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Committed
to Excellence
Annual Report 2021
Overview
Committed to Shareholder Returns
LFL Group has generated significant free cash flow through our successful retail business.
Our policy is to manage our capital to take advantage of potential opportunities and
return surplus cash to shareholders.
Since the start of 2021, we have returned $435 million to our shareholders in the form
of dividends and share repurchases.
Capital Returned to Shareholders
(millions)
Quarterly Dividends
Special Dividends
Repurchase of Shares: Normal Course Issuer Bid
Repurchase of Shares: Substantial Issuer Bid1
Total Capital Returned to Shareholders
$
$
$
$
$
50
120
65
200
435
1. The substantial issuer bid expired on December 30, 2021. The Company paid for shares tendered to the bid on January 4, 2022.
Revenue
Net Income
Shareholders’ Equity Per Share2
$2,220 million
$2,513 million
2020
2021
+13%
$163 million
$207 million
2020
2021
+27%
$13.03
$14.01
2020
2021
+8%
2. Normalized to exclude the substantial issuer bid in 2021 and
special dividends in both years.
Table of Contents
Chair’s Letter
CEO’s Message
Innovation in Action
Executive Leadership Team
A Diversified Portfolio of Businesses
2
4
8
12
13
Committed to Canadians Nationwide
Our ESG Commitment
Five-Year Review
14
16
18
Management’s Discussion and Analysis 19
Consolidated Financial Statements
35
Our associates have demonstrated their unwavering
Our associates have demonstrated their unwavering
commitment to keeping our customers safe and providing
commitment to keeping our customers safe and providing
excellent service under challenging circumstances.
excellent service under challenging circumstances.
Shareholders’ Equity Per Share2
Leon’s Furniture Limited / Annual Report 2021
1
Chair’s Letter
The first Leon’s
store was opened
in Welland, Ontario
and served as the
springboard for one
of Canada’s most
successful retail
businesses.
Back in 1909, our founder
Ablan Leon established a
company that he envisioned
had a foundation built
on integrity, compassion,
fairness and respect for all.
2
Leon’s Furniture Limited / Annual Report 2021
Much has happened over the course of the last
As the President and COO during these difficult
112 years. Triumphs, tragedies and innovations have
periods, Michael Walsh has played a leading role
all come to pass during those times. Back in 1909,
in the transformation of LFL into an omnichannel
our founder Ablan Leon, established a company that
business. Our Board has expressed the highest
he envisioned had a foundation built of integrity,
level of confidence in Michael by appointing him as
compassion, fairness and respect for all.
the new Chief Executive Officer of Leon’s Furniture
Over the last two years this country and the world
was thrown into a cauldron of anxiety, apprehension,
dread and in many cases, the tragic loss of loved
ones. On the economic front, businesses large and
small were confronted with debilitating decisions
affecting millions of lives.
Leon’s Furniture Limited was not immune to the same
potential hardships others had to face. Yet, through
God’s good graces, the exceptional leadership of our
management team, and the incredible efforts of over
10,000 associates from coast to coast, we met the
challenge in a manner that instills us all with great
satisfaction and gratitude. We are extremely proud
to say that 2021 was our most successful year ever.
However, we cannot rest on our laurels. Be assured
Limited. Michael has been with our Company for
six years after serving as VP of Operations at
Canadian Tire. We have great faith that Michael
will continue to inspire our associates and to build
on our distinguished legacy.
We believe the spirit of our founders continue to
envelop all who work here with the strength, courage
and determination to ensure our continued success
is infused with the qualities of that foundation laid in
1909. On behalf of our Board and our shareholders,
we thank all members of our exceptional Company
for their noteworthy accomplishments. We wish you
all good health and continued success.
there will be many challenges to come and how they
“Mark J. Leon”
are met will be the measure of our efforts.
Mark J. Leon
Chairman of the Board
The heroic deeds of our front line health care workers
and first responders should never be forgotten or
taken for granted. Although we pray this deadly
pandemic is slowly fading into our rear view mirrors,
our vigilance should not waiver.
In 2021, Edward Leon informed us of his plans to
retire. For many years Edward’s leadership has been
exemplary, not the least of which, was successfully
overcoming the hardships of the pandemic. His
efforts are greatly appreciated by our associates and
our shareholders.
Leon’s Furniture Limited / Annual Report 2021
3
CEO’s Message
Our team overcame significant
challenges in 2021 to deliver
one of the most successful
years in LFL Group’s history.
Faced with ongoing headwinds related to the COVID-19 pandemic, we
not only held our ground but significantly advanced our strategic position
while delivering record financial and operating results.
4
Leon’s Furniture Limited / Annual Report 2021
Michael J. Walsh
President & CEO
of LFL Group
Record Results
Strategic Advances
Systemwide sales increased 13.2% to reach
Our resilience and growth are the direct result of a
$3.1 billion in 2021, a remarkable milestone for
carefully crafted strategy that has been years in the
LFL Group. Same-store sales growth was 13.6%,
making, and an unrelenting commitment to retail
the highest increase in the modern history of
excellence. As always, we have made customer
the Company. That top-line performance led to
service a core focus. We continued to expand and
adjusted EBITDA growth of 16.5% and a 23.3%
renew our bricks-and-mortar assets while retailers
increase in adjusted net income.
These were more than just strong increases in
comparison to a shutdown-affected year in
were closing locations. We have established a
portfolio of industry-leading service businesses
and a national distribution infrastructure.
2020. Starting with 2019 as a base, our average
Perhaps most importantly, we invested in a digital
annualized growth rate over the past two years
capability that has enabled our customers to shop
has been 4.5% on same-store sales and 38.7% on
where, when and how they want. We transitioned
adjusted net income. These trends demonstrate
to the highly scalable Shopify Plus eCommerce
solid fundamental growth in our business.
platform in 2018. That decision enabled us to pivot
A Team Effort
Credit for these accomplishments is shared among
the entire LFL team. Our associates across the
country showed dedication and commitment
to ensuring everyone’s safety and maintaining
operations even during periods of temporary
store closures and layoffs. They handled triple-
digit increases in eCommerce volumes and found
product to satisfy customer demand in the face of
unprecedented global supply chain constraints.
quickly to a fully online model when in-person
shopping was restricted for months at a time.
We believe an effective omnichannel strategy is
essential in today’s retail environment. At least
three-quarters of consumers begin shopping for
furniture online, but most people still visit a store
to try the product for themselves before making
a final decision. Their experience must be consistent
throughout the process. Our websites display
our full product catalogue and offer tools to
help shoppers visualize the products in their
homes, as well as a live chat feature staffed with
To add to the immensity of the achievement, our
knowledgeable sales associates.
team delivered these results as they implemented
a continued transformation of LFL into an
omnichannel business. They stepped up when we
most needed them to, and it is because of their
efforts that we have continued to thrive.
Systemwide
sales exceeded
$3B
Same-store
sales growth
was
13.6%
Leon’s Furniture Limited / Annual Report 2021
5
CEO’s message
Tying everything together is the strength of our
During 2021 we paid two special dividends of
brands, primarily The Brick and Leon’s. People want
$0.30 and $1.25 per share in addition to our
to buy from a brand they can trust. Our customers
quarterly dividend of $0.16 per share. We also
are confident we will get products to them safely
repurchased $65 million of common shares through
and provide the after-sales support we’ve promised.
our normal course issuer bid and a further $200
In an environment of supply chain restrictions,
million through a substantial issuer bid launched in
customers have appreciated our transparency
the fourth quarter and paid in early January, 2022.
about potential delays in their orders.
Together, these initiatives represent more than
It is the combination of all of these factors – a
committed team, sound strategy and trusted
$435 million of capital returned to shareholders
over a 12-month period.
brands – that has enabled us to report another
While we may not be in a position to distribute this
successful year.
Return of Capital
amount every year, we are committed to rewarding
our shareholders through consistent performance
and disciplined allocation of capital.
The free cash flow generated by our business
has left us in a very strong financial position. We
Outlook
ended the year with over $613 million of liquidity,
We are feeling positive about maintaining our
including $490 million of cash and investments.
momentum and are cautiously optimistic about
These resources offer the flexibility to pursue
the Canadian economy and consumer confidence
strategic opportunities, or alternatively, reward our
remaining relatively strong. Inflation and interest
shareholders with a meaningful return of capital.
rates are potential causes for concern which we are
Adjusted net
income increased
23.3%
Capital returned
to shareholders:
$435M
monitoring closely. We have seen that the course
of the COVID-19 pandemic can be unpredictable,
and we expect supply chain issues to persist in 2022.
Recent experience has shown that there are few
challenges the talented group of people inside this
organization cannot solve.
6
Leon’s Furniture Limited / Annual Report 2021
As we return to a more normal environment, we
I would like to thank my predecessor, Edward
will take a close look at our strategy and chart a
Leon, for his mentorship and his skilled leadership
path forward. With a solid balance sheet, trusted
throughout the pandemic. The Leon family has
brands, a thriving omnichannel business, and assets
entrusted me as the first “non-Leon” CEO, and I
spanning wholesale, distribution and service, we
hope to repay that great honour by building upon
have a tremendous opportunity to build upon all we
the legacy of those who have come before me.
have accomplished.
I am very excited about the future of LFL, and
I believe this sentiment is shared across our
organization. I feel humbled to be part of such a
great group of people.
“Michael J. Walsh”
Michael J. Walsh
President & Chief Executive Officer
LFL Group
Leon’s Furniture Limited / Annual Report 2021
7
Innovation
in Action
Delivering on
Omnichannel
LFL Group has completed the transformation to
a true omnichannel retailer. Our customers can
choose when, where and how they shop, and enjoy
a truly seamless experience.
We have four online stores - thebrick.com, leons.ca,
furniture.ca and appliancecanada.com – and
Our eCommerce stores are fully integrated with
LFL’s nationwide fulfillment and distribution
platform. Financing, insurance, warranty and after-
sales services are available to all shoppers. We have
invested in the IT infrastructure required to manage
significantly higher volumes.
More often than ever before, our customers chose
to complete their purchases online in 2021.
more than 300 traditional stores across Canada.
Creating a singular, cohesive shopping experience
Customers visiting any venue have access to
across all our platforms has been central to our
the full product assortment for each brand, and
strategy for several years. We are committed
knowledgeable sales associates are always on
to ongoing innovation to build on our position
hand to help.
of leadership.
8
Leon’s Furniture Limited / Annual Report 2021
Innovation in Action
In-Store Innovation
We continue to introduce new technologies and conveniences in our stores to enhance the shopping experience.
Tablets
Instant Financing
e-tags
We have deployed more than 3,000
point-of-sale tablets in our stores to
enable our sales associates to serve
customers more efficiently.
Technology provided by our new partner
Flexiti replaces the old paper forms and
provides customers with real-time
decisions on product financing both
in-store and online.
Electronic tags displaying prices and other
product details were recently extended into
our appliance and electronics departments.
Scandit
Augmented Reality (AR)
QR Codes
The data capture tool for in-store
fulfillment and product tracking is installed
directly on smart phones and replaces
older RF technology.
Sales associates can visually insert new
items into an existing display using AR so
that customers can see how they would
look in combination.
Customers can view additional details about
items in our showroom by accessing the QR
code with their smart phones.
Leon’s Furniture Limited / Annual Report 2021
9
Innovation
in action
Retail Concept Renewal
We continually update our retail locations with fresh
These “smart stores” display curated collections of
concepts and ideas. Customers appreciate new
furniture and appliances while using interactive
shopping experiences when they visit.
technology to provide access to our full product
Our retail network now includes a number of
smaller-scale stores. For example, a store may
occupy 15,000 square feet rather than our more
traditional 35,000-to-50,000 square feet locations.
The reduced footprint makes it economically viable
for us to expand into mid-sized markets.
assortment. Video walls can display products in their
actual size. Touchscreen kiosks allow customers to
browse the full catalogue and view custom colour
and fabric options.
We continued to
provide the products
and services people
need during a period
when people were
spending more time
than ever in their
homes.
10
Leon’s Furniture Limited / Annual Report 2021
Innovation in Action
Delta, BC
Dartmouth, NS
Excellence in Distribution
LFL has been strengthening our distribution
In 2021, we stocked more than 394,000 unique
network by building facilities and implementing
SKUs and made nearly 1.5 million deliveries to our
new technologies.
At the start of 2021, we opened a new distribution
customers. Efficient fulfilment and distribution
capabilities are essential to a business of this scale.
centre in Dartmouth, Nova Scotia. The state-of-
Our IT supply chain platform helps us optimize every
the-art, 165,815 square feet facility will support our
stage of the value chain. Ongoing improvements to
expected growth in Atlantic Canada. Like the DC we
our distribution capabilities are reducing both our
opened several years ago in Delta, British Columbia,
costs and our environmental impact. We are also
it will serve both the Leon’s and Brick brands, as well
providing better service to our customers, such as
as our eCommerce operations.
offering them real-time visibility into delivery times.
Leon’s Furniture Limited / Annual Report 2021
11
Leadership Team
Executive
Leadership Team
Our management team has unparalleled retail experience and a commitment to
delivering value to all our stakeholders.
Graeme Leon
Constantine Pefanis
Michael J. Walsh
David B. Freeman
Divisional President
of Leon’s
CFO of LFL Group
President & CEO
of LFL Group
Divisional President
of The Brick
Graeme was promoted
to President of Leon’s
Furniture Division in
2020. His 40 years of
service with the Company
have included roles
as Vice President of
Merchandising and
National Store Operations
Manager, both for the
Leon’s Furniture Division.
Costa has held various
management positions
within Leon’s Furniture
Limited since joining the
Company as Corporate
Finance Manager in May
2005. In 2016 he was
appointed as the Director
of Finance, Audit & IT, a
position he held until his
appointment in 2018 to the
position of Chief Financial
Officer of the LFL Group.
Mike was promoted to the
Chief Executive Officer
effective July 1, 2021.
He became President
& COO in 2020 after
serving for five years
as President of Leon’s
Furniture Division. Mike
is a seasoned executive
with over 30 years of
retail experience. Prior to
joining the Company, he
served as Vice President of
Operations at Canadian
Tire Corporation.
Dave is a long-serving
Brick associate with more
than 40 years of retail
experience. Prior to his
appointment as President
of The Brick in 2016, Dave
served in a variety of
roles including Senior Vice
President of Operations
and Vice President of Sales.
12
Leon’s Furniture Limited / Annual Report 2021
Our Value Chain
A Diversified Portfolio
of Businesses
Our industry-leading capabilities throughout the value chain have enabled us to maintain service to our
customers during recent challenges such as interruptions in the supply chain. We take full advantage of
our portfolio of businesses to provide a true omnichannel offering.
Real Estate
Our stores and warehouses sit on a vast
portfolio of real estate which is reported at
historical cost and represents significant
opportunity to unlock value through sale
or development.
Insurance
We offer credit insurance on our customers’
outstanding balances to protect against
unforeseen events or loss.
Wholesale
We deal directly with many manufacturers
to capitalize on market trends, improve
quality control, simplify our supply chain
and capture incremental margin.
After-Sales Service
As Canada’s largest supplier of after-sales
service, we fulfil the installation, repair and
service requirements for our customers, as
well as a growing number of third parties.
Distribution
State-of-the-art distribution centres
opened in B.C. and Nova Scotia have
enabled us to improve efficiency and fulfil
orders from multiple banners, online sales,
and third-party vendors.
Warranty
We offer extended warranties to customers
who value extra protection and cost
certainty, and we service those warranties
as required.
Leon’s Furniture Limited / Annual Report 2021
13
LFL Group At-a-Glance
Committed to
Canadians Nationwide
We have expanded our retail footprint into every province, providing unbeatable service,
selection and value through our flagship Leon’s and The Brick brands. Our eCommerce
sites offer everyone the opportunity to shop with us from their own homes at a time of
their choosing.
We are proud to be listed among Canada’s most trusted retail brands. The entire LFL team
is committed to continuing to earn the loyalty of consumers across the country.
A Leader in eCommerce
Leons.ca
TheBrick.com
Furniture.ca
ApplianceCanada.com
Transglobalservice.com
5 eCommerce sites
14
Leon’s Furniture Limited / Annual Report 2021
185
The Brick
89
Leon’s
21
The Brick
Mattress Store
6
The Brick Outlet
5
Appliance Canada
Yukon
1
British Columbia
36
6
Alberta
42
7
7
3
Northwest Territories
1
Manitoba
7
3
1
The Brick
Leon’s
The Brick Mattress Store
The Brick Outlet
Appliance Canada
Quebec
16
10
Newfoundland
& Labrador
3
1
Prince Edward Island
1
1
Saskatchewan
12
3
1
Ontario
60
48
14
5
1
New Brunswick
5
4
Nova Scotia
4
3
306 Total Stores Nationwide
Leon’s Furniture Limited / Annual Report 2021
15
Environmental, Social and Governance Overview
Our ESG Commitment
LFL Group strives to be an integral part of communities across Canada.
We care about the people who work for us, the customers who shop in our
stores, the places where all of us live, and the planet our children will inherit.
Minimizing Our Impact
Minimizing Our Impact
We ship products from around the world to homes
across Canada. We make every effort to ensure
that the manufacturing, transportation and storage
activities are carried out in a sustainable and
energy-efficient manner.
Recycling
Our facilities are equipped with recycling equipment
to ensure we divert waste and conserve other
resources. For example, the Brick division’s recycling
efforts conserved the equivalent of 29,019 cubic
yards of landfill airspace, 39,419 mature trees,
12.2 million kw-hours of electricity and 22.1 million
gallons of water.
Supplier Audits
A Safe and Healthy
A Safe and Healthy
Workplace
Workplace
We follow all safety protocols and best practices to
We conducted in-depth audits of our international
help keep our associates healthy. Through
supply chain to test for compliance with our
our human resources policies, we strive to ensure
contractual standards for labour and environmental
that equal opportunities exist for all our associates
practices. We are pleased to report that no suppliers
and that our benefits and remuneration packages
stood in contravention of our agreements.
are designed to properly motivate our workforce.
16
Leon’s Furniture Limited / Annual Report 2021
Giving Back to Our
Giving Back to Our
Communities
Communities
Protecting the Interests
Protecting the Interests
of All Stakeholders
of All Stakeholders
We are proud to support health and wellness
We have implemented governance policies to
initiatives across the country, and this past year has
help ensure that we consider the needs of multiple
reminded us how much we all depend on those
essential services.
stakeholder groups. The Board of Directors is
comprised of a majority of independent directors,
who periodically meet without management and
non-independent members present. The Board has
adopted a written Code of Conduct to guide the
activities of all directors, officers and employees,
and closely monitors compliance. In 2021, the
Board completed a CEO succession process,
appointing Michael J. Walsh as CEO following the
retirement of Edward F. Leon.
Leon’s Furniture Limited / Annual Report 2021
17
Five-Year Review
Income Statistics
($ in thousands, except amounts per share)
2021
2020
2019
2018
2017
Revenue
Cost of Sales
Gross Profit
Operating Expenses
Income before income taxes
Provision for income taxes
Net Income
$ 2,512,670
$ 2,220,180
$ 2,283,411
$ 2,241,437
$ 2,215,379
1,404,446
1,236,258
1,284,826
1,264,561
1,261,112
$ 1,108,224
$
983,922
$
998,585
$
976,876
$
954,267
831,845
773,437
855,539
826,286
276,379
210,485
143,046
150,590
69,221
47,235
36,117
39,560
822,838
131,429
34,836
$207,158
$
163,250
$
106,929
$
111,030
$
96,593
Common shares outstanding (weighted average '000s)
77,623
79,799
77,595
76,368
72,904
Earnings per common share
Percent annual change in sales
Net income as a percentage of sales
$
2.67
$
2.05
$
1.38
$
1.45
$
13.2%
8.2%
(2.8%)
7.4%
3.3%
4.7%
1.2%
5.0%
1.32
3.3%
4.4%
Dividend declared
$
146,092
$
69,977
$
43,445
$
39,716
$
35,136
Balance Sheet Statistics
($ in thousands, except amounts per share)
2021
2020
2019
2018
2017
Shareholders’ equity
Total assets
Purchase of capital assets
Working capital1
791,193
$ 1,016,003
$ 915,764
$ 857,362
$ 773,048
2,453,133
2,418,589
2,146,461
1,723,572
1,661,455
14,896
43,493
32,931
19,650
55,041
(34,455)
161,286
100,206
198,445
162,328
Shareholders’ equity per common share2
14.01
13.03
11.80
11.23
10.60
Common share price range on the Toronto Stock Exchange
High
Low
$
$
26.30
20.09
$
$
21.68
10.25
$
$
17.29
14.01
$
$
19.50
14.70
$
$
19.57
16.19
1. 2021 and 2018 exclude the amounts of $90,000 and $144,712, respectively, comprised of loans and borrowings due to the classification from non-current liabilities to current liabilities
as at December 31.
2. For year-on-year comparability, 2021 excludes the substantial issuer bid and special dividends. 2020 excludes special dividends.
Revenue
($ in thousands)
Net Income
($ in thousands)
Shareholders’ Equity3
($ per share)
17
18
19
20
21
$2,215,379
$2,241,437
$2,283,411
$2,220,180
17
18
19
20
$96,593
$111,030
$106,929
$163,250
17
18
19
20
$2,512,670
21
$207,158
21
$10.60
$11.23
$11.80
$13.03
$14.01
18
Leon’s Furniture Limited / Annual Report 2021
3. For year-on-year comparability, 2021 excludes the
substantial issuer bid and special dividends. 2020
excludes special dividends.
Management’s
Discussion and
Analysis
For the year ended December 31, 2021
1.
Preface ..........................................................................................................20
2. Business Overview .....................................................................................20
3. Results of Operations .................................................................................21
4. Store Network ..............................................................................................25
5. Summary of Consolidated Quarterly Results ....................................25
6.
7.
Financial Position ........................................................................................26
Liquidity and Capital Resources ............................................................ 27
8. Outlook ..........................................................................................................28
9. Outstanding Common Shares ................................................................29
10. Related Party Transactions ......................................................................29
11. Critical Assumptions...................................................................................29
12. Risks and Uncertainties .............................................................................32
13. Controls and Procedures .........................................................................33
14. Non-IFRS and Supplementary Financial Measures ........................33
19
Leon’s Furniture Limited / Annual Report 2021 1. Preface
The following Management’s Discussion and Analysis (“MD&A”) is prepared as at February 23, 2022 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, 2021 and for the
years ended December 31, 2021 and 2020. It should be read in conjunction with the fiscal year 2021 consolidated financial statements and
the notes thereto. For additional detail and information relating to the Company, readers are referred to the fiscal 2021 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 (“C$”). 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 relevant management share purchase plans 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 2021 consolidated financial
statements and MD&A were approved on February 23, 2022.
2. 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 manufacturers’ warranty service work in addition to servicing a number of individual
programs offered by other dealers. This division also performs work for products sold with extended warranties and is an integral part
of the retail offering. These extended warranties, underwritten by the Company’s wholly-owned subsidiaries, are offered on appliances,
electronics and furniture to provide coverage that extends beyond the manufacturer’s warranty period by up to five years. The warranty
contracts provide both repair and replacement service depending upon the nature of the warranty claim.
The Company’s wholly-owned subsidiaries Trans Global Insurance Company (“TGI”) and its sister company, Trans Global Life Insurance
Company (“TGLI”), also offer credit insurance on the 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 and the Caribbean, through its wholly-owned subsidiaries First Oceans Trading Corporation
and King & State Limited, respectively. 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, and the retail banners that sell their extended warranties on appliances and
electronics to their customers, respectively.
20
Management’s Discussion and AnalysisLeon’s Furniture Limited / Annual Report 2021 COVID-19
On March 11, 2020, the World Health Organization declared the novel coronavirus, which has the potential to cause severe respiratory illness
(“COVID-19”), a global pandemic. As an emerging risk, the duration and full financial effect of the COVID-19 pandemic is unknown at this
time, as is the efficacy of the government and central bank interventions. Any estimate of the length and severity of these developments is
therefore subject to significant uncertainty. The COVID-19 pandemic has increased the uncertainties around key assumptions used by the
Company in estimating the recoverable amount for the purpose of testing for impairment of property, plant and equipment, goodwill and
intangible assets. These key estimates include future cash flows, margins and discount rates. Accordingly, estimates of the extent to which
the COVID-19 pandemic could materially and adversely affect the Company’s operations, financial results and condition in future periods,
including the use of estimates and judgements described in Note 2 in the fiscal year 2021 consolidated financial statements, are also subject
to significant uncertainty.
3. Results of Operations
Summary financial highlights for the three months ended December 31, 2021 and December 31, 2020
For the
Three months ended
(C$ in millions except %, share and per share amounts)
December 31,
2021
December 31,
2020
$ Increase
(Decrease)
% Increase
(Decrease)
Total system-wide sales (1)
Franchise sales (1)
Revenue
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 loss on financial derivative instruments (1)
Net income
820.5
150.7
669.8
373.2
296.7
44.30%
218.6
32.64%
78.0
(2.9)
75.1
18.1
57.0
8.51%
0.5
56.5
830.9
155.8
675.1
366.5
308.7
45.73%
230.8
34.19%
77.9
(3.9)
74.0
17.7
56.3
8.34%
3.0
53.3
Basic weighted average number of common shares
76,818,991
78,356,607
Basic earnings per share
Adjusted basic earnings per share (1)
$0.74
$0.74
$0.68
$0.72
Diluted weighted average number of common shares
77,662,535
80,285,965
Diluted earnings per share
Adjusted diluted earnings per share (1)
Common share dividends declared
Convertible, non-voting shares dividends declared
$0.73
$0.74
$0.16
$0.32
$0.67
$0.71
$0.46
$0.29
1. Non-IFRS financial measure. Refer to section 14 in this MD&A for additional information.
2. Selling, general and administrative expenses (“SG&A”).
(10.4)
(5.1)
(5.3)
6.7
(12.0)
(1.3%)
(3.3%)
(0.8%)
1.8%
(3.9%)
(12.2)
(5.3%)
0.1
(1.0)
1.1
0.4
0.7
(2.5)
3.2
$0.06
$0.02
$0.06
$0.03
$(0.30)
$0.03
0.1%
(25.6%)
1.5%
2.3%
1.2%
(83.3%)
6.0%
8.8%
2.8%
9.0%
4.2%
(65.2%)
10.3%
21
Management’s Discussion and AnalysisLeon’s Furniture Limited / Annual Report 2021 Same Store Sales (1)
For the
(C$ in millions, except %)
Same store sales (1)
Three months ended
December 31, 2021 December 31, 2020
$ Decrease
% Decrease
652.4
653.1
(0.7)
(0.1%)
1. Supplementary financial measure. Refer to section 14 in this MD&A for additional information.
Revenue
For the three months ended December 31, 2021, revenue was $669.8 million compared to $675.1 million in the fourth quarter 2020. The
decrease in revenue of $5.3 million or 0.8% as compared to the prior year quarter was driven by a decrease in the sale of furniture in the
quarter, primarily due to disruptions occurring from global supply chain delays. Despite these inventory supply delays that significantly
affected imported furniture from Asia, consumer demand for all product categories remained strong in the quarter, as evidenced by the
Company’s robust open order book of customer deposits which at the end of the fourth quarter remained at historical highs. In addition,
the decrease in furniture sales in the quarter was offset by an increase in sales of all other product categories.
Furthermore, the Company’s continued focus on eCommerce, including its live chat initiatives, generated a quarter over quarter 37% increase
in eCommerce driven sales during the quarter, which is on top of the growth in eCommerce sales of 227% in the fourth quarter of 2020 as
compared to the fourth quarter of 2019. The digital platform is a key component to allowing the Company to attract new customers as they
begin their shopping experience online and then continue in store to be assisted by our knowledgeable sales associates. The increase in
eCommerce-initiated sales during the quarter was also achieved despite all the Company’s retail stores being open, as compared to the
prior year quarter’s provincially mandated retail showroom closures that began on November 12, 2020, in Manitoba. This then continued to
impact the municipalities of Toronto and Peel in the province of Ontario which began on November 23, 2020, ultimately leading to all retail
showrooms being closed in Ontario and Quebec on December 26, 2020, and remaining so for the balance of the prior year’s quarter and
into the first quarter of fiscal year 2021.
Same Store Sales (1)
Same store sales in the quarter remained flat compared to the fourth quarter 2020.
Gross Profit
The gross profit margin of 44.30% in the quarter decreased by 143 basis points from the fourth quarter 2020. This was due to higher cost of
sales which can be attributed to increased freight costs due to the ongoing disruptions of the global supply chain and increased product
costs that are directly the result of increased tariffs implemented by the Canada Border Services Agency (“CBSA”) in relation to upholstered
product being sourced from China and Vietnam. In order to retain the Company’s gross margin in the fourth quarter, it was necessary
to determine the trade-off between having product available for sale in Canada for the Company’s customers and determining the
Company’s tolerance to pay significantly higher freight costs.
Selling, General and Administrative Expenses (“SG&A”)
The Company’s SG&A as a percentage of revenue for the fourth quarter 2020 was 34.19% compared to 32.64% for the fourth quarter
of 2021, an improvement of 155 basis points over the fourth quarter 2020. This improvement in operating costs leverage and continued
cost reduction initiatives in the quarter are due to effectively managing the Company’s payroll expenses and eCommerce spend while
continuing to drive traffic to both the Company’s retail stores and websites.
Adjusted Net Income (2) and Adjusted Diluted Earnings Per Share (2)
As a result of the above and a continued reduction in net finance costs, adjusted net income in the current quarter totaled $57.0 million, an
increase of $0.7 million over the prior year’s quarter. This resulted in adjusted diluted earnings per share to increase to $0.74 per share in
the current quarter, an increase of 4.2% over the prior year’s quarter.
22
Management’s Discussion and AnalysisLeon’s Furniture Limited / Annual Report 2021 Net Income and Diluted Earnings Per Share
Net income for the fourth quarter of 2021 was $56.5 million, or $0.73 per diluted earnings per share as compared to the net income of $53.3
million in the prior year’s quarter, or $0.67 per diluted earnings per share.
1. Supplementary financial measure. Refer to section 14 in this MD&A for additional information.
2. Non-IFRS financial measure. Refer to section 14 in this MD&A for additional information.
Summary financial highlights for the year ended December 31, 2021 , 2020 and 2019
For the
(C$ in millions except %, share and per
share amounts)
Total system-wide sales (1)
Franchise sales (1)
Revenue
Cost of sales
Gross profit
Gross profit margin as a percentage
2021
2020
3,057.6
2,701.6
544.9
2,512.7
1,404.4
1,108.2
481.4
2,220.2
1,236.3
983.9
$ Increase
(Decrease)
% Increase
(Decrease)
356.0
63.5
292.5
168.1
124.3
13.2%
13.2%
13.2%
13.6%
12.6%
2020
2,701.6
481.4
2,220.2
1,236.3
983.9
2019
2,728.6
445.2
2,283.4
1,284.8
998.6
Year ended December 31
$ Increase
(Decrease)
% Increase
(Decrease)
(27.0)
36.2
(63.2)
(48.5)
(14.7)
(1.0%)
8.1%
(2.8%)
(3.8%)
(1.5%)
of revenue
44.10%
44.32%
44.32%
43.73%
Selling, general and administrative
expenses (2) (3)
SG&A as a percentage of revenue (3)
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
819.1
32.60%
751.0
33.83%
68.1
9.1%
751.0
33.83%
830.5
36.37%
(79.5)
(9.6%)
289.1
(15.0)
274.1
68.7
205.5
233.0
(17.9)
215.1
48.4
166.7
56.1
(2.9)
59.0
20.3
38.8
24.1%
(16.2%)
27.4%
41.9%
23.3%
233.0
(17.9)
215.1
48.4
166.7
168.1
(25.2)
142.9
36.1
106.8
64.9
(7.3)
72.2
12.3
59.9
38.6%
(29.0%)
50.5%
34.1%
56.1%
8.18%
7.51%
7.51%
4.68%
(1.7)
207.2
3.4
163.3
(5.1)
(150.0%)
43.9
26.9%
3.4
163.3
(0.1)
106.9
3.5
56.4
52.8%
of common shares
77,623,382 79,798,908
79,798,908 77,594,496
Basic earnings per share
Adjusted basic earnings per share (1)
Diluted weighted average number
$2.67
$2.65
$2.05
$2.09
$0.62
$0.56
30.2%
26.8%
$2.05
$2.09
$1.38
$1.38
$0.67
$0.71
48.6%
51.5%
of common shares
79,062,376 82,113,879
82,113,879 83,746,040
Diluted earnings per share
Adjusted diluted earnings per share (1)
Common share dividends declared
Convertible, non-voting shares
$2.62
$2.60
$1.89
$1.99
$2.04
$0.88
$0.63
$0.56
$1.01
31.7%
27.5%
114.8%
$1.99
$2.04
$0.88
$1.30
$1.30
$0.56
$0.69
$0.74
$0.32
53.1%
56.9%
57.1%
dividends declared
$0.32
$0.29
$0.03
10.3%
$0.29
$0.28
$0.01
3.6%
1. Non-IFRS financial measure. Refer to section 14 in this MD&A for additional information.
2. Selling, general and administrative expenses (“SG&A”).
3. SG&A as a percentage of revenue for the year ended December 31, 2020, includes the impact of the CEWS of $31.6 million or 1.4% as a percentage of revenue in the
year. Therefore, excluding the impact of the CEWS, the total SG&A as a percentage of revenue in the year amounted to 35.25%.
23
Management’s Discussion and AnalysisLeon’s Furniture Limited / Annual Report 2021 Same Store Sales (1)
For the
(C$ in millions, except %)
Same store sales (1)
Year ended
December 31, 2021
December 31, 2020
$ Increase
% Increase
2,446.9
2,153.1
293.8
13.6%
1. Supplementary financial measure. Refer to section 14 in this MD&A for additional information.
Revenue
For the year ended December 31, 2021, revenue was $2,512.7 million compared to $2,220.2 million in the prior year, an increase of
$292.5 million or 13.2% as compared to the prior year due to increases in all product categories driven by continuing customer demand.
This increase was achieved despite being impacted by COVID related factors in the first half of the year related primarily to provincially
mandated retail store closures, ongoing global supply chain issues in relation to importing product to Canada and significant product
cost increases primarily due to CBSA tariffs on certain upholstered seating products that are imported by the Company from Asia.
Same Store Sales (1)
Same store corporate sales increased 13.6% compared to the year ended December 31, 2020. The Company achieved this increase in
same store sales despite store closures in the first half of the year due to COVID-19 restrictions imposed by the provincial governments
of Ontario and Quebec.
Gross Profit
The gross profit margin remained relatively flat from 44.32% for the year ended December 31, 2020 to 44.10% in the year ended December 31,
2021. This slight decrease was due to higher cost of sales with the ongoing supply chain issues and increased freight costs.
Selling, General and Administrative Expenses
The Company’s SG&A as a percentage of revenue for the year ended December 31, 2021 improved to 32.60%, a decrease of 123 basis points
over the prior year of 33.83%. This reduction in SG&A percentage was due to effectively managing payroll and advertising spend.
In addition, in the second quarter 2020, the Government of Canada announced the Canada Emergency Wage Subsidy (CEWS) in order to
help employers return and keep their employees on their payrolls. Excluding the CEWS, the Company’s SG&A as a percentage of revenue
for the year ended December 31, 2020 was 35.25%. This results in a decrease of SG&A costs of 265 basis points for the year ended December
31, 2021.
Adjusted Net Income (2) and Adjusted Diluted Earnings Per Share (2)
Adjusted net income for the year ended December 31, 2021 totaled $205.5 million, an increase of $38.8 million or 23.3% over the prior year.
Adjusted diluted earnings per share for the Company increased by $0.56 to $2.60 per share, an increase of 27.5% over the prior year.
Excluding the impact of the CEWS, adjusted net income for the year ended December 31, 2020 totaled $143.4 million compared to adjusted
net income for the current year of $205.5 million, an increase of $62.1 million or 43.3% over the prior year. Adjusted diluted earnings per share
for the Company increased by $0.85 to $2.60 per share, an increase of 48.6% over the prior year.
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, 2021 was
$207.2 million, or $2.62 per diluted earnings per share (net income $163.3 million, $1.99 per diluted earnings per share in 2020).
1. Supplementary financial measure. Refer to section 14 in this MD&A for additional information.
2. Non-IFRS financial measure. Refer to section 14 in this MD&A for additional information.
24
Management’s Discussion and AnalysisLeon’s Furniture Limited / Annual Report 2021 4. Store Network
The Company has 306 retail stores in Canada at December 31, 2021. The following table illustrates the Company’s store count continuity
from December 31, 2020 to December 31, 2021 by retail banner:
Banner
Corporate Stores
Leon’s
Appliance Canada
The Brick (1)
The Brick Mattress Store
Brick Outlet
Corporate Subtotal
Franchise Stores
Leon’s
The Brick
Franchise Subtotal
Total Corporate & Franchise Stores
1.
Includes the Midnorthern Appliance banner.
Number of stores as at
December 31, 2020
Opened
Closed
Number of stores as at
December 31, 2021
54
5
117
21
7
204
35
65
100
304
1
–
1
–
–
2
–
2
2
4
(1)
–
–
–
(1)
(2)
–
–
–
(2)
54
5
118
21
6
204
35
67
102
306
The Company continues to reposition store locations in markets that allow its divisions to expand their market share and support existing locations.
5. Summary of Consolidated Quarterly Results
The table below highlights the variability of quarterly results and the impact of seasonality on the Company’s results. The Company’s
profitability is typically lower in the first half of the year, since retail sales are traditionally higher in the third and fourth quarters.
For the quarter ended
December 31
September 30
June 30
March 31
(C$ in millions except per share amounts)
Total system-wide sales (1)
Franchise sales (1)
Revenue
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)
2021
820.5
150.7
669.8
56.5
57.0
$0.74
$0.73
$0.74
$0.74
2020
830.9
155.8
675.1
53.3
56.3
$0.68
$0.67
$0.72
$0.71
2021
825.5
142.3
683.2
63.8
60.6
$0.83
$0.81
$0.79
$0.77
2020
762.8
132.0
630.8
49.1
49.3
$0.62
$0.60
$0.62
$0.61
2021
714.4
125.9
588.5
46.0
46.6
$0.59
$0.58
$0.60
$0.58
2020
509.9
93.2
416.7
47.2
47.2
$0.59
$0.58
$0.59
$0.58
2021
697.1
126.0
571.1
40.9
41.2
$0.52
$0.51
$0.52
$0.51
2020
598.1
100.5
497.6
13.7
13.9
$0.17
$0.17
$0.17
$0.16
1. Non-IFRS financial measure. Refer to section 14 in this MD&A for additional information.
25
Management’s Discussion and AnalysisLeon’s Furniture Limited / Annual Report 2021 6. Financial Position
As at
(C$ in millions)
Total assets
Total non-current liabilities
Assets
December 31, 2021
December 31, 2020
2,453.1
462.2
2,418.6
581.8
Total assets at December 31, 2021 of $2,453.1 million were $34.5 million higher than the $2,418.6 million reported at December 31, 2020. This
change was driven by an increase in cash and cash equivalents, inventory, and trade receivables.
Non-Current Liabilities
Non-current liabilities of $462.2 million were $119.6 million lower than the $581.8 million reported at December 31, 2020. This was due to the
movement of loans and borrowings from non-current liabilities to current liabilities. This change was also driven by a decrease in non-
current lease liabilities which was offset by an increase in deferred warranty plan revenue.
Net Debt
The table below reflects the Company’s net debt balances, excluding its lease liabilities and restricted marketable securities as at
December 31, 2021.
As at
(C$ in millions)
Term debt
Convertible debenture
Total long-term debt (excluding lease liabilities)
Less: cash, cash equivalents, debt and equity instruments
Net cash balance (1)
December 31, 2021 December 31, 2020
$ Change
90.0
–
90.0
490.0
400.0
90.0
0.4
90.4
490.8
400.4
–
(0.4)
(0.4)
(0.8)
(0.4)
1. Non-IFRS financial measure. Refer to section 14 in this MD&A for additional information.
At December 31, 2021, the Company’s total net debt balance, excluding its lease liabilities, continues to reflect a net positive cash position of
$400.0 million. This positive result was achieved mainly due to generating approximately $300 million in free cash flow in the year ended
December 31, 2021.
26
Management’s Discussion and AnalysisLeon’s Furniture Limited / Annual Report 2021 7. Liquidity and Capital Resources
Liquidity Risk Management
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. As at December 31, 2021, unrestricted liquidity was $613.6 million comprised of cash and cash equivalents,
debt and equity instruments and its undrawn revolving credit facility.
Consolidated Cash Flow Movements
The following table provides a summarized statement of cash flows for the three months and year ended December 31, 2021 and
December 31, 2020:
For the
(C$ in millions)
Three months ended
Year ended
December 31,
2021
December 31,
2020
$ Increase
(Decrease)
December 31,
2021
December 31,
2020
$ Increase
(Decrease)
Cash provided by operating activities before
changes in operating working capital items
Changes in operating working capital items
Cash provided by operating activities
Cash provided by/(used in) investing activities
Cash used in financing activities
Increase/(decrease) in cash and cash equivalents
Cash Provided By Operating Activities
93.6
(0.7)
92.9
39.7
(137.4)
(4.8)
97.1
(25.1)
72.1
(10.0)
(43.1)
19.0
(3.5)
24.4
20.8
49.7
(94.3)
(23.8)
360.6
(46.9)
313.8
16.2
(316.5)
13.5
293.8
217.7
511.4
(43.1)
(188.8)
279.6
66.8
(264.6)
(197.6)
59.3
(127.7)
(266.1)
Cash from operating activities consists 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
and customers’ deposits.
For the three months ended December 31, 2021, cash provided by operating activities increased by $20.8 million compared to the prior
year’s quarter. This movement is primarily driven by an increase in customers’ deposits of $73.8 million with an offset due to an increase
in trade receivables of $18.7 million and a decrease in trade payables of $38.3 million.
For the year ended December 31, 2021, cash provided by operating activities decreased by $197.6 million compared to the prior year. This
movement is primarily driven by decreases in the movement of customers’ deposits, trade and other payables and inventories of $97.0 million,
$46.9 million and $65.9 million, respectively. This was partially offset by an increase in cash received on warranty sales of $14.7 million.
27
Management’s Discussion and AnalysisLeon’s Furniture Limited / Annual Report 2021 Cash Used In Investing Activities
Investing activities relate primarily to capital expenditures and the purchase and sale of debt and equity instruments.
For the three months ended December 31, 2021, cash used in investing activities decreased by $49.7 million compared to the prior year’s quarter.
This change is driven by an increase in the proceeds on the sale of debt and equity instruments of $39.6 million as well as a decrease in the
purchase of property, plant and equipment of $5.0 million.
For the year ended December 31, 2021, cash used in investing activities decreased by $59.3 million compared to the prior year. This decrease
is a result of a decrease in the purchase of property plant and equipment of $28.6 million as well as an increase in the proceeds on the sale
of debt and equity instruments of $33.1 million.
Cash Used in Financing Activities
Financing activities consist primarily of cash used to pay dividends, loans and borrowings and lease liabilities.
For the three months ended December 31, 2021, cash used in financing activities increased by $94.3 million compared to the prior year’s
quarter. The movement is primarily driven by an increase in dividends paid of $97.5 million offset by a reduction in the repurchase of
common shares of $3.5 million.
For the year ended December 31, 2021, cash used in financing activities increased by $127.7 million compared to the prior year. The movement
is driven by an increase in the dividends paid of $125.3 million.
Adequacy of Financial Resources
At December 31, 2021, the Company’s current liabilities exceeded its current assets by $124.5 million. Included in current liabilities is an
amount payable of $200 million to purchase, for cancellation, the common shares of the Company under a Substantial Issuer Bid (“SIB”).
The SIB is further discussed in Note 16 of the consolidated financial statements. Cash and cash equivalents, restricted marketable securities,
and debt and equity instruments were $490.4 million compared to $493.3 million at December 31, 2020. Under the Company’s Senior
Secured Credit Agreement, the Company had unused borrowing capacity of $127 million as at December 31, 2021 ($174 million as at
December 31, 2020). Subsequent to year end the Company completed an amendment that increased the amount of borrowings under the
Company’s credit facilities from $265 million to $350 million. This amendment is discussed further in Note 29 of the consolidated financial
statements. The Company believes that its existing financing resources together with cash flow provided from its current operations and its
expanded revolving credit facility will provide a sound liquidity and working capital position throughout the next twelve months.
Contractual Obligations
As at December 31, 2021
(C$ in millions)
Contractual obligations
Loans and borrowings
Lease liability
Total contractual obligations
8. Outlook
Total
90.9
427.6
518.5
2022
90.9
91.7
182.6
2023
–
64.1
64.1
2024
–
62.3
62.3
2025
–
61.7
61.7
Payments Due by Period
2026
–
60.2
60.2
2027 &
Beyond
–
87.6
87.6
In the short term, the duration and full financial effect of COVID-19 is unknown, as is the efficacy of government and central bank interventions to
curb the spread of COVID-19 and stimulate the economy. Federal and provincial governments have instituted social distancing requirements,
temporary store closures, bans on non-essential travel and other measures that have directly led to uncertainty regarding customer demand.
The Company continues to actively monitor the situation and will continue to respond as the impact of the COVID-19 pandemic evolves, which
will depend on a number of factors including the course of the virus, our customer and employee reactions and any further government
actions, none of which can be predicted with any degree of certainty.
On a longer-term basis, we still believe that the underlying Canadian economy remains relatively strong. Although it is difficult to gauge
future consumer confidence and what impact it may have on retail, we remain cautiously optimistic that our sales and profitability will
increase. This cautious optimism is predicated on taking a measured approach as it relates to striking the correct balance of driving revenue
growth and finding incremental efficiencies. Given the Company’s strong and continuously improving financial position, our principal
objective is to increase our market share and profitability. We remain focused on our commitment to effectively manage our costs but to
also continuously invest in digital innovation that we believe will drive more customers to both our online eCommerce sites and our 306
store locations across Canada.
28
Management’s Discussion and AnalysisLeon’s Furniture Limited / Annual Report 2021 9. Outstanding Common Shares
At December 31, 2021, there were 76,800,313 common shares issued and outstanding. During the year ended December 31, 2021, 189,792
series 2009 shares, 36,443 series 2012 shares, 356,649 series 2013 shares, 199,704 series 2014 shares and 205,905 series 2015 shares were
converted into common shares. For details on the Company’s commitments related to its redeemable share liability please refer to Note 15
of the consolidated financial statements.
During the year ended December 31, 2021, and including the common shares repurchased under the automatic share purchase plan
(“ASPP”), the Company repurchased 2,864,840 shares of its common shares on the open market pursuant to the terms and conditions of
Normal Course Issuer Bids and ASPP at a net cost of $64.5 million.
As at December 31, 2021, the Company has cancelled all of these repurchased shares. During the year ended December 31, 2021, the
Company commenced a SIB, by way of a modified Dutch auction, to purchase, for cancellation, the common shares of the Company.
The Company purchased for cancellation 7,999,993 common shares. As at December 31, 2021, the Company had not cancelled these shares
and they were held as treasury shares, which had a value of $200 million and were subsequently cancelled in January 2022.
During the year ended December 31, 2021, convertible debentures with a stated value of $365 were converted to 29,342 common shares,
at the holder’s option.
10. Related Party Transactions
For the year ended December 31, 2021, 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.
11. 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.
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. 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.
29
Management’s Discussion and AnalysisLeon’s Furniture Limited / Annual Report 2021 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 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 that may influence the recoverability of the debt instruments held.
Impairment of property, plant and equipment and right-of-use assets
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 the probable outflow of resources required to settle the obligation.
Leases
Management exercises judgment in the process of applying IFRS 16 and determining the appropriate lease term on a lease-by-lease basis.
Management considers many factors including any events that create an economic incentive to exercise a renewal option including store
performance, expected future performance and past business practice. Renewal options are only included if Management are reasonably
certain that the option will be renewed.
Materiality
In preparing this MD&A and the information contained herein, management considers the likelihood that a reasonable investor’s decision
would be influenced to buy or not buy, or to sell or hold securities of the Company if such information were omitted, misstated or obscured
in any way. This concept of materiality is consistent with the notion of materiality applied to financial statements and contained in IFRS.
Recent Accounting Pronouncements
Adoption of new accounting standards
Costs necessary to sell inventories IAS 2, Inventories agenda decision
At its June 2021 meeting, the IFRS Interpretations Committee finalized an agenda decision about the costs an entity includes as the “estimated
costs to make the sale” when determining the net realizable value of inventories. The IFRS Interpretations Committee concluded that when
determining the net realizable value of inventories, an entity estimates the costs necessary to make the sale in the ordinary course of business,
which requires the exercise of judgment. The Company assessed the impact of costs included in the “estimated costs necessary to make
the sale” as comprehensive of all related costs. The adoption of the agenda decision did not have a material impact on the consolidated
financial statements.
30
Management’s Discussion and AnalysisLeon’s Furniture Limited / Annual Report 2021 Accounting standards and amendments issued but not yet adopted
IFRS 17, Insurance Contracts (“IFRS 17”)
In May 2017, the IASB issued IFRS 17, which replaces IFRS 4, Insurance Contracts. 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
In June 2020, the IASB issued amendments to IFRS 17 partly aimed at helping companies implement the standard. IFRS 17, incorporating
the amendments, is effective for annual reporting periods beginning on or after January 1, 2023. Retrospective application is required.
The Company plans to adopt the new standard on the effective date. The Company is currently analyzing the impact this standard will
have on its financial statements.
Amendments to IAS 1, Presentation of Financial Statements (“IAS 1”)
In January 2020, the IASB issued Classification of Liabilities as Current or Non-current, which amends IAS 1. The narrow scope amendments
affect only the presentation of liabilities in the statement of financial position and not the amount or timing of their recognition. The
amendments clarify that the classification of liabilities as current or non-current should be based on rights that are in existence at the end of
the reporting period and align the wording in all affected paragraphs to refer to the right to defer settlement by at least twelve months. That
classification is unaffected by the likelihood that an entity will exercise its deferral right. The amendments are effective for annual reporting
periods beginning on or after January 1, 2023 and are to be applied retrospectively. The Company is currently analyzing the impact this
amendment will have on its financial statements.
Amendments to IFRS 9, Financial Instruments (“IFRS 9”)
As part of its 2018-2020 annual improvements to IFRS standards process, the IASB issued an amendment to IFRS 9. The amendment clarifies
the fees that an entity includes when assessing whether the terms of a new or modified financial liability are substantially different from
the terms of the original financial liability. These fees include only those paid or received between the borrower and the lender, including
fees paid or received by either the borrower or lender on the other’s behalf. An entity applies the amendment to financial liabilities that
are modified or exchanged on or after the beginning of the annual reporting period in which the entity first applies the amendment. The
amendment is effective for annual reporting periods beginning on or after January 1, 2022 with earlier adoption permitted. The adoption of
this amendment will not have a material impact on the financial statements.
Amendments to IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors (“IAS 8”)
In February 2021, the IASB issued Definition of Accounting Estimates, which amends IAS 8. The amendment replaces the definition of a
change in accounting estimates with a definition of accounting estimates. Under the new definition, accounting estimates are “monetary
amounts in financial statements that are subject to measurement uncertainty”. The amendment provides clarification to help entities to
distinguish between accounting policies and accounting estimates. The amendments are effective for annual periods beginning on or after
January 1, 2023. The Company is currently analyzing the impact this amendment will have on its financial statements.
Amendments to IAS 1 and IFRS Practice Statement 2
In February 2021, the IASB issued Disclosure of Accounting Policies, which amends IAS 1 and IFRS Practice Statement 2. The amendments
are intended to help preparers in deciding which accounting policies to disclose in their financial statements. The amendment to IAS 1
requires companies to disclose their material accounting policy information rather than its significant accounting policies. The amendment
also clarifies that not all accounting policy information that relates to material transactions, other events or conditions is material to the
financial statements. The amendment to IFRS Practice Statement 2 adds guidance and examples to the materiality practice statement,
which explains how to apply the materiality process to identify material accounting policy information. The amendments are effective for
annual periods beginning on or after January 1, 2023 and are to be applied prospectively. The Company is currently analyzing the impact
these amendments will have on its financial statements.
31
Management’s Discussion and AnalysisLeon’s Furniture Limited / Annual Report 2021 12. 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 23, 2022, which provides
information on the risk factors facing the Company. The February 23, 2022 AIF can be found online at www.sedar.com.
For additional potential risks associated with COVID-19 refer to section 2 in this MD&A.
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, including the effective management
of its supply chain, (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.
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.
32
Management’s Discussion and AnalysisLeon’s Furniture Limited / Annual Report 2021 13. 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, 2021.
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, 2021, 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.
14. Non-IFRS and Supplementary Financial Measures
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 financial 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
Adjusted Net Income
Leon’s calculates comparable measures by excluding the effect of changes in fair value of derivative instruments, related to the net effect
of USD-denominated forward contracts. The Company uses derivative instruments to manage its financial risk 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, and basic and diluted earnings per share to adjusted basic
and diluted earnings per share:
For the
(C$ in millions 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
Three months ended
Year ended
December 31,
2021
December 31,
2020
December 31,
2021
December 31,
2020
56.5
0.5
57.0
$0.74
$0.73
$0.74
$0.74
53.3
3.0
56.3
$0.68
$0.67
$0.72
$0.71
207.2
(1.7)
205.5
$2.67
$2.62
$2.65
$2.60
163.3
3.4
166.7
$2.05
$1.99
$2.09
$2.04
33
Management’s Discussion and AnalysisLeon’s Furniture Limited / Annual Report 2021 Adjusted EBITDA
Adjusted earnings before interest, income taxes, depreciation and amortization, mark-to-market adjustment due to the changes in
the fair value of the Company’s financial derivative instruments and any non-recurring charges to income (“Adjusted EBITDA”) is a
non-IFRS financial measure used by the Company. The Company considers adjusted EBITDA to be an effective measure of profitability
on an operational basis and is commonly regarded as an indirect measure of operating cash flow, a significant indicator of success for
many businesses. Adjusted EBITDA is a non-IFRS financial measure used by the Company. The Company’s Adjusted EBITDA may not
be comparable to the Adjusted EBITDA measure of other companies, but in management’s view appropriately reflects Leon’s specific
financial condition. This measure is not intended to replace net income, which, as determined in accordance with IFRS, is an indicator
of operating performance.
The following is a reconciliation of reported net income to adjusted EBITDA:
For the
(C$ in millions)
Net income
Income tax expense
Net finance costs
Depreciation and amortization
Mark-to-market (gain)/loss on financial derivative instruments
Three months ended
Year ended
December 31,
2021
December 31,
2020
December 31,
2021
December 31,
2020
56.5
17.9
2.9
27.7
0.7
53.3
16.6
3.9
28.1
4.1
207.2
69.2
15.0
112.0
(2.2)
401.2
163.3
47.2
17.9
111.3
4.6
344.3
Adjusted EBITDA
105.7
106.0
Total System Wide Sales
Total system wide sales refer to the aggregation of revenue recognized in the Company’s consolidated financial statements plus the
franchise sales occurring at franchise stores to their customers which are not included in the revenue figure presented in the Company’s
consolidated financial statements. Total system wide sales is not a measure recognized by IFRS and does not have a standardized
meaning prescribed by IFRS, but it is a key indicator used by the Company to measure performance against prior period results.
Therefore, total system wide sales as discussed in this MD&A may not be comparable to similar measures presented by other issuers.
We believe that disclosing this measure is meaningful to investors because it serves as an indicator of the strength of the Company’s overall
store network, which ultimately impacts financial performance.
Franchise Sales
Franchise sales figures refer to sales occurring at franchise stores to their customers which are not included in the revenue figures presented
in the Company’s consolidated financial statements, or in the same store sales figures in this MD&A. Franchise sales is not a measure
recognized by IFRS, and does not have a standardized meaning prescribed by IFRS, but it is a key indicator used by the Company to
measure performance against prior period results. Therefore, franchise sales as discussed in this MD&A may not be comparable to similar
measures presented by other issuers. Once again, we believe that disclosing this measure is meaningful to investors because it serves as
an indicator of the strength of the Company’s brands, which ultimately impacts financial performance.
Net Debt
Net debt is calculated as the principal amount of the term loan, convertible debentures less cash, cash equivalents and debt and equity
instruments. Net debt is a non-IFRS financial measure used by the Company. The Company considers net debt to be an effective measure
of the overall debt position and borrowing capacity available to the Company.
Free Cash Flow
Free cash flow is calculated as net cash flows from operating activities less additions to property, plant and equipment. The Company
uses free cash flow as an indicator of the financial strength and performance of its business, indicating the amount of cash the Company
can generate from operations and after capital expenditures. Free cash flow is a non-IFRS financial measure used by the Company.
The Company believes free cash flow is useful in assessing the Company’s cash available for additional financing and investing activities.
Supplementary Financial Measures
The Company uses supplementary financial measures to disclose financial measures that are (a) not presented in the financial statements
and (b) are, or are intended to be, disclosed periodically to depict the historical or expected future financial performance, financial position
or cash flow, that is not a non-IFRS financial measure as detailed above.
Same Store Sales
Same store sales are defined as sales generated by stores, both in store and through online transactions, that have been open for more
than 12 months on a fiscal basis. 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.
34
Management’s Discussion and AnalysisLeon’s Furniture Limited / Annual Report 2021
Consolidated
Financial Statements
For the year ended December 31, 2021
Management’s Responsibility for Financial Reporting ............................................................................................................................................36
Independent Auditor’s Report .......................................................................................................................................................................................... 37
Consolidated Financial Statements
Consolidated Statements of Financial Position ......................................................................................................................................................... 40
Consolidated Statements of Income ..............................................................................................................................................................................41
Consolidated Statements of Comprehensive Income ...............................................................................................................................................41
Consolidated Statements of Changes in Shareholders’ Equity .............................................................................................................................42
Consolidated Statements of Cash Flows ..................................................................................................................................................................... 43
Notes to the Consolidated Financial Statements
Note 1
Reporting Entity ....................................................... 44
Note 15 Management Share Purchase Plan ................. 64
Note 2
Basis of Presentation ............................................. 44
Note 16 Common Shares ..................................................... 65
Note 3
Summary of Significant Accounting Policies .. 46
Note 17 Revenue ..................................................................... 66
Note 4
Adoption of Accounting Standards
and Amendments ................................................... 55
Note 5
Cash and Cash Equivalents ................................. 56
Note 6
Inventories................................................................. 56
Note 7
Deferred Acquisition Costs ................................... 56
Note 8
Property, Plant and Equipment and
Right-Of-Use Assets ................................................57
Note 9
Investment Properties ........................................... 58
Note 10
Intangible Assets and Goodwill .......................... 59
Note 11
Trade and Other Payables .................................. 60
Note 12 Provisions ................................................................... 61
Note 13
Leases ........................................................................ 62
Note 14
Loans and Borrowings .......................................... 63
Note 18 Expenses by Nature ............................................... 67
Note 19 Net Finance Costs ................................................... 67
Note 20
Income Tax Expense .............................................. 67
Note 21
Earnings Per Share ................................................ 69
Note 22 Financial Instruments ............................................ 69
Note 23
Insurance Contract Risk .........................................73
Note 24 Capital Management .............................................74
Note 25 Commitments and Contingencies ......................74
Note 26 Consolidated Statements of Cash Flows ..........75
Note 27 Related Party Transactions ...................................76
Note 28 Comparative Financial Information...................76
Note 29 Subsequent Events ..................................................76
35
Leon’s Furniture Limited / Annual Report 2021
Management’s Responsibility for Financial Reporting
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 LLP, 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.
“Michael J. Walsh”
“Constantine Pefanis”
Mike Walsh President and CEO
Constantine Pefanis CFO
36
Leon’s Furniture Limited / Annual Report 2021
Independent Auditor’s Report
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 and its subsidiaries (the “Group”),
which comprise the consolidated statements of financial position as at December 31, 2021 and 2020, and the consolidated statements of
income, consolidated statements of comprehensive income, consolidated statements of changes in shareholders’ 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, 2021 and 2020, and its consolidated financial performance and its consolidated cash flows for
the years then ended in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting
Standards Board.
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.
Key Audit Matter
Key audit matters are those matters that, in our professional judgment, were of most significance in the audit of the consolidated financial
statements of the current period. These matters were addressed in the context of the audit of the consolidated financial statements as a
whole, and in forming the auditor’s opinion thereon, and we do not provide a separate opinion on these matters. For the matter below, our
description of how our audit addressed the matter is provided in that context.
We have fulfilled the responsibilities described in the Auditor’s responsibilities for the audit of the consolidated financial statements section
of our report, including in relation to this matter. Accordingly, our audit included the performance of procedures designed to respond to our
assessment of the risks of material misstatement of the consolidated financial statements. The results of our audit procedures, including the
procedures performed to address the matter below, provide the basis for our audit opinion on the accompanying consolidated financial
statements.
Key audit matter
How our audit addressed the key audit matter
Valuation of Goodwill and Indefinite Life intangibles related to The Brick acquisition
Goodwill and indefinite-life intangible assets arising from the 2013 acquisition of
To test the estimated recoverable amount of the Brick division, our audit
the Brick represent $379 million and $266 million, respectively as of December 31,
procedures included, among others, assessing valuation methodology
2021. The indefinite-life intangible assets are comprised of brand name and
and evaluating significant assumptions and the accuracy of underlying
franchise agreements. As disclosed in Note 10 of the consolidated financial
data used by management in its analysis. With the assistance of our
statements, the Group allocated these assets to the Brick division (a group of
valuation specialists, we evaluated the Group’s model, valuation
cash generating units (“CGUs”)) and assesses at least annually, or at any time
methodology, and certain significant assumptions, including the pre-tax
if an indicator of impairment exists, whether there has been an impairment
discount rate. We assessed the selection and application of the pre-tax
loss in the carrying value of these assets. When performing impairment tests,
discount rate by evaluating the inputs and mathematical accuracy of
the Group estimates the recoverable amount of the group of CGUs to which
the calculation.
goodwill and indefinite-life intangible assets have been allocated using a
discounted cash flow model.
We assessed the historical accuracy of management’s estimates on
cash flow projections, revenue growth rate and earnings margins by
Auditing management’s annual goodwill and indefinite-life intangibles
comparing management’s past projections to actual and historical
impairment tests was complex, as considerable management judgement
performance. We also compared the revenue growth rate to current
was required due to the significant measurement uncertainty related
industry trends to assess the reasonableness of the revenue growth
to determining the recoverable amount of the Brick division. Significant
rate used by the management in its analysis. We performed sensitivity
assumptions included revenue growth rate, earnings margins and pre-tax
analysis on significant assumptions, including the pre-tax discount rate,
discount rate, which are affected by expectations about future market and
to evaluate changes in the recoverable amount of the Brick division that
economic conditions.
would result from changes in the assumptions.
37
Leon’s Furniture Limited / Annual Report 2021 Independent Auditor’s Report
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 and 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.
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 IFRS, 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 scepticism 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.
38
Leon’s Furniture Limited / Annual Report 2021 Independent Auditor’s Report
• 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.
From the matters communicated with those charged with governance, we determine those matters that were of most significance in the
audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in
our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we
determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be
expected to outweigh the public interest benefits of such communication.
The engagement partner on the audit resulting in this independent auditor’s report is Laura Sluce.
Toronto, Canada
February 23, 2022
Chartered Professional Accountants
Licensed Public Accountants
39
Leon’s Furniture Limited / Annual Report 2021 Consolidated Statements of Financial Position
As at
(C$ in thousands)
Assets
Current assets
Cash and cash equivalents
Restricted marketable securities
Debt securities
Equity securities
Trade receivables
Income taxes recoverable
Inventories
Deferred acquisition costs
Prepaid expenses and other assets
Total current assets
Non-current assets
Deferred acquisition costs
Loan receivable
Property, plant and equipment and right-of-use assets
Investment properties
Intangible assets
Goodwill
Deferred income tax assets
Total non-current assets
Total assets
Liabilities
Current liabilities
Trade and other payables
Provisions
Income taxes payable
Customers’ deposits
Lease liabilities
Dividends payable
Deferred warranty plan revenue
Loans and borrowings
Derivative liabilities
Total current liabilities
Non-current liabilities
Loans and borrowings
Convertible debentures
Lease liabilities
Deferred warranty plan revenue
Redeemable share liability
Deferred income tax liabilities
Total non-current liabilities
Total liabilities
Shareholders’ equity
Common shares
Equity component of convertible debentures
Retained earnings
Accumulated other comprehensive income
Total shareholders’ equity
Total liabilities and shareholders’ equity
Notes
December 31, 2021
December 31, 2020
5
20
6
7
7
15.1
8
9
10
10
20
11
12
20
17
13
16
17
14
22
14
14
13
17
15.2
20
16
14
382,138
466
66,561
41,251
160,093
2,242
395,646
11,294
15,598
1,075,289
19,896
10,039
657,809
14,850
270,173
390,120
14,957
1,377,844
2,453,133
543,737
24,649
32,523
362,099
74,920
12,287
57,787
90,000
1,742
1,199,744
–
–
291,334
99,840
13
71,009
462,196
1,661,940
149,966
–
627,243
13,984
791,193
2,453,133
368,635
2,451
73,565
48,634
130,582
4,266
332,072
10,725
11,095
982,025
17,614
12,721
714,423
16,212
270,481
390,120
14,993
1,436,564
2,418,589
304,844
25,608
15,479
305,460
73,476
36,163
55,733
–
3,976
820,739
90,000
441
327,227
88,604
13
75,562
581,847
1,402,586
164,669
31
842,604
8,699
1,016,003
2,418,589
The accompanying notes are an integral part of these consolidated financial statements.
On behalf of the Board:
“Mark J. Leon”
“Mary Ann Leon”
40
Mark J. Leon
Director
Mary Ann Leon
Director
Consolidated Financial StatementsLeon’s Furniture Limited / Annual Report 2021
Consolidated Statements of Income
For the
Year ended
(C$ in thousands except share and per share amounts)
Notes
December 31, 2021
December 31, 2020
Revenue
Cost of sales
Gross profit
Operating expenses
Selling, general and administrative expenses
Operating profit
Finance costs
Finance income
Change in fair value of derivative instruments
Net income before income tax
Income tax expense
Net income for the year
Weighted average number of common shares outstanding
Basic
Diluted
Earnings per share
Basic
Diluted
Dividends declared per share
Common
Convertible, non-voting
17
6
19
19
20
21
2,512,670
1,404,446
1,108,224
819,091
289,133
(20,752)
5,767
2,231
276,379
69,221
207,158
2,220,180
1,236,258
983,922
750,951
232,971
(22,413)
4,526
(4,599)
210,485
47,235
163,250
77,623,382
79,062,376
79,798,908
82,113,879
$2.67
$2.62
$1.89
$0.32
$2.05
$1.99
$0.88
$0.29
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of Comprehensive Income
For the
(C$ in thousands)
Net income for the year
Other comprehensive income
Items that may be reclassified subsequently to profit or loss:
Gain (loss) on debt instruments arising during the year
Reclassification adjustment for gains on disposal of debt instruments
Items that will not be reclassified to profit or loss:
Gain on equity instruments arising during the year
Income tax expense (recovery) on the above
Other comprehensive income for the year
Comprehensive income for the year
The accompanying notes are an integral part of these consolidated financial statements.
Year ended
December 31, 2021
December 31, 2020
207,158
163,250
(2,371)
30
8,288
(662)
5,285
2,053
135
3,129
4
5,321
212,443
168,571
41
Consolidated Financial StatementsLeon’s Furniture Limited / Annual Report 2021 Consolidated Statements of Changes in Shareholders’ Equity
(C$ in thousands)
As at December 31, 2020
Comprehensive income
Net income for the year
Other comprehensive income for the year
Total comprehensive income
Transactions with shareholders
Dividends declared
Management share purchase plan [note 15.2]
Convertible debentures [note 14]
Treasury shares and share repurchase
commitment [note 16]
Repurchase of common shares [note 16]
Total transactions with shareholders
As at December 31, 2021
(C$ in thousands)
As at December 31, 2019
Comprehensive income
Net income for the year
Other comprehensive income for the year
Total comprehensive income
Transactions with shareholders
Dividends declared
Management share purchase plan [note 15.2]
Convertible debentures [note 14]
Treasury shares [note 16]
Share repurchase commitment [note 16]
Repurchase of common shares [note 16]
Equity
component
of convertible
debentures
31
Accumulated
other
comprehensive
income
8,699
Common
shares
164,669
Retained
earnings
842,604
Total
1,016,003
–
–
–
–
–
(31)
–
–
(31)
–
–
–
–
–
11,971
408
(21,064)
(6,018)
(14,703)
149,966
–
5,285
5,285
207,158
–
207,158
207,158
5,285
212,443
–
–
–
–
–
–
13,984
(146,092)
(146,092)
–
–
11,971
377
(217,936)
(58,491)
(422,519)
627,243
(239,000)
(64,509)
(437,253)
791,193
Equity
component
of convertible
debentures
3,542
Accumulated
other
comprehensive
income
3,378
Common
shares
115,728
Retained
earnings
793,116
–
–
–
–
–
(3,511)
–
–
–
–
–
–
–
2,499
51,859
(6)
(159)
(5,252)
48,941
–
5,321
5,321
163,250
–
163,250
–
–
–
–
–
–
–
(69,977)
–
–
(59)
(841)
(42,885)
(113,762)
Total
915,764
163,250
5,321
168,571
(69,977)
2,499
48,348
(65)
(1,000)
(48,137)
(68,332)
Total transactions with shareholders
(3,511)
As at December 31, 2020
31
164,669
8,699
842,604
1,016,003
The accompanying notes are an integral part of these consolidated financial statements.
42
Consolidated Financial StatementsLeon’s Furniture Limited / Annual Report 2021 Notes December 31, 2021
December 31, 2020
Year ended
276,379
210,485
Consolidated Statements of Cash Flows
For the
(C$ in thousands)
Operating activities
Net income before income tax
Add (deduct) items not involving an outlay of cash:
Depreciation of property, plant and equipment, right-of-use assets
and investment properties
Amortization of intangible assets
Amortization of deferred warranty plan revenue
Amortization of premium
Net finance costs
Loss (gain) on sale of property, plant and equipment and investment properties
Fair value gain on loan receivable
Gain on sale of debt and equity instruments
Change in operating working capital
Cash received on warranty plan sales
Income taxes paid
Cash provided by operating activities
Investing activities
Purchase of property, plant and equipment
Purchase of intangible assets
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
Repayment of loan receivable
Interest received
Cash provided by (used in) investing activities
Financing activities
Payment of lease liabilities
Dividends paid
Decrease of employee loans-redeemable shares
Repurchase of common shares
Early redemption payment on outstanding debentures
Repayment of term loan
Interest paid
Cash used in financing activities
Net increase in cash and cash equivalents during the year
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
The accompanying notes are an integral part of these consolidated financial statements.
15.1
26
8
10
15.1
13
15.2
16
14
14
110,202
1,810
(67,613)
317
14,985
200
(1,212)
(30)
335,038
(46,856)
80,903
(55,332)
313,753
(14,896)
(1,502)
1,138
(41,631)
63,662
3,894
5,547
16,212
(73,117)
(169,968)
11,971
(64,574)
(77)
–
(20,697)
(316,462)
13,503
368,635
382,138
108,970
2,319
(64,736)
222
18,050
(831)
(714)
(139)
273,626
217,674
66,130
(46,006)
511,424
(43,493)
(995)
1,298
(36,038)
30,586
1,046
4,526
(43,070)
(71,076)
(44,636)
2,499
(48,202)
–
(5,000)
(22,336)
(188,751)
279,603
89,032
368,635
43
Consolidated Financial StatementsLeon’s Furniture Limited / Annual Report 2021 Notes to the
Consolidated Financial
Statements
For the years ended December 31, 2021 and 2020
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 the 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) 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 23, 2022.
Basis of measurement
The consolidated financial statements have been prepared under the historical cost convention, except for investments, debt and equity
instruments, derivative instruments, 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
On March 11, 2020, the World Health Organization declared the novel coronavirus, (“COVID-19”), which has the potential to cause severe
respiratory illness, a global pandemic. As an emerging risk, the duration and full financial effect of the COVID-19 pandemic is unknown at
this time, as is the efficacy of the government and central bank interventions. Any estimate of the length and severity of these developments
is therefore subject to significant uncertainty. The COVID-19 pandemic has increased the uncertainties around key assumptions used by the
Company in estimating the recoverable amount for the purpose of testing for impairment of property, plant and equipment and right-of-use
44
Leon’s Furniture Limited / Annual Report 2021 assets, goodwill and intangible assets. These key estimates include future cash flows, margins and discount rates. Accordingly, estimates of
the extent to which the COVID-19 pandemic could materially and adversely affect the Company’s operations, financial results and condition
in future periods, including the use of estimates and judgements are also subject to significant uncertainty.
The Company continues to actively monitor the situation and will continue to respond as the impact of the COVID-19 pandemic evolves.
Management has exercised judgment in the process of applying the Company’s accounting policies. The preparation of consolidated
financial statements in accordance with IFRS requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the consolidated statement of financial position dates and the
reported amounts of revenue and expenses during the reporting period. Estimates and other judgments are continuously evaluated and
are based on management’s experience and other factors, including expectations about future events that are believed to be reasonable
under the circumstances. Actual results could differ from those estimates. The following discusses the most significant accounting judgments
and estimates that the Company has made in the preparation of the consolidated financial statements.
Consolidation and classification of joint arrangements
Assessing the Company’s ability to control or influence the relevant financial and operating policies of another entity may, depending on
the facts and circumstances, require the exercise of significant judgment to determine whether the Company controls, jointly controls, or
exercises significant influence over the entity performing the work. This assessment of control impacts how the operations of these entities
are reported in the Company’s consolidated financial statements (i.e. 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 that may influence the recoverability of the debt instruments held.
Impairment of property, plant and equipment and right-of-use assets
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.
45
Notes to the Consolidated Financial StatementsLeon’s Furniture Limited / Annual Report 2021 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 the probable outflow of resources required to settle the obligation.
Leases
Management exercises judgment in the process of applying IFRS 16, Leases (“IFRS 16”) and determining the appropriate lease term
on a lease-by-lease basis. Management considers many factors including any events that create an economic incentive to exercise a
renewal option including store performance, expected future performance and past business practice. Renewal options are only included
if management are reasonably certain that the option will be renewed.
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 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 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.
46
Notes to the Consolidated Financial StatementsLeon’s Furniture Limited / Annual Report 2021 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 when control passes. 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
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
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. 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 FVOCI, 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. This includes trade receivables, and these are
recorded at amortized cost with gains and losses recognized in profit or loss in the period that the asset is no longer recognized or
becomes impaired; and
c) FVTPL – financial assets which are classified as FVTPL.
Classifications that the Company has used for financial liabilities include:
a) Amortized cost – non-derivative financial liabilities, including loans and borrowings, measured at amortized cost with gains and losses
recognized in profit or loss in the period that the liability is no longer recognized; and
b) FVTPL – financial liabilities which are classified as FVTPL.
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).
47
Notes to the Consolidated Financial StatementsLeon’s Furniture Limited / Annual Report 2021 Impairment of financial assets
In accordance with IFRS 9, Financial Instruments (“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.
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
The Company allocates the amount initially recognized in respect of an item of property, plant and equipment to its significant parts and
depreciates separately each such part. Residual values, method of depreciation and useful lives of items of property, plant and equipment
are reviewed annually by the Company and adjusted, if appropriate.
Gains and losses on disposal of property, plant and equipment are determined by comparing the proceeds with the carrying amount of the
asset and are included as part of selling, general and administration expenses in the consolidated statements of income.
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Notes to the Consolidated Financial StatementsLeon’s Furniture Limited / Annual Report 2021 Leases
The Company as lessee
The Company determines whether a contract is or contains a lease at inception of the contract. A contract is, or contains, a lease if the contract
conveys the right to control the use of an identified asset for a period of time in exchange for consideration.
(i) Right-of-use assets
The Company recognizes a right-of-use asset and a lease liability based on the present value of future lease payments when the lessor
makes the leased asset available for use by the Company. The right-of-use asset is initially measured at cost, which comprises the initial
amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs
incurred and an estimate of costs to dismantle and remove the underlying asset. The right-of-use asset is subsequently depreciated using
the straight-line method from the commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the
lease term. The estimated useful lives of right-of-use assets are determined on the same basis as those of property, plant and equipment.
Right-of-use assets are subject to impairment.
(ii) Lease liabilities
The Company recognizes lease liabilities measured at the present value of lease payments to be made over the lease term, discounted
using the interest rate implicit in the lease. The lease payments include fixed payments (including in-substance fixed payments), variable
payments that depend on an index or a rate, renewal options that are reasonably certain to be exercised less any lease incentives
receivable. Variable lease payments that do not depend on an index or rate are recognized as an expense in the period in which the event
that triggers the payment occurs. In addition, the carrying amount of lease payments is remeasured if there is a modification, a change
in the lease term or a change in the in-substance fixed lease payments. The Company has elected to apply the practical expedient to not
separate the lease component and its associated non-lease component.
Management exercises judgment in the process of applying IFRS 16 and determining the appropriate lease term on a lease-by-lease basis.
Management considers many factors including any events that create an economic incentive to exercise a renewal option including store
performance, expected future performance and past business practice. Renewal options are only included if management are reasonably
certain that the option will be renewed.
As most of the Company’s operating lease contracts do not provide the implicit interest rate, nor can the implicit interest rate be readily
determined, the Company uses its incremental borrowing rate as the discount rate for determining the present value of lease payments.
The Company’s incremental borrowing rate for a lease is the rate that the Company would pay to borrow an amount necessary to obtain
an asset of a similar value to the right-of-use asset on a collateralized basis over a similar term.
(iii) Short-term leases and leases of low-value assets
The Company has elected not to recognize right-of-use assets and lease liabilities for short-term leases of property, plant and equipment
that have a lease term of 12 months or less and leases of low-value assets (e.g. laptop computers). The Company recognizes the lease
payments associated with these leases as an expense on a straight-line basis over the lease term.
The Company as a lessor
At the inception of the lease, the Company classifies each lease as either an operating lease or a finance lease. A lease is a finance lease
if it transfers substantially all the risks and rewards of the underlying asset to the lessee; otherwise, the lease is an operating lease. Rental
income from operating leases is recognized on a straight-line basis over the lease term.
Investment properties
Assets that are held for long-term rental yields or for capital appreciation or both, and that are not occupied by either the Company or any of
its subsidiaries, are classified as investment properties. Investment properties are measured initially at cost, including related transaction costs.
Subsequent to initial recognition, investment properties are carried at cost and depreciated over the estimated useful lives of the properties:
Buildings
Building improvements
30 to 50 years
Over the remaining lease term
Land held by the Company and classified as investment property is not depreciated.
Subsequent expenditures on investment properties are capitalized to the properties’ carrying amount only when it is probable that future
economic benefits associated with the expenditures will flow to the Company and the cost of the item can be measured reliably. All other
repairs and maintenance costs are expensed when incurred. When part of an investment property is replaced, the carrying amount of the
replaced part is derecognized.
If an investment property becomes owner occupied, it is reclassified as property, plant and equipment.
49
Notes to the Consolidated Financial StatementsLeon’s Furniture Limited / Annual Report 2021 Goodwill and intangible assets
Goodwill
Goodwill is the residual amount that results when the purchase price of an acquired business exceeds the sum of the amounts allocated
to the tangible and intangible assets acquired, less liabilities assumed, based on their fair value. Goodwill is assigned at the date of the
business acquisition. The Company assesses at least annually, or at any time if an indicator of impairment exists, whether there has been
an impairment loss in the carrying value of goodwill and it is carried at cost less accumulated impairment losses. Impairment losses on
goodwill are not reversed.
Goodwill is allocated to CGUs or groups of CGUs that are expected to benefit from the business combination for the purpose of impairment
testing. A group of CGUs represents the lowest level within the Company at which goodwill is monitored for internal management purposes.
Intangible assets
Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business
combination is their fair value at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any
accumulated amortization and accumulated impairment losses. Internally generated intangibles, excluding capitalized development costs,
are not capitalized and the related expenditure is reflected in profit or loss in the period in which the expenditure is incurred. The useful lives
of intangible assets are assessed as either finite or indefinite.
Intangible assets with finite useful lives are amortized on a straight-line basis over their estimated useful lives as follows:
Customer relationships
Non-compete agreement
Computer software
8 years
8 years
3 to 7 years
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.
50
Notes to the Consolidated Financial StatementsLeon’s Furniture Limited / Annual Report 2021 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.
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 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.
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Notes to the Consolidated Financial StatementsLeon’s Furniture Limited / Annual Report 2021 Product returns
The Company has a return policy allowing customers to return merchandise if not satisfied within certain timeframes. 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
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.
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.
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 accounted for under IFRS 4 Insurance Contracts. Insurance contracts are contracts under where the Company has
accepted significant risk, other than financial risk, from another party (the “policyholders”) by agreeing to compensate the policyholders on
the occurrence of a specified uncertain future event (the “insured event”) adversely affects the policyholders.
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.
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Notes to the Consolidated Financial StatementsLeon’s Furniture Limited / Annual Report 2021 Deferred 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 a deferred insurance revenue adequacy test on an annual basis to determine whether the carrying amount of the
deferred 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 deferred 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.
Deferred insurance revenue is calculated based on assumptions of loss emergence, payment rates, interest, and expected expenses
associated with the adjustment and payment of claims. Deferred insurance revenue is derecognized when the obligation to pay a claim
expires, is discharged or is cancelled in accordance with the pattern of insurance service provided under the contract.
Deferred warranty plan revenue
Warranties, underwritten by the Company’s wholly owned subsidiaries, are offered on furniture, appliance and electronic 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.
Deferred acquisition costs
Acquisition costs comprises 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.
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Notes to the Consolidated Financial StatementsLeon’s Furniture Limited / Annual Report 2021 Joint arrangements
Under IFRS 11, Joint Arrangements (“IFRS 11”), 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 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 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.
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. 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 IFRS 9, (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.
Government grants
The Company recognizes government grants when there is reasonable assurance that the Company will comply with the conditions of
the grant and the grant will be received. Government grants receivable are recorded in prepaid and other assets on the consolidated
statement of financial position. The Company recognizes government grants in the consolidated statement of income in the same period
as the expenses for which the grant is intended to compensate. In cases where a government grant becomes receivable as compensation
for expenses already incurred in prior periods, the grant is recognized in profit or loss in the period in which it becomes receivable.
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Notes to the Consolidated Financial StatementsLeon’s Furniture Limited / Annual Report 2021 4. Adoption of Accounting Standards and Amendments
Adoption of new accounting standards
Costs necessary to sell inventories IAS 2, Inventories (“IAS 2”) agenda decision
At its June 2021 meeting, the IFRS Interpretations Committee finalized an agenda decision about the costs an entity includes as the
“estimated costs to make the sale” when determining the net realizable value of inventories. The IFRS Interpretations Committee concluded
that when determining the net realizable value of inventories, an entity estimates the costs necessary to make the sale in the ordinary
course of business, which requires the exercise of judgment. The Company assessed the impact of costs included in the “estimated costs
necessary to make the sale” as comprehensive of all related costs. The adoption of the agenda decision did not have a material impact
on the consolidated financial statements.
Accounting standards and amendments issued but not yet adopted
IFRS 17, Insurance Contracts (“IFRS 17”)
In May 2017, the IASB issued IFRS 17, which replaces IFRS 4, Insurance Contracts. 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
In June 2020, the IASB issued amendments to IFRS 17 partly aimed at helping companies implement the standard. IFRS 17, incorporating
the amendments, is effective for annual reporting periods beginning on or after January 1, 2023. Retrospective application is required.
The Company plans to adopt the new standard on the effective date. The Company is currently analyzing the impact this standard will
have on its financial statements.
Amendments to IAS 1, Presentation of Financial Statements (“IAS 1”)
In January 2020, the IASB issued Classification of Liabilities as Current or Non-current, which amends IAS 1. The narrow scope amendments
affect only the presentation of liabilities in the statement of financial position and not the amount or timing of their recognition. The
amendments clarify that the classification of liabilities as current or non-current should be based on rights that are in existence at the end of
the reporting period and align the wording in all affected paragraphs to refer to the right to defer settlement by at least twelve months. That
classification is unaffected by the likelihood that an entity will exercise its deferral right. The amendments are effective for annual reporting
periods beginning on or after January 1, 2023 and are to be applied retrospectively. The Company is currently analyzing the impact this
amendment will have on its financial statements.
Amendments to IFRS 9
As part of its 2018-2020 annual improvements to IFRS standards process, the IASB issued an amendment to IFRS 9. The amendment clarifies
the fees that an entity includes when assessing whether the terms of a new or modified financial liability are substantially different from
the terms of the original financial liability. These fees include only those paid or received between the borrower and the lender, including
fees paid or received by either the borrower or lender on the other’s behalf. An entity applies the amendment to financial liabilities that
are modified or exchanged on or after the beginning of the annual reporting period in which the entity first applies the amendment. The
amendment is effective for annual reporting periods beginning on or after January 1, 2022 with earlier adoption permitted. The adoption of
this amendment will not have a material impact on the financial statements.
Amendments to IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors (“IAS 8”)
In February 2021, the IASB issued Definition of Accounting Estimates, which amends IAS 8. The amendment replaces the definition of a
change in accounting estimates with a definition of accounting estimates. Under the new definition, accounting estimates are “monetary
amounts in financial statements that are subject to measurement uncertainty”. The amendment provides clarification to help entities to
distinguish between accounting policies and accounting estimates. The amendments are effective for annual periods beginning on or after
January 1, 2023. The Company is currently analyzing the impact this amendment will have on its financial statements.
55
Notes to the Consolidated Financial StatementsLeon’s Furniture Limited / Annual Report 2021 Amendments to IAS 1 and IFRS Practice Statement 2
In February 2021, the IASB issued Disclosure of Accounting Policies, which amends IAS 1 and IFRS Practice Statement 2. The amendments
are intended to help preparers in deciding which accounting policies to disclose in their financial statements. The amendment to IAS 1
requires companies to disclose their material accounting policy information rather than its significant accounting policies. The amendment
also clarifies that not all accounting policy information that relates to material transactions, other events or conditions is material to the
financial statements. The amendment to IFRS Practice Statement 2 adds guidance and examples to the materiality practice statement,
which explains how to apply the materiality process to identify material accounting policy information. The amendments are effective for
annual periods beginning on or after January 1, 2023 and are to be applied prospectively. The Company is currently analyzing the impact
these amendments will have on its financial statements.
5. Cash and Cash Equivalents
As at
(C$ in thousands)
Cash and cash equivalents
6. Inventories
December 31, 2021
December 31, 2020
382,138
368,635
The amount of inventory recognized as an expense for the year ended December 31, 2021 was $1,350,292 (2020 – $1,184,162), which is
presented within cost of sales in the consolidated statement of income.
There were $473 in inventory write-downs recognized during 2021 (as at December 31, 2020 – $41 inventory write-downs). As at December 31,
2021, the inventory markdown provision totaled $5,827 (as at December 31, 2020 – $5,354).
7. Deferred Acquisition Costs
(C$ in thousands)
Balance as at December 31, 2019
Costs of new policies sold
Policy sales costs recognized
Balance as at January 1, 2020
Cost of new policies sold
Policy sales costs recognized
Balance as at December 31, 2021
Reported as:
Current
Non-current
Balance as at December 31, 2020
Current
Non-current
Balance as at December 31, 2021
56
Total
27,864
11,761
(11,286)
28,339
13,816
(10,965)
31,190
10,725
17,614
28,339
11,294
19,896
31,190
Notes to the Consolidated Financial StatementsLeon’s Furniture Limited / Annual Report 2021 8. Property, Plant and Equipment and Right-Of-Use Assets
(C$ in thousands)
Land Buildings Equipment Vehicles
Building
improvements
Leased
property
Leased
equipment
Total
Cost
Balance as at December 31, 2020
Additions
Disposals
104,124
–
(12)
286,531
1,024
–
180,040
6,855
(2,764)
60,759
2,091
(1,004)
245,092
7,365
(3,018)
555,943
35,585
(3,052)
1,494 1,433,983
53,564
(9,850)
644
–
Balance as at December 31, 2021
104,112
287,555
184,131
61,846
249,439
588,476
2,138 1,477,697
Accumulated depreciation
Balance as at December 31, 2020
Depreciation
Disposals
Balance as at December 31, 2021
–
–
–
–
160,349
7,250
–
136,163
7,530
(2,572)
35,997
6,003
(918)
204,509
8,524
(2,999)
181,929
80,216
(2,976)
167,599
141,121
41,082
210,034
259,169
613
270
–
883
719,560
109,793
(9,465)
819,888
Net book value as at December 31, 2021
104,112
119,956
43,010
20,764
39,405
329,307
1,255
657,809
(C$ in thousands)
Land Buildings Equipment Vehicles
Building
improvements
Leased
property
Leased
equipment
Total
Cost
Balance as at December 31, 2019
Additions
Disposals
104,468
261,421
171,918
56,293
239,103
502,886
1,963 1,338,052
–
25,110
9,041
5,840
(344)
–
(919)
(1,374)
7,189
(1,200)
56,055
(2,998)
–
103,235
(469)
(7,304)
Balance as at December 31, 2020
104,124
286,531
180,040
60,759
245,092
555,943
1,494 1,433,983
Accumulated depreciation
Balance as at December 31, 2019
Depreciation
Disposals
Balance as at December 31, 2020
–
–
–
–
153,932
129,953
31,711
197,238
103,808
6,417
7,087
5,643
–
(877)
(1,357)
8,471
(1,200)
80,451
(2,330)
160,349
136,163
35,997
204,509
181,929
Net book value as at December 31, 2020 104,124
126,182
43,877
24,762
40,583
374,014
616
466
617,258
108,535
(469)
(6,233)
613
881
719,560
714,423
Included in the above balances as at December 31, 2021, are assets not being amortized with a net book value of approximately $493 (as
at December 31, 2020 – $21,046) being construction in progress. Also included are fully depreciated assets still in use with a cost of $304,310
(as at December 31, 2020 – $284,166). Depreciation of property, plant and equipment is included within selling, general and administration
expenses on the consolidated statements of income.
57
Notes to the Consolidated Financial StatementsLeon’s Furniture Limited / Annual Report 2021 9. Investment Properties
(C$ in thousands)
Cost
Balance as at December 31, 2020
Disposals
Balance as at December 31, 2021
Accumulated depreciation
Balance as at December 31, 2020
Depreciation
Disposals
Balance as at December 31, 2021
Net book value as at December 31, 2021
(C$ in thousands)
Cost
Balance as at December 31, 2019
Additions
Balance as at December 31, 2020
Accumulated depreciation
Balance as at December 31, 2019
Depreciation
Balance as at December 31, 2020
Net book value as at December 31, 2020
Land
Buildings
Buildings
improvements
10,946
(300)
10,646
–
–
–
–
10,646
17,333
(1,937)
15,396
12,586
353
(1,345)
11,594
3,802
1,111
(158)
953
592
56
(97)
551
402
Land
Buildings
Buildings
improvements
10,946
–
10,946
–
–
–
10,946
17,333
–
17,333
12,209
377
12,586
4,747
1,097
14
1,111
534
58
592
519
Total
29,390
(2,395)
26,995
13,178
409
(1,442)
12,145
14,850
Total
29,376
14
29,390
12,743
435
13,178
16,212
The estimated fair value of the investment properties portfolio as at December 31, 2021, was approximately $42,000 (as at December 31,
2020 – $44,000). This recurring fair value disclosure is categorized within Level 3 of the fair value hierarchy (Note 22 for definition of levels).
This was compiled internally by management based on available market evidence.
58
Notes to the Consolidated Financial StatementsLeon’s Furniture Limited / Annual Report 2021 10. Intangible Assets and Goodwill
(C$ in thousands)
Cost
Balance as at December 31, 2020
Additions
Balance as at December 31, 2021
Accumulated amortization
Balance as at December 31, 2020
Amortization
Balance as at December 31, 2021
Customer
relationships
Brand name
and franchise
agreements
Computer
software
Total
7,000
–
7,000
6,843
157
7,000
268,500
–
268,500
2,500
–
2,500
20,586
1,502
22,088
16,262
1,653
17,915
4,173
296,086
1,502
297,588
25,605
1,810
27,415
270,173
Net book value as at December 31, 2021
–
266,000
(C$ in thousands)
Cost
Balance as at December 31, 2019
Additions
Disposals
Balance as at December 31, 2020
Accumulated amortization
Balance as at December 31, 2019
Amortization
Disposals
Balance as at December 31, 2020
Net book value as at December 31, 2020
Customer
relationships
Brand name
and franchise
agreements
Computer
software
Total
7,000
268,500
19,694
295,194
–
–
–
–
995
(103)
995
(103)
7,000
268,500
20,586
296,086
6,218
625
–
6,843
157
2,500
–
–
2,500
266,000
14,666
1,694
(98)
16,262
4,324
23,384
2,319
(98)
25,605
270,481
Amortization of intangible assets is included within selling, general and administrative expenses on the consolidated statements of income.
The following table presents the details of the Company’s indefinite-life intangible assets:
As at
(C$ in thousands)
The Brick brand name (allocated to Brick division)
The Brick franchise agreements (allocated to Brick division)
Total
December 31, 2021 December 31, 2020
245,000
245,000
21,000
266,000
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.
59
Notes to the Consolidated Financial StatementsLeon’s Furniture Limited / Annual Report 2021 The following table presents the details of the Company’s finite-life intangible assets:
As at
(C$ in thousands)
Brick division customer relationships
Computer software
Total
December 31, 2021 December 31, 2020
157
–
4,173
4,173
4,324
4,481
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:
As at
(C$ in thousands)
Appliance Canada (included within Leon’s division)
Brick division
Total
Impairment tests
December 31, 2021 December 31, 2020
11,282
378,838
390,120
11,282
378,838
390,120
The Company performed impairment tests of goodwill, brand and franchise agreements intangible as at December 31, 2021 and 2020 in
accordance with the accounting policy as described in Note 3. The recoverable amount of the CGUs was determined based on value-in-
use calculations. These calculations used cash flow projections based on financial budgets approved by management covering a one-year
period. Cash flows beyond the one-year period are extrapolated using the estimated growth rates stated below. The key assumptions used
for the value-in-use calculation as at December 31, 2021 and 2020 were as follows:
As at
Growth rate
Pre-tax discount rate
December 31, 2021 December 31, 2020
2.0%
10.5%
2.0%
8.4%
The impairment tests performed resulted in no impairment of the goodwill and indefinite life intangibles as at December 31, 2021 and
December 31, 2020.
11. Trade and Other Payables
As at
(C$ in thousands)
Trade payables
Other payables
Total
December 31, 2021 December 31, 2020
145,300
398,437
543,737
171,616
133,228
304,844
Included in the other payables balance above as at December 31, 2021, is an amount payable of $200,000 to purchase, for cancellation,
the common shares of the Company under a substantial issuer bid (“SIB”) as well as an obligation to repurchase shares of $45,000 under
an automatic share purchase plan (“ASPP”). The SIB and ASPP are further discussed in Note 16.
60
Notes to the Consolidated Financial StatementsLeon’s Furniture Limited / Annual Report 2021 12. Provisions
(C$ in thousands)
Balance as at December 31, 2020
Provisions made during the year
Provisions used during the year
Unused provisions reversed
Balance as at December 31, 2021
Unpaid insurance claims
Unpaid
insurance
claims
Unpaid
warranty
claims
Product
returns
638
330
–
606
5,180
1,946
–
–
256
–
(267)
Full circle
14,912
6,110
(2,860)
Other
2,932
14
–
–
(1,000)
Total
25,608
6,710
(6,402)
(1,267)
2,000
1,935
18,162
1,946
24,649
(362)
(3,180)
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.
Full circle
The provision for full circle represents the Company’s estimate of amounts the Company expects to incur regarding its full circle protection
plan. The Company’s full circle protection plan allows customers that did not make a claim during the term of their warranty the opportunity
to obtain merchandise credit in an amount equal to the price paid for the plan. The provision recognized represents the estimated amounts
necessary to settle future full circle redemption amounts subject to the terms of the plan, historical information and management judgment.
61
Notes to the Consolidated Financial StatementsLeon’s Furniture Limited / Annual Report 2021 13. Leases
Company as a lessee
Leasing arrangements
The Company leases various items of real estate property, vehicles and equipment used in its operations. The lease terms are generally
between 5 and 15 years. There are some leases with renewal options that are included when management is reasonably certain they will
be exercised. Management uses significant judgement in determining whether these extensions are reasonably certain to be exercised.
Lease liabilities
Carrying amounts of lease liabilities are as follows:
(C$ in thousands)
Balance as at December 31, 2020
Additions
Disposals
Interest
Payments
Balance as at December 31, 2021
Reported as:
Current
Non-current
Total
(C$ in thousands)
Balance as at December 31, 2019
Additions
Disposals
Interest
Payments
Balance as at December 31, 2020
Reported as:
Current
Non-current
Total
Total
400,703
38,744
(76)
19,693
(92,810)
366,254
74,920
291,334
366,254
Total
412,694
59,756
(671)
20,472
(91,548)
400,703
73,476
327,227
400,703
For the year ended December 31, 2021, the Company recognized rent expense from short-term leases of $1,469, leases of low-value assets
of $2,120 and variable lease payments of $36,227. For the year ended December 31, 2020, the Company recognized rent expense from
short-term leases of $1,475, leases of low-value assets of $1,667 and variable lease payments of $36,116.
Company as a lessor
Lease revenue receivable
The Company has entered into operating leases on its investment property portfolio consisting of certain land and building properties.
These leases generally have terms between 5 and 15 years.
Future minimum rentals receivable under non-cancellable operating are as follows:
(C$ in thousands)
No later than 1 year
Later than 1 year and no later than 5 years
Later than 5 years
Total
62
Total
1,528
4,749
3,635
9,912
Notes to the Consolidated Financial StatementsLeon’s Furniture Limited / Annual Report 2021 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
80.39310 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 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.
During the year ended December 31, 2021, convertible debentures with a stated value of $365 were converted to 29,342 common shares, at
the holder’s option (year ended December 31, 2020 – $49,583 were converted to 3,924,426 common shares).
(C$ in thousands)
Carrying value of convertible debentures as at December 31, 2020
Conversion of convertible debentures for the year ended December 31, 2021
Early redemption payment on outstanding debentures
Carrying value of convertible debentures as at December 31, 2021
Bank indebtedness
Total
441
(364)
(77)
–
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 original 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. The Company completed a second
amendment on May 31, 2019. The amounts borrowed under the term credit facility must be repaid in full by May 31, 2022. Subsequent to year
end, the Company completed an amendment that adjusted the amount of borrowings and repayment terms of the term credit facility. The
amendment is discussed further in Note 29.
The Company completed a revolving credit commitment increase agreement on April 27, 2020, whereby it exercised its $125,000 credit
accordion primarily as a precaution due to the COVID-19 pandemic. Therefore, the Company’s total revolving credit facility is $175,000.
As at December 31, 2021, there are no amounts outstanding against the revolving credit facility, except for the letters of credit. Subsequent
to year end, as the Company completed an amendment this increased the total revolving credit facility to $200,000. The amendment is
discussed further in Note 29.
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 were previously deferred and amortized
over the life of the agreement in relation to the first amendment of the SSCA. The remaining balance, as at May 31, 2019, of $148 was written
off. No additional transaction costs were incurred for the second amendment. The Company has the ability to choose the type of advance
required. Interest is based on the market rate plus an applicable margin. The term credit facility is repayable in yearly amounts of $25,000
and this amount for both 2020 and up to maturity have been paid in advance. Currently, the Company has entered into a 31-day Bankers’
Acceptance with a cost of borrowing of 1.15% that was renewed on December 31, 2021.
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 property of the Company. In addition to this, there are financial covenants related to the credit
facility. As at December 31, 2021, the Company was not in compliance of its fixed charge coverage ratio due to the payment of a special
dividend of $96,417 in the fourth quarter of the current year. Subsequent to year end, the Company amended its credit agreement to
exclude this amount from its fixed charge ratio covenant. As the Company is now in compliance, it did not trigger an event of default.
63
Notes to the Consolidated Financial StatementsLeon’s Furniture Limited / Annual Report 2021 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 MSPP,
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 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.
During the year ended December 31, 2021, the Company recognized compensation expense of $231 (year ended December 31, 2020 – $231).
Dividends paid to MSPP holders, for the year ended December 31, 2021, of $2,171 were credited against the loan receivable (year ended
December 31, 2020 – $1,046). The loan receivable is recognized at fair value and during the year ended December 31, 2021, finance income
of $1,702 was recognized by the Company (year ended December 31, 2020 – $714).
During the year ended December 31, 2021, 33,333 of the 2018 series of shares were forfeited and 79,296 of shares, also under this plan, were
sold. The total share proceeds of $1,723 were credited against the loan receivable. The Company recognized a net finance expense of $490
and a compensation expense of $52 (year ended December 31, 2020 – nil).
As at December 31, 2021, 839,998 of the 2018 series of common shares were outstanding under the 2018 MSPP (December 31, 2020 – 1,188,873).
15.2 Redeemable share liability
As at
(C$ in thousands)
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
4,295 series 2009 shares (December 31, 2020 – 194,087)
70,728 series 2012 shares (December 31, 2020 – 107,171)
310,091 series 2013 shares (December 31, 2020 – 666,740)
178,990 series 2014 shares (December 31, 2020 – 378,694)
272,934 series 2015 shares (December 31, 2020 – 478,839)
Less employee share purchase loans
Total
December 31, 2021 December 31, 2020
38
878
3,532
2,693
3,674
(10,802)
13
1,718
1,330
7,594
5,699
6,445
(22,773)
13
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 thirteenth anniversary of such issue. Each issued and fully paid for series 2013, series 2014 and series 2015
shares may be converted into one common share at any time after the third anniversary date of the issue of these shares and prior to
the thirteenth anniversary of such issue. The series 2009, series 2012, series 2013, series 2014 and series 2015 shares are redeemable at the
option of the holder for a period of one business day following the date of issue of such shares. The Company has the option to redeem
the series 2009 and series 2012 shares at any time after the fifth anniversary date of the issue of these shares and must redeem them prior
to the thirteenth 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 thirteenth anniversary of such
64
Notes to the Consolidated Financial StatementsLeon’s Furniture Limited / Annual Report 2021 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 $529 (2020 – $566) 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, 2021, 189,792 series 2009 shares, 36,443 series 2012 shares, 356,649 series 2013 shares, 199,704 series 2014
shares and 205,905 series 2015 shares (year ended December 31, 2020 – 26,410 series 2009 shares, 6,363 series 2012 shares, 47,296 series 2013
shares, 53,665 series 2014 shares and 62,393 series 2015 shares) were converted into common shares with a stated value of approximately
$1,680, $452, $4,062, $3,006 and $2,771, respectively (year ended December 31, 2020 – $234, $79, $539, $807 and $840 respectively).
During the year ended December 31, 2021, the Company did not cancel any shares from any of the series of shares (year ended December 31,
2020 – no shares were cancelled in any of the series of shares).
Employee share purchase loans have been netted against the redeemable share liability, as the Company has the legally enforceable right
of set-off and the positive intent to settle on a net basis.
16. Common Shares
As at
(C$ in thousands)
Authorized – Unlimited common shares
Issued
76,800,313 common shares (2020 – 78,650,418)
December 31, 2021 December 31, 2020
149,966
164,669
During the year ended December 31, 2021, 189,792 series 2009 shares, 36,443 series 2012 shares, 356,649 series 2013 shares, 199,704 series 2014
shares and 205,905 series 2015 shares (year ended December 31, 2020 – 26,410 series 2009 shares, 6,363 series 2012 shares, 47,296 series 2013
shares, 53,665 series 2014 shares and 62,393 series 2015 shares) were converted into common shares with a stated value of approximately
$1,680, $452, $4,062, $3,006 and $2,771, respectively (year ended December 31, 2020 – $234, $79, $539, $807 and $840, respectively).
Substantial issuer bid
On November 25, 2021, the Company commenced a SIB, by way of a modified Dutch auction, to purchase, for cancellation, the common
shares of the Company (“Offer”). The Offer expired on December 30, 2021. For the duration of the SIB, the Company suspended share
repurchases under the current normal course issuer bid, but resumed after the expiration of the SIB. The Company purchased for
cancellation 7,999,993 common shares at a purchase price of $25 per common share, for aggregate consideration of $200,000, being the
maximum purchase price payable under the Offer. The common shares purchased under the Offer represented approximately 10.4% of
the issued and outstanding common shares at the time the Offer was completed. As at December 31, 2021, the Company has not cancelled
these shares and they were held as Treasury shares, which have a value of $200,000, of which $17,746 represents a reduction in share
capital and the remaining $182,254 was charged to retained earnings. These shares were cancelled in January 2022.
Normal course issuer bid
On September 13, 2021, the Company received TSX approval of its notice of intention to renew its common share repurchase programme.
The Company intends to repurchase for cancellation a maximum of 3,869,268 common shares representing 4.99% of the total number of
its 77,540,442 issued and outstanding common shares as at September 6, 2021. The average daily trading volume for the six months ended
August 31, 2021 was 13,357. Therefore, other than block purchase exemptions, daily purchases will be limited to 3,339 common shares. The
bid commenced on September 15, 2021 and will terminate on the earliest of the purchase of 3,869,268 common shares, the issuer providing
a notice of termination, and September 14, 2022. Purchases will be executed through the facilities of the TSX at market price under the
normal course issuer bid rules of the TSX.
On September 27, 2021, the Company entered into an ASPP with the Company’s broker in order to facilitate the repurchase of its common
shares under the normal course issuer bid during self-imposed blackout periods. During the year ended December 31, 2021, the Company
repurchased and cancelled 617,430 common shares under the ASPP for a total cost of $13,687, of which $1,310 represents a reduction in
share capital and the remaining $12,377 was charged to retained earnings. As at December 31, 2021, an obligation for the repurchase of
shares of $45,000 (as at December 31, 2020 – $6,000) was recognized under the ASPP, of which $3,920 (2020 – $602) represents a reduction
in share capital and the remaining $41,080 (2020 – $5,398) was charged to retained earnings.
During the year ended December 31, 2021, and excluding the common shares repurchased under the ASPP, the Company repurchased
2,247,410 shares (year ended December 31, 2020 – 2,008,726 shares) of its common shares on the open market pursuant to the terms and
conditions of normal course issuer bid at a net cost of $50,822 (year ended December 31, 2020 – $35,638). The repurchase of common
65
Notes to the Consolidated Financial StatementsLeon’s Furniture Limited / Annual Report 2021 shares resulted in a reduction of share capital in the amount of $4,708 (year ended December 31, 2020 – $3,966). The excess net cost over
the average carrying value of the shares of $46,114 (year ended December 31, 2020 – $31,672) has been recorded as a reduction in retained
earnings. As at December 31, 2021, the Company has cancelled all of these repurchased shares (year ended December 31, 2020 – 2,005,626
of the repurchased shares were cancelled).
During year ended December 31, 2021, convertible debentures with a stated value of $365 were converted to 29,342 common shares, at the
holder’s option (year ended December 31, 2020 – $49,583 were converted to 3,924,426 common shares).
As at December 31, 2021 and 2020, dividends payable were $12,287 ($0.16 per share) and $36,163 ($0.46 per share), respectively.
17. Revenue
a) Disaggregation of revenue
For the
(C$ in thousands)
Sales of goods by corporate stores
Income from franchise operations
Extended warranty revenue
Insurance sales revenue
Rental income from investment property
Total
b) Customers’ deposits
For the
(C$ in thousands)
Opening balance as at January 1
Year ended
December 31, 2021 December 31, 2020
2,408,443
2,117,024
35,306
56,141
11,197
1,583
30,521
58,422
12,738
1,475
2,512,670
2,220,180
Year ended
December 31, 2021 December 31, 2020
305,460
151,817
Revenue recognized that was included in the customers’ deposit balance at the beginning
of the year
(269,439)
(145,954)
Year ended
December 31, 2021 December 31, 2020
144,337
142,943
(67,613)
80,903
157,627
57,787
99,840
157,627
(64,736)
66,130
144,337
55,733
88,604
144,337
c) Deferred warranty plan revenue
For the
(C$ in thousands)
Opening balance as at January 1
Revenue recognized that was included in the deferred warranty balance at the beginning
of the year
Recognition of deferred warranty during the year
Total
Reported as:
Current
Non-current
Total
66
Notes to the Consolidated Financial StatementsLeon’s Furniture Limited / Annual Report 2021 18. Expenses by Nature
For the
(C$ in thousands)
Salaries and benefits (1)
Depreciation of property, plant and equipment, right-of-use assets and investment properties
Amortization of intangible assets
Occupancy expenses
Year ended
December 31, 2021 December 31, 2020
420,068
110,202
1,810
93,734
391,178
108,970
2,319
87,470
1. Salaries and benefits for the year ended December 31, 2020, include Canada Emergency Wage Subsidy instalments of $31,559.
19. Net Finance Costs
For the
(C$ in thousands)
Interest expense on lease obligations
Interest expense on term credit facilities and revolving credit facilities
Interest expense on convertible debentures
Finance income
Total
Year ended
December 31, 2021 December 31, 2020
19,693
1,045
14
(5,767)
14,985
20,472
1,787
154
(4,526)
17,887
20. Income Tax Expense
(a) The major components of income tax expense for the years ended December 31 are as follows:
For the
(C$ in thousands)
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
Income tax expense reported in the consolidated statements of income
Year ended
December 31, 2021 December 31, 2020
73,787
(4,566)
69,221
54,378
(7,143)
47,235
(b) Reconciliation of the effective tax rates are as follows:
For the
(C$ in thousands, except %)
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
Remeasurement of deferred income tax asset for rate changes
Income exempt from tax
Prior year adjustments
Other
Income tax expense reported in the consolidated
Year ended
December 31, 2021
December 31, 2020
276,379
71,388
25.83%
210,485
55,568
26.40%
534
(196)
(159)
1,169
(3,515)
0.19%
(0.07%)
(0.06%)
0.42%
(1.27%)
410
(461)
(138)
(2,307)
(5,837)
0.19%
(0.22%)
(0.07%)
(1.10%)
(2.77%)
statements of income
69,221
25.05%
47,235
22.44%
67
Notes to the Consolidated Financial StatementsLeon’s Furniture Limited / Annual Report 2021
(c) Deferred income tax balances and reconciliation are as follows:
(i) Deferred income tax relates to the following:
As at
(C$ in thousands)
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:
As at
(C$ in thousands)
Deferred warranty plan
Deferred financing fees
Deferred acquisition costs
Property, plant and equipment
Intangible assets
Lease liabilities
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, 2021 December 31, 2020
14,957
(71,009)
(56,052)
14,993
(75,562)
(60,569)
Balance,
beginning of
year
(98)
11
(319)
(91,101)
(76,572)
85,177
21,215
1,119
(60,568)
(1)
(1)
December 31, 2021
Expense
(benefit)
Consolidated
Balance, end
of year
–
(44)
(4)
11,192
98
(10,047)
3,969
(599)
4,565
1
1
(98)
(33)
(323)
(79,909)
(76,474)
75,130
25,135
520
(56,052)
–
–
Other
–
–
–
–
–
–
(49)
–
(49)
–
–
Total deferred income tax expense (benefit)
(60,569)
(49)
4,566
(56,052)
As at
(C$ in thousands)
Deferred warranty plan
Deferred financing fees
Deferred acquisition costs
Property, plant and equipment
Intangible assets
Lease liabilities
Other
Mark to market
Net deferred income tax expense – statements of income
Movement in convertible debenture
Net deferred income tax expense (benefit) – equity
Total deferred income tax expense (benefit)
Balance,
beginning of
year
(98)
56
(359)
(98,914)
(76,793)
91,804
18,158
(95)
(66,241)
(1,282)
(1,282)
(67,523)
December 31, 2020
Expense
(benefit)
Consolidated
Balance, end
of year
–
(45)
40
7,813
221
(6,627)
3,246
1,214
5,862
1,281
1,281
7,143
(98)
11
(319)
(91,101)
(76,572)
85,177
21,215
1,119
(60,568)
(1)
(1)
(60,569)
Other
–
–
–
–
–
–
(189)
–
(189)
–
–
(189)
68
Notes to the Consolidated Financial StatementsLeon’s Furniture Limited / Annual Report 2021 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 77,623,382 for the year ended December 31, 2021
(2020 – 79,798,908). The following table reconciles the net income for the period and the number of shares for the basic and diluted
earnings per share calculations:
For the
(C$ in thousands except share and per share amounts)
Net income for the period for basic earnings per share
Net income for the period for diluted earnings per share
Weighted average number of common shares outstanding
Dilutive effect
Dilutive 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, 2021 December 31, 2020
207,158
207,367
77,623,382
1,438,994
79,062,376
$2.67
$2.62
163,250
163,751
79,798,908
2,314,971
82,113,879
$2.05
$1.99
The classification of the Company’s financial instruments, as well as their carrying amounts and fair values, are disclosed in the tables below.
As at
(C$ in thousands)
Financial assets
Cash and cash equivalents
Trade receivables
Restricted marketable securities
Equity instruments
Equity instruments
Debt instruments
Debt instruments
Loan receivables
Financial liabilities
Trade and other payables
Loans and borrowings
Redeemable share liability
Derivative liabilities
December 31, 2021
Classification and
measurement
Total
carrying
amount
Fair value
Fair value
hierarchy
Amortized cost
Amortized cost
382,138
160,093
382,138
160,093
FVOCI
FVOCI
FVOCI
FVOCI
FVTPL
FVTPL
466
37,941
3,310
66,461
100
466
37,941
3,310
66,461
100
10,039
10,039
Amortized cost
543,737
543,737
Amortized cost
90,000
90,000
Amortized cost
FVTPL
13
1,742
13
1,742
Level 1
Level 2
Level 1
Level 1
Level 3
Level 1
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
69
Notes to the Consolidated Financial StatementsLeon’s Furniture Limited / Annual Report 2021 As at
(C$ in thousands)
Financial assets
Cash and cash equivalents
Trade receivables
Restricted marketable securities
Equity instruments
Equity instruments
Debt instruments
Debt instruments
Loan receivables
Financial liabilities
Trade and other payables
Loans and borrowings
Convertible debentures
Redeemable share liability
Derivative liabilities
December 31, 2020
Classification and
measurement
Total
carrying
amount
Fair value
Fair value
hierarchy
Amortized cost
Amortized cost
368,635
130,582
368,635
130,582
FVOCI
FVOCI
FVOCI
FVOCI
FVTPL
FVTPL
2,451
45,324
3,310
73,465
100
2,451
45,324
3,310
73,465
100
12,721
12,721
Amortized cost
Amortized cost
Amortized cost
Amortized cost
304,844
90,000
304,844
90,000
441
13
647
13
FVTPL
3,976
3,976
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
The fair value hierarchy of financial instruments measured at fair value, as at December 31, 2021 includes financial assets of $487,006,
$170,232 and $3,310 for Levels 1, 2 and 3 respectively, and financial liabilities of $nil, $635,492 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 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, 2021, convertible debentures have been fully settled. For the convertible debentures as at 2020, the fair value is calculated
based on the face value of the convertible debentures of $442. As at 2020, the convertible debentures were determined using their quoted
market price (not in thousands of dollars) of $146.49 per $100 of face value.
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 financial derivatives which comprise of foreign exchange forwards, with maturities that do not exceed past
December 2023. As at December 31, 2021, the fair value of derivatives liabilities is $1,742 (as at December 31, 2020 – $3,976).
Fair values of financial instruments reflect the credit risk of the Company and counterparties when appropriate.
70
Notes to the Consolidated Financial StatementsLeon’s Furniture Limited / Annual Report 2021 Fair value hierarchy
The Company uses a fair value hierarchy to categorize the inputs used to measure the fair value of financial assets and financial liabilities,
the levels of which are as follows:
Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2:
Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices)
or indirectly (that is, derived from prices).
Level 3:
Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs).
Financial risk management
The Company’s activities expose it to a variety of financial risks: credit risk, liquidity risk and market risk (including interest rate risk, currency
risk and other price risk). Risk management is carried out by the Company by identifying and evaluating the financial risks inherent within
its operations. The Company’s overall risk management activities seek to minimize potential adverse effects on the Company’s financial
performance.
Credit risk
Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual
obligations. The 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.
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.
As at
(C$ in thousands)
Cash and cash equivalents
Restricted marketable securities
Debt instruments
Trade receivables
Total
Carrying amount
December 31, 2021 December 31, 2020
382,138
466
66,561
160,093
609,258
368,635
2,451
73,565
130,582
575,233
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. The Company’s trade receivables totaled $160,093 as at December 31, 2021, (2020 – $130,582). 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 $8,285 as at December 31, 2021 (2020 – $7,095). IFRS 9 requires that a forward-looking ECL model is followed. The guidance
allows for a simplified approach for assets, including trade receivables, that do not contain a significant financing component. This does
not require the tracking of changes in credit risk, but requires recognition of lifetime ECLs at all times. The Company’s ECL based on the total
receivables, past due invoices, historical data and future analysis was $1,118 as at December 31, 2021 (2020 – $1,355).
IFRS 9 provides a low credit risk simplified approach for certain financial instruments if they are deemed to be a low credit risk. 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 debt 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.
71
Notes to the Consolidated Financial StatementsLeon’s Furniture Limited / Annual Report 2021 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 is 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.
As at December 31, 2021, unrestricted liquidity was $613,648, comprising cash and cash equivalents, debt and equity instruments and its
undrawn revolving credit facility.
The following tables summarize the Company’s contractual maturity for its financial liabilities, including both principal and interest payments:
(C$ in thousands)
As at December 31, 2021
Trade and other payables
Lease liabilities
Loans and borrowings
Redeemable share liability
Total
(C$ in thousands)
As at December 31, 2020
Trade and other payables
Lease liabilities
Loans and borrowings
Convertible debentures
Redeemable share liability
Carrying
amount
Contractual
cash flows
2022
2023
2024
2025
Payments due by period
2027 &
Beyond
2026
543,737
366,254
90,000
13
543,737
427,561
90,883
13
1,000,004
1,062,194
543,737
91,715
90,883
–
726,335
–
64,095
–
–
64,095
–
62,259
–
–
62,259
–
61,745
–
–
61,745
–
60,146
–
–
60,146
–
87,601
–
13
87,614
Carrying
amount
Contractual
cash flows
2021
2022
2023
2024
Payments due by period
2026 &
Beyond
2025
304,844
400,703
90,000
441
13
304,844
473,208
92,053
471
13
304,844
92,019
1,170
13
–
–
70,597
90,883
13
–
–
–
–
–
68,209
66,353
65,820
110,210
–
445
–
–
–
–
–
–
–
–
–
13
Total
796,001
870,589
398,046
161,493
68,654
66,353
65,820
110,223
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 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.
72
Notes to the Consolidated Financial StatementsLeon’s Furniture Limited / Annual Report 2021 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 comprises 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 lease
liabilities and convertible debentures due to fluctuations in interest rates. Fair value risk related to the 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, 2021, the Company’s average indebtedness under the
term credit facility was $90,000 (2020 – $90,000) and under the revolving credit facility was $nil (2020 – $nil). Accordingly, a change during
the year ended December 31, 2021 of a one percentage point increase or decrease in the applicable interest rate would have impacted the
Company’s net income by approximately $666 (2020 – $666).
(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 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. 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. 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 establishing
maximum benefit limits per claim types that the policy holder is entitled to. The Company, therefore, has a defined maximum exposure
which enables it to effectively manage the overall risk.
73
Notes to the Consolidated Financial StatementsLeon’s Furniture Limited / Annual Report 2021 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 favorable supplier agreements both in respect of early payment discounts and overall
payment terms.
The capital structure currently includes debt and equity securities, lease liabilities, convertible debentures, term credit facility and borrowing
capacity available under the revolving credit facilities (note 14). As at December 31, 2021, $127,008 is available to draw on under our $175,000
revolving credit facility, as the borrowing capacity is reduced by ordinary letters of credit of $47,992 (December 31, 2020 – $993). The
Company exercised its $125,000 credit accordion, during the prior fiscal year, as a precaution due to the COVID-19 pandemic. Most of this
reduction in borrowing capacity is due to the Company needing to post collateral to backstop the provisional tariffs that were payable to the
Canada Border Services Agency (“CBSA”) as of May 5, 2021. Due to the significant reduction in these provisional tariffs that were announced
by The Canadian International Trade Tribunal on September 2, 2021, the Company anticipates the majority of this collateral will no longer be
required, and the unused borrowing capacity will be restored pending final confirmation from the CBSA.
As at
(C$ in thousands)
Current portion of lease liabilities
Current portion of loans and borrowings
Convertible debentures
Lease liabilities
Loans and borrowings
Total shareholders’ equity
Total capital under management
December 31, 2021 December 31, 2020
74,920
90,000
–
291,334
–
791,193
1,247,447
73,476
–
441
327,227
90,000
1,016,003
1,507,147
The Board of Directors reviews and approves any material transactions out of the ordinary course of business, including proposals on
acquisitions or other major investments or divestitures, as well as capital and operating budgets. Based on the Company’s borrowing capacity
available and expected cash flow from operating activities, management believes that the Company has sufficient funds available to meet its
liquidity requirements at any point in time. However, if cash from operating activities is lower than expected or capital costs for projects exceed
current estimates, or if the Company incurs major unanticipated expenses, it may be required to seek additional capital.
The Company is not subject to any externally imposed capital requirements, other than with respect to its insurance subsidiaries.
Restriction on the distribution of capital from Trans Global Insurance Company and Trans Global Life Insurance Company
For purposes of regulatory requirements for TGI and TGLI, capital is considered to be equivalent to their respective statement of financial
position equity. Regulatory requirements stipulate that TGI must maintain minimum capital of at least $3,000 and TGLI must maintain
minimum capital of at least $5,000.
In addition, the Company is subject to the regulatory capital requirements defined by The Office of the Superintendent of Insurance of
Alberta and the Insurance Act of Alberta (the “Insurance 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 Insurance Act. As at
December 31, 2021, TGI’s Minimum Capital Test ratio was 646% (December 31, 2020 – 513%), which is in compliance with the requirements of
The Office of the Superintendent of Insurance of Alberta and the Insurance 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, 2021, TGLI’s LICAT ratio was 491% (December 31, 2020 – MCCSR 534%), which is in compliance
with the requirements of The Office of the Superintendent of Insurance of Alberta and the Insurance Act.
25. Commitments and Contingencies
(a) Pursuant to a reinsurance agreement relating to the extended warranty sales, the Company has pledged debt instruments amounting
to $466 (2020 – $2,451).
(b) In the normal course of operations, the Company is party to a number of lawsuits, claims and contingencies. Accruals are made in
instances where it is probable that liabilities have been incurred and where such liabilities can be reasonably estimated. Although it
is possible that liabilities may be incurred in instances for which no accruals have been made, the Company does not believe that the
ultimate outcome of these matters will have a material impact on its financial position.
74
Notes to the Consolidated Financial StatementsLeon’s Furniture Limited / Annual Report 2021 26. Consolidated Statements of Cash Flows
(a) The net change in operating working capital balances consist of the following:
For the
(C$ in thousands)
Trade receivables
Inventories
Prepaid expenses and other assets
Trade and other payables
Customers’ deposits
Derivative assets
Derivative liabilities
Provisions
Deferred acquisition costs
Total
(b) Changes in liabilities arising from financing activities comprise the following:
(C$ in thousands)
Balance as at December 31, 2020
Cash changes:
Lease obligation repayment
Early redemption payment on outstanding debentures
Non-cash changes:
Additions
Disposals
Conversions of debenture
Interest
Balance as at December 31, 2021
(C$ in thousands)
Balance as at December 31, 2019
Cash changes:
Long-term debt repayment
Lease obligation repayment
Non-cash changes:
Additions
Disposals
Conversions of debenture
Interest
Accretion
Balance as at December 31, 2020
Convertible Debentures
(including equity component)
472
–
(77)
–
–
(395)
–
–
Convertible Debentures
(including equity component)
52,330
–
–
–
–
(51,877)
–
19
472
Year ended
December 31, 2021 December 31, 2020
(29,511)
(63,574)
(4,503)
137
56,639
–
(2,234)
(959)
(2,851)
(46,856)
Leases
400,703
(92,810)
–
38,744
(76)
–
19,693
366,254
Leases
412,694
–
(91,548)
59,756
(671)
–
20,472
–
400,703
9,953
2,371
(1,822)
47,069
153,643
625
3,976
2,334
(475)
217,674
Loans and
borrowings
90,000
–
–
–
–
–
–
90,000
Loans and
borrowings
95,000
(5,000)
–
–
–
–
–
–
90,000
75
Notes to the Consolidated Financial StatementsLeon’s Furniture Limited / Annual Report 2021 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 five senior executives of the Company. The compensation expense paid to key management for employee
services during each year is shown below:
For the
(C$ in thousands)
Salaries and other employee benefits
Year ended
December 31, 2021 December 31, 2020
8,225
7,462
28. Comparative Financial Information
The comparative consolidated financial statements have been reclassified from statements previously presented to conform to the presentation
of the December 31, 2021 consolidated financial statements.
29. Subsequent Events
On February 17, 2022 the Company completed a third amendment to its SSCA. Under this amendment the Company increased its total
credit facilities from $265,000 to $350,000. The amounts borrowed under this amendment must be repaid in full by May 31, 2024.
76
Notes to the Consolidated Financial StatementsLeon’s Furniture Limited / Annual Report 2021 Corporate & Shareholder
Corporate & Shareholder
Information
Information
BOARD OF DIRECTORS
OFFICERS
AUDITORS
Mark J. Leon
Chairman of the Board
Terrence T. Leon
Vice Chairman
Michael J. Walsh
President and CEO
Constantine Pefanis
CFO
John A. Cooney
Vice President, Legal and
Corporate Secretary
CORPORATE OFFICE
45 Gordon Mackay Road
Toronto, Ontario M9N 3X3
(416) 243-7880
Ernst & Young LLP Toronto
REGISTRAR AND
TRANSFER AGENT
TSX Trust Company (Canada)
LISTING
Leon's Furniture Limited
common shares are listed
on the Toronto Stock Exchange
Ticker Symbol is LNF
ANNUAL AND SPECIAL MEETING
Thursday, May 12, 2022, 2:00pm
Fairmont Royal York
100 Front Street West
Toronto, Ontario
M5J 1E3
Mark J. Leon
Toronto, ON
Terrence T. Leon
Toronto, ON
Edward F. Leon
King City, ON
Joseph M. Leon II
Ridgeway, ON
Alan J. Lenczner
Founding Partner in
Lenczner Slaght
Toronto, ON
Mary Ann Leon
Financial Executive
Toronto, ON
Frank Gagliano
Vice Chairman,
St. Joseph Communications,
Toronto, ON
Hon. Lisa Raitt
Vice Chair, CIBC Global
Investment Banking
Milton, ON
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