUs are defined as individual stores or regional groups of stores within a geographic market.
For the Company’s corporate assets that do not generate separate cash inflows, the recoverable amount is determined for the CGU
to which the corporate asset belongs. Where a reasonable and consistent basis of allocation can be identified, corporate assets are
allocated to an individual CGU; otherwise, they are allocated to the smallest group of CGUs for which a reasonable and consistent
allocation basis can be identified. Impairment losses recognized in respect of CGUs are allocated to reduce the carrying amounts of
the assets in the CGUs on a pro rata basis.
Impairment losses recognized in prior periods are assessed at each reporting date for any indication that the loss has decreased or no
longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount and
the reversal is recognized in income. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed
the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized.
INCOME 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.
Current income tax
Current income tax expense is based on the results of the year as adjusted for items that are not taxable or not deductible. Current
income tax is calculated using tax rates and laws that were substantively enacted at the end of the reporting period. Management
periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to
interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.
LEON’S FUR NITURE LIM ITED A NNUA L R E PO RT 201 8
39
NOTES TO TH E CO NSO L IDATE D F I NA NCI AL STATE M ENTS
Deferred income tax
Deferred income tax is recognized, using the liability method, on temporary differences arising between the tax bases of assets and
liabilities and their carrying amounts in the consolidated statements of financial position. Deferred income tax is determined using
tax rates and laws that have been enacted or substantively enacted by the consolidated statement of financial position dates and are
expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled.
Deferred income tax assets are recognized only to the extent that it is probable that future taxable profit will be available against which
the temporary differences can be utilized.
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current income tax assets against
current income tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation
authority where there is an intention to settle the balances on a net basis.
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.
Unpaid insurance claims
The provision for unpaid claims includes adjustment expenses and an estimate of the future settlement of claims, both reported and
unreported, that have occurred on or before the reporting date on the insurance contracts the Company has underwritten. The provision
is actuarially determined on an annual basis using assumptions of loss emergence, payment rates, interest, and expected expenses
associated with the adjustment and payment of such claims. The provision includes appropriate charges for risk and uncertainty and
is measured on a discounted basis. As this provision is an estimate, the amount of actual claims may differ from the recorded amount.
The provisions are derecognized when the obligation to pay a claim no longer exists.
Unpaid warranty claims
Warranty repairs related to warranty plans sold separately are recorded as claims expense at the time the customer reports a claim. For
these warranties, a provision for unpaid warranty claims is established for unpaid reported claims. The provision for unpaid claims is
based on estimates, and may differ from actual claims paid.
The Company also provides a standard warranty for certain products. For these warranties, a provision for warranty claims is
recognized when the underlying products are sold. The amount of the provision is estimated using historical experience and may differ
from actual claims paid.
Product returns
The Company has a return policy allowing customers to return merchandise if not satisfied within 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
The Company applied IFRS 15 using the full retrospective method and concluded no significant differences between the point of
transfer of risk and rewards under IAS 18, Revenue Recognition ("IAS 18"), and the point of transfer of control under IFRS 15 and
no restatements are required.
LEON’S FURNITUR E LI MI TE D A NNUAL R E PO RT 20 1 8
40
NOTES TO THE CO NSO L IDATE D F I NA NCI AL STATE M ENTS
Revenue recognition
IFRS 15 provides a single, principles based five-step model that will apply to all contracts with customers with limited exceptions. Under
IFRS 15, revenue is recognized at an amount that reflects the consideration to which an entity expects to be entitled in exchange for
transferring goods or services to a customer [See note 4].
In addition to the above general principles, the Company applies the following specific revenue recognition policies:
Sale of goods and related services
Revenue from the sale of goods and related services is recognized either when the customer picks up the merchandise ordered or when
merchandise is delivered to the customer’s home and the performance obligation has been satisfied. Any payments received in advance
of delivery are deferred and recorded as customers’ deposits. Revenue is shown net of sales tax and financing charges.
The Company records a provision for sales returns and price guarantees based on historical experience and actual experience each quarter.
Franchise operations
Leon’s franchisees operate principally as independent owners. The Company charges each franchisee a royalty fee based on a
percentage of the franchisee’s gross revenue. The Company supplies inventory for amounts representing landed cost plus a mark-up.
The royalty income and sales to franchises, is recorded by the Company on a monthly basis once the sale occurs and the performance
obligations have been satisfied.
Insurance contracts and revenue
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.
Unearned insurance revenue
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.
Deferred warranty plan revenue
Warranties, underwritten by the Company’s wholly-owned subsidiaries, are offered on all products sold by the Company and franchisees
to provide coverage that extends beyond the manufacturer’s warranty period by up to five years. Warranties are sold to customers when
they make their original purchase and take effect immediately. The warranty contracts provide both repair and replacement services
depending upon the nature of the warranty claim.
The Company’s extended warranty plan revenues are deferred at the time of sale and are recognized as revenue over the weighted
average term of the warranty plan on a straight-line basis.
LEON’S FUR NITURE LIM ITED A NNUA L R E PO RT 201 8
41
NOTES TO TH E CO NSO L IDATE D F I NA NCI AL STATE M ENTS
Deferred acquisition costs
Acquisition costs are comprised of commissions, premium taxes and other expenses that relate directly to the writing or renewing of
warranty and insurance contracts, and are considered costs to obtain the contract. These costs are deferred only to the extent that they
are expected to be recovered from unearned premiums and are amortized over the period in which the revenue from the policies is
earned. All other acquisition costs are recognized as an expense when incurred.
Costs incurred on warranty plan sales, including sales commissions and premium taxes, are recorded as deferred acquisition costs.
These costs are amortized to income in the same pattern as revenue from warranty plan sales is recognized.
Changes in the expected pattern of consumption are accounted for by changing the amortization period and are treated as a change in
an accounting estimate. Deferred acquisition costs are derecognized when the related contracts are either settled or disposed of.
Sale of gift cards
Revenue from the sale of gift cards is recognized when the gift cards are redeemed (the customer purchases merchandise). Revenue
from unredeemed gift cards is deferred and included in trade and other payables.
Rental income on investment properties
Rental income arising on investment properties is accounted for on a straight-line basis over the lease term and is presented
within revenue.
STORE PRE-OPENING COSTS
Store pre-opening costs are expensed as incurred.
BORROWING COSTS
Borrowing costs are expensed in the period in which they occur. Borrowing costs consist of interest and other costs that the Company
incurs in connection with the borrowing of funds.
EARNINGS PER SHARE
Basic earnings per share have been calculated using the weighted average number of common shares outstanding during the year.
Diluted earnings per share are calculated using the “if converted” method. The dividends declared on the redeemable share liability
under the Company’s Management Share Purchase Plan (the “Plan”) are included in net income for the year. The redeemable shares
convertible under the Plan are included in the calculation of diluted number of common shares to the extent the redemption price was
less than the average annual market price of the Company’s common shares.
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. Joint ventures
are accounted for using the equity method of accounting in accordance with IAS 28, Investments in Associates and Joint Ventures
("IAS 28"). Under the equity method of accounting, the Company’s investments in joint ventures and associates are carried at cost and
adjusted for post-acquisition changes in the net assets of the investment. Profit or loss reflects the Company’s share of the results of
these investments. Distributions received from an investee reduce the carrying amount of the investment. The consolidated statements
of comprehensive income (loss) also include the Company’s share of any amounts recognized by joint ventures and associates in OCI.
Where there has been a change recognized directly in the equity of the joint venture or associate, the Company recognizes its share
of that change in equity. The financial statements of the joint ventures and associates are generally prepared for the same reporting
period as the Company, using consistent accounting policies. Adjustments are made to bring into line any dissimilar accounting policies
that may exist in the underlying records of the joint venture and/or associate. Adjustments are made in the consolidated financial
statements to eliminate the Company’s share of unrealized gains and losses on transactions between the Company and its joint ventures
and associates. 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.
LEON’S FURNITUR E LI MI TE D A NNUAL R E PO RT 20 1 8
42
Associates
Entities in which the Company has significant influence and which are neither subsidiaries, nor joint arrangements, are accounted for
using the equity method of accounting in accordance with IAS 28, “Investments in Associates and Joint Ventures.” This method of
accounting is described in the previous section Joint Arrangements. The Company discontinues the use of the equity method from
the date on which it ceases to have significant influence, and from that date accounts for the investment in accordance with IAS 39,
(its initial costs are the carrying amount of the associate on that date), provided the investment does not then qualify as a subsidiary
or a joint arrangement.
4. Adoption of Accounting Standards and Amendments
ADOPTION OF NEW ACCOUNTING STANDARDS
The Company has adopted the new IFRS accounting standards listed below as at January 1, 2018, in accordance with the transitional
provisions outlined in the respective standard.
IFRS 9, FINANCIAL INSTRUMENTS (“IFRS 9”)
IFRS 9 was issued on July 24, 2014 and the new standard must be applied retrospectively with some exemptions. The core areas
addressed within IFRS 9 are classification and measurement of financial assets and liabilities, impairment of financial assets and hedge
accounting. The Company has applied IFRS 9 retrospectively, with the initial application date of January 1, 2018. Consistent with the
transitional provisions in IFRS 9 paragraph 7.2.15, comparative information has not been restated.
Classification and measurement
Under IFRS 9, existing IAS 39 classification and measurement categories for financial assets are being replaced with fair value through
profit and loss (“FVTPL”), fair value through other comprehensive income (“FVOCI”) and amortized cost.
The details of changes are disclosed below:
•
The Company reclassified financial assets from loans and receivables to amortized cost.
•
•
•
Equity instruments at FVOCI – represent securities that the Company intends to hold for the long-term for strategic purposes. As
permitted by IFRS 9, these investments have been designated at the date of initial application as measured at FVOCI. Unlike IAS 39,
there will be no reclassification to profit or loss on derecognition and these securities are not subject to an impairment assessment.
Interest income and dividend income will continue to be recognised in net income. Under IAS 39, the Company’s equity instruments
were classified as available-for-sale.
Debt instruments at FVOCI – represent securities the Company holds to collect contractual cash flows and to sell. Upon
derecognition, gains and losses will be reclassified to profit or loss. Under IAS 39, the Company’s debt instruments at FVOCI were
classified under restricted marketable securities and available-for-sale financial assets.
Debt instruments at FVTPL – represent securities the Company has concluded that are neither held to collect contractual cash flows,
nor managed under an objective that results in both collecting the contractual cash flows and selling the investment. Under IAS 39,
the Company’s debt instruments at FVTPL were classified under restricted marketable securities.
Impairment of financial assets
IFRS 9 replaces the incurred loss model from IAS 39 by introducing a new ‘expected credit loss’ model (“ECL”) for calculating
impairment of financial assets. IFRS 9 specifies different approaches for measuring and recognizing expected credit losses, by
considering only defaults in the next 12 months and/or the full remaining life of the financial asset. The expected credit loss model
requires a credit loss to be reflected in profit and loss immediately after an asset is acquired and subsequent changes in expected credit
losses at each reporting date reflecting the change in credit risk. Due to the terms offered to customers and the Company’s policy on
providing for expected credit losses, the Company concludes that there is no impact on its allowance for doubtful accounts.
IFRS 9 provides a low credit risk simplified approach for certain trade receivables and IFRS 15 contract assets. The simplified approach
does not require the tracking of changes in credit risk, but instead requires the recognition of lifetime ECL at all times. Based on the
Company’s portfolio, historical trends and future looking analyst predictions, it was concluded that the low credit risk simplification
could be used as the trade receivables and investments have a low risk of default and the Company has a strong capacity to meet its
contractual cash flow obligations in the near future.
IFRS 15, REVENUE FROM CONTRACTS WITH CUSTOMERS (“IFRS 15”)
IFRS 15 was issued in May 2014, which replaces IAS 11, Construction Contracts, IAS 18, Revenue Recognition, and related Interpretations.
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.
43
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSLEON’S FURNITURE LIMITED ANNUAL REPORT 2018 NOTES TO TH E CO NSO L IDATE D F I NA NCI AL STATE M ENTS
Under IFRS 15, revenue is recognized at an amount that reflects the consideration to which an entity expects to be entitled in exchange
for transferring goods or services to a customer.
The standard requires entities to exercise judgment, taking into consideration all of the relevant facts and circumstances when applying
each step of the model to contracts with their customers. The standard also specifies the accounting for the incremental costs of
obtaining a contract and the costs directly related to fulfilling a contract.
The Company has performed a detailed impact assessment, identifying all current sources of revenue and analyzing the accounting
requirements for each under IFRS 15. The Company adopted IFRS 15 using the full retrospective method and has concluded that there
is no impact in relation to IFRS 15 because the Company’s analysis of contracts relating to sale of goods by corporate stores and income
from franchise operations under the new revenue recognition standard supports the current process of recognition at a point in time
when control is transferred to the customer. Extended warranty revenue will be deferred and subsequently recognised over time which
is consistent with the current revenue model. The impact to consolidated financial statements is limited to additional disclosure on the
disaggregation of the Company’s revenue streams and contract liabilities, as included in note 17.
ACCOUNTING STANDARDS AND AMENDMENTS ISSUED BUT NOT YET ADOPTED
IFRS 16, Leases (“IFRS 16”)
In January 2016, the IASB issued IFRS 16, which will replace IAS 17. IFRS 16 sets out the principles for the recognition, measurement,
presentation and disclosure of leases and requires lessees to account for all leases under a single on-balance sheet model similar to the
accounting for finance leases under IAS 17. The new standard will be effective for fiscal years beginning on or after January 1, 2019.
At the commencement date of a lease, a lessee will recognise a liability to make lease payments (i.e., the lease liability) and an asset
representing the right to use the underlying asset during the lease term (i.e., the right-of-use asset). Lessees will be required to
separately recognise the interest expense on the lease liability and the depreciation expense on the right-of-use asset. The standard
includes two recognition exemptions for lessees – leases of ‘low-value’ assets (e.g., laptop computers) and short-term leases (i.e., leases
with a lease term of 12 months or less). The Company will apply these exemptions where applicable.
Under IFRS 16, the lessor’s accounting for operating and finance leases will remain substantially unchanged.
The Company expects the following changes:
•
•
The amount of total assets and total liabilities will increase due to the recognition of right-of-use assets and financial liabilities for
future payment obligations from leases previously classified as operating leases;
Operating lease payments which are currently included in selling, general and administrative expenses on the Consolidated Statement
of Income will be replaced with depreciation, (included in selling, general and administrative expenses), from the right-of-use asset
and interest expense, (included under net finance costs), from the lease liability.
As the Company has significant contractual obligations in the form of real estate operating leases, Management have decided to
apply this standard using the Modified Retrospective Approach. Under this approach the Company will not be restating comparative
information and has elected to use the following practical expedients on adoption of the standard on January 1, 2019:
•
the Company has not reassessed, under IFRS 16, contracts that were identified as leases under the previous standard (IAS 17);
•
the Company will use a single discount rate to a portfolio of leases with reasonably similar underlying characteristics;
•
the Company has used hindsight in determining the lease term where the lease contracts contains options to extend or terminate
the lease.
IFRS 16 is expected to have a material impact on the Company’s consolidated statements of financial position. The Company expects
to recognize right-of-use assets in the range of $405 million to $425 million and related lease liabilities in the range of $392 million to
$412 million. The difference between these amounts will reflect derecognition of certain intangible assets relating to favourable lease
agreements, and adjustments relating to deferred rent liabilities and lease inducements.
IFRS 17, Insurance Contracts (“IFRS 17”)
In May 2017, the IASB issued IFRS 17, which replaces IFRS 4 – Insurance Contracts (“IFRS 4”). IFRS 17 establishes new principles for
the recognition, measurement, presentation and disclosure of insurance contracts. IFRS 17 applies to all types of insurance contracts
regardless of the type of entities that issue them, as well as to certain guarantees and financial instruments with discretionary
participation features. IFRS 17 provides a comprehensive model for insurance contracts, covering all relevant accounting aspects.
The core of IFRS 17 is the general model, supplemented by:
• A specific adaptation for contracts with direct participation features (the variable fee approach)
• A simplified approach (the premium allocation approach) mainly for short-duration contracts
LEON’S FURNITUR E LI MI TE D A NNUAL R E PO RT 20 1 8
44
NOTES TO THE CO NSO L IDATE D F I NA NCI AL STATE M ENTS
IFRS 17 is effective for annual periods beginning on or after January 1, 2021. Retrospective application is required. The Company
plans to adopt the new standard on the effective date. The IASB has tentatively decided to defer the effective date of IFRS 17 to
annual periods beginning on or after January 1, 2022. The Company is currently analyzing the impact these standards will have on
its financial statements.
IFRS Interpretation Committee Interpretation 23, Uncertainty over Income Tax Treatments (“IFRIC 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 does not expect any material impact on the consolidated
financial statements.
5. Cash and Cash Equivalents
Cash and cash equivalents
As at December 31
As at December 31
2018
90,267
$
2017
36,207
$
6. Inventories
The amount of inventory recognized as an expense for the year ended December 31, 2018 was $1,214,147 (2017 — $1,212,951), which is
presented within cost of sales in the consolidated statements of income.
There was $2,170 in inventory write-down reversals (2017 — $1,171 inventory write downs) recognized as an expense during 2018. As at
December 31, 2018, the inventory markdown provision totalled $6,995 (2017 — $9,165).
7. Deferred Acquisition Costs
Balance as at December 31, 2016
Costs of new policies sold
Policy sales costs recognized
Balance as at December 31, 2017
Cost of new policies sold
Policy sales costs recognized
Balance as at December 31, 2018
Reported as:
Current
Non-current
Balance as at December 31, 2017
Current
Non-current
Balance as at December 31, 2018
$
$
$
20,771
6,885
(7,183)
20,473
7,061
(7,884)
19,650
5,841
14,632
20,473
7,899
11,751
19,650
LEON’S FUR NITURE LIM ITED A NNUA L R E PO RT 201 8
45
NOTES TO TH E CO NSO L IDATE D F I NA NCI AL STATE M ENTS
8. Property, Plant and Equipment
Land
Buildings
Equipment
Vehicles
improvements
property
equipment
Total
Building
Leased
Leased
As at December 31, 2018:
Opening net book value
Reclass
Additions
Disposals
Depreciation
$
102,991 $ 115,164 $
–
–
(1,900)
–
(239)
751
(2,487)
(6,477)
42,795 $
297
6,786
(118)
(7,992)
22,331 $
–
5,589
(125)
(4,577)
46,155 $
–
6,524
–
(9,994)
7,254 $
–
–
–
(1,131)
58 $
(58)
–
–
–
336,748
–
19,650
(4,630)
(30,171)
Closing net book value
101,091
106,712
41,768
23,218
42,685
6,123
–
321,597
As at December 31, 2018:
Cost
Accumulated depreciation
101,091
–
254,361
(147,649)
158,675
(116,907)
50,876
(27,658)
235,765
(193,080)
20,766
(14,643)
9,765
(9,765)
831,299
(509,702)
Net book value
$ 101,091 $ 106,712 $
41,768 $
23,218 $
42,685 $
6,123 $
– $ 321,597
Land
Buildings
Equipment
Vehicles
improvements
property
equipment
Total
Building
Leased
Leased
As at December 31, 2017:
Opening net book value
Additions
Disposals
Depreciation
$
86,254 $
16,737
–
–
105,670 $
15,634
–
(6,140)
41,771 $
11,343
(1,005)
(9,314)
Closing net book value
102,991
115,164
42,795
20,307 $
52,694 $
6,567
(12)
(4,531)
22,331
4,760
–
(11,299)
46,155
8,385 $
–
–
(1,131)
419 $
–
–
(361)
315,500
55,041
(1,017)
(32,776)
7,254
58
336,748
As at December 31, 2017:
Cost
Accumulated depreciation
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)
Net book value
$
102,991 $
115,164 $
42,795 $
22,331 $
46,155 $
7,254 $
58 $
336,748
Included in the above balances as at December 31, 2018 are assets not being amortized with a net book value of approximately $2,516
(2017 – $257) being construction in progress. Also included are fully depreciated assets still in use with a cost of $247,243 (2017 – $204,951).
9. Investment Properties
As at December 31, 2018:
Opening net book value
Additions
Depreciation
Closing net book value
As at December 31, 2018:
Cost
Accumulated depreciation
Net book value
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
Land
Buildings
Building
improvements
$
$
$
$
10,946
–
–
10,946
10,946
–
10,946
10,946
–
–
10,946
10,946
–
10,946
$
$
$
$
$
$
5,879
–
(377)
5,502
17,333
(11,831)
5,502
6,257
–
(378)
5,879
17,333
(11,454)
$
5,879
$
704
–
(80)
624
1,097
(473)
624
781
–
(77)
704
1,097
(393)
704
$
$
$
Total
17,529
–
(457)
17,072
29,376
(12,304)
17,072
17,984
–
(455)
17,529
29,376
(11,847)
$
17,529
The estimated fair value of the investment properties portfolio as at December 31, 2018 was approximately $44,000 (2017 – $44,800).
This recurring fair value disclosure is categorized within Level 3 of the fair value hierarchy (Note 22 for definition of levels). This was
compiled internally by management based on available market evidence.
LEON’S FURNITUR E LI MI TE D A NNUAL R E PO RT 20 1 8
46
10. Intangible Assets
As at December 31, 2018:
Opening net book value
Additions
Amortization
Closing net book value
As at December 31, 2018:
Cost
Accumulated amortization
Net book value
As at December 31, 2017:
Opening net book value
Additions
Disposals
Amortization
Closing net book value
As at December 31, 2017:
Cost
Accumulated amortization
NOTES TO THE CO NSO L IDATE D F I NA NCI AL STATE M ENTS
Customer
relationships
Brand name
and franchise
agreements Computer software
Favourable lease
agreements
$
$
$
2,031
–
(625)
1,406
7,000
(5,594)
1,406
2,656
–
–
(625)
2,031
7,000
(4,969)
$
266,000
–
–
266,000
268,500
(2,500)
$
266,000
$
266,250
–
–
(250)
266,000
268,500
(2,500)
$
$
$
9,487
1,138
(3,537)
7,088
18,458
(11,370)
7,088
11,120
1,164
(17)
(2,780)
9,487
17,320
(7,833)
$
$
$
28,768
–
(2,366)
26,402
46,049
(19,647)
26,402
31,438
–
–
(2,670)
28,768
46,049
(17,281)
$
Total
306,286
1,138
(6,528)
300,896
340,007
(39,111)
$
300,896
$
311,464
1,164
(17)
(6,325)
306,286
338,869
(32,583)
Net book value
$
2,031
$
266,000
$
9,487
$
28,768
$
306,286
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,
$
2018
245,000
21,000
$
266,000
2017
$
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. 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:
Brick division customer relationships
Brick division favourable lease agreements
Computer software
As at December 31,
$
2018
1,406
26,402
7,088
$
2017
2,031
28,767
9,488
$
34,896
$
40,286
For the purpose of the annual impairment testing, goodwill is allocated to the following CGU groups, which are the groups expected to
benefit from the synergies of the business combinations and to which the goodwill is monitored by the Company:
Appliance Canada (included within the Leon’s division)
Brick division
Total goodwill
IMPAIRMENT TESTS
As at December 31,
$
2018
11,282
378,838
$
390,120
2017
$
11,282
378,838
$
390,120
The Company performed impairment tests of goodwill, brand and franchise agreements intangible as at December 31, 2018 and
December 31, 2017 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
LEON’S FUR NITURE LIM ITED A NNUA L R E PO RT 201 8
47
NOTES TO TH E CO NSO L IDATE D F I NA NCI AL STATE M ENTS
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, 2018 and December 31, 2017
were as follows:
Growth rate
Pre-tax discount rate
2018
2.0%
9.2%
2017
2.0%
9.4%
The impairment tests performed resulted in no impairment of the goodwill and indefinite life intangibles as at December 31, 2018 and
December 31, 2017.
11. Trade and Other Payables
Trade payables
Other payables
12. Provisions
As at December 31,
2018
$
203,602
43,534
$
247,136
$
2017
200,568
33,910
$
234,478
Unpaid insurance
claims
Unpaid warranty
claims
Balance as at December 31, 2017
Provisions made during the year
Provisions used during the year
Unused provisions reversed
$
1,695
865
(1,145)
(323)
$
2,296
3,786
(33)
–
$
Product
returns
2,081
226
–
(198)
$
Other
2,719
239
(521)
–
$
Total
8,791
5,116
(1,699)
(521)
Balance as at December 31, 2018
$
1,092
$
6,049
$
2,109
$
2,437
$
11,687
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.
LEON’S FURNITUR E LI MI TE D A NNUAL R E PO RT 20 1 8
48
NOTES TO THE CO NSO L IDATE D F I NA NCI AL STATE M ENTS
FINANCE LEASE LIABILITIES
Finance lease liabilities are payable as follows:
Less than one year
Between one and five years
More than five years
Reported as:
Current
Non-current
Future
minimum lease
payments
$
1,892
7,704
803
10,399
$
Interest
477
709
14
1,200
2018
Present value
of minimum
lease payments
Future
minimum lease
payments
$
$
1,848
7,670
2,729
12,247
$
$
1,415
6,995
789
9,199
1,415
7,784
9,199
Interest
574
1,153
46
1,773
2017
Present value of
minimum lease
payments
$
1,274
6,517
2,683
10,474
1,421
9,053
$
10,474
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 March 31 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 $50,125 through a charge to
net income over their term. This charge will be included in finance costs.
During the year ended December 31, 2018, a portion of the convertible debentures with a stated value of $17 was converted to 1,344
common shares, at the holder’s option (year ended December 31, 2017 – $49,858 converted to 3,945,113 common shares).
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
Accretion expense for the year ended December 31, 2018
Conversion of convertible debentures for the year ended December 31, 2018
Carrying value of convertible debentures as at December 31, 2018
$
93,520
808
(46,324)
48,004
439
(8)
$
48,435
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 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 31-day Bankers’ Acceptance with a cost of borrowing of 4.0% that was renewed on December 31, 2018. 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 covenants related to the credit facility.
As at December 31, 2018, the Company is in full compliance of these financial and non-financial covenants.
LEON’S FUR NITURE LIM ITED A NNUA L R E PO RT 201 8
49
NOTES TO TH E CO NSO L IDATE D F I NA NCI AL STATE M ENTS
15. Management Share Purchase Plan
15.1 EMPLOYEE BENEFIT PLAN
Members of senior management participate in the Company’s Management Share Purchase Plan (“MSPP”). Under the terms of the Plan,
the Company advanced non-interest bearing loans to certain of its employees in 2018 to allow them to acquire common shares of the
Company. Participation in the MSPP is voluntary. The common shares purchased under the MSPP are held in trust by a trustee for the
benefit of the employee until the later of three years from the date of issue and the date the related loan to acquire the shares is repaid
in full. While such shares are held in trust, any dividends paid on these common shares are credited against the related loan.
During the fourth quarter of 2018, a total of 1,188,873 of the 2018 series of common shares were issued under the 2018 MSPP to senior
management employees at $15.30 per share. The Company recognized a loan receivable in the amount of $13,191 (recognized at fair
value) and a deferred compensation expense receivable of $2,315. The common shares issued of $15,506 are shown within common
shares on the consolidated statements of financial position.
15.2 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
296,202 series 2009 shares (December 31, 2017 – 367,565)
125,357 series 2012 shares (December 31, 2017 – 139,820)
823,845 series 2013 shares (December 31, 2017 – 948,206)
496,385 series 2014 shares (December 31, 2017 – 545,865)
692,182 series 2015 shares (December 31, 2017 – 735,519)
Less employee share purchase loans
As at December 31
2018
2017
$
2,622
1,556
9,383
7,470
9,317
(30,335)
$
3,254
1,735
10,800
8,215
9,900
(33,747)
$
13
$
157
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 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 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 $615 (2017 – $643) 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, 2018, 71,363 series 2009 shares, 14,463 series 2012 shares, 124,361 series 2013 shares,
49,480 series 2014 shares and 23,975 series 2015 shares (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) were converted
into common shares with a stated value of approximately $632, $179, $1,417, $745 and $323, respectively (year ended December 31, 2017
– $995, $1,106, $1,658, $730 and $337).
During the year ended December 31, 2018, the Company cancelled 19,362 series 2015 shares (year ended December 31, 2017 – 28,816
series 2014 shares and 34,481 series 2015 shares), in the amount of $261 (year ended December 31, 2017 –$434 and $464, respectively).
Employee share purchase loans have been netted against the redeemable share liability, as the Company has the legally enforceable right
of set-off and the positive intent to settle on a net basis.
LEON’S FURNITUR E LI MI TE D A NNUAL R E PO RT 20 1 8
50
NOTES TO THE CO NSO L IDATE D F I NA NCI AL STATE M ENTS
16. Common Shares
Authorized - Unlimited common shares
Issued – 77,490,893 common shares (2017 – 76,188,143)
As at December 31
2018
2017
$ 111,956
$
93,392
During the year ended December 31, 2018, 71,363 series 2009 shares, 14,463 series 2012 shares, 124,361 series 2013 shares, 49,480
series 2014 shares and 23,975 series 2015 shares (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) were converted into common shares with
a stated value of approximately $632, $179, $1,417, $745 and $323, respectively (year ended December 31, 2017 – $995, $1,106, $1,658,
$495 and $95).
On September 10, 2018, the Company announced that it has received approval for a common share repurchase programme on
The Toronto Stock Exchange. The Company intends to repurchase for cancellation a maximum of 3,813,398 common shares representing
4.99% of the total number of its 76,420,803 issued and outstanding common shares as at August 31, 2018. The average daily trading
volume for the six months ending August 31, 2018 was 8,019. Therefore, other than block purchase exemptions, daily purchases will
be limited to 2,005 common shares. The bid will commence on September 12, 2018 and terminate on the earliest of the purchase of
3,813,398 common shares, the issuer providing a notice of termination, and September 11, 2019. Purchases will be executed through
the facilities of the Toronto Stock Exchange at market price under the normal course issuer bid rules of the Toronto Stock Exchange.
During the year ended December 31, 2018, the Company repurchased 201,775 shares (year ended December 31, 2017 – nil) of its
common shares on the open market pursuant to the terms and conditions of Normal Course Issuer Bids at a net cost of $3,058
(year ended December 31, 2017 - $nil). The repurchase of common shares resulted in a reduction of share capital in the amount of
$254 (year ended December 31, 2017 - $nil). The excess net cost over the average carrying value of the shares of $2,804 (year ended
December 31, 2017 - $nil) has been recorded as a reduction in retained earnings. As at December 31, 2018 the Company has cancelled
171,105 of these repurchased shares and the remaining amount of 30,670 shares were held as Treasury Shares, which have a value of $39.
During the year ended December 31, 2018, the Company implemented a management share purchase plan. This resulted in an addition
of 1,188,873 common shares at an amount of $15,506 (year ended December 31, 2017 – $nil).
During the year ended December 31, 2018, a portion of the convertible debentures with a stated value of $17 were converted to
1,344 common shares (year ended December 31, 2017 – $49,858,000 converted to 3,945,113 common shares).
As at December 31, 2018, the dividends payable were $10,690 [$0.14 per share] and as at December 31, 2017 were $9,140 [$0.12 per share].
17. Revenue
(a) Disaggregation of Revenue
Sale of goods by corporate stores
Income from franchise operations
Extended warranty revenue
Insurance sales revenue
Rental income from investment property
Total
(b) Customers’ Deposits
Year ended December 31
$
2018
2,161,320
27,779
39,361
11,837
1,140
$
2017
2,135,316
25,548
42,785
10,393
1,337
$
2,241,437
$
2,215,379
Year ended December 31
Opening balance as at January 1
Revenue recognized that was included in the customer deposit balance at the beginning of the year
$
$
128,078
(126,053)
$
$
Any payments received in advance of delivery are deferred and recorded as customers’ deposits.
2018
2017
117,990
(116,037)
LEON’S FUR NITURE LIM ITED A NNUA L R E PO RT 201 8
51
NOTES TO TH E CO NSO L IDATE D F I NA NCI AL STATE M ENTS
(c) Deferred Warranty
Opening balance as at January 1
Revenue recognized that was included in the Deferred Warranty at the beginning of the year
Recognition of Deferred Warranty during the year
18. Expenses By Nature
Salaries and benefits
Depreciation of property, plant and equipment and investment properties
Amortization of intangible assets
Occupancy expenses
19. Net Finance Costs
Interest expense on finance lease obligations
Interest expense on term credit facilities and revolving credit facilities
Interest expense on convertible debentures
Finance income
Year ended December 31
2018
147,752
(64,376)
64,930
$
$
$
2017
145,128
(60,064)
62,688
$
$
$
$
$
$
$
$
Year ended December 31
2018
383,550
30,628
6,528
182,406
2017
373,536
33,231
6,325
182,716
$
$
$
$
Year ended December 31
2018
573
6,879
1,944
(2,468)
$
2017
667
7,770
3,515
(1,450)
Total
$
6,928
$
10,502
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
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
Income tax expense reported in the consolidated
2018
$
41,170
41,170
(1,610)
–
(1,610)
2017
$
40,879
40,879
(6,043)
–
(6,043)
statements of income
$
39,560
$
34,836
(b) Reconciliation of the effective tax rates are as follows:
Income before income taxes
Income tax expense based on statutory tax rate
Increase (decrease) in income taxes resulting from
non-taxable items or adjustments of prior year taxes:
Non-deductible items
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
$
2018
150,590
40,177
969
–
–
–
311
(705)
(1,192)
2017
$
131,429
35,105
843
(8)
79
66
49
(187)
(1,111)
26.68%
0.64%
0.00%
0.00%
0.00%
0.21%
(0.47%)
(0.79%)
26.71%
0.64%
(0.01%)
0.06%
0.05%
0.04%
(0.14%)
(0.84%)
statements of income
$
39,560
26.27%
$
34,836
26.51%
LEON’S FURNITUR E LI MI TE D A NNUAL R E PO RT 20 1 8
52
NOTES TO THE CO NSO L IDATE D F I NA NCI AL STATE M ENTS
(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)
(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
December 31,
2018
$
7,208
(81,311)
$ (74,103)
$
Balance,
beginning
of year
849
110
57
(15,252)
(76,778)
2,050
2,806
41
10,182
1,457
(74,478)
(1,282)
(1,282)
$
Total deferred income tax expense (benefit)
$
(75,760)
$
December 31,
2017
$
7,592
(83,352)
$
(75,760)
Other
Expense
(benefit)
$
(854)
(83)
(178)
1,298
(326)
(209)
(321)
(20)
3,817
(1,514)
1,610
–
–
–
–
–
–
–
–
–
–
47
–
47
–
–
47
2018
Consolidated
Balance,
end of year
$
(5)
27
(121)
(13,954)
(77,104)
1,841
2,485
21
14,046
(57)
(72,821)
(1,282)
(1,282)
$
1,610
$
(74,103)
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)
Total deferred income tax expense (benefit)
$
(81,829)
$
Other
Expense
(benefit)
–
–
–
–
–
–
–
–
26
–
26
–
–
26
$
$
(932)
(244)
(905)
2,143
400
(75)
(364)
(17)
3,882
881
4,769
1,274
1,274
6,043
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)
$
(75,760)
LEON’S FUR NITURE LIM ITED A NNUA L R E PO RT 201 8
53
NOTES TO TH E CO NSO L IDATE D F I NA NCI AL STATE M ENTS
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 76,368,088 for the year ended December 31, 2018
[2017 – 72,904,130]. 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
22. Financial Instruments
CLASSIFICATION OF FINANCIAL INSTRUMENTS AND FAIR VALUE
Year ended December 31
2018
$
$
111,030
112,906
76,368,088
6,523,552
82,891,640
$
$
1.45
1.36
2017
96,593
99,638
72,904,130
10,008,853
82,912,983
1.32
1.20
$
$
$
$
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, 2018:
Financial Assets
Cash and cash equivalents
Trade receivables
Restricted marketable securities
Equity instruments
Equity instruments
Debt instruments
Debt instruments
Loan receivable
Other assets
Financial Liabilities
Trade and other payables
Provisions
Finance lease liabilities
Loans and borrowings
Convertible debentures
Redeemable share liability
December 31, 2017:
Loans and receivables
Cash and cash equivalents
Trade receivables
Available-for-sale
Restricted marketable securities
Available-for-sale financial assets
Other financial liabilities
Trade and other payables
Provisions
Finance lease liabilities
Loans and borrowings
Convertible debentures
Redeemable share liability
Derivative instruments
Other liabilities
Classification &
Measurement
Total Carrying
Amount
Fair Value
Fair Value
Hierarchy
Amortized cost
Amortized cost
FVOCI
FVOCI
FVOCI
FVOCI
FVTPL
FVTPL
FVTPL
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
$
$
90,267
122,131
5,994
30,552
3,310
54,659
100
13,191
484
247,136
11,687
9,199
144,712
48,435
13
Classification &
Measurement
Total Carrying
Amount
Fair value
Amortized cost
Fair value
Fair value
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
$
$
$
36,207
138,516
13,778
67,327
234,478
8,791
10,474
194,439
48,004
157
$
$
$
$
$
90,267
122,131
5,994
30,552
3,310
54,659
100
13,191
484
247,136
11,687
9,671
144,712
73,428
13
Level 1
Level 2
Level 1
Level 1
Level 3
Level 1
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
Fair Value
Fair Value
Hierarchy
36,207
138,516
13,778
67,327
234,478
8,791
10,474
194,439
73,453
157
Level 1
Level 2
Level 1
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
Fair value
$
5,434
$
5,434
LEON’S FURNITUR E LI MI TE D A NNUAL R E PO RT 20 1 8
54
NOTES TO THE CO NSO L IDATE D F I NA NCI AL STATE M ENTS
The fair value hierarchy of financial instruments measured at fair value, as at December 31, 2018 includes financial assets of
$181,472, $135,906 and $3,310 for Levels 1, 2 and 3 respectively, and financial liabilities of $nil, $486,647 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 are based on interest rates at lease inception. The fair value of these is
determined based on approximate 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 debt and equity instruments that are traded in active markets are determined by reference to their quoted closing price
or dealer price quotations at the reporting date. For financial instruments that are not traded in active markets, the Company determines
fair values using a combination of discounted cash flow models and comparison to similar instruments for which market observable
prices exist.
As at December 31, 2018, 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 (2017 – $146.49 per $100.00 of face value). For the convertible debentures
as at December 31, 2018, fair value is calculated based on the face value of the convertible debentures of $50,125.
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 (2017 – $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, 2018, a $484 unrealized gain was recorded in other assets. (2017 – $5,434 unrealized loss).
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).
Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs).
Level 3:
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 Company limits its exposure to counterparty credit risk by transacting only with highly-rated financial institutions and
other counterparties and by managing within specific limits for credit exposure and term to maturity. The Company’s financial instrument
portfolio is spread across financial institutions, provincial and federal governments and, to a lesser extent, corporate issuers that are
dual rated and have a credit rating in the “A” category or better.
LEON’S FUR NITURE LIM ITED A NNUA L R E PO RT 201 8
55
NOTES TO TH E CO NSO L IDATE D F I NA NCI AL STATE M ENTS
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
Debt instruments
Trade receivables
Carrying amount
December 31,
2018
December 31,
2017
$
$
90,267
5,994
54,759
122,131
$
273,151
$
36,207
13,778
41,128
138,516
229,629
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. IFRS 9 provides a low credit risk simplified approach for certain trade
receivables and IFRS 15 contract assets. The simplified approach does not require the tracking of changes in credit risk, but instead
requires the recognition of lifetime ECL at all times. Based on the Company’s portfolio, historical trends and future looking analyst
predictions, it was concluded that the low credit risk simplification could be used as the trade receivables and investments have a low
risk of default and the Company has a strong capacity to meet its contractual cash flow obligations in the near future.
As at December 31, 2018, there are no financial assets that the Company deems to be impaired or that are past due according to
their terms and conditions, for which allowances have not been recorded. The Company’s trade receivables totaled $122,131 as at
December 31, 2018 [2017 – $138,516]. 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 $3,543 as at December 31, 2018 [2017 – $3,965]. The Company’s
lifetime expected credit loss based on the total receivables, past due invoices, historical data and future analysis was $1,606 as at
December 31, 2018 [2017 – $2,281].
The majority of the Company’s retail sales are funded through cash, traditional credit cards and private label credit cards carried on a
non-recourse basis by third parties. Accordingly, fluctuations in the availability and cost of credit may have an impact on the Company’s
retail sales and profitability.
The Company manages credit risk for its cash and cash equivalents by maintaining bank accounts with major Canadian banks and
investing only in highly rated Canadian and U.S. securities that are traded on active markets and are capable of prompt liquidation.
LIQUIDITY RISK
Liquidity risk is the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities. The purpose
of liquidity risk management is to maintain sufficient amounts of cash and cash equivalents, and authorized credit facilities, to fulfill
obligations associated with financial liabilities. To manage liquidity risk, the Company prepares budgets and cash forecasts, and monitors
its performance against these. Management also monitors cash and working capital efficiency given current sales levels and seasonal
variability. The Company measures and monitors liquidity risk by regularly evaluating its cash inflows and outflows under expected
conditions through cash flow reporting such that it anticipates certain funding mismatches and ensures the cash management of the
business within certain tolerable levels. These cash flow forecasts are reviewed on a weekly basis by management. The Company
mitigates liquidity risk through continuous monitoring of its credit facilities and the diversification of its funding sources, both in the
short term as well as the long term.
LEON’S FURNITUR E LI MI TE D A NNUAL R E PO RT 20 1 8
56
NOTES TO THE CO NSO L IDATE D F I NA NCI AL STATE M ENTS
The following tables summarize the Company’s contractual maturity for its financial liabilities, including both principal and interest payments:
As at December 31, 2018:
Trade and other payables
Finance lease liabilities
Loans and borrowings
Convertible debentures
Redeemable share liability
As at December 31, 2017:
Trade and other payables
Finance lease liabilities
Loans and borrowings
Convertible debentures
Redeemable share liability
Carrying
amount
Contractual
cash flows
Under 1 year
1–3 years
3–5 years
More than
5 years
Remaining term to maturity
$
247,136
9,199
144,712
48,435
13
$
247,136
10,399
150,349
56,526
13
$
247,136
1,892
150,349
1,506
–
$
$
449,495
$
464,423
$
400,883
$
–
3,852
–
3,012
–
6,864
$
$
–
3,852
–
52,008
–
$
55,860
$
–
803
–
–
13
816
Carrying
amount
Contractual
cash flows
Under 1 year
1–3 years
3–5 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
–
$
$
487,552
$
506,385
$
243,955
$
202,188
$
–
3,853
–
3,008
–
6,861
More than
5 years
$
–
2,729
–
50,495
157
$
53,381
The contractual cash flows have been included in the tables above based on the contractual arrangements that exist at the reporting
date and do not factor in any assumptions for early repayment. The amount and timing of actual payments may be materially different.
Contractual cash flows presented in the above maturity analysis table for finance lease liabilities, loans and borrowings and convertible
debentures include principal repayments, interest payments, and other related cash payments. As the carrying amounts of these
liabilities are measured at amortized cost, the future contractual cash flows do not agree to the carrying amounts.
The Company’s credit facilities and convertible debentures are further discussed in note 14.
The Company’s future obligations under operating leases are discussed in note 25.
MARKET RISK
Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices.
Market risk is comprised of three types of risk: interest rate risk, currency risk, and other price risk.
(A) INTEREST RATE RISK
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market
interest rates.
The Company is exposed to cash flow risk on the term credit facility and the revolving credit facility, and to fair value risk on the finance
lease liabilities and convertible debentures due to fluctuations in interest rates. Fair value risk related to the finance lease liabilities
and convertible debentures impacts disclosure only as these items are carried at amortized cost on the consolidated statements of
financial position.
As well, the Company’s revenues depend, in part, on supplying financing alternatives to its customers through third-party credit
providers. The terms of these financing alternatives are affected by changes in interest rates. Therefore, interest rate fluctuations may
impact the Company’s financing costs for retail sales financed using these alternatives, and may also impact the Company’s revenues
where customers’ buying decisions are impacted by their ability or desire to use these financing alternatives.
(i) Interest rate sensitivity analysis
The Company’s net income is sensitive to the impact of a change in interest rates on the average indebtedness under the term credit
facility and the revolving credit facility during the year. For the year ended December 31, 2017, the Company’s average indebtedness
under the term credit facility was $170,000 [2017 – $217,500] and under the revolving credit facility was $nil [2017 – $3,143].
Accordingly, a change during the year ended December 31, 2018 of a one percentage point increase or decrease in the applicable
interest rate would have impacted the Company’s net income by approximately $1,247 [2017 – $1,609].
LEON’S FUR NITURE LIM ITED A NNUA L R E PO RT 201 8
57
NOTES TO TH E CO NSO L IDATE D F I NA NCI AL STATE M ENTS
(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.
(C) OTHER PRICE RISK
The Company is exposed to fluctuations in the market prices of its portfolio of debt securities. 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.
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 facilities and borrowing capacity available under the revolving credit facilities (note 14). As
at December 31, 2018, $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 (2017 – $649).
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,
$
2018
1,415
144,712
48,435
7,784
–
857,362
$
2017
1,421
–
48,004
9,053
194,439
773,048
$ 1,059,708
$ 1,025,965
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, 2018.
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.
LEON’S FURNITUR E LI MI TE D A NNUAL R E PO RT 20 1 8
58
NOTES TO THE CO NSO L IDATE D F I NA NCI AL STATE M ENTS
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, 2018, TGI’s Minimum Capital Test ratio was 458% [2017 – 541%], which is in compliance with the requirements of The Office of the
Superintendent of Insurance of Alberta and the Act.
For TGLI, the Life Insurance Capital Adequacy Test (“LICAT”) replaced the Minimum Continuing Capital and Surplus Requirements
(“MCCSR”) effective January 1, 2018. As at December 31, 2018, TGLI’s LICAT ratio was 432% [2017 – MCCRS 656%], which is in
compliance with the requirements of The Office of the Superintendent of Insurance of Alberta and the Act.
25. Commitments and Contingencies
(a) The Company leases a number of retail stores and trucks under operating leases. Generally, the retail store leases have rent
escalation terms and renewal options to extend. The Company is obligated under these operating leases for future minimum annual
rental payments as follows:
No later than 1 year
Later than 1 year and no later than 5 years
Later than 5 years
$
85,381
265,428
111,772
$
462,581
(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
$
$
1,632
5,178
2,889
9,699
(c) Pursuant to a reinsurance agreement relating to the extended warranty sales, the Company has pledged debt instruments amounting
to $5,994 [2017 – $13,778].
(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:
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 lease inducements
Year ended December 31,
$
2018
16,388
(11,403)
362
13,026
(6,550)
18,284
2,896
823
(5,918)
230
$
2017
(10,374)
(9,113)
1,843
19,597
(5,421)
10,088
3,323
298
3,310
(589)
$
28,138
$
12,962
LEON’S FUR NITURE LIM ITED A NNUA L R E PO RT 201 8
59
NOTES TO TH E CO NSO L IDATE D F I NA NCI AL STATE M ENTS
(b) Supplemental cash flow information:
Income taxes paid
(c) Changes in liabilities arising from financing activities comprise the following:
Year ended December 31,
2018
2017
$
46,680
$
48,631
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
$
51,559
$
10,474
$
194,439
–
–
–
(17)
439
–
–
(1,195)
–
–
–
(80)
(50,000)
–
273
–
–
–
$
51,981
$
9,199
$
144,712
27. Related Party Transactions
Balances and transactions between the Company and its subsidiaries, which are related parties of the Company, have been eliminated
on consolidation.
The Company has a 50% ownership interest in a joint operation "Beedie/Leon's Delta-Link Joint Venture". This joint operation developed
land into a 432,000 square foot distribution centre which the Company occupies in Delta, British Columbia.
Key management compensation
Key management includes the Directors and the five senior executives of the Company. The compensation expense paid to key
management for employee services during each year is shown below:
Salaries and other employee benefits
Year ended December 31,
2018
6,726
$
2017
6,953
$
28. Comparative Financial Information
The comparative consolidated financial statements have been reclassified from statements previously presented to conform to the
presentation of the year ended December 31, 2018 consolidated financial statements.
LEON’S FURNITUR E LI MI TE D A NNUAL R E PO RT 20 1 8
60
Corporate &
Shareholder Information
BOARD OF DIRECTORS
OFFICERS
CORPORATE OFFICE
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
Mark J. Leon
Chairman of the Board
Terrence T. Leon
Vice Chairman
Edward F. Leon
President and CEO
Constantine Pefanis
CFO
John A. Cooney
Vice President, Legal and
Corporate Secretary
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 common shares are listed
on the Toronto Stock Exchange
Ticker Symbol is LNF
ANNUAL GENERAL MEETING
Wednesday, April 17, 2019, 2:00PM
Fairmont Royal York
100 Front Street West
Toronto, Ontario
M5J 1E3
After 109 years in business, Canada's largest retailer of furniture,
mattresses, appliances and home electronics is still very much
young at heart. This year's report describes some of the innovative
initiatives underway to stay close to our customers and create more
value in the years ahead.
FINANCIAL HIGHLIGHTS
Revenue
Net Income
Shareholder’s Equity
1.2%
14.9%
10.9%
Income before income taxes
Revenue
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
2017
Change
$ 2,241,437,000
$ 2,215,379,000
2018
150,590,000
111,030,000
182,074,000
38,166,000
1.45
2.38
0.52
11.23
$
$
131,429,000
96,593,000
156,603,000
33,179,000
1.32
2.15
0.48
10.60
%
1.2%
14.6%
14.9%
16.3%
15.0%
9.8%
10.7%
8.3%
5.9%
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Our customers can find everything that we have to 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
LEON'S FURNITURE LIMITED ("LFL GROUP")
2018 ANNUAL REPORT